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Structural Changes Pressure Coca Cola Amatil

More pressure on shares in Coca Cola Amatil (CCL) in yesterday’s widespread sell-off – although the losses were not as horrendous as seen last Friday in the wake of the surprise profit warning and restructuring announcement.

The shares dipped a further 7% to $9.06 – after their near 15% slump on Friday.

The fall yesterday means the company’s shares are now in a bear phase where the fall is well over 20% from its most recent peak of just over $13 last November.

But despite the investor disquiet with the stock, don’t imagine that the problems afflicting Coca Cola Amatil, which resulted in a profit warning and ‘review’ from the new CEO on Friday, are unique to Coke or Australia.

Sure there are a number of specific factors for CCL, but no one should be really shocked at the news of a forecast profit fall or major review – after all the company has a new CEO in Alison Watkins to replace the long term incumbent in Terry Davis, and when that happens, there’s usually a clean out of costs, unwanted staff and businesses.

So Ms Watkins’ announcement on Friday a review of the company is in the now usual vein of a new broom after a decade of one CEO’s management. It’s something of a standard tactic.

That means standby for big losses, write downs assets sales and job losses, later in the year in a clean up of CCA’s books, with the implicit understanding of all concerned that the real cause was the former CEO (although many of the board remains in place).

CCL 1Y – Coke enters bear territory

Complicating matters is the breakdown of the only real growth market for CCA – Indonesia, where the economy and demand have slowed and costs risen because of high levels of inflation.

But Australia is the company’s core market and where most of the sales and earnings are created and that’s where the changes, secular and short term, are doing the most damage.

On top of the now usual complaints about the big nasty supermarkets taking profit margins, there’s a bigger, more long term change underway – carbonated drinks are losing their appeal to more and more consumers.

A combination of health concerns (diet and fears about sugar and diabetes) and the ageing population, plus the emergence of a raft of new drink products, are making it tougher for the giants like Coke.

And this secular change will be hardest to cope with – beyond restructuring and cost-cutting and even acquisition (Coke and other companies have moved into other non-carbonated drinks, but with mixed success).

In the US, where many of these trends emerge first, sales of carbonated drinks (sodas in the US market) are falling and it’s hurting giants like Coke itself and Pepsi.

And, even though sales of some drink types, such as iced teas, water and sports drinks, continue to grow, the overall liquid beverage market in the US saw a sharp fall in volumes in 2013. That was after a rise in 2012.

A combination of problems – from increased competition, especially in a market that is declining overall, with health and demographic reasons overlaid – are hurting sales.

Non-carbonated drinks, such as the caffeine-based segment (Red Bull, V), natural fruit based drinks, sports drinks, water and bottled teas and iced coffee and even coffee itself, are all taking drinkers and share from the carbonated giants like Coke and its family, Pepsi and Dr Pepper and Snapple.

But even the diet segment is now turning down. Only the caffeine segment seems to be growing, but health concerns are starting to be heard about these products.

Beverage Digest, the bible for the US drinks sector, revealed last week that sales volumes of carbonated drinks fell 3% last year.

It was the second year in a row that sales in this segment fell – they dropped 1.2% in 2012.

Soda volumes in the US are now at their lowest since 1995.

That’s a fall of 1.2 billion cases a year – or more than 21 billion.

That also means billions of dollars in lost sales, which the companies have for years managed to patch up by price increases and cost-cutting.

Coke was the top soda brand in 2013, followed by Diet Coke at No. 2, Pepsi at No. 3 and Mountain Dew at No. 4. The only new brand in the top 10 was Coke Zero, which displaced Diet Dr Pepper.

Tonight, our time, the US sector’s problems will be exposed by the first quarter report from Coca Cola itself (the biggest shareholder in Coca Cola Amatil). Some analysts are forecasting weak sales (and a fall in US volumes) and a poor profit.

While it’s hard to extrapolate from the US to Australia, the two common factor in both markets are the rise of other drink products which are taking share from established brands, and the rising health concerns in both countries, especially about the over consumption of sugar.

In Australia, figures from Euromonitor show Australians turned away from less healthy soft drinks in preference for healthier alternatives such as bottled water or RTD tea.

Soft drinks recorded 3% current total value growth taking sales up to $A12.2 billion while total volume sales grew by 1% during the year.

Coca-Cola Amatil led sales in soft drinks market during 2013, with a 28% off-trade volume share.

Despite aggressive competitor pricing and the threat of private labels, Coca-Cola Amatil managed to gain slight market share in 2013 due to its strong portfolio of brands and national distribution across Australia.

"The company owns key brands in carbonates, bottled water, sports and energy drinks and RTD tea. Coca-Cola Amatil maintained consumer demand through new product developments and innovation added with strong marketing campaigns and promotional activity," Euromonitor said in a report released earlier this month.

Friday’s price fall was the largest seen in CCA shares for 23 years.

New boss Alison Watkins warned interim profit would fall 15% at least and she forecast a major restructure of the group (which usually means a series of one-off losses as well).

The 15% slide in profit equates to around $56 million in the six months to June 30, from the $373.9 million reported for the six months to June 2013.

In the statement to the ASX Ms Watkins said the company needed "to challenge our model thoroughly in light of the low growth and competitive markets in which we operate in order to deliver long-term sustainable growth.

"CCA is facing a number of immediate challenges, particularly in the Australian beverage and Indonesia markets.

"At the full year result in February, we highlighted that we were concerned by the generally weak consumer confidence and spending environment in Australia and that we faced challenges in Indonesia with substantial cost inflation," Ms Watkins said.

In February, at the company’s full-year results, Coca-Cola Amatil shareholders were hit with a massive $404 million writedown, following the Victorian state government’s $22 million bail out of its struggling SPC Ardmona fruit cannery.

The company said SPC sales revenue had increased by 10% in the first quarter and management was finalising the details of significant capital investment in the second half of 2014.

Analysts say aggressive pricing across Coles and Woolworths has limited Coca-Cola Amatil’s ability to recover increased costs of doing business.

And a word of warning – Beverage Digest said the weakness wasn’t just limited to the soda category – the total "liquid refreshment beverage" segment saw a 1.6% fall in volumes in 2013 after a small rise the year before.

Even diet drinks are no longer seeing growth thanks to growing consumer concerns about artificial sweeteners.

Only heavily caffeinated "energy drinks" such as Monster and Red Bull have continued to grow volume. But there are now rising health concerns about these and their ultra high levels of caffeine.

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