The Daily Warren Buffett Stock is KO. Berkshire Hathaway owns 200,000,000 shares. As of Dec 31,2007, this represents 17.85 percent of portfolio.
The Coca-Cola Company is the largest manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups in the world. Finished beverage products bearing our trademarks, sold in the United States since 1886, are now sold in more than 200 countries. Along with Coca-Cola, which is recognized as the worldâ€™s most valuable brand, we market four of the worldâ€™s top five nonalcoholic sparkling brands, including Diet Coke, Fanta and Sprite. In this report, the terms â€śCompany,â€ť â€śwe,â€ť â€śusâ€ť or â€śourâ€ť mean The Coca-Cola Company and all entities included in our consolidated financial statements.
Our business is nonalcoholic beveragesâ€”principally sparkling beverages, but also a variety of still beverages. We manufacture beverage concentrates and syrups, which we sell to bottling and canning operations, fountain wholesalers and some fountain retailers, as well as finished beverages, which we sell primarily to distributors. Our Company owns or licenses more than 450 brands, including diet and light beverages, waters, enhanced waters, juices and juice drinks, teas, coffees, and energy and sports drinks. In addition, we have ownership interests in numerous beverage joint ventures, bottling and canning operations, although most of these operations are independently owned and managed.
We were incorporated in September 1919 under the laws of the State of Delaware and succeeded to the business of a Georgia corporation with the same name that had been organized in 1892.
Our Company is one of numerous competitors in the commercial beverages market. Of the approximately 53 billion beverage servings of all types consumed worldwide every day, beverages bearing trademarks owned by or licensed to us account for approximately 1.5 billion.
We believe that our success depends on our ability to connect with consumers by providing them with a wide variety of choices to meet their desires, needs and lifestyle choices. Our success further depends on the ability of our people to execute effectively, every day.
Our goal is to use our Companyâ€™s assetsâ€”our brands, financial strength, unrivaled distribution system, global reach and the talent and strong commitment of our management and associatesâ€”to become more competitive and to accelerate growth in a manner that creates value for our shareowners.
The Companyâ€™s operating structure is the basis for our internal financial reporting. As of December 31, 2007, our operating structure included the following operating segments, the first seven of which are sometimes referred to as â€śoperating groupsâ€ť or â€śgroupsâ€ť:
Our operating structure as of December 31, 2007 reflected changes we made effective January 1, 2007, when we combined the Eurasia and Middle East Division, and the Russia, Ukraine and Belarus Division, both of which previously had been included in the former North Asia, Eurasia and Middle East operating segment, with the India Division, which previously had been included in the former East, South Asia and Pacific Rim operating segment, to form the Eurasia operating segment; and combined the China Division and the Japan Division, both of which previously had been included in the former North Asia, Eurasia and Middle East operating segment, with the remaining former East, South Asia and Pacific Rim operating segment to form the Pacific operating segment. We revised previously reported operating segment information to conform to our current operating structure.
Except to the extent that differences among operating segments are material to an understanding of our business taken as a whole, the description of our business in this report is presented on a consolidated basis.
For financial information about our operating segments and geographic areas, refer to Note 6 and Note 21 of Notes to Consolidated Financial Statements set forth in Part II, â€śItem 8. Financial Statements and Supplementary Dataâ€ť of this report, incorporated herein by reference. For certain risks attendant to our non-U.S. operations, refer to â€śItem 1A. Risk Factors,â€ť below.
Products and Distribution
Our Company manufactures and sells beverage concentrates, sometimes referred to as â€śbeverage bases,â€ť and syrups, including fountain syrups, and finished beverages.
As used in this report:
â€śconcentratesâ€ť means flavoring ingredients and, depending on the product, sweeteners used to prepare syrups or finished beverages;
â€śsyrupsâ€ť means the beverage ingredients produced by combining concentrates and, depending on the product, sweeteners and added water;
â€śfountain syrupsâ€ť means syrups that are sold to fountain retailers, such as restaurants, that use dispensing equipment to mix the syrups with sparkling or still water at the time of purchase to produce finished beverages that are served in cups or glasses for immediate consumption;
â€śsparkling beveragesâ€ť means nonalcoholic ready-to-drink beverages with carbonation, including energy drinks and carbonated waters and flavored waters;
â€śstill beveragesâ€ť means nonalcoholic beverages without carbonation, including non-carbonated waters, flavored waters and enhanced waters, juices and juice drinks, teas, coffees and sports drinks; and
â€śCompany Trademark Beveragesâ€ť means beverages bearing our trademarks and certain other beverage products licensed to us for which we provide marketing support and from the sale of which we derive economic benefit.
We sell the concentrates and syrups for bottled and canned beverages to authorized bottling and canning operations. In addition to concentrates and syrups for sparkling beverages and flavored still beverages, we also sell concentrates (in powder form) for purified water products such as Dasani to authorized bottling operations.
Authorized bottlers and canners either combine our syrups with sparkling water or combine our concentrates with sweeteners (depending on the product), still water and/or sparkling water to produce finished sparkling beverages. The finished sparkling beverages are packaged in authorized containers bearing our trademarksâ€”such as cans and refillable and nonrefillable glass and plastic bottles (â€śbottle/can productsâ€ť)â€”and are then sold to retailers (â€śbottle/can retailersâ€ť) or, in some cases, wholesalers.
For our fountain products in the United States, we manufacture fountain syrups and sell them to authorized fountain wholesalers and some fountain retailers. The wholesalers are authorized to sell the Companyâ€™s fountain syrups by a nonexclusive appointment from us that neither restricts us in setting the prices at which we sell fountain syrups to the wholesalers, nor restricts the territory in which the wholesalers may resell in the United States. Outside the United States, fountain syrups typically are manufactured by authorized bottlers from concentrates sold to them by the Company. The bottlers then typically sell the fountain syrups to wholesalers or directly to fountain retailers.
Finished beverages manufactured by us include a variety of sparkling and still beverages. We sell these beverages to authorized bottlers or distributors, wholesalers or directly to retailers. We manufacture and sell juice and juice-drink products and certain water products to retailers and wholesalers in the United States and numerous other countries, both directly and through a network of business partners, including certain Coca-Cola bottlers.
Our beverage products include Coca-Cola, Coca-Cola Classic, caffeine free Coca-Cola, caffeine free Coca-Cola Classic, Cherry Coke, Diet Coke (sold under the trademark Coca-Cola Light in many countries other than the United States), caffeine free Diet Coke, Diet Coke Sweetened with Splenda, Diet Coke with Lime, Diet Cherry Coke, Diet Coke Plus, Coca-Cola Zero (sold under the trademark Coke Zero in some countries), Fanta brand sparkling beverages, Sprite, Diet Sprite/Sprite Zero (sold under the trademark Sprite Light in many countries other than the United States), Pibb Xtra, Mello Yello, Tab, Fresca brand sparkling beverages, Barqâ€™s, Powerade, Aquarius, Sokenbicha, Ciel, Bonaqa/Bonaqua, Dasani, Dasani brand flavored waters, Georgia brand ready-to-drink coffees (sold in Japan), Lift, Thums Up, Kinley, Eight Oâ€™Clock, Qoo, Vault, Full Throttle and other products developed for specific countries. In many countries (excluding the United States, among others), our Companyâ€™s beverage products also include Schweppes, Canada Dry, Dr Pepper and Crush. Our Company produces, distributes and markets juice and juice-drink products, including Minute Maid juices and juice drinks, Simply juices and juice drinks, Odwalla nourishing health beverages, Five Alive refreshment beverages, Bacardi mixers concentrate (manufactured and marketed under license agreements from Bacardi & Company Limited) and Hi-C ready-to-serve juice drinks. We have a license to manufacture and sell concentrates for Seagramâ€™s mixers, a line of sparkling drinks, in the United States and certain other countries. Our Company has an exclusive master distribution agreement for Evian bottled water in the United States and Canada, and for Rockstar, an energy drink, in most of the United States and in Canada. In addition, in the United States we market Nestea and Enviga products under a sublicense agreement with NestlĂ© USA, Inc. Multon, a Russian juice business (â€śMultonâ€ť) operated as a joint venture with Coca-Cola Hellenic Bottling Company S.A., markets juice products under various trademarks, including Dobriy, Rich and Nico, in Russia, Ukraine and Belarus. Beverage Partners Worldwide (â€śBPWâ€ť), the Companyâ€™s joint venture with NestlĂ© S.A. (â€śNestlĂ©â€ť), markets ready-to-drink tea products under various trademarks, including Yang Guang, Nagomi, Frestea, Ten Ren and Shi-Zen, in various markets worldwide, other than the United States and Japan.
Consumer demand determines the optimal menu of Company product offerings. Consumer demand can vary from one locale to another and can change over time within a single locale. Employing our business strategy, and with special focus on core brands, our Company seeks to build its existing brands and, at the same time, to broaden its historical family of brands, products and services in order to create and satisfy consumer demand locale by locale.
During 2007, we expanded our still beverage offerings by acquiring Energy Brands Inc., also known as glacĂ©au, the maker of enhanced water brands such as vitaminwater, fruitwater and smartwater, and vitaminenergy; Fuze Beverage, LLC (â€śFuzeâ€ť), the maker of the Fuze fortified beverages, enhanced water, tea-flavored beverages, and sports and fruit drinks; and Leao Junior, S.A. (â€śLeao Juniorâ€ť), a Brazilian herbal beverage company. Also during 2007, we and Coca-Cola FEMSA, S.A.B. de C.V. jointly acquired Jugos del Valle, S.A.B. de C.V. (â€śJugos del Valleâ€ť), the second largest producer of packaged juices, nectars and fruit-flavored beverages in Mexico and the largest producer of such beverages in Brazil. In addition, during 2007, our Company introduced a variety of new brands, brand extensions and new beverage products. Among numerous examples, in the United States, the Company launched Dasani Plus enhanced water beverages, Vanilla Coke Zero and the Minute Maid Enhanced Juice line; and in Canada, we launched the Fanta brand of sparkling beverages. In Latin America, the products launched included Coca-Cola Zero, Fanta Zero, Lift Zero, Fresca Zero, Lift + Manzana, Fresca Lado B, Dasani and Flanm. In Europe, new launches included Diet Coke Plus in Great Britain, Coke Zero in Austria and Switzerland, Coca-Cola Blak in the Czech Republic and Slovakia, and Fruitopia by Minute Maid in Germany. We also launched Damla, a spring water, in Turkey; Coke Zero in Croatia and Romania; and Next Joy in Serbia. In the Middle East, we launched Burn, Cappy juice, and Jericho and Sahtain waters. In Pakistan, we launched Sprite 3G and in Kazakhstan, Cappy juice. Also, in Japan we launched Ayataka, a premium ready-to-drink green tea.
Our Company measures the volume of products sold in two ways: (1) unit cases of finished products and (2) concentrate sales. As used in this report, â€śunit caseâ€ť means a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings); and â€śunit case volumeâ€ť means the number of unit cases (or unit case equivalents) of Company beverage products directly or indirectly sold by the Company and its bottling partners (â€śCoca-Cola systemâ€ť) to customers. Unit case volume primarily consists of beverage products bearing Company trademarks. Also included in unit case volume are certain products licensed to, or distributed by, our Company, and brands owned by Coca-Cola system bottlers for which our Company provides marketing support and from the sale of which we derive economic benefit. Such products licensed to, or distributed by, our Company or owned by Coca-Cola system bottlers account for a minimal portion of total unit case volume. In addition, unit case volume includes sales by joint ventures in which the Company has an equity interest. Although most of our Companyâ€™s revenues are not based directly on unit case volume, we believe unit case volume is one of the measures of the underlying strength of the Coca-Cola system because it measures trends at the consumer level. The unit case volume numbers used in this report are based on estimates received by the Company from its bottling partners and distributors. Concentrate sales volume represents the amount of concentrates, syrups, beverage bases and powders (in all cases expressed in equivalent unit cases) sold by, or used in finished beverages sold by, the Company to its bottling partners or other customers. â€śConcentrate salesâ€ť replaced the â€śgallon salesâ€ť concept beginning with the first quarter of 2007. We made this change primarily to replace â€śequivalent gallonsâ€ť with â€śequivalent unit casesâ€ť as a unit of measurement for concentrates, syrups, beverage bases and powders, which better reflects how our Company conducts its operations. Most of our revenues are based on concentrate sales, a primarily wholesale activity. Unit case volume and concentrate sales growth rates are not necessarily equal during any given period. Items such as seasonality, bottlersâ€™ inventory practices, supply point changes, timing of price increases, new product introductions and changes in product mix can impact unit case volume and concentrate sales and can create differences between unit case volume and concentrate sales growth rates.
In 2007, concentrates and syrups for beverages bearing the trademark â€śCoca-Colaâ€ť or any trademark that includes â€śCoca-Colaâ€ť or â€śCokeâ€ť (â€śCoca-Cola Trademark Beveragesâ€ť) accounted for approximately 53 percent of the Companyâ€™s total concentrate sales.
In 2007, concentrate sales in the United States (â€śU.S. concentrate salesâ€ť) represented approximately 24 percent of the Companyâ€™s worldwide concentrate sales. Approximately 56 percent of U.S. concentrate sales for 2007 was attributable to sales of beverage concentrates and syrups to 76 authorized bottler ownership groups in 393 licensed territories. Those bottlers prepare and sell finished beverages bearing our trademarks for the food store and vending machine distribution channels and for other distribution channels supplying products for home and immediate consumption. Approximately 33 percent of 2007 U.S. concentrate sales was attributable to fountain syrups sold to fountain retailers and to 491 authorized fountain wholesalers, some of which are authorized bottlers. The remaining approximately 11 percent of 2007 U.S. concentrate sales was attributable to sales by the Company of finished beverages, including juice and juice-drink products and certain water products. Coca-Cola Enterprises Inc., including its bottling subsidiaries and divisions (â€śCCEâ€ť), accounted for approximately 48 percent of the Companyâ€™s U.S. concentrate sales in 2007. At December 31, 2007, our Company held an ownership interest of approximately 35 percent in CCE, which is the worldâ€™s largest bottler of Company Trademark Beverages.
In 2007, concentrate sales outside the United States represented approximately 76 percent of the Companyâ€™s worldwide concentrate sales. The countries outside the United States in which our concentrate sales were the largest in 2007 were Mexico, Brazil, China and Japan, which together accounted for approximately 28 percent of our worldwide concentrate sales. Approximately 90 percent of non-U.S. unit case volume for 2007 was attributable to sales of beverage concentrates and syrups to authorized bottlers together with sales by the Company of finished beverages, other than juice and juice-drink products, in 490 licensed territories. Approximately 5 percent of 2007 non-U.S. unit case volume was attributable to fountain syrups. The remaining approximately 5 percent of 2007 non-U.S. unit case volume was attributable to juice and juice-drink products.
In addition to conducting our own independent advertising and marketing activities, we may provide promotional and marketing services or funds to our bottlers. In most cases, we do this on a discretionary basis under the terms of commitment letters or agreements, even though we are not obligated to do so under the terms of the bottling or distribution agreements between our Company and the bottlers. Also, on a discretionary basis in most cases, our Company may develop and introduce new products, packages and equipment to assist its bottlers. Likewise, in many instances, we provide promotional and marketing services and/or funds and/or dispensing equipment and repair services to fountain and bottle/can retailers, typically pursuant to marketing agreements. The aggregate amount of funds provided by our Company to bottlers, resellers or other customers of our Companyâ€™s products, principally for participation in promotional and marketing programs, was approximately $4.1 billion in 2007.
Bottlerâ€™s Agreements and Distribution Agreements
Most of our products are manufactured and sold by our bottling partners. We typically sell concentrates and syrups to our bottling partners, who convert them into finished packaged products which they sell to distributors and other customers. Separate contracts (â€śBottlerâ€™s Agreementsâ€ť) exist between our Company and each of our bottling partners regarding the manufacture and sale of Company products. Subject to specified terms and conditions and certain variations, the Bottlerâ€™s Agreements generally authorize the bottlers to prepare specified Company Trademark Beverages, to package the same in authorized containers, and to distribute and sell the same in (but, subject to applicable local law, generally only in) an identified territory. The bottler is obligated to purchase its entire requirement of concentrates or syrups for the designated Company Trademark Beverages from the Company or Company-authorized suppliers. We typically agree to refrain from selling or distributing, or from authorizing third parties to sell or distribute, the designated Company Trademark Beverages throughout the identified territory in the particular authorized containers; however, we typically reserve for ourselves or our designee the right (1) to prepare and package such beverages in such containers in the territory for sale outside the territory, and (2) to prepare, package, distribute and sell such beverages in the territory, in any other manner or form. Territorial restrictions on bottlers vary in some cases in accordance with local law.
Being a bottler does not create a legal partnership or joint venture between us and our bottlers. Our bottlers are independent contractors and are not our agents.
The Bottlerâ€™s Agreements between us and our authorized bottlers in the United States differ in certain respects from those in the other countries in which Company Trademark Beverages are sold. As further discussed below, the principal differences involve the duration of the agreements; the inclusion or exclusion of canned beverage production rights; the inclusion or exclusion of authorizations to manufacture and distribute fountain syrups; in some cases, the degree of flexibility on the part of the Company to determine the pricing of syrups and concentrates; and the extent, if any, of the Companyâ€™s obligation to provide marketing support.
Outside the United States
The Bottlerâ€™s Agreements between us and our authorized bottlers outside the United States generally are of stated duration, subject in some cases to possible extensions or renewals of the term of the contract. Generally, these contracts are subject to termination by the Company following the occurrence of certain designated events. These events include defined events of default and certain changes in ownership or control of the bottler.
In certain parts of the world outside the United States, we have not granted comprehensive beverage production rights to the bottlers. In such instances, we or our authorized suppliers sell Company Trademark Beverages to the bottlers for sale and distribution throughout the designated territory, often on a nonexclusive basis. A majority of the Bottlerâ€™s Agreements in force between us and bottlers outside the United States authorize the bottlers to manufacture and distribute fountain syrups, usually on a nonexclusive basis.
Our Company generally has complete flexibility to determine the price and other terms of sale of the concentrates and syrups we sell to bottlers outside the United States. In some instances, however, we have agreed or may in the future agree with the bottler with respect to concentrate pricing on a prospective basis for specified time periods. Outside the United States, in most cases, we have no obligation to provide marketing support to the bottlers. Nevertheless, we may, at our discretion, contribute toward bottler expenditures for advertising and marketing. We may also elect to undertake independent or cooperative advertising and marketing activities.
Within the United States
In the United States, with certain very limited exceptions, the Bottlerâ€™s Agreements for Coca-Cola Trademark Beverages and other cola-flavored beverages have no stated expiration date. Our standard contracts for other sparkling beverage flavors and for still beverages are of stated duration, subject to bottler renewal rights. The Bottlerâ€™s Agreements in the United States are subject to termination by the Company for nonperformance or upon the occurrence of certain defined events of default that may vary from contract to contract. The â€ś1987 Contract,â€ť described below, is terminable by the Company upon the occurrence of certain events, including:
the bottlerâ€™s insolvency, dissolution, receivership or the like;
any disposition by the bottler or any of its subsidiaries of any voting securities of any bottler subsidiary without the consent of the Company;
any material breach of any obligation of the bottler under the 1987 Contract; or
except in the case of certain bottlers, if a person or affiliated group acquires or obtains any right to acquire beneficial ownership of more than 10 percent of any class or series of voting securities of the bottler without authorization by the Company.
Under the terms of the Bottlerâ€™s Agreements, bottlers in the United States are authorized to manufacture and distribute Company Trademark Beverages in bottles and cans. However, these bottlers generally are not authorized to manufacture fountain syrups. Rather, as described above, our Company manufactures and sells fountain syrups to authorized fountain wholesalers (including certain authorized bottlers) and some fountain retailers. These wholesalers in turn sell the syrups or deliver them on our behalf to restaurants and other retailers.
In the United States, the form of Bottlerâ€™s Agreement for cola-flavored sparkling beverages that covers the largest amount of U.S. concentrate sales (the â€ś1987 Contractâ€ť) gives us complete flexibility to determine the price and other terms of sale of concentrates and syrups for Company Trademark Beverages. In some instances, we have agreed or may in the future agree with the bottler with respect to concentrate pricing on a prospective basis for specified time periods. Bottlers operating under the 1987 Contract accounted for approximately 91.8 percent of our Companyâ€™s total U.S. concentrate sales for bottled and canned beverages in 2007, excluding direct sales by the Company of juice and juice-drink products and other finished beverages (â€śU.S. bottle/can concentrate salesâ€ť). Certain other forms of U.S. Bottlerâ€™s Agreements, entered into prior to 1987, provide for concentrates or syrups for certain Coca-Cola Trademark Beverages and other cola-flavored Company Trademark Beverages to be priced pursuant to a stated formula. Bottlers accounting for approximately 7.8 percent of U.S. bottle/can concentrate sales in 2007 have contracts for certain Coca-Cola Trademark Beverages and other cola-flavored Company Trademark Beverages with pricing formulas that generally provide for a baseline price. This baseline price may be adjusted periodically by the Company, up to a maximum indexed ceiling price, and is adjusted quarterly based upon changes in certain sugar or sweetener prices, as applicable. Bottlers accounting for the remaining approximately 0.4 percent of U.S. bottle/can concentrate sales in 2007 operate under our oldest form of contract, which provides for a fixed price for Coca-Cola syrup used in bottles and cans. This price is subject to quarterly adjustments to reflect changes in the quoted price of sugar.
We have standard contracts with bottlers in the United States for the sale of concentrates and syrups for non-cola-flavored sparkling beverages and certain still beverages in bottles and cans, and, in certain cases, for the sale of finished still beverages in bottles and cans. All of these standard contracts give the Company complete flexibility to determine the price and other terms of sale.
Under the 1987 Contract and most of our other standard beverage contracts with bottlers in the United States, our Company has no obligation to participate with bottlers in expenditures for advertising and marketing. Nevertheless, at our discretion, we may contribute toward such expenditures and undertake independent or cooperative advertising and marketing activities. Some U.S. Bottlerâ€™s Agreements that predate the 1987 Contract impose certain marketing obligations on us with respect to certain Company Trademark Beverages.
As a practical matter, our Companyâ€™s ability to exercise its contractual flexibility to determine the price and other terms of sale of its syrups, concentrates and finished beverages under various agreements described above is subject, both outside and within the United States, to competitive market conditions.
Significant Equity Method Investments and Company Bottling Operations
Our Company maintains business relationships with three types of bottlers:
bottlers in which the Company has no ownership interest;
bottlers in which the Company has invested and has a noncontrolling ownership interest; and
bottlers in which the Company has invested and has a controlling ownership interest.
In 2007, bottling operations in which we had no ownership interest produced and distributed approximately 25 percent of our worldwide unit case volume. We have equity positions in 46 unconsolidated bottling, canning and distribution operations for our products worldwide. These cost or equity method investees produced and distributed approximately 54 percent of our worldwide unit case volume in 2007. Controlled and consolidated bottling operations produced and distributed approximately 10 percent of our worldwide unit case volume in 2007. The remaining approximately 11 percent of our worldwide unit case volume in 2007 was produced by our fountain operations and our juice and juice drink, sports drink and other finished beverage operations.
We make equity investments in selected bottling operations with the intention of maximizing the strength and efficiency of the Coca-Cola systemâ€™s production, distribution and marketing capabilities around the world. These investments are intended to result in increases in unit case volume, net revenues and profits at the bottler level, which in turn generate increased concentrate sales for our Companyâ€™s concentrate and syrup business. When this occurs, both we and our bottling partners benefit from long-term growth in volume, improved cash flows and increased shareowner value.
The level of our investment generally depends on the bottlerâ€™s capital structure and its available resources at the time of the investment. Historically, in certain situations, we have viewed it as advantageous to acquire a controlling interest in a bottling operation, often on a temporary basis. Owning such a controlling interest has allowed us to compensate for limited local resources and has enabled us to help focus the bottlerâ€™s sales and marketing programs and assist in the development of the bottlerâ€™s business and information systems and the establishment of appropriate capital structures.
In line with our long-term bottling strategy, we may periodically consider options for reducing our ownership interest in a bottler. One such option is to combine our bottling interests with the bottling interests of others to form strategic business alliances. Another option is to sell our interest in a bottling operation to one of our equity method investee bottlers. In both of these situations, our Company continues to participate in the bottlerâ€™s results of operations through our share of the strategic business alliancesâ€™ or equity method investeesâ€™ earnings or losses.
In cases where our investments in bottlers represent noncontrolling interests, our intention is to provide expertise and resources to strengthen those businesses.
Significant investees in which we have noncontrolling ownership interests include the following:
Coca-Cola Enterprises Inc. (â€śCCEâ€ť). Our ownership interest in CCE was approximately 35 percent at December 31, 2007. CCE is the worldâ€™s largest bottler of the Companyâ€™s beverage products. In 2007, sales of concentrates, syrups, mineral waters, juices, sweeteners and finished products by the Company to CCE were approximately $6.3 billion. CCE estimates that the territories in which it markets beverage products to retailers (which include portions of 46 states and the District of Columbia in the United States, the U.S. Virgin Islands and certain other Caribbean islands, Canada, Great Britain, continental France, the Netherlands, Luxembourg, Belgium and Monaco) contain approximately 79 percent of the United States population, 98 percent of the population of Canada, and 100 percent of the populations of Great Britain, continental France, the Netherlands, Luxembourg, Belgium and Monaco. In 2007, CCEâ€™s net operating revenues were approximately $20.9 billion. Excluding fountain products, in 2007, approximately 60 percent of the unit case volume of CCE consisted of Coca-Cola Trademark Beverages, approximately 33 percent of its unit case volume consisted of other Company Trademark Beverages and approximately 7 percent of its unit case volume consisted of beverage products of other companies.
Coca-Cola Hellenic Bottling Company S.A. (â€śCoca-Cola Hellenicâ€ť). At December 31, 2007, our ownership interest in Coca-Cola Hellenic was approximately 23 percent. Coca-Cola Hellenic has bottling and distribution rights, through direct ownership or joint ventures, in Armenia, Austria, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, the Czech Republic, Estonia, Former Yugoslavian Republic of Macedonia, Greece, Hungary, Italy, Latvia, Lithuania, Moldova, Nigeria, Northern Ireland, Poland, Republic of Ireland, Romania, Russia, Serbia, Montenegro, Slovakia, Slovenia, Switzerland and Ukraine. Coca-Cola Hellenic estimates that the territories in which it markets beverage products contain approximately 67 percent of the population of Italy and 100 percent of the populations of the other countries named above in which Coca-Cola Hellenic has bottling and distribution rights. In 2007, Coca-Cola Hellenicâ€™s net sales of beverage products were approximately $8 billion. In 2007, approximately 43 percent of the unit case volume of Coca-Cola Hellenic consisted of Coca-Cola Trademark Beverages, approximately 51 percent of its unit case volume consisted of other Company Trademark Beverages and approximately 6 percent of its unit case volume consisted of beverage products of Coca-Cola Hellenic or other companies.
Coca-Cola FEMSA, S.A.B. de C.V. (â€śCoca-Cola FEMSAâ€ť). Our ownership interest in Coca-Cola FEMSA was approximately 32 percent at December 31, 2007. Coca-Cola FEMSA is a Mexican holding company with bottling subsidiaries in a substantial part of central Mexico, including Mexico City and southeastern Mexico; greater SĂŁo Paulo, Campinas, Santos, the state of Matto Grosso do Sul and part of the state of Goias in Brazil; central Guatemala; most of Colombia; all of Costa Rica, Nicaragua, Panama and Venezuela; and greater Buenos Aires, Argentina. Coca-Cola FEMSA estimates that the territories in which it markets beverage products contain approximately 48 percent of the population of Mexico, 16 percent of the population of Brazil, 98 percent of the population of Colombia, 47 percent of the population of Guatemala, 100 percent of the populations of Costa Rica, Nicaragua, Panama and Venezuela, and 31 percent of the population of Argentina. In 2007, Coca-Cola FEMSAâ€™s net sales of beverage products were approximately $6 billion. In 2007, approximately 63 percent of the unit case volume of Coca-Cola FEMSA consisted of Coca-Cola Trademark Beverages, approximately 33 percent of its unit case volume consisted of other Company Trademark Beverages and approximately 4 percent of its unit case volume consisted of beverage products of Coca-Cola FEMSA or other companies.
Coca-Cola Amatil Limited (â€śCoca-Cola Amatilâ€ť). At December 31, 2007, our Companyâ€™s ownership interest in Coca-Cola Amatil was approximately 30 percent. Coca-Cola Amatil has bottling and distribution rights, through direct ownership or joint ventures, in Australia, New Zealand, Fiji, Papua New Guinea and Indonesia. Coca-Cola Amatil estimates that the territories in which it markets beverage products contain 100 percent of the populations of Australia, New Zealand, Fiji and Papua New Guinea, and 98 percent of the population of Indonesia. In 2007, Coca-Cola Amatilâ€™s net sales of beverage products from continuing operations were approximately $2.9 billion. In 2007, approximately 49 percent of the unit case volume of Coca-Cola Amatil consisted of Coca-Cola Trademark Beverages, approximately 38 percent of its unit case volume consisted of other Company Trademark Beverages and approximately 13 percent of its unit case volume consisted of beverage products of Coca-Cola Amatil.
Other Interests. BPW, our joint venture with NestlĂ©, is focused on the total ready-to-drink tea category worldwide, except in the United States and Japan. Multon, a Russian juice business operated as a joint venture with Coca-Cola Hellenic, markets and sells juice products in Russia, Ukraine and Belarus. Jugos del Valle, a beverage business we acquired jointly with Coca-Cola FEMSA in the fourth quarter of 2007, markets and sells packaged juices, nectars and fruit-flavored beverages in Mexico and Brazil.
Sales of our ready-to-drink nonalcoholic beverages are somewhat seasonal, with the second and third calendar quarters accounting for the highest sales volumes. The volume of sales in the beverages business may be affected by weather conditions.
Our Company competes in the nonalcoholic beverages segment of the commercial beverages industry. Based on internally available data and a variety of industry sources, we believe that in 2007, worldwide sales of Company products accounted for approximately 10 percent of total worldwide sales of nonalcoholic beverage products. The nonalcoholic beverages segment of the commercial beverages industry is highly competitive, consisting of numerous firms. These include firms that, like our Company, compete in multiple geographic areas as well as firms that are primarily regional or local in operation. Competitive products include numerous nonalcoholic sparkling beverages; various water products, including packaged, flavored and enhanced waters; juices and nectars; fruit drinks and dilutables (including syrups and powdered drinks); coffees and teas; energy and sports and other performance-enhancing drinks; dairy-based drinks, and various other nonalcoholic beverages. These competitive beverages are sold to consumers in both ready-to-drink and other than ready-to-drink form. In many of the countries in which we do business, including the United States, PepsiCo, Inc. is one of our primary competitors. Other significant competitors include, but are not limited to, NestlĂ©, Cadbury Schweppes plc, Groupe Danone, Kraft Foods Inc. and Unilever. We also compete against numerous regional and local firms in various geographic areas in which we operate.
Competitive factors impacting our business include, but are not limited to, pricing, advertising, sales promotion programs, product innovation, increased efficiency in production techniques, the introduction of new packaging, new vending and dispensing equipment, and brand and trademark development and protection.
Our competitive strengths include leading brands with a high level of consumer acceptance; a worldwide network of bottlers and distributors of Company products; sophisticated marketing capabilities; and a talented group of dedicated associates. Our competitive challenges include strong competition in all geographic regions and, in many countries, a concentrated retail sector with powerful buyers able to freely choose among Company products, products of competitive beverage suppliers and individual retailersâ€™ own store-brand beverages.
The principal raw materials used by our business are nutritive and non-nutritive sweeteners. In the United States, the principal nutritive sweetener is high fructose corn syrup, a form of sugar, which is available from numerous domestic sources and is historically subject to fluctuations in its market price. The principal nutritive sweetener used by our business outside the United States is sucrose, another form of sugar, which is also available from numerous sources and is historically subject to fluctuations in its market price. Our Company generally has not experienced any difficulties in obtaining its requirements for nutritive sweeteners. In the United States, we purchase high fructose corn syrup to meet our and our bottlersâ€™ requirements with the assistance of Coca-Cola Bottlersâ€™ Sales & Services Company LLC (â€śCCBSSâ€ť). CCBSS is a limited liability company that is owned by authorized Coca-Cola bottlers doing business in the United States. Among other things, CCBSS provides procurement services to our Company for the purchase of various goods and services in the United States, including high fructose corn syrup.
The principal non-nutritive sweeteners we use in our business are aspartame, acesulfame potassium, saccharin, cyclamate and sucralose. Generally, these raw materials are readily available from numerous sources. However, our Company purchases aspartame, an important non-nutritive sweetener that is used alone or in combination with other important non-nutritive sweeteners such as saccharin or acesulfame potassium in our low-calorie sparkling beverage products, primarily from The NutraSweet Company and Ajinomoto Co., Inc., which we consider to be our primary sources for the supply of this product. We currently purchase acesulfame potassium from Nutrinova Nutrition Specialties & Food Ingredients GmbH, which we consider to be our primary source for the supply of this product. Our Company generally has not experienced any difficulties in obtaining its requirements for non-nutritive sweeteners.
Our Company sells a number of products sweetened with sucralose, a non-nutritive sweetener. We work closely with Tate & Lyle, our sucralose supplier, to maintain continuity of supply. Although Tate & Lyle is our single source for sucralose, we do not anticipate difficulties in obtaining our requirements for sucralose.
With regard to juice and juice-drink products, citrus fruit, particularly orange juice concentrate, is our principal raw material. The citrus industry is subject to the variability of weather conditions. In particular, freezing weather or hurricanes in central Florida may result in shortages and higher prices for orange juice concentrate throughout the industry. Due to our ability to also source orange juice concentrate from the Southern Hemisphere (particularly from Brazil), we normally have an adequate supply of orange juice concentrate that meets our Companyâ€™s standards.
Mr. Allen is President, Chief Executive Officer and a Director of Allen & Company Incorporated, a privately held investment firm, and has held these positions for more than the past five years. Mr. Allen was a Managing Director of Allen & Company LLC, a privately held investment banking firm, from September 2002 to February 2003. He is a Director of Convera Corporation.
Mr. Allen is an Advisory Director of Delta Air Lines, Inc., a major U.S. air transportation company. From July 1997 through July 2005, Mr. Allen was a consultant to and Advisory Director of Delta. He retired as Deltaâ€™s Chairman of the Board, President and Chief Executive Officer in July 1997, and had been its Chairman of the Board and Chief Executive Officer since 1987. He is a Director of Aaron Rents, Inc., Aircastle Limited and Interstate Hotels & Resorts, Inc.
Ms. Black is President, Hearst Magazines, a unit of The Hearst Corporation, a major media and communications company, and has held this position since November 1995. Ms. Black has been a Director of The Hearst Corporation since January 1996. From May 1991 to November 1995, she served as President and Chief Executive Officer of the Newspaper Association of America, a newspaper industry organization. She served as a Director of the Company from April 1990 to May 1991, and was again elected as a Director in October 1993. Ms. Black is a Director of International Business Machines Corporation.
Mr. Diller is Chairman of the Board and Chief Executive Officer of IAC/InterActiveCorp, an interactive commerce company. He is also Chairman of the Board and Senior Executive of Expedia, Inc., an online travel company. He has held his position with IAC or its predecessors since August 1995. He was Chairman of the Board and Chief Executive Officer of QVC, Inc. from December 1992 through December 1994. From 1984 to 1992, Mr. Diller served as Chairman of the Board and Chief Executive Officer of Fox, Inc. Prior to joining Fox, Inc., Mr. Diller served for ten years as Chairman of the Board and Chief Executive Officer of Paramount Pictures Corporation. He is a Director of The Washington Post Company.
Ms. Herman serves as Chair and Chief Executive Officer of New Ventures LLC, a corporate consulting company, and has held these positions since 2001. She also serves as Chair of Toyota Motor Corporationâ€™s North American Diversity Advisory Board. She also serves as Chair of the Business Advisory Board of Sodexho, Inc., an integrated food and facilities management services company. As chair of the Companyâ€™s Human Resources Task Force from 2001 to 2006, Ms. Herman worked with the Company to identify ways to improve its human resources policies and practices following the November 2000 settlement of an employment lawsuit. The seven-member Task Force assessed the Companyâ€™s progress on specific human resource initiatives in annual reports to the court. From 1997 to 2001, she served as U.S. Secretary of Labor. Ms. Herman served in the Carter Administration as Director of the Womenâ€™s Bureau from 1977 to 1981 and as Director of Public Liaison for the White House from 1992 to 1997. She is also a Director of Cummins Inc., Entergy Corporation and MGM Mirage.
Mr. Isdell is Chairman of the Board and Chief Executive Officer of the Company, and has held these positions since June 1, 2004. From January 2002 to May 2004, Mr. Isdell was an international consultant to the Company. He was Chief Executive Officer of Coca-Cola Hellenic Bottling Company S.A. from September 2000 to May 2001 and Vice Chairman from May 2001 to December 2001. He was Chairman and Chief Executive Officer of Coca-Cola Beverages Plc from July 1998 to September 2000. Mr. Isdell joined the Coca-Cola system in 1966 with a local bottling company in Zambia. He held a variety of positions prior to serving as Senior Vice President of the Company from January 1989 until February 1998. He also served as President of the Greater Europe Group from January 1995 to February 1998. He is a Director of SunTrust Banks, Inc.
Muhtar Kent is President and Chief Operating Officer of the Company and has held these positions since December 2006. On July 1, 2008, he will succeed E. Neville Isdell as Chief Executive Officer of the Company. From January 2006 through December 2006, Mr. Kent served as President of Coca-Cola International and from May 2005 through January 2006, he was President and Chief Operating Officer of the Companyâ€™s North Asia, Eurasia and Middle East Group. Mr. Kent originally joined the Company in 1978 and held a variety of marketing and operations roles until 1995, when he became Managing Director of Coca-Cola Amatil Limited-Europe. From 1999 until his return to the Company in May 2005, he served as President and Chief Executive Officer of the Efes Beverage Group, the majority shareholder of Turkish bottler Coca-Cola Icecek.
Mr. Keough is nonexecutive Chairman of the Board of Allen & Company Incorporated, a privately held investment firm, and nonexecutive Chairman of the Board of Allen & Company LLC, an investment banking firm, and has held these positions for more than the past five years. Mr. Keough retired as President, Chief Operating Officer and a Director of the Company in April 1993, positions he had held since March 1981. He was again elected as a Director in February 2004. He is a Director of Berkshire Hathaway Inc., Convera Corporation and IAC/InterActiveCorp.
Mr. McHenry is Distinguished Professor in the Practice of Diplomacy and International Affairs at the School of Foreign Service, Georgetown University. He has held this position for more than the past five years. From 1981 to May 2007, he was a principal owner and President of the IRC Group, LLC, a Washington, D.C. consulting firm. He is a Director of International Paper Company.
Mr. Nunn is Co-Chairman and Chief Executive Officer of the Nuclear Threat Initiative, a position he has held since 2001. The Nuclear Threat Initiative is a charitable organization working to reduce the global threats from nuclear, biological and chemical weapons. Mr. Nunn was a partner in the law firm of King & Spalding from 1997 to December 2003. He served as a member of the United States Senate from 1972 through 1996. He is a Director of Chevron Corporation, Dell Inc. and General Electric Company.
Mr. Robinson is General Partner of RRE Ventures, a private information technology-focused venture capital firm, and has held this position since 1994. He is also President of JD Robinson, Inc., a strategic advisory firm. Until February 2008, he was nonexecutive Chairman of the Board of Bristol-Myers Squibb Company. He previously served as Chairman and Chief Executive Officer of American Express Company from 1977 to 1993. Mr. Robinson is a Director of Bristol-Myers Squibb Company and Novell, Inc.
Mr. Ueberroth is an investor and Chairman of the Contrarian Group, Inc., a business management company, and has held this position since 1989. He is the nonexecutive Co-Chairman of Pebble Beach Company. Mr. Ueberroth is also a Director of Adecco SA, Aircastle Limited, Ambassadors International, Inc. and Hilton Hotels Corporation.
Mr. Wallenberg is Chairman of the Board of Investor AB, a Swedish industrial holding company, and has held this position since April 2005. Mr. Wallenberg is also Vice Chairman of Skandinaviska Enskilda Banken AB, a North European financial group, having served as its Chief Executive Officer from 1997 to 1998 and as its Chairman of the Board from April 1998 to April 2005. Mr. Wallenberg also serves as Vice Chairman of Atlas Copco AB and SAS AB, both Swedish companies. Since January 2008, Mr. Wallenberg is a Senior Advisor to Foundation Asset Management Sweden AB. From January 2006 until December 2007, he was a Senior Advisor to Thisbe AB. He was acting Chairman of W Capital Management AB from January 2002 to December 2005. He is a Director of ABB Ltd.
Mr. Williams retired in March 1998 as Chairman of the Board and Chief Executive Officer of SunTrust Banks, Inc., a bank holding company, which positions he had held for more than five years. He is a Director of Marine Products Corporation, Rollins, Inc. and RPC, Inc.
MANAGEMENT DISCUSSION FROM LATEST 10K
The following Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations (â€śMD&Aâ€ť) is intended to help the reader understand The Coca-Cola Company, our operations and our present business environment. MD&A is provided as a supplement toâ€”and should be read in conjunction withâ€”our consolidated financial statements and the accompanying notes thereto contained in â€śItem 8. Financial Statements and Supplementary Dataâ€ť of this report. This overview summarizes the MD&A, which includes the following sections:
Our Businessâ€” a general description of our business and the nonalcoholic beverages segment of the commercial beverages industry, our objective, our strategic priorities, our core capabilities, and challenges and risks of our business.
Critical Accounting Policies and Estimatesâ€” a discussion of accounting policies that require critical judgments and estimates.
Operations Review â€”an analysis of our Companyâ€™s consolidated results of operations for the three years presented in our consolidated financial statements. Except to the extent that differences among our operating segments are material to an understanding of our business as a whole, we present the discussion in the MD&A on a consolidated basis.
Liquidity, Capital Resources and Financial Positionâ€” an analysis of cash flows; off-balance sheet arrangements and aggregate contractual obligations; foreign exchange; an overview of financial position; and the impact of inflation and changing prices.
We are the largest manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups in the world. Along with Coca-Cola, which is recognized as the worldâ€™s most valuable brand, we market four of the worldâ€™s top five nonalcoholic sparkling brands, including Diet Coke, Fanta and Sprite. Our Company owns or licenses more than 450 brands, including diet and light beverages, waters, enhanced waters, juices and juice drinks, teas, coffees, and energy and sports drinks. Through the worldâ€™s largest beverage distribution system, consumers in more than 200 countries enjoy the Companyâ€™s beverages at a rate of approximately 1.5 billion servings each day. Our Company generates revenues, income and cash flows by selling beverage concentrates and syrups as well as finished beverages. We generally sell these products to bottling and canning operations, fountain wholesalers and some fountain retailers, and, in the case of finished products, to distributors. Our bottlers sell our branded products to businesses and institutions including retail chains, supermarkets, restaurants, small neighborhood grocers, sports and entertainment venues, and schools and colleges. We continue to expand our marketing presence and increase our unit case volume in both developed and emerging markets. Our strong and stable system helps us to capture growth by manufacturing, distributing and marketing existing, enhanced and new innovative products to our consumers throughout the world.
We have three types of bottling relationships: bottlers in which our Company has no ownership interest, bottlers in which our Company has a noncontrolling ownership interest and bottlers in which our Company has a controlling ownership interest. We authorize our bottling partners to manufacture and package products made from our concentrates and syrups into branded finished products that they then distribute and sell. In 2007, bottling partners in which our Company has no ownership interest or a noncontrolling ownership interest produced and distributed approximately 79 percent of our worldwide unit case volume.
We make significant marketing expenditures in support of our brands, including expenditures for advertising, sponsorship fees and special promotional events. As part of our marketing activities, we, at our discretion, provide retailers and distributors with promotions and point-of-sale displays; our bottling partners with advertising support and funds designated for the purchase of cold-drink equipment; and our consumers with coupons, discounts and promotional incentives. These marketing expenditures help to enhance awareness of and increase consumer preference for our brands. We believe that greater awareness and preference promote long-term growth in unit case volume, per capita consumption and our share of worldwide nonalcoholic beverage sales.
The Nonalcoholic Beverages Segment of the Commercial Beverages Industry
We operate in the highly competitive nonalcoholic beverages segment of the commercial beverages industry. We face strong competition from numerous other general and specialty beverage companies. We, along with other beverage companies, are affected by a number of factors, including, but not limited to, cost to manufacture and distribute products, consumer spending, economic conditions, availability and quality of water, consumer preferences, inflation, political climate, local and national laws and regulations, foreign currency exchange fluctuations, fuel prices and weather patterns.
Our objective is to use our formidable assetsâ€”brands, financial strength, unrivaled distribution system, global reach, and a strong commitment by our management and associates worldwideâ€”to achieve long-term sustainable growth. Our vision for sustainable growth includes the following:
People: Being a great place to work where people are inspired to be the best they can be.
Portfolio: Bringing to the world a portfolio of beverage brands that anticipates and satisfies peopleâ€™s desires and needs.
Partners: Nurturing a winning network of partners and building mutual loyalty.
Planet: Being a responsible global citizen that makes a difference.
Profit: Maximizing return to shareowners while being mindful of our overall responsibilities.
We have five strategic priorities designed to create long-term sustainable growth for our Company and the Coca-Cola system and value for our shareowners. These strategic priorities are growing sparkling beverage leadership; rapidly growing still beverages; leveraging a balanced geographic portfolio; accelerating the innovation pipeline; and strengthening Coca-Cola system capability. To enable the entire Coca-Cola system so that we can deliver on these strategic priorities, we must further enhance our core capabilities of consumer marketing; commercial leadership; and franchise leadership.
Marketing investments are designed to enhance consumer awareness and increase consumer preference for our brands. This produces long-term growth in unit case volume, per capita consumption and our share of worldwide nonalcoholic beverage sales. We heighten consumer awareness of and product appeal for our brands using integrated marketing programs. Through our relationships with our bottling partners and those who sell our products in the marketplace, we create and implement marketing programs both globally and locally. In developing a strategy for a Company brand, we conduct product and packaging research, establish brand positioning, develop precise consumer communications and solicit consumer feedback. Our integrated global and local marketing programs include activities such as advertising, point-of-sale merchandising and sales promotions.
The Coca-Cola system has millions of customers around the world who sell or serve our products directly to consumers. We focus on enhancing value for our customers and providing solutions to grow their beverage businesses. Our approach includes understanding each customerâ€™s business and needs, whether that customer is a sophisticated retailer in a developed market or a kiosk owner in an emerging market. We focus on ensuring that our customers have the right product and package offerings and the right promotional tools to deliver enhanced value to themselves and the Company. We are constantly looking to build new beverage consumption occasions in our customersâ€™ outlets through unique and innovative consumer experiences, product availability and delivery systems, and beverage merchandising and displays.
We must continue to improve our franchise leadership capabilities to give our Company and our bottling partners the ability to grow together through shared values, aligned incentives and a sense of urgency and flexibility that supports consumersâ€™ always changing needs and tastes. The financial health and success of our bottling partners are critical components of the Companyâ€™s success. We work with our bottling partners to continuously look for ways to improve system economics, and we share best practices throughout the bottling system. We also design business models for still beverages in specific markets to ensure that we appropriately share the value created by these beverages with our bottling partners. We will continue to build a supply chain network that leverages the size and scale of the Coca-Cola system to gain a competitive advantage.
Challenges and Risks
Being a global company provides unique opportunities for our Company. Challenges and risks accompany those opportunities.
Our management has identified certain challenges and risks that demand the attention of the nonalcoholic beverages segment of the commercial beverages industry and our Company. Of these, four key challenges and risks are discussed below.
Obesity and Inactive Lifestyles. Increasing awareness among consumers, public health professionals and government agencies of the potential health problems associated with obesity and inactive lifestyles represents a significant challenge to our industry. We recognize that obesity is a complex public health problem. Our commitment to consumers begins with our broad product line, which includes a wide selection of diet and light beverages, juices and juice drinks, sports drinks and water products. Our commitment also includes adhering to responsible policies in schools and in the marketplace; supporting programs to encourage physical activity and promote nutrition education; and continuously meeting changing consumer needs through beverage innovation, choice and variety. We are committed to playing an appropriate role in helping address this issue in cooperation with governments, educators and consumers through science-based solutions and programs.
Water Quality and Quantity. Water quality and quantity is an issue that increasingly requires our Companyâ€™s attention and collaboration with the nonalcoholic beverages segment of the commercial beverages industry, governments, nongovernmental organizations and communities where we operate. Water is the main ingredient in substantially all of our products. It is also a limited natural resource facing unprecedented challenges from overexploitation, increasing pollution and poor management. Our Company is in an excellent position to share the water-related knowledge we have developed in the communities we serveâ€”water-resource management, water treatment, wastewater treatment systems, and models for working with communities and partners in addressing water and sanitation needs. We are actively engaged in assessing the specific water-related risks that we and many of our bottling partners face and have implemented a formal water risk management program. We are working with our global partners to develop water sustainability projects. We are actively encouraging improved water efficiency and conservation efforts throughout our system. As demand for water continues to increase around the world, we expect commitment and continued action on our part will be crucial in the successful long-term stewardship of this critical natural resource.
Evolving Consumer Preferences. Consumers want more choices. We are impacted by shifting consumer demographics and needs, on-the-go lifestyles, aging populations in developed markets and consumers who are empowered with more information than ever. We are committed to generating new avenues for growth through our core brands with a focus on diet and light products. We are also committed to continuing to expand the variety of choices we provide to consumers to meet their needs, desires and lifestyle choices.
Increased Competition and Capabilities in the Marketplace. Our Company is facing strong competition from some well-established global companies and many local participants. We must continue to selectively expand into other profitable segments of the nonalcoholic beverages segment of the commercial beverages industry and strengthen our capabilities in marketing and innovation in order to maintain our brand loyalty and market share.
All four of these challenges and risksâ€”obesity and inactive lifestyles, water quality and quantity, evolving consumer preferences, and increased competition and capabilities in the marketplaceâ€”have the potential to have a material adverse effect on the nonalcoholic beverages segment of the commercial beverages industry and on our Company; however, we believe our Company is well positioned to appropriately address these challenges and risks.
See also â€śItem 1A. Risk Factorsâ€ť in Part I of this report for additional information about risks and uncertainties facing our Company.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, which require management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe that our most critical accounting policies and estimates relate to the following:
Basis of Presentation and Consolidation
Recoverability of Noncurrent Assets
Management has discussed the development, selection and disclosure of critical accounting policies and estimates with the Audit Committee of the Companyâ€™s Board of Directors. While our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of the Companyâ€™s significant accounting policies, refer to Note 1 of Notes to Consolidated Financial Statements.
Basis of Presentation and Consolidation
Our Company consolidates all entities that we control by ownership of a majority voting interest as well as variable interest entities for which our Company is the primary beneficiary. Our judgment in determining if we are the primary beneficiary of the variable interest entities includes assessing our Companyâ€™s level of involvement in setting up the entity, determining if the activities of the entity are substantially conducted on behalf of our Company, determining whether the Company provides more than half of the subordinated financial support to the entity, and determining if we absorb the majority of the entityâ€™s expected losses or returns.
We use the equity method to account for investments for which we have the ability to exercise significant influence over operating and financial policies of the investee. Our consolidated net income includes our Companyâ€™s proportionate share of the net income or loss of these companies. Our judgment regarding the level of influence over each equity method investment includes considering key factors such as our ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions.
We use the cost method to account for investments in companies that we do not control and for which we do not have the ability to exercise significant influence over operating and financial policies. In accordance with the cost method, these investments are recorded at cost or fair value, as appropriate. We record dividend income when applicable dividends are declared.
Our Company eliminates all significant intercompany transactions, including the intercompany portion of transactions with equity method investees, from our financial results.
Recoverability of Noncurrent Assets
Managementâ€™s assessments of the recoverability of noncurrent assets involve critical accounting estimates. These assessments reflect managementâ€™s best assumptions, which, we believe, are consistent with the assumptions that hypothetical marketplace participants would use. Factors that management must estimate when performing recoverability and impairment tests include, among others, the economic life of the asset, sales volume, prices, inflation, cost of capital, marketing spending, foreign currency exchange rates, tax rates and capital spending. These factors are often interdependent and therefore do not change in isolation. These factors include inherent uncertainties, and significant management judgment is involved in estimating their impact. However, the assumptions we use for financial reporting purposes are consistent with those we use in our internal planning, and we believe they are consistent with those that a hypothetical marketplace participant would use. Management periodically evaluates and updates the estimates based on the conditions that influence these factors. The variability of these factors depends on a number of conditions, including uncertainty about future events, and thus our accounting estimates may change from period to period. If other assumptions and estimates had been used in the current period, the balances for noncurrent assets could have been materially impacted. Furthermore, if management uses different assumptions or if different conditions occur in future periods, future operating results could be materially impacted.
Our Company faces many uncertainties and risks related to various economic, political and regulatory environments in the countries in which we operate, particularly in developing or emerging markets. Refer to the heading â€śOur Businessâ€”Challenges and Risks,â€ť above, and â€śItem 1A. Risk Factorsâ€ť in Part I of this report. As a result, management must make numerous assumptions which involve a significant amount of judgment when determining the recoverability of noncurrent assets in various regions around the world.
During 2007, operating losses incurred in several quarters by certain consolidated bottling operations in Asia and Europe were considered impairment indicators. Therefore, the Company completed impairment reviews of our noncurrent assets in these bottling operations. In 2007, as a result of these impairment reviews, the Company did not record any impairment charges related to these bottling operations. As of December 31, 2007, the remaining carrying values of our noncurrent assets in bottling operations subject to these impairment reviews in Asia and Europe were approximately $386 million and $2,829 million, respectively. The Company will continue to monitor the recoverability of these noncurrent assets and investments in bottling operations in 2008.
Equity Method and Cost Method Investments
We review our equity and cost method investments in every reporting period to determine whether a significant event or change in circumstances has occurred that may have an adverse effect on the fair value of each investment. When such events or changes occur, we evaluate the fair value compared to the carrying value of the related investment. We also perform this evaluation every reporting period for each investment for which the carrying value has exceeded the fair value in the prior period. The fair values of most of our Companyâ€™s investments in publicly traded companies are often readily available based on quoted market prices. For investments in nonpublicly traded companies, managementâ€™s assessment of fair value is based on valuation methodologies including discounted cash flows, estimates of sales proceeds and appraisals, as appropriate. We consider the assumptions that we believe hypothetical marketplace participants would use in evaluating estimated future cash flows when employing the discounted cash flow or estimates of sales proceeds valuation methodologies. The ability to accurately predict future cash flows, especially in developing and unstable markets, may impact the determination of fair value.
In the event a decline in fair value of an investment occurs, management may be required to determine if the decline in fair value is other than temporary. Managementâ€™s assessment as to the nature of a decline in fair value is based on the valuation methodologies discussed above, our ability and intent to hold the investment, and whether evidence indicating the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. We consider most of our equity method investees to be strategic long-term investments. If the fair value of an investment is less than its carrying value and the decline in value is considered to be other than temporary, a write-down is recorded. Managementâ€™s assessments of fair value represent our best estimates as of the time of the impairment review and are consistent with the assumptions that we believe hypothetical marketplace participants would use. If different assessments were made, this could have a material impact on our consolidated financial statements.
Our Company invests in infrastructure programs with our bottlers that are directed at strengthening our bottling system and increasing unit case volume. Additionally, our Company advances payments to certain customers to fund future marketing activities intended to generate profitable volume and expenses such payments over the periods benefited. Advance payments are also made to certain customers for distribution rights. Payments under these programs are generally capitalized and reported as other assets in our consolidated balance sheets. When facts and circumstances indicate that the carrying value of these assets may not be recoverable, management evaluates the recoverability of the carrying value of these assets by preparing estimates of sales volume and the resulting gross profit and cash flows. If the carrying value of these assets is assessed to be recoverable, it is amortized over the periods benefited. If the carrying value of these assets is considered to be not recoverable, an impairment is recognized, resulting in a write-down of assets.
Property, Plant and Equipment
Certain events or changes in circumstances may indicate that the recoverability of the carrying amount of property, plant and equipment should be assessed. Such events or changes may include a significant decrease in market value, a significant change in the business climate in a particular market, or a current-period operating or cash flow loss combined with historical losses or projected future losses. If an event occurs or changes in circumstances are present, we estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, we recognize an impairment loss. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. We use a variety of methodologies to determine the fair value of property, plant and equipment, including appraisals and cash flow analyses, that are consistent with the assumptions we believe hypothetical marketplace participants would use.
In 2007, our Company recorded a charge of approximately $99 million in the line item equity incomeâ€”net resulting from the impact of our proportionate share of asset write-downs primarily related to excess and obsolete bottles and cases at CCBPI, which impacted Bottling Investments. Refer to the heading â€śOperations Reviewâ€”Equity Incomeâ€”Netâ€ť and Note 3 of Notes to Consolidated Financial Statements.
In 2006, our Company recorded a charge of approximately $602 million in the line item equity incomeâ€”net resulting from the impact of our proportionate share of an impairment charge recorded by CCE, which impacted Bottling Investments. Refer to the heading â€śOperations Reviewâ€”Equity Incomeâ€”Netâ€ť and Note 3 of Notes to Consolidated Financial Statements.
Our trademarks and other intangible assets determined to have definite lives are amortized over their useful lives. In accordance with SFAS No. 142, if conditions exist that indicate the carrying value may not be recoverable, we review such trademarks and other intangible assets with definite lives for impairment. Such conditions may include an economic downturn in a market or a change in the assessment of future operations. Trademarks and other intangible assets determined to have indefinite useful lives are not amortized. We test such trademarks and other intangible assets with indefinite useful lives for impairment annually, or more frequently if events or circumstances indicate that assets might be impaired. Goodwill is not amortized. We also perform tests for impairment of goodwill annually, or more frequently if events or circumstances indicate it might be impaired. All goodwill is assigned to reporting units, which are one level below our operating segments. Goodwill is assigned to the reporting unit that benefits from the synergies arising from each business combination. We perform our impairment tests of goodwill at our reporting unit level. Impairment tests for goodwill include comparing the fair value of the respective reporting unit with its carrying value, including goodwill. We use a variety of methodologies in conducting these impairment assessments, including cash flow analyses that are consistent with the assumptions we believe hypothetical marketplace participants would use, estimates of sales proceeds and appraisals. Where applicable, we use an appropriate discount rate that is commensurate with the risk inherent in the projected cash flows.
In 2006, our Company recorded impairment charges of approximately $41 million primarily related to trademarks for beverages sold in the Philippines and Indonesia. The Philippines and Indonesia are components of the Pacific. The amount of these impairment charges was determined by comparing the fair values of the intangible assets to their respective carrying values. The fair values were determined using discounted cash flow analyses. Because the fair values were less than the carrying values of the assets, we recorded impairment charges to reduce the carrying values of the assets to their respective fair values. These impairment charges were recorded in the line item other operating charges in the consolidated statement of income.
In 2005, our Company recorded impairment charges of approximately $84 million related to intangible assets. These intangible assets were related to trademarks for beverages sold in the Philippines. The carrying value of our trademarks in the Philippines, prior to the recording of the impairment charges in 2005, was approximately $268 million. The impairments were the result of our revised outlook for the Philippines, which had been unfavorably impacted by declines in volume and income before income taxes resulting from the continued lack of an affordable package offering and the continued limited availability of these trademark beverages in the marketplace. We determined the amounts of the impairment charges by comparing the fair values of the intangible assets to their then carrying values. Fair values were derived using discounted cash flow analyses with a number of scenarios that were weighted based on the probability of different outcomes. Because the fair values were less than the carrying values of the assets, we recorded impairment charges to reduce the carrying values of the assets to fair values. In addition, in 2005, we recorded an impairment charge of approximately $4 million in the line item equity incomeâ€”net related to our proportionate share of a write-down of intangible assets recorded by our equity method investee bottler in the Philippines.
We recognize revenue when persuasive evidence of an arrangement exists, delivery of products has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. For our Company, this generally means that we recognize revenue when title to our products is transferred to our bottling partners, resellers or other customers. In particular, title usually transfers upon shipment to or receipt at our customersâ€™ locations, as determined by the specific sales terms of each transaction. Our sales terms do not allow for a right of return except for matters related to any manufacturing defects on our part.
In addition, our customers can earn certain incentives, which are included in deductions from revenue, a component of net operating revenues in the consolidated statements of income. These incentives include, but are not limited to, cash discounts, funds for promotional and marketing activities, volume-based incentive programs and support for infrastructure programs. Refer to Note 1 of Notes to Consolidated Financial Statements. The aggregate deductions from revenue recorded by the Company in relation to these programs, including amortization expense on infrastructure programs, was approximately $4.1 billion, $3.8 billion and $3.7 billion for the years ended December 31, 2007, 2006 and 2005, respectively.
In July 2006, the FASB issued FASB Interpretation No. 48, â€śAccounting for Uncertainty in Income Taxesâ€ť (â€śInterpretation No. 48â€ť). Interpretation No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterpriseâ€™s financial statements in accordance with SFAS No. 109, â€śAccounting for Income Taxes.â€ť Interpretation No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interpretation No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Our Company adopted the provisions of Interpretation No. 48 effective January 1, 2007. As a result of the adoption of Interpretation No. 48, we recorded an approximate $65 million increase in accrued income taxes in our consolidated balance sheet for unrecognized tax benefits, which was accounted for as a cumulative effect adjustment to the January 1, 2007 balance of reinvested earnings.
Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain based upon one of the following: (1) the tax position is not â€śmore likely than notâ€ť to be sustained, (2) the tax position is â€śmore likely than notâ€ť to be sustained, but for a lesser amount, (3) the tax position is â€śmore likely than notâ€ť to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position, and (3) each tax position is evaluated without considerations of the possibility of offset or aggregation with other tax positions taken. We adjust these reserves, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit.
A number of years may elapse before a particular matter for which we have established a reserve is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the â€śmore likely than notâ€ť recognition threshold would be recognized in our income tax expense in the first interim period when the uncertainty disappears under any one of the following conditions: (1) the tax position is â€śmore likely than notâ€ť to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired. Settlement of any particular issue would usually require the use of cash.
Tax law requires items to be included in the tax return at different times than when these items are reflected in the consolidated financial statements. As a result, the annual tax rate reflected in our consolidated financial statements is different than that reported in our tax return (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are the enacted tax rates in effect for the year in which the differences are expected to reverse. Based on the evaluation of all available information, the Company recognizes future tax benefits, such as net operating loss carryforwards, to the extent that realizing these benefits is considered more likely than not.
We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our forecasted taxable income using both historical and projected future operating results, the reversal of existing temporary differences, taxable income in prior carryback years (if permitted) and the availability of tax planning strategies. A valuation allowance is required to be established unless management determines that it is more likely than not that the Company will ultimately realize the tax benefit associated with a deferred tax asset.
Additionally, undistributed earnings of a subsidiary are accounted for as a temporary difference, except that deferred tax liabilities are not recorded for undistributed earnings of a foreign subsidiary that are deemed to be indefinitely reinvested in the foreign jurisdiction. The Company has formulated a specific plan for reinvestment of undistributed earnings of its foreign subsidiaries which demonstrates that such earnings will be indefinitely reinvested in the applicable tax jurisdictions. Should we change our plans, we would be required to record a significant amount of deferred tax liabilities.
The American Jobs Creation Act of 2004 (the â€śJobs Creation Actâ€ť) was enacted in October 2004. Among other things, it provided a one-time benefit related to foreign tax credits generated by equity investments in prior years. In 2004, the Company recorded an income tax benefit of approximately $50 million as a result of this new law. The Jobs Creation Act also included a temporary incentive for U.S. multinationals to repatriate foreign earnings at an approximate 5.25 percent effective tax rate. During 2005, the Company repatriated approximately $6.1 billion in previously unremitted foreign earnings, with an associated tax liability of approximately $315 million. The reinvestment requirements of this repatriation have been fulfilled at December 31, 2007. Refer to Note 1 and Note 17 of Notes to Consolidated Financial Statements.
The Companyâ€™s effective tax rate is expected to be approximately 22.0 to 22.5 percent in 2008. This estimated tax rate does not reflect the impact of any unusual or special items that may affect our tax rate in 2008.
Our Company is subject to various claims and contingencies, mostly related to legal proceedings and tax matters (both income taxes and indirect taxes). Due to their nature, such legal proceedings and tax matters involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions. Management assesses the probability of loss for such contingencies and accrues a liability and/or discloses the relevant circumstances, as appropriate. Management believes that any liability to the Company that may arise as a result of currently pending legal proceedings, tax matters or other contingencies will not have a material adverse effect on the financial condition of the Company taken as a whole. Refer to Note 13 of Notes to Consolidated Financial Statements.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Sales of our ready-to-drink nonalcoholic beverages are somewhat seasonal, with the second and third calendar quarters accounting for the highest sales volumes. The volume of sales in the beverage business may be affected by weather conditions.
We measure our sales volume in two ways: (1) unit cases of finished products and (2) concentrate sales. A "unit case" is a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings). Unit case volume represents the number of unit cases of Company beverage products directly or indirectly sold by the Company and its bottling partners ("Coca-Cola system") to customers. Unit case volume primarily consists of beverage products bearing Company trademarks. Also included in unit case volume are certain products licensed to, or distributed by, our Company, and brands owned by Coca-Cola system bottlers for which our Company provides marketing support and from the sale of which we derive economic benefit. Such products licensed to, or distributed by, our Company or owned by Coca-Cola system bottlers account for a minimal portion of total unit case volume. In addition, unit case volume includes sales by joint ventures in which the Company is a partner. Unit case volume is derived based on estimates supplied by our bottling partners and distributors. Concentrate sales volume represents the amount of concentrates, syrups, beverage bases and powders (in all cases expressed in equivalent unit cases) sold by, or used in finished beverages sold by, the Company to its bottling partners or other customers. Most of our revenues are based on concentrate sales, a primarily wholesale activity. Unit case volume and concentrate sales growth rates are not necessarily equal during any given period. Factors such as seasonality, bottlers' inventory practices, supply point changes, timing of price increases, new product introductions and changes in product mix can impact unit case volume and concentrate sales and can create differences between unit case volume and concentrate sales growth rates.
Unit Case Volume
Although most of our Company's revenues are not based directly on unit case volume, we believe unit case volume is one of the measures of the underlying strength of the Coca-Cola system because it measures trends at the consumer level.
In Africa, unit case volume decreased 1 percent in the first quarter of 2008 versus the comparable period of the prior year. This decline was primarily due to a 9 percent volume decline in South Africa and a 1 percent decline in Nigeria, partially offset by unit case volume growth in East and Central Africa and North and West Africa. The volume decline in South Africa was primarily due to supply chain issues resulting from carbon dioxide shortages. Our system is currently investing in manufacturing capabilities that would allow us to produce our own supply of carbon dioxide to mitigate the risk of future shortages.
In Eurasia, unit case volume grew 13 percent in the first quarter of 2008 compared to the first quarter of 2007. Turkey, Russia, India and Eastern Europe drove results, each realizing double-digit unit case volume growth during the period. Unit case volume in India increased 13 percent during the quarter, reflecting double-digit growth in Trademark Coca-Cola and still beverages.
Unit case volume in the European Union increased 3 percent in the first quarter of 2008 versus the comparable period of the prior year. The volume growth during the quarter reflected double-digit growth in still beverages and 2 percent growth in sparkling beverages. Unit case volume increased mid single-digits in Great Britain, its second consecutive quarter of growth. Germany also realized 2 percent volume growth during the quarter.
Unit case volume in Latin America increased 9 percent in the first quarter of 2008 compared to the first quarter of 2007. The results for the quarter included unit case volume growth in all key markets, a 5 percent increase in Trademark Coca-Cola and the benefit of acquisitions. Unit case volume in Mexico increased 11 percent, primarily related to 6 percent growth in brand Coca-Cola and the successful integration of Jugos del Valle, S.A.B. de C.V. ("Jugos del Valle"), which contributed 4 percent of growth. In Brazil, unit case volume grew 11 percent, primarily due to solid growth in Trademark Coca-Cola and the current period impact of Leao Junior acquired at the end of the first quarter in 2007. Argentina realized 5 percent unit case volume growth, which was largely attributable to strong sparkling beverage growth led by Trademark Coca-Cola.
In North America, unit case volume was even in the first quarter of 2008 versus the comparable period of the prior year, reflecting a difficult U.S. economic environment. Retail unit case volume increased 2 percent, including a benefit from acquisitions, while Foodservice and Hospitality declined 4 percent, reflecting the challenging foodservice industry environment. Unit case volume for the still beverages category increased 10 percent, partially offset by a 3 percent decline in unit case volume in the sparkling beverages category. The increase in unit case volume for still beverages is primarily the result of the strong performance of glacĂ©au and Fuze, which continue to increase ahead of our expectations, as well as mid single-digit growth in warehouse-delivered chilled juices. Warehouse-delivered chilled juices included double-digit growth in Trademark Simply and the expansion of Minute Maid Enhanced Juices. The unit case volume decline in sparkling beverages was primarily due to the decline in Foodservice and other on-premise businesses. However, Coca-Cola Zero delivered a strong performance, increasing unit case volume more than 40 percent in the first quarter of 2008. North America's first quarter 2007 results do not include unit case volume for Fuze and glacĂ©au, which were acquired at the end of the first quarter and in the second quarter of 2007, respectively.
In the Pacific, unit case volume increased 10 percent in the first quarter of 2008 compared to the first quarter of 2007. Pacific's unit case volume growth was led by 20 percent growth in China and 21 percent growth in the Philippines. Japan achieved slight positive unit case volume growth in the quarter. This was Japan's sixth consecutive quarter of growth. Unit case volume growth in Japan included double-digit growth in Trademark Coca-Cola driven by the success of Coca-Cola Zero and the execution of our three-cola strategy (focusing on driving unit case volume growth for Coca-Cola, Coca-Cola Zero and Diet Coke or Coca-Cola light). Georgia Coffee unit case volume increased 1 percent in the quarter, achieving its second consecutive quarter of growth. The growth in Trademark Coca-Cola and Georgia Coffee was partially offset by mid single-digit unit case volume declines in Sokenbicha and Aquarius, primarily due to unfavorable weather. The unit case volume growth in China was led by double-digit growth in Trademark Coca-Cola, Trademark Sprite and Minute Maid. The unit case volume growth in the Philippines was primarily due to the double-digit growth in Trademark Coca-Cola that resulted from successful marketing campaigns and market execution.
Unit case volume for Bottling Investments increased 40 percent in the first quarter of 2008 versus the comparable period of the prior year primarily due to the prior year acquisition of certain bottlers, including CCBPI, 18 bottling and distribution operations in Germany and Nordeste Refrigerantes S.A. ("NORSA"). The unit case volume growth during the quarter also reflects the overall improving health of the Company's consolidated bottling operations.
Concentrate Sales Volume
For the first quarter of 2008, differences between unit case volume and concentrate sales volume growth rates for all segments were primarily due to timing of concentrate shipments and inventory related to upcoming product introductions. In Latin America, the inclusion of Jugos del Valle contributed to unit case volume growth. However, Jugos del Valle does not contribute to concentrate sales volume, since the Company does not sell concentrate to Jugos del Valle.
Net Operating Revenues
Net operating revenues were $7,379 million in the first quarter of 2008, compared to $6,103 million in the first quarter of 2007, an increase of $1,276 million or 21 percent.
Gross profit margin decreased to 64.4 percent in the first quarter of 2008 from 64.9 percent in the first quarter of 2007. Our gross profit margin was unfavorably impacted by the acquisitions of CCBPI and Leao Junior during the first quarter of 2007, the acquisition of glacĂ©au in the second quarter of 2007, and the acquisitions of NORSA and 18 German bottling and distribution operations during the third quarter of 2007. Refer to the heading "Beverage Volume" and Note L of Notes to Condensed Consolidated Financial Statements. Generally, bottling and finished product operations produce higher net revenues but lower gross profit margins compared to concentrate and syrup operations. Our gross profit margin was also unfavorably impacted by product mix and increases in the cost of raw materials and freight.
Selling, general and administrative expenses increased $478 million or 21 percent for the first quarter of 2008 as compared to the first quarter of 2007. Approximately 17 percent of the increase is attributable to bottler acquisitions, increased costs from brand acquisitions and the impact of foreign currency. The remaining 4 percent increase was primarily related to increased marketing and innovation activities designed to drive growth in the business while controlling general and administrative expenses as we focus on productivity and expense management. General and administrative expenses also benefited from the impact of amendments made to the U.S. retiree medical plan during 2007. Refer to Note G of Notes to Condensed Consolidated Financial Statements.
As of March 28, 2008, there was approximately $645 million of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under our plans. That cost is expected to be recognized over a weighted-average period of 1.9 years. This expected cost does not include the impact of any future stock-based compensation awards.
Other Operating Charges
Other operating charges in the first quarter of 2008 primarily related to restructuring costs and the impairment of certain assets. These restructuring costs are related to the steps the Company took to streamline and simplify its operations globally. These costs are primarily related to the plan to close a beverage concentrate manufacturing and distribution plant in Drogheda, Ireland, as well as streamlining activities in other selected business units. The total cost of these restructuring activities is expected to be approximately $345 million. The Company has incurred total pretax expenses of approximately $287 million related to these restructuring activities since they commenced, and expects to expense the remainder of these charges during 2008. The expected payback period is three to four years. Refer to Note K of Notes to Condensed Consolidated Financial Statements. The impairment of certain assets is related to the write-down of manufacturing lines that produce product packaging materials. Refer to Note H of Notes to Condensed Consolidated Financial Statements.