Case Study: Coca-Cola HBC Treasury Takes Control of Commodity Risk Management

Coca-Cola Hellenic Bottling Company (Coca-Cola HBC) is
the world’s second largest bottler of the Coca-Cola Company’s products and the
largest in Europe. Net sales revenue for fiscal 2012 was 6.8bn. Coca-Cola HBC is headquartered in Zug,
Switzerland, and has a premium listing on the London Stock Exchange and a
secondary listing on the Athens Exchange. It serves approximately 581m 
people in 28 countries.

The company decided to concentrate its
commodity market risk management within the treasury department, in
response to high levels of profit and loss (P/L) volatility and the
relatively high credit risk with its suppliers. The ensuing project
involved change management for transfer of the company’s commodity risk
hedging to treasury, the selection and implementation of a new technology
solution and putting in place a reporting environment that would provide the
necessary levels of understanding to support decision taking in line with
the organisation’s risk appetite.

The project described below won
the risk management award in the 2013 gtnews awards for global
corporate treasury and finance. 

The Commodity Management

Coca-Cola HBC’s business is exposed to commodity
price volatility in aluminium, oil, plastics and sugar.

In the
past, commodity hedging was not performed by group treasury.  This
resulted in a different approach in areas such as the implementation of
counterparty limits, controls and reporting and so forth, the management of
different foreign exchanges (FX) and the rates from commodities transactions.
In addition hedging was carried out through the various suppliers, an
approach that had a number of shortcomings:

  • It was difficult to
    follow a strategy with a consistent hedging horizon as the hedges could not
    extend in time beyond the maturity date of the contract with the supplier.
    Thus the hedging horizon was simply determined by contract maturity,
    which did not necessarily reflect Coca-Cola HBC’s actual exposure.
  • There was a further issue in counterparty risk management, as the
    contracts with the suppliers – and especially the hedging transactions
    executed through them – could not give the same legal certainty as contracts
    supported by International Swaps and Derivatives Association (ISDA)
    documentation. In addition, the company’s counterparty banks were better
    rated than our suppliers and thus we were exposed to higher levels of credit
    risk than we would be if Coca-Cola HBC were to have directly transacted the
    edges with our banks. Finally, the credit charges that suppliers were
    paying to the banks and then passed on to us would be lower if we were to
    deal directly with the banks, reflected our own creditworthiness.
  • The credit crunch that occurred in 2008 exerted a severe liquidity
    squeeze on the company’s suppliers, primarily as a consequence of
    increasing levels of margin calls that were being made by their banks for
    additional collateral to be lodged against their financing operations.

Our management team analysed the situation, and decided to
initiate a project towards achieving the following high level results:

  • To give the treasury department primary responsibility for making
    risk management decisions relating to commodity risk hedging. Treasury
    would do this in close consultation with the company’s procurement
    department; the practical situation would be that treasury would manage
    commodity market risk, and this would be separated from the role of
    procurement, which would have more time to focus on supplier price
    increases on conversion costs.
  • The commodity risk management
    operation would be overseen by the financial risk management committee,
    together with the management of foreign exchange (FX) and interest rates.
    This committee is comprised of senior finance and procurement personnel
    and is chaired by the group chief financial officer (CFO). 

The project’s most important initial objective was to select and
implement a technology solution that would:

  • Fully support
    Coca-Cola HBC treasury department’s commodity hedging decisions and market
  • Improve the transparency over the marketable commodity
    risks in the group.
  • Support the booking and reporting of the

The Solution Selection Project

The Coca-Cola HBC solution selection project ran from two ato three
months, as the team  identified and evaluated a range of potential vendor
solutions. This process took a little longer than I had originally
anticipated, but this time was well spent in achieving the best solution
for the urgent business issues we were confronting in commodity risk

The selection team consisted of several end users
and representatives of other significant stakeholders such as financial
reporting, IT, back office and front office. A project manager and an IT
specialist were additionally appointed as specialists to support this team’s
researches, operations and decisions.

The selection and
implementation projects were overseen by a project monitoring
committee. The selection team evaluated five contrasting solutions,
ultimately selecting Reval’s software-as-a-service (SaaS) treasury and
risk management (TRM) solution. The primary factor which influenced this
decision was the team’s feeling that this system was the most closely
attuned to the practical realities of Coca-Cola HBC treasury’s operations
in the active hedging of commodity exposures in the marketplace.

The Implementation Project

The implementation
project ran for just over six months, from June 2012 to January 2013. It
has successfully delivered its primary objectives within the planned
budget and time parameters. The three major strategic objectives of the
project reflected a broad range of Coca-Cola HBC’s management priorities:

  • Change management for transforming Coca-Cola HBC’s commodity
    management business processes so that treasury would assume responsibility
    for all aspects of risk management, and the procurement department would
    focus more on their primary responsibility of managing the conversion
    costs. Part of this change was the transfer of the commodity hedging
    operations to treasury. Procurement is still involved in the decision
    making process, but the primary responsibility lies with treasury.
  • System implementation, involving the roll-out of TRM as an integrated
    SaaS solution. The high-level scope of the implementation was the capture
    of the commodity exposures, the identification and execution of
    appropriate hedging trades, and the administration and reporting of
    hedging, hedge accounting and risk management.
  • Internal
    reporting. The project aimed to produce significantly higher levels of
    transparency for Coca-Cola HBC’s management, through the generation of
    specific reporting regarding the transactional impact of relevant financial
    risks for the company’s senior management and the various country management
    teams. Commodity risk is now consolidated with FX and other financial
    risk, which is managed in SAP. 

Operational Benefits of
the New Solution

Coca-Cola HBC treasury now enjoys a range
of benefits from the live operations of TRM. The most valuable
improvements include:

  • Harmonising risk management
    Commodity risk management is now targeted consistently
    with the methodology used for the other asset classes managed at Coca-Cola
    HBC. This means that the team can now consistently consolidate and analyse
    our entire exposure spectrum, which enables us to enjoy a much more
    complete understanding of the total financial risk which we are
  • Ability to hedge with financial derivatives
    using our counterparty banks:
    There are numerous benefits being
    achieved, ranging from reduced execution costs and reduced counterparty
    risk, to more flexibility on determining hedging strategy, and in commercial
    negotiation with the company’s suppliers.
  • Identifying
    commodity exposures accurately:
    The team has now established
    a new process in which the country and the procurement managers calculate
    the exposures and various commodities acquisition needs on a monthly
    basis. This process, tied with strong controls and key performance
    indicators (KPIs), has improved the accuracy of the reporting.
  • Enhanced treasury operations and analysis: The
    treasury team can now use the TRM solution for a range of operational and
    analytical purposes, including automated hedge valuation, effectiveness
    testing, advanced regression analysis, credit valuation adjustment (CVA)
    calculation, hedge accounting and reporting under IAS 39, and
    straight-through processing (STP) integration with SAP.
  • Management reporting: The treasury team now has
    full visibility of the commodity exposure position, and how it is hedged.
    This new wealth of understanding is reflected in its reporting to the
    financial risk management committee. The new reporting arrangement enables
    both treasury and management to see clearly which prices are fixed and which
    are floating.  The team continually reviews its management reporting output,
    to ensure that it is properly optimised. 


I have identified effective change management as
being a critical part of transforming and improving the way we work together
at Coca-Cola HBC. Change management has been central to achieving the
successful separation of the market risk component from the conversion
component in commodity management. A new process has been established for
the review of the contracts with the suppliers.  The team has built a number
of controls and authorisations to ensure the validity of the exposure
reporting process. It also devotes much time to identifying the optimal
structure of the transactions in order to reduce the tax risks and build a
legal framework through sound documentation.

There are also
numerous changes needed in several areas, from back office to tax and
financial reporting. In front office the team used the same controls as are
used for FX for the commodity trade execution; but has also had to work on
the position monitoring and the reports that we produce. On the reporting,
our main challenge was the fact that the hedges – previously focusing only
on market risk – were settling before the delivery of the physical product
to our factories. For the strategy, we spend much time before settling on
a specific approach. We also updated our treasury policy, which is
included in the procurement policy as well.

What Have
We Learned?

There are several recommendations that I
would make to others who are considering initiating a project similar to
Coca-Cola HBC’s commodity risk management exercise.

It’s most
important to take a clear look at the big picture, so that the full
spectrum of business issues and potential solutions are properly identified
and considered before detailed work begins. This includes ensuring that
all the relevant people across the organisation are properly involved, so
that they contribute to the design of the project, and will assume a share
of the ownership of the solution. In our case procurement, financial
reporting, back office, cash management, IT, tax and legal were all
involved. We also had involvement from the countries in which Coca-Cola HBC

Ensure that everyone involved understands the
relevant details and objectives of the project, and maintain this level of
understanding through internal reviews. Education in the essential details
for all concerned parties is vital. The project should establish and
operate appropriate internal controls, and define an agreed set of KPIs so
that progress and results can be effectively managed.


The big underlying idea of this
project was to try to improve Coca-Cola HBC’s risk management culture and
practice. As required, we have now successfully isolated the management of
commodity market risk within treasury, so it is now performed by specialists
who are experts on managing financial risks. The information is
communicated to the senior managers, and the hedging strategy is customised
to their risk appetite.

The team now enjoys the multiple benefits of
reduced P/L volatility, better pricing, reduced supplier-based risk,
enhanced control, transparency and reporting, and an improved environment
for effective commodity risk decision-taking.  


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