Coca-Cola Amatil’s reliance on pricing growth over volume growth is proving to be problematic for the beverage giant. Coca-Cola’s beverage business (not including alcohol) has seen revenue grow at an annual compound growth rate of 4.5 per cent against volume growth of only 2 per cent over the past five years.
Coca-Cola’s immediate problems originate from determined competitor pricing across the grocery channel, which has forced the group to announce a 5 to 7 per cent drop in earnings before interest and tax on last calendar year. Initial guidance earnings guidance was flat to a slip of only 4 per cent.
To help the bottom line out this year, Coca-Cola is on track to deliver $10 to $15 million in savings during this half year. Unfortunately, slashing costs and saving where possible are not sustainable options to growing earnings. Beyond this year, the group is expecting to deliver $30 to $40 million of annual efficiency gains and cost out initiatives.
Around 70 per cent of earnings come from the Australian beverage business, intensifying the spotlight on the ability of the group to withstand increasing competitive pressures. For the first half of this year, volume in the beverage business slipped 6.4 per cent against the previous comparable period.
Competitors are pricing their offerings more aggressively. Pepsi owner Asahi is leading the way. Consequently Coke has seen its market share in the cola segment slip to 36.5 per cent from 40.2 per cent over the year ending in June.
Beyond direct competitors to product offerings, supermarkets are committed to driving prices down where they can. Volumes have been slipping within the supermarket channel, which makes up the lion share of total volumes. Growing volumes in other channels is not enough to offset the structural problems the group face when dealing with supermarkets.
There is also an obvious lack of new products in the pipeline for Coca Cola. For a consumer product brand, innovation through new products is central to sustaining volume growth and price growth opportunities.
In current market conditions it is a challenging prospect to try and think about expanding volumes from current levels. Falling volumes in the beverage business led to a 10 per cent drop in net profit for the first half of this year. For the market, this in itself should have been largely concerning as this sector of Coca-Cola’s business should ordinarily be considered a staple and not subject to such sharp drop-offs.
From today’s trading update it is evident the problems reported at the half-year are not one-off events. It is perhaps something more systemic.
If future growth relies on pricing over volume growth, it looks set to be a battle for the beverage giant.