16 November 2020
www.abc.net.au
It is a symbol of American-style capitalism. But in Australia, the soft-drink Coca-Cola has lost some of its fizz, and a corporate takeover is tipped by some at its best chance of continuing growth.
Key points:
- The iconic fizzy drink brand is sold in Australia by a local company with franchise rights
- That company is now the subject of a European takeover bid
- Investors are set to bid on the takeover in early 2021
Since the 1960s, the brown fizzy drink has been made and sold in Australia by a local company, Coca-Cola Amatil.
This has been done under a franchise agreement with the American brand’s head office in the United States, The Coca-Cola Company.
Today, CCA has the rights to the drink across Australia, New Zealand, PNG, Fiji and Indonesia, and has dozens of factories across these regions that make it.
And these rights don’t just cover selling the drink to supermarkets and petrol stations, although these are its biggest market. CCA also owns the rights to sell it as a syrup to venues, such as cinemas, fast food stores and pizza chains.
But the arrangement is complicated.
Almost a third of CCA is owned by the US parent company, giving it a controlling stake. The rest is owned by a range of shareholders on the ASX.
Australian finance analyst Paul Rickard bought shares in CCA a decade ago, as part of his superannuation portfolio.
“Coca-Cola Amatil has always been an iconic brand with great assets,” he said.
“It has a big business here in Australia but also good growth prospects in PNG, Indonesia and the Pacific islands. I thought it could leverage that.
“But I think for many shareholders, it has been a pretty disappointing company.”
What issues has CCA been grappling with?
Arthur Corcoris has been selling Coca-Cola in his two family-owned supermarkets in Melbourne for 40 years.
In the early 90s, when sugar was king and John Farnham was its Australian brand ambassador, the fizzy drink had almost had an entire aisle to itself in his supermarkets.
“It was our number one sku. Our number one seller,” Mr Corcoris said.
“Everybody was buying Coke. It was huge with adults. Younger people. People were mixing it in spirits.
“It was really quite a huge part of our business but over the years it has demised to a smaller part of our business.
“The sugar content and concerns by people about what they put into their bodies has effected its sales.”
The brand has fought back against the anti-sugar movement with diet versions of the signature brand. But as time goes on, consumers have been walking past fizzy carbonated drinks altogether.
Mr Corcoris drinks’ aisle is now a rainbow of options: Bottled water. Diet drinks. Iced tea and milk. Energy and sports drinks. And the latest fad, fermented tea.
“Young people love that kombucha drink,” Mr Corcoris said.
As a company, CCA has been trying to move with the times. But as a franchisee, it is in a complicated situation. A lot of things require approval from the fatherland.
In its latest annual statement, CCA noted that its arrangement with the US parent company “prohibit us from producing, promoting or selling any non-alcoholic beverage without (their) consent”.
There is a phrase for this bureaucratic predicament within CCA. Employees call it “The Coke Machine”.
Some of the markets it has chased include tea, spirits, and flavoured milk.
For instance, it bought up a small Australian kombucha company in late 2018, as the craze was getting into full swing.
One of its more unpopular decisions was buying up Australian canned fruit company SPC in 2005. It pumped $250 million into it over 14 years and then sold if off again last year for just $15 million profit.
In another setback, it was dumped by pizza chain Dominos in favour of Pepsi in 2017, meaning that at least in that round, its rival finally won the Pepsi challenge.
One area that the company has succeeded in is bottled water. According to IBISWorld, CCA controls almost 70 per cent of that market in Australia.
But that area has not been without its own challenges, too.
Brands owned by supermarkets, dubbed private label, have made huge inroads into the bottled water space and forced prices, and therefore revenue, down overall for everybody competing.
“We have our own (private label) water that sells very, very cheap at $5.20 for a case of 24,” Mr Corcoris said.
“This is what those major companies are now up against.”
All big grocery brands are battling changing tastes
Anne Ricci is a marketing and brand consultant that advises major grocery brands in Australia.
“Consumers needs are changing rapidly. Consumers are becoming more health conscious and value conscious,” she said.
“It’s really hard for big brands to stay relevant with the younger consumers. Millennials are more attracted to small niche brands. They stay away from the corporate.
“New brands are popping out of the woodworks every day. And often they’re brands that can target really small niche segments or an emerging trend that it’s harder for a big brand like Coca-Cola to go after.
“They’re set up to make millions and millions of Coke bottles every year. They find it hard to go after some of those smaller opportunities.
“And those opportunities in single form may seem small, but the collective impact of those small brands make a significant impact on big brands in Australia.
“Big brands have to be acting with speed and pace and agility, rather than this slow steady brand building they’ve been doing in the past. They need to be nimble to keep up, and that’s hard to do in a big organisation.”
To its credit, it appears CCA has been making some inroads.
After steady declines from 2012, IBIS World data shows its revenue stream from its core fizzy drink market was rising again in 2018.
And in February, the company posted sales growth in its core market Australia for the first time in seven years, off the back of good diet drink sales and a few other newer trends.
As a shareholder, Paul Rickard believes this has been a bit too little, too late.
“I don’t think they’ve leveraged the opportunities they had offshore particularly in Indonesia where they’re still a distant second to their first competitor, Pepsi,” he said.
“I think it’s tough running a sugary drinks business. I think, in fairness to the current leadership team, they’ve done a reasonable job, but for shareholders, it hasn’t been a winner.”
Company set to be swallowed up
Two years ago, another global franchisee of Coca-Cola started circling.
The European wing’s initial offer to buy Coca-Cola Amatil at $10 a share was knocked back by the board. Last month, it came back with another $9.3b bid that works out to $12.75 a share.
In a complicated deal, the US parent company has also offered to sell its third share in CCA to the European bottler for a cheaper price, meaning that it clearly wants the deal to happen.
“We believe it is in the best interests of the shareowners of both companies and of the Coca-Cola system overall,” the US company said last month.
“We are confident that by combining the significant strengths and capabilities of CCEP and Amatil, we will unlock further growth and value in their important markets.”
The deal has already been recommended by the CCA board and will be voted on by shareholders in early 2021.
Several of its larger shareholders, including an Irish investment company, have come out saying the offer still isn’t high enough.
But retail investor Mr Rickard believes it is a fair offer.
“I’m not surprised that a franchise of the parent company wants to buy CCA,” he said.
“It’s been partly owned by the US parent. The only option for shareholders is that the parent should buy or an affiliate should buy and that’s exactly what has happened.
“I think shareholders will take the money and say: thank you very much.”
In a sign that shareholders already likely back the deal, CCA’s share-price has risen very close to the $12.75 offer from Europe in recent weeks.
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