As a Coca-Cola Amatil Ltd (ASX: CCL) shareholder, I was shocked the other day to spot a mountain of 1.125 litre Coca-Cola bottles on sale for ~$1.80, a 50% discount, at a Coles supermarket. Not too far away were the 600ml packages selling for $3.40 apiece – though mercifully at the same price as competitor Pepsi’s beverages, which are traditionally cheaper.
Whilst this was only one supermarket and not representative of the wider market, I was surprised as I had thought the worst of supermarket discounting was over. Instead, it now seems as though Wesfarmers Ltd (ASX: WES), which owns Coles supermarkets, may be pulling more levers in its battle with Woolworths Limited (ASX: WOW).
In the face of this kind of discounting, Coca-Cola is going to have some trouble passing price rises onto consumers. These have been an important part of the group’s strategy over the past few years.
Fortunately there’s more to the investment thesis than just the price and/or discounting of Coke. With consumer preferences shifting, Amatil’s three strategic goals are as follows:
- Strengthen category leadership
Sceptics – myself included – might read this as ‘attain’ category leadership, with Amatil aiming to have a leading product in every beverage category – soft drinks, juices, coffees, sparkling waters, etc. It’s been a mixed bag so far, although recent distribution agreements with Beam Suntory and The Coca-Cola Company (more on this below) show promise.
- Improve productivity and ‘in-market execution’
Cost is an extremely important factor both for consumers and Amatil’s success as a company, and management recently reported that its $100 million cost-saving plan was ahead of schedule. Improvements in customer ordering also saw close to 30% of customers making orders online at the end of 2015. Manufacturing initiatives have reduced plastic and aluminium requirements, as well as increased the amount of recycled materials being used.
- Better alignment with (US-listed parent) The Coca-Cola Company
Amatil has started selling products that are owned by The Coca-Cola Company and successful in other markets, for example Zico Coconut Water. Management stated that agreements have been struck in order to incentivise both players to jointly grow their water portfolio. Recent growth in sales across most regions came from bottled and sparkling water products, so this segment will be important going forwards.
Amatil is also jumping on the healthy product bandwagon, and reports that 26% of its products are ‘low kiloujoule’ (less than 80kj per 100ml) and 27% contain no kilojoules. Amatil’s entire Non-Alcoholic Ready To Drink (NARTD) portfolio saw the equivalent of a 3.8% reduction in kilojoules per litre recently.
These are all steps in the right direction, but it only takes a walk through the supermarket to see the kind of competition that Coke faces domestically – and it’s the domestic operations funding the overseas growth opportunities in Indonesia. I’m comfortable holding my shares, but it could be a long haul for shareholders.
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Motley Fool contributor Sean O'Neill owns shares of Coca-Cola Amatil Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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