Growth may prove elusive for Coke

After being forced to make another downgrade on earnings guidance for 2013,

Coca-Cola Amatil chief Terry Davis will be wishing he had pulled up stumps a couple of years ago when the company was breaking records and he had marked 10 years.

With almost 12 years under his belt, he is one of the country's longest-serving chief executives and a successor is expected to be announced before year's end.

At a time when the company is facing several challenges across its business, it is not surprising that Coca-Cola Amatil chairman David Gonski has been busy looking for a successor. He is believed to have been ready to make an announcement a couple of months ago but was forced to delay until later in the year.

Several names have been tossed around, including the group's head of the Australasian business, Warwick White, who has spent more than 28 years in the global Coca-Cola system, and external candidates including GrainCorp chief executive Alison Watkins, who will be looking for another job if US agriculture company Archer Daniels Midland gets the green light from the Foreign Investment Review Board and Treasurer Joe Hockey for a $3 billion bid for the grain handler. FIRB is expected to make a decision by mid-December.

With so many challenges facing CCA, Gonski will need to get it right. There is no doubt Davis has done a good job at CCA, including creating a more performance-oriented approach, rather than a previous culture of promoting volume growth. To put it another way, in eight out of 11 years he has delivered double-digit profit growth.

But times will only get tougher from here on and the board is under pressure to find a replacement as soon as possible and let Davis move on.

In his latest trading update, Davis warns that 2013 earnings will be down between 5 and 7 per cent on last year's. He says the final result will depend on the group's performance in the next eight weeks as its Australasian beverage business contributes 70 per cent of earnings and two-thirds of its second-half earnings in November and December.

A key issue is its Australian business, which is mature and is facing lacklustre consumer spending at a time when its competitor, Pepsi, is selling products at up to 50 per cent less, and adverse currency movements in Indonesia.

A prescient note by Merrill Lynch analyst David Errington two weeks ago said: "Coca-Cola Amatil looks challenged to generate positive earnings growth in its Australian business - unless it is able to grow volumes. And currently, a number of issues have intensified - making Coke's ability to generate volume growth in the near-term difficult, in our view."

He said these included increased competitive pricing by Coke's competition, a lack of new product innovation within the Coke system (the last big brand innovation was Coke Zero in March 2006), "Australian supermarkets looking to drive costs down harder and a general concern toward Australian household confidence".

These are big issues for anyone to tackle but in the context of CCA's major shareholder, The Coca-Cola Company (TCCC), there is the added complication that it pulls quite a few of CCA's strings.

CCA is an anchor bottler for TCCC, which holds 30 per cent of CCA's shares. This means there is a tension within the relationship, where TCCC wants volume to be the endgame, while CCA is more focused on profit margins.

In CCA's growth market, Indonesia, there has long been speculation that TCCC is "constructively discontent" with the relationship and ideally would like to acquire the Indonesian Coca-Cola licence and business back from CCA, or find a partner such as Mexican bottler Coca-Cola FEMSA. The speculation intensified in December when TCCC sold 51 per cent of its Philippines bottler to FEMSA.

The latest trading update shows a hiccup in Indonesia, with the economy slowing and the weaker Indonesian currency likely to hit earnings by 1 per cent for 2013.

CCA will take a group of analysts to Indonesia on Thursday and it will be interesting to see what comes out of the tour, including a feel for the TCCC relationship.

While CCA has done an outstanding job with Indonesia, generating earnings before interest and tax of $102 million for 2012, up 16.8 per cent, and growing volume more than 10 per cent, the latest wobbles will put fresh pressure on the relationship.

Besides Indonesia, the other growth plank is alcohol, with a non-compete clause expiring in December. It has announced a long-term distribution deal with US brewer Samuel Adams to join a few other brands. There is also a $50 million joint-venture brewery in place but it will take a gargantuan effort given most of the big beer brands are sewn up by the Lion and Carlton & United Breweries heavyweights.