Investors took an axe to the Coca-Cola Amatil Ltd (ASX: CCL) share price after it downgraded earnings expectations for the six months to June 30 2014 by 15%. Today it sells for $9.13 around 17% lower than its pre-downgrade price.
Surprisingly, the company blamed the profit falls on a generally weak consumer confidence and spending environment in Australia in Q1 2014, with its core Australian beverage business having a poor start to the year across the grocery and non-grocery channels. While the Australian economy has not been flying along, to blame the slowing sales on weak consumer confidence pre-Federal budget seems somewhat contrary to reality. More candidly the business went on to admit that aggressive pricing activity from competitors had limited its ability to raise prices to recover cost increases. Overall it seems the price-rising business model of old has some structural issues to address.
New chief executive Alison Watkins has announced a strategic review, with more detail of changes proposed provided in the notes to May's AGM. The share price has failed to rebound though and this perhaps reflects some disappointment over the lack of emphasis on reviewing the route to market of key products. This would include an emphasis on fixed cost-cutting and streamlining manufacturing costs to reduce the cost of goods sold.
Another major problem for Coca-Cola Amatil has been the willingness of competitor Schweppes to cut the prices of its Pepsi product to win market share. The duopoly power of supermarket giants Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) also does not help, but this is not going to change.
Some have suggested grocery store sales are declining because of a consumer shift to healthy alternatives, this seems a dubious argument given the existence of Coke Zero and reality that Coke is a supremely popular product with virtually bulletproof demand credentials.
Coca-Cola remains a business with attractive fundamentals, competitive advantages and diverse revenue growth opportunities. However, it seems clear the strategic review will have to deliver meaningful change and a new growth strategy. If it does deliver then the company should be able to return to its growth trajectory.
