Coca-Cola's revival will hinge on product innovation

Alison Watkins wants to bring the magic back to the company and a focus on health will continue to be a key component of the brand strategy.

Coca-Cola Amatil boss Alison Watkins has said she wants to “bring back the magic” to the company even as she waves goodbye to two members of the old guard led by finance boss Nessa O’Sullivan.

The timing of the departure was treated negatively by the market but Watkins no doubt sees it as a natural course of events and a staged withdrawal of a talented finance director.

Former boss Terry Davis plainly overstayed his welcome which was a snafu at board level, but presented with the facts Watkins’ desire to take a clean broom to management is understandable.

While O’Sullivan will probably depart in March she is being kept on the payroll until May to help with the hand over. Watkins is looking for a senior person to help with a revival that will hinge around product innovation.

Based on Bank of America Merrill Lynch numbers next month the company will report a 30 per cent fall in earnings per share to 46 cents after last year’s 10 per cent fall, meaning it will be a while before the company matches 2012’s return of 73 cents a share.

For the record, the consensus forecast for 2014 is for a 22 per cent fall in EPS and Watkins is on record as saying there will be no further falls this year, and in the 2016 year the company will return to circa 7 per cent growth.

BAML’s David Errington has earnings continuing to slide to as low as 33 cents a share in 2016.

The restructuring ahead comes against an era where the company charged too much for its products in the supermarkets, letting rival Pepsi grab market share, on top of a global move away from carbonated soft drinks.

Watkins is no doubt more confident, having radically changed market expectations with last year’s downgrade, revamped the agreement with 30 per cent shareholder Coca-Cola so that incentives are based on transactions with more people drinking smaller amounts more often.

The Atlanta major shareholder faces much the same hurdles, and Watkins has made no secret of the fact she is keen to work with its circa 100 staff in Australia as well as head office.

Smaller cans are one change and this summer colour has been king, but the push is around health, with IXL Stevia (a natural sweetener in IXL jams) and Coke Life using the same natural sweetener which is derived from the Chrysanthemum plant family.

Zico coconut water is being sold as a source of replenishment, not just a drink. Coffee through Nespresso is another growth market. Whether these products can offset the challenges facing the main brand remain to be seen.

Parking a lot

Telstra closed yesterday up 3 cents at $6.20 marking the first time that its dividend yield fell 'as low' as 5 per cent for some 14 years, based on consensus forecasts of a 31 cents a share dividend this year.

The stock has risen some 31 per cent from its February low last year of $4.72, against a market which has done nothing.

The shares are known in the trade as a parking lot stock because people tend to buy and sit, and the parking lot is very full right now.

Patience at IAG

IAG boss Mike Wilkins is ready to hand over another $150 million to the State Bank of India to increase the company’s stake in a general insurance joint venture to 49 per cent.

Late last year the Indian cabinet approved the long-awaited change which underlines Prime Minister Narendra Modi’s commitment to loosening regulations.

The unusual move to pass a law by ordinance needs to be ratified by Parliament which is expected to happen in the session which starts shortly and runs to May.

IAG invested around $120m for the initial stake in the venture, which was signed in 2009 and became operational the following year, and Wilkins is keen to boost returns by as much as possible from the joint venture.

The IAG money should be measured against the hoped for increase of $US7 billion ($8.5bn) foreign investment in the Indian insurance market once the law is passed.

Macquarie unveiled another joint venture with SBI back in 2008 and the two launched a joint fund in 2009, which has some $910m of committed capital across eight investments.

SBI is a keenly sought joint venture partner given it is India’s largest bank with around 20 per cent of the market, some 220 million customers, 222,000 staff, 16,000 branches and $370bn in assets. By comparison, CBA has $79bn in assets and NAB some 2400 branches.

One of the SBI branches is in Sydney and NAB yesterday scored a coup in signing a memorandum of understanding with SBI to explore opportunities.

Just where this heads remains to be seen, and as can be seen by the IAG and Macquarie deals its Mumbai headquarters are certainly well known to many financial services company bosses.

NAB has just one branch in India, whereas ANZ is the local leader with one branch in Mumbai plus approval for three others, as well as 7000 staff in Bangalore.

ANZ boss Mike Smith has made clear he wants to expand in India and has acknowledged the bank erred back in 2000 when it’s sold its Grindlay branches to Standard Chartered for $1.3bn.

IAG’s Wilkins is on record saying he wants at least 10 per cent of group earnings to be sourced from Asia by 2017, which means they will have to increase more than fivefold from present levels.

This explains in part why he is keen to invest more in the SBI joint venture.

He is also a big supporter of Trade Minister Andrew Robb’s push to sign a free-trade agreement with India this year.

When asked the key to investing in India, Wilkins without hesitation says “patience”.

This is something he has shown given the company is now into its eighth year in the market and in all has some $800m invested in Asia generating circa $20m in earnings.

The long-term payback should be huge and in the process Wilkins is being a good insurance person by diversifying his risk.

The Indian central bank boss Raghuram Rajan yesterday surprised the market by cutting short-term rates by 0.25 per cent to 7.75 per cent.

This is the first rate cut in India for two years and follows the recent China rate cut highlighting the slowdown in the region’s economy.

ANZ follows lead

ANZ economist Warren Hogan yesterday followed the lead of NAB and Westpac in cutting his growth forecasts for this year and joined NAB’s Alan Oster in tipping a March rate cut from the RBA. All three banks are tipping Australian rates will fall by 0.5 per cent this year to 2 per cent.

Hogan said: “Our decision is not based on the Australian economic outlook deteriorating in any substantial way. Rather, the downward pressure on prices from lower energy costs and the risk the Australian dollar’s depreciation may stall as global interest rates fall makes monetary policy a potentially important policy lever once again.”

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