The board and management of Coca Cola Amatil might have trekked to Atlanta last week for meetings with the board of the major shareholder, The Coca Cola Company about Indonesia and other issues. They may as well have stayed at home and saved the money judging by the surprisingly poor third quarter result produced by the US company overnight Tuesday.
In fact you could argue that the problems besetting Coca Cola Amatil in Indonesia (financing the rapid expansion in future years) isn’t the biggest concern – it’s the commonality of experience of both the Australian and US companies in failing to meet a changing marketplace for carbonated drinks.
In other words, the weak performance of the Australian company in the past two years might have been founded in changing attitudes to soft drinks, as well as weak and inept management at the top of the company (now hopefully repaired) and board, but it’s one that is being shared with head office in Atlanta.
So those discussions hopefully will have centred on sharing experiences and discussing common ways of tackling the slowly emerging crisis – for that’s what it is for this giant consumer goods multinational.
Badly handled and expensive diversification away from carbonated drinks have not paid off for both companies (or are proving very slow to happen). And both are in danger of seeing key parts of the business change for ever because of changing consumer behaviour and weak management.
So weak was the Coca Cola Company’s September quarter report that the shares fell 7% at one stage overnight Tuesday, and closed down 6%, a big fall for a blue chip on a day when the S&P 500 had its biggest rise for 2014 with a near 2% jump.
Profits fell to $US2.1 billion for the three months to September 26, from $US2.4 billion in the same quarter of 2013.
Revenue totalled $US11.9 billion, falling short of the $US12.1 billion forecast by analysts.
Sales volume rose 2% in Latin America and Asia, but fell 5% in Europe and 1% in North America.
(It’s incidentally bad news for Warren Buffett who is Coke’s biggest shareholder with 400 million shares).
As a result it warned that the 2014 result will be come in under its long term earnings per share growth targets (a nice way of saying the weakening results of recent quarters will continue for a while yet).
On top of the weak operating performance inside the US (a feature also of the quarterly result from McDonald’s overnight Tuesday), currency effects will squeeze the group’s 2014 operating result by a full six percentage points – a hefty whack from the appreciation of the greenback.
Chief executive Muhtar Kent stressed that Coke was facing currency pressures and volatile economic environments in both developed and emerging markets.
“We continue to face a challenging macro environment – far more challenging than was expected at the start of the year,” he said, adding that geopolitical issues were weighing on travel and customer confidence.
“There just is a lot of apprehension and so . . . mobility is down. When traffic is down that impacts our immediate consumption business,” he said.
That is what’s happening in Australia where for different factors, the trade route business – Coca Cola Amatil’s sales and profit heartland (and the business with the highest margins) has been damaged by weak management, rising competition and an inability to service the sector consistently.
And in another similarity to the experience in Australia, the US company’s attempts to diversify its portfolio away from fizzy drinks has led to a number of high-profile acquisitions for Coke, and higher costs (The Australian company has moved into fruit products, beer and coffee, without getting solid returns on the capital invested).
In August, the US company said it would pay $US2.15 billion for a 16.7% stake in energy drink brand Monster, following its buyout of Zico coconut water and building a shareholding in Keurig Green Mountain Coffee.
Both companies have been grappling with a long-term decline in carbonated drinks sales, where consumers have cut back on sugar consumption, or moved to energy drinks (Red Bull for example) which contain far more caffeine than Coca Cola, and sugar, but as sold as ‘cool’ products to young consumers.
Coca Cola says it will sell back most of its company-owned North American bottling operations to independent bottlers by the end of 2017, and a substantial portion of the remaining territories no later than 2020 as part of a bid to streamline costs.
Other changes and cost cutting will happen. Don’t be surprised to see the global empire change as well. The problems of Indonesia seem marginal to the US company (while they are of course vital for Australia).
