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Coca-Cola Amatil Ltd – right company, wrong strategy?

I read an article recently where the author argued that Coke’s parent company in America has got its priorities wrong, focussing too much on soft drinks instead of following new consumer trends into the energy drinks and healthier beverages sector.

I couldn’t help but wonder if that argument also applies to our domestic bottler Coca-Cola Amatil Ltd (ASX: CCL), which is expected to release a new stevia-flavoured soft drink to the Australian market later this year.

In light of that possibility, the new beverage combined with the upcoming results from CCA’s strategic review make this the perfect opportunity to review the company and its strategy.

Here are the main predictions put forward by analysts and what they could mean for the company.

  1. Job losses, cost cutting, renegotiations with staff and suppliers

With the cost pressures Coca-Cola is facing in terms of both cheaper competing products and supermarket pressures squeezing margins, it is inevitable that management will try to cut costs where they can.

Already new wages agreements are being considered for some employees and it’s entirely possible that staff numbers will be reduced in some areas (like production and distribution) and increased in others (like sales and marketing).

  1. New products and marketing

Coca-Cola has always been a fantastic domestic marketer, as witnessed by its standout Share a Coke campaign back in 2012.

However ongoing innovation to refine the brand and bring it to new consumers is always essential and continuing expenditure in this area will be vital.

Tying in with marketing are new products, and here I feel the proposed launch of Coke Life (a stevia-sweetened low calorie beverage) will fall short for a number of reasons.

First, Coke already has Coke Zero and Diet Coke in the low-calorie range, so will Coke Life actually increase sales or simply split existing ones among three beverages? Could Diet Coke be up for retirement??

Second, Pepsi beat Coke to the punch with stevia-flavoured Pepsi Next over a year ago, which makes Coke’s new product almost look like a reaction than an original development.

Third, Pepsi Next isn’t even that successful so far, making it pretty unlikely that Coke Life will single-handedly turn the company’s fortunes around.

Fourth – is Coke Life actually going to attract new people to the Coke brand, or will it simply be an additional choice for people who were going to buy a Coke anyway?

  1. Better tracking of changing consumer preferences

As consumers trend towards more health conscious beverages, Coca-Cola needs to simultaneously follow and lead the trends with new products and new marketing campaigns to attract drinkers.

Seen in this light Coke Life is a step in the right direction, but CCA’s performance from its line of healthier beverages hasn’t been that great and the company really needs to reinvent itself in this sector.

Coca-Cola’s Mother is a great venture into the energy drink sector, but CCA is up against stiff competition in Red Bull since that company benefits significantly from its sole focus on energy drinks.

  1. Indonesia

CCA’s Indonesian venture has been disappointing so far with cheaper competitors and cost inflation conspiring against its assumed success.

Some analysts have tipped that CCA could sell part of its Indonesian stake and joint-venture the operation, or fund additional investment through the sale of subsidiary brands like Mount Franklin water.

Personally I hope that neither will take place, since selling successful brands is not the way to get ahead even though the departure of Mount Franklin would allow CCA to develop a low-cost water in the segment.

There’s no doubt that something needs to be done about Indonesia, but deciding not to abandon ship or sell assets will force a solution to be generated from within the company and this is the way most likely to lead to improved outcomes for shareholders.

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Motley Fool contributor Sean O'Neill owns shares in Coca-Cola Amatil.

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