Pruning for Growth — the Power of Divestment

News in from Coca-Cola reminds us that growth is more about recalibration than it is about adding size. According to the Wall Street Journal, Coke plans to sell off all of its US manufacturing plants by 2017.

Why would they do that?

Coke has struggled with its asset heavy distribution over the past couple of years and is now reversing a decision it made in 2006 to acquire its largest bottler for $12.3 billion. Divestment enables the soft drinks behemoth to focus on its more profitable concentrate business, and on being a brand manager and IP manager rather than a bottling manufacturer. After this divestiture, Coke’s operating margins will increase from 23% to 34%

Business is inherently cyclical. An asset-heavy strategy may be needed in certain market conditions. Other times may demand a lighter approach. In this case, for Coca-Cola today, the sum of the whole is worth less than the individual pieces. Its assets hold higher value when they’re separated. And Coke knows it has to take action to avoid becoming an acquisition target. There have been rumors that Anheuser-Busch InBev could try to buy the company.

What lessons can middle market companies learn from Coke’s dramatic pivot? Perhaps the most important point is that M&A is not about simply getting bigger. It’s about strategic recalibration and seizing opportunities to refocus your business to best leverage the market and future demand. Practically speaking, progress for your business may not always mean expansion. Pruning can also be a stimulus to long-term growth.

Photo Credit: Mike Mozart via Flickr cc