- Refer to page 51 of Coca-Cola 10-K.pdf. for the advertising expense table. How would you classify advertising expense variable, fixed, mixed, step??
- Now, analyze the advertising costs for Coca-Cola Inc. How have the costs changed between years 2015 and 2017? Has the cost increased / decreased or remained relatively stable? What about advertising costs as a percentage of total costs or sales revenues? How have the ratios changed?
- Now take a look at Pepsico Inc 10-K, and do the same working as in (2) for Pepsico, including total advertising costs as well as ratio of advertising expense to sales and advertising expense to total costs. Advertising expense numbers are on page 88 of the report. Does the cost increase / decrease for Pepsico look similar to that for Coca-Cola Inc.? Why or why not?
- Now, consider you are the Chairman of the Board for Coca-Cola Inc. You understand the importance of advertising in a company like Coca-Cola Inc. You want to evaluate the companys executive officers on the companys advertising spend. The list of officers is provided on page 23 of the report. Do you think the company spent enough / overspent / underspent on advertising expenses? How would you decide on that?
Selling, General and Administrative Expenses The following table sets forth the significant components of selling, general and administrative expenses (in millions): Year Ended December 31, Stock-based compensation expense 2017 2016 2015 $219 258 236 Advertising expenses Selling and distribution expenses Other operating expenses Selling, general and administrative expenses 4,004 3,976 3,958 3,257 5,177 6,025 5,062 6,190 5,823 $12,496 15,262 $16,427 Includes operating expenses as well as general and administrative expenses primarily related to our Bottling Investments operating segment Year Ended December 31, 2017 versus Year Ended December 31, 2016 Selling, general and administrative expenses decreased $2,766 million, or 18 percent. During the year ended December 31, 2017 fluctuations in foreign currency exchange rates had a nominal impact on selling, general and administrative expenses. The decrease in selling and distribution expenses and advertising expenses during 2017 reflects the impact of divestitures. Additionally, advertising expenses during 2017 decreased 1 percent as a result of foreign currency exchange rate fluctuations. The decrease in other operating expenses during 2017 reflects savings from our productivity and reinvestment initiatives and a reduction in net periodic benefit cost. Foreign currency exchange rate fluctuations have a more significant impact on both advertising and other operating expenses as compared to our selling and distribution expenses since they are generally transacted in local currency. Our selling and distribution expenses are primarily related to our Company-owned bottling operations, of which the majority of expenses are attributable to CCR and are primarily denominated in U.S. dollars. Refer to Note 2 of Notes to Consolidated Financial Statements for additional information related to divestitures As of December 31, 2017, we had $286 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under our plans. This cost is expected to be recognized over a weighted-average period of 3.0 years as stock-based compensation expense. This expected cost does not include the impact of any future stock-based compensation awards. Refer to Note 12 of Notes to Consolidated Financial Statements Year Ended December 31, 2016 versus Year Ended December 31, 2015 Selling, general and administrative expenses decreased $1,165 million, or 7 percent. During the year ended December 31, 2016 fluctuations in foreign currency decreased selling, general and administrative expenses by 2 percent. The increase in advertising expenses reflects the Company's increased investments to strengthen our brands, partially offset by a foreign currency exchange impact of 3 percent. The decrease in selling and distribution expenses reflects the impact of divestitures. The decrease in other operating expenses reflects the shift of the Company's marketing spending to more consumer-facing advertising expenses as well as savings from our productivity and reinvestment initiatives. Foreign currency exchange rate fluctuations have a more significant impact on both advertising and other operating expenses as compared to our selling and distribution expenses since they are generally transacted in local currency. Our selling and distribution expenses are primarily related to our Company-owned bottling operations, of which the majority of expenses are attributable to CCR and are primarily denominated in U.S. dollars. Refer to Note 2 of Notes to Consolidated Financial Statements for additional information related to divestitures Total Marketplace Spending We offer sales incentives and discounts through various programs to customers and consumers. Total marketplace spending includes sales incentives, discounts, advertising and other marketing activities. Sales incentives and discounts are primarily accounted for as a reduction of revenue and include payments to customers for performing activities on our behalf, such as payments for in-store displays, payments to gain distribution of new products, payments for shelf space and discounts to promote lower retail prices. Sales incentives and discounts also include support provided to our independent bottlers. Anumber ofour sales incentives, such as bottler funding to independent bottlers and customervolume rebates, are based on annual targets, and accruals are established during the year for the expected payout. These accruals are based on contract terms and our historical experience with similar programs and require management judgment with respect to estimating customer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. In addition, certain advertising and marketing costs are also based on annual targets and recognized during the year as incurred. The terms of most ofour incentive arrangements do not exceed a year, and, therefore, do not require highly uncertain long-term estimates Certain arrangements, such as fountain pouring rights, may extend beyond one year. Up-front payments to customers under these arrangements are recognized over the shorter of the economic or contractual life primarily as a reduction of revenue, and the remaining balances of $262 million as of December 30, 2017 and $291 million as of December 31, 2016 are included in prepaid expenses and other current assets and other assets on our balance sheet. For additional unaudited information on our sales incentives, see "Our Customers" in "Item 1. Business" and "Our Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations For interim reporting, our policy is to allocate our forecasted full-year sales incentives for most of our programs to each of our interim reporting periods in the same year that benefits from the programs. The allocation methodology is based on our forecasted sales incentives for the full year and the proportion of each interim period's actual gross revenue or volume, as applicable, to our forecasted annual gross revenue or volume, as applicable. Based on our review of the forecasts at each interim period, any changes in estimates and the related allocation of sales incentives are recognized beginning in the interim period that they are identified. In addition, we apply a similar allocation methodology for interim reporting purposes for certain advertising and other marketing activities. Our annual financial statements are not impacted by this interim allocation methodology Advertising and other marketing activities, reported as selling, general and administrative expenses, totaled $4.1 billion in 2017, $4.2 billion in 2016 and $3.9 billion in 2015, including advertising expenses of $2.4 billion in 2017, $2.5 billion in 2016 and $2.4 billion in 2015. Deferred advertising costs are not expensed until the year first used and consist of: media and personal service prepayments; promotional materials in inventory; and production costs of future media advertising Deferred advertising costs of $46 million and $32 million as of December 30, 2017 and December 31, 2016, respectively, are classified as prepaid expenses and other current assets on our balance sheet. PHOTO LEFT TO RIGHT Kirk Tanner Ruth Fattori David Yawman Jim Andrew Grace Puma President and Chief Executive Vice President, Executive Vice President, Executive Vice President, Corporate Strategy and Chief Venturing Officer Executive Vice President, Government Affairs Operating Officer, North America Human Resources and Global Operations Chief Human Resources General Counsel and Officer Beverages Corporate Secretary Albert P. Carey Chief Executive Officer North America Jon Banner Mike Spanos Executive Vice President, Laxman Narasimhan Ramon Laguarta Chief Executive Officer Chief Executive Officer President Communications Asia, Middle East and Latin America and Sanjeev Chadha Chairman, Asia Europe Sub-Saharan North Africa Indra K. Nooyi Chairman of the Dr. Mehmood Khan Africa Vice Chairman, Middle East and Eugene Willemsen Executive Vice President, Board of Directors and Executive Vice President North Africa Hugh F. Johnston Vice Chairman Chief Executive Officer and Chief Scientific Global Categories & Franchise Management Officer, Global Research and Development Executive Vice President Vivek Sankaran and Chief Financial Officer President and Chief Silviu Popovici President Europe Sub-Saharan Operating Officer, Frito-Lay North America Africa Selling, General and Administrative Expenses The following table sets forth the significant components of selling, general and administrative expenses (in millions): Year Ended December 31, Stock-based compensation expense 2017 2016 2015 $219 258 236 Advertising expenses Selling and distribution expenses Other operating expenses Selling, general and administrative expenses 4,004 3,976 3,958 3,257 5,177 6,025 5,062 6,190 5,823 $12,496 15,262 $16,427 Includes operating expenses as well as general and administrative expenses primarily related to our Bottling Investments operating segment Year Ended December 31, 2017 versus Year Ended December 31, 2016 Selling, general and administrative expenses decreased $2,766 million, or 18 percent. During the year ended December 31, 2017 fluctuations in foreign currency exchange rates had a nominal impact on selling, general and administrative expenses. The decrease in selling and distribution expenses and advertising expenses during 2017 reflects the impact of divestitures. Additionally, advertising expenses during 2017 decreased 1 percent as a result of foreign currency exchange rate fluctuations. The decrease in other operating expenses during 2017 reflects savings from our productivity and reinvestment initiatives and a reduction in net periodic benefit cost. Foreign currency exchange rate fluctuations have a more significant impact on both advertising and other operating expenses as compared to our selling and distribution expenses since they are generally transacted in local currency. Our selling and distribution expenses are primarily related to our Company-owned bottling operations, of which the majority of expenses are attributable to CCR and are primarily denominated in U.S. dollars. Refer to Note 2 of Notes to Consolidated Financial Statements for additional information related to divestitures As of December 31, 2017, we had $286 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under our plans. This cost is expected to be recognized over a weighted-average period of 3.0 years as stock-based compensation expense. This expected cost does not include the impact of any future stock-based compensation awards. Refer to Note 12 of Notes to Consolidated Financial Statements Year Ended December 31, 2016 versus Year Ended December 31, 2015 Selling, general and administrative expenses decreased $1,165 million, or 7 percent. During the year ended December 31, 2016 fluctuations in foreign currency decreased selling, general and administrative expenses by 2 percent. The increase in advertising expenses reflects the Company's increased investments to strengthen our brands, partially offset by a foreign currency exchange impact of 3 percent. The decrease in selling and distribution expenses reflects the impact of divestitures. The decrease in other operating expenses reflects the shift of the Company's marketing spending to more consumer-facing advertising expenses as well as savings from our productivity and reinvestment initiatives. Foreign currency exchange rate fluctuations have a more significant impact on both advertising and other operating expenses as compared to our selling and distribution expenses since they are generally transacted in local currency. Our selling and distribution expenses are primarily related to our Company-owned bottling operations, of which the majority of expenses are attributable to CCR and are primarily denominated in U.S. dollars. Refer to Note 2 of Notes to Consolidated Financial Statements for additional information related to divestitures Total Marketplace Spending We offer sales incentives and discounts through various programs to customers and consumers. Total marketplace spending includes sales incentives, discounts, advertising and other marketing activities. Sales incentives and discounts are primarily accounted for as a reduction of revenue and include payments to customers for performing activities on our behalf, such as payments for in-store displays, payments to gain distribution of new products, payments for shelf space and discounts to promote lower retail prices. Sales incentives and discounts also include support provided to our independent bottlers. Anumber ofour sales incentives, such as bottler funding to independent bottlers and customervolume rebates, are based on annual targets, and accruals are established during the year for the expected payout. These accruals are based on contract terms and our historical experience with similar programs and require management judgment with respect to estimating customer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. In addition, certain advertising and marketing costs are also based on annual targets and recognized during the year as incurred. The terms of most ofour incentive arrangements do not exceed a year, and, therefore, do not require highly uncertain long-term estimates Certain arrangements, such as fountain pouring rights, may extend beyond one year. Up-front payments to customers under these arrangements are recognized over the shorter of the economic or contractual life primarily as a reduction of revenue, and the remaining balances of $262 million as of December 30, 2017 and $291 million as of December 31, 2016 are included in prepaid expenses and other current assets and other assets on our balance sheet. For additional unaudited information on our sales incentives, see "Our Customers" in "Item 1. Business" and "Our Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations For interim reporting, our policy is to allocate our forecasted full-year sales incentives for most of our programs to each of our interim reporting periods in the same year that benefits from the programs. The allocation methodology is based on our forecasted sales incentives for the full year and the proportion of each interim period's actual gross revenue or volume, as applicable, to our forecasted annual gross revenue or volume, as applicable. Based on our review of the forecasts at each interim period, any changes in estimates and the related allocation of sales incentives are recognized beginning in the interim period that they are identified. In addition, we apply a similar allocation methodology for interim reporting purposes for certain advertising and other marketing activities. Our annual financial statements are not impacted by this interim allocation methodology Advertising and other marketing activities, reported as selling, general and administrative expenses, totaled $4.1 billion in 2017, $4.2 billion in 2016 and $3.9 billion in 2015, including advertising expenses of $2.4 billion in 2017, $2.5 billion in 2016 and $2.4 billion in 2015. Deferred advertising costs are not expensed until the year first used and consist of: media and personal service prepayments; promotional materials in inventory; and production costs of future media advertising Deferred advertising costs of $46 million and $32 million as of December 30, 2017 and December 31, 2016, respectively, are classified as prepaid expenses and other current assets on our balance sheet. PHOTO LEFT TO RIGHT Kirk Tanner Ruth Fattori David Yawman Jim Andrew Grace Puma President and Chief Executive Vice President, Executive Vice President, Executive Vice President, Corporate Strategy and Chief Venturing Officer Executive Vice President, Government Affairs Operating Officer, North America Human Resources and Global Operations Chief Human Resources General Counsel and Officer Beverages Corporate Secretary Albert P. Carey Chief Executive Officer North America Jon Banner Mike Spanos Executive Vice President, Laxman Narasimhan Ramon Laguarta Chief Executive Officer Chief Executive Officer President Communications Asia, Middle East and Latin America and Sanjeev Chadha Chairman, Asia Europe Sub-Saharan North Africa Indra K. Nooyi Chairman of the Dr. Mehmood Khan Africa Vice Chairman, Middle East and Eugene Willemsen Executive Vice President, Board of Directors and Executive Vice President North Africa Hugh F. Johnston Vice Chairman Chief Executive Officer and Chief Scientific Global Categories & Franchise Management Officer, Global Research and Development Executive Vice President Vivek Sankaran and Chief Financial Officer President and Chief Silviu Popovici President Europe Sub-Saharan Operating Officer, Frito-Lay North America Africa
