Coca-Cola to slash costs, launch new product in wake of review

Sue Mitchell
October 27, 2014
The Age
Coca-Cola Amatil and its US partner The Coca-Cola Co will this week launch their first new cola product for seven years as chief executive Alison Watkins releases the outcome of a strategic review that is likely to involve job major cuts.
Analysts are expecting Ms Watkins to detail plans to slash capital expenditure and cut costs by at least $100 million over three years by centralising production, streamlining supply chain and support costs, and culling products and brands to free up funds to reinvest in marketing and new initiatives to drive volume growth.
The strategic review is likely to involve significant job losses, particularly in production and distribution. However, analysts believe Coca-Cola Amatil may add jobs in sales, reversing cuts made in the second half of 2013 that contributed to a fall in revenues in the Australian beverages business.
Ms Watkins is also expected to unveil a new operating and profit-sharing structure with The Coca Cola Co in Indonesia, which has experienced a sharp fall in earnings and is facing increased competition from low-price rivals.
She announced the strategic review after issuing a 15 per cent profit warning in April, two months after taking the helm at Coca-Cola Amatil from long-serving chief executive Terry Davis.
Analysts expect Coca-Cola Amatil and its US partner to unveil new products, including Coke Life, its first new cola variety since the highly successful launch of Coke Zero in 2006.
Coca-Cola Amatil registered the Coca-Cola Life brand earlier this year and has been evaluating its performance in other markets over the last few months.
Analysts say the company would need to launch Coke Life in October or November to take advantage of the seasonal surge in soft drink consumption.
Morningstar analyst Daniel Mueller believes Coke Life, which is sweetened with stevia and has 60 per cent fewer calories than regular Coke, will appeal to Australian consumers demanding low-calorie low-sugar alternatives to sugary soft drinks. Credit Suisse analyst Larry Gandler is more sceptical, pointing to the launch of steevia-sweetened Pepsi Next.
Ms Watkins has promised a “step-change” in fixed costs and productivity and a new era of innovation and product development, saying Coca-Cola Amatil is now paying the price for ignoring changes in consumer preferences, underinvesting in marketing and new products and placing shorter term profits ahead of longer term returns.
Analysts have slashed profit forecasts ahead of the strategic review and now expect 2014 net profit before one-off costs to fall between 20 and 30 per cent.
“The remedies required to improve CCA’s current operating performance will be costly and should cause its earnings to retrace (heavily) before growth can recommence,” Merrill Lynch analyst David Errington said in a report last Thursday.
Ms Watkins is keen to build a more collaborative relationship with the company’s 29 per cent shareholder, The Coca-Cola Co, which has been increasingly unhappy with growth in Australia and Indonesia in the last few years.
Last week, The Coca-Cola Co unveiled plans to cut costs by $US3 billion ($3.4 billion) a year by 2019 – up from $US1 billion previously – and shift its focus from volume growth to revenue growth. This may come at a cost to Coca-Cola Amatil if The Coca-Cola Co seeks to boost margins through higher concentrate prices.
Coca-Cola Amatil has invested more than $1.3 billion into Indonesia over the last two decades, according to Credit Suisse, but the business remains significantly cash flow negative and volumes have failed to meet targets.
It needs to spend another $1 billion to fully develop the Indonesian market and tackle recent entrants such as Big Cola, but is reluctant to invest further capital unless it can achieve better returns.
Under one proposal discussed by the Coca-Cola Amatil board and The Coca-Cola Co in recent weeks, the former would sell an equity stake in the Indonesian business for as much as $600 million, which would fund its share of future capital expenditure.
However, the joint venture proposal has received a mixed reception from analysts. Some say it would create conflicts of interest and do little to improve profits for Coca-Cola Amatil because The Coca-Cola Co would seek to make a return on its investment through higher concentrate costs and lower marketing support.
The Coca-Cola Amatil board is expected to make a final decision on Indonesia on Wednesday, ahead of the strategic review update on Thursday.
If the board decides against a joint venture, Coca-Cola Amatil may raise capital to fund further capital expenditure in Indonesia.
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