Despite my dad working for Schweppes when I was young I've never been a fan of soft drink. Perhaps it was because I helped stack the crates of empty bottles during school holidays, which weighed nearly as much as I did. But recently it seems more people are turning away from sugary drinks, or at least increasing the variety of cavity-inducing liquids they consume.
Warren Buffett is renowned for promoting US-listed company Coca-Cola as an inevitable stock that will essentially increase profits forever, but falling sales volumes in the US and the recent interim result from Coca-Cola Amatil (Australia's major distributor of Coke) suggest otherwise.
Coca-Cola Amatil’s share price has fallen to levels not seen since the GFC following a terrible interim result. In Australia revenue fell 0.5% to $1,364m compared to the same period last year but, with slightly higher volumes failing to offset lower prices, operating profit slumped 14.1% to $227m.
This is the company’s most important division, but Indonesia – widely touted as the company’s future growth engine – barely produced an operating profit as costs exploded due to the fall in the Indonesian rupiah. In case there was any confusion, Coca-Cola is no longer blessed with abundant pricing power.
The Alcohol and SPC Ardmona businesses are as much a management distraction as anything else, but more concerning is the unprecedented competition facing the core Coca-Cola business. People are becoming increasingly health conscious while competitors are dropping their prices. Private label sales are increasing and Woolworths and Coles are using their market power to demand lower prices as they simultaneously consolidate the grocery, liquor and service station industries.
In its best jargonese the company has laid out a comprehensive list of priorities to increase profits. Our best interpretation reveals some key factors; costs will be cut – a clear sign that top-line growth will be limited; marketing must address health issues and attract teenagers; the variety of serving sizes and packages will increase; new products must be found and marketed; and the company must retain its premium market position in bottled water through its Mount Franklin brand.
New chief executive Alison Watkins will announce further details on her strategic review in due course and you can expect a slight improvement in earnings in the second half, but that will still mean a big fall in earnings from last year. Unless the share price falls further we’ll be in no rush to get involved while the company’s competitive position deteriorates.