Treasure Chest | Oct 03 2013
By Greg Peel
It stands to reason that the longstanding Australian leader in sales of fizzy drinks should be a safe, reliable, long-term bet as an investment. Fizzy drinks, or carbonated soft drinks to be precise, are quite simply a “staple” grocery item. Coca-Cola Amatil ((CCL)) controls around 75% of the local market. CSD sales, by rights, should follow a growth trend at least consistent with population growth.
Earlier in 2013, when Australians were still chasing defensive earnings and reasonable dividend yield, CCL was a popular investment. Investors and analysts alike were thus shocked when the company issued a profit warning in May. The CCL share price plunged from over $15 to under $13 in a heartbeat and has been in the doldrums ever since. Sales have declined, warned management. Australians are simply not drinking as much fizz as they used to.
How could this be? Well for most the answer was obvious. Australians are becoming more health conscious, conceding to loud threats of a rising obesity problem. Top of list of no-nos are sugary CSDs. Coca-Cola’s problem is not cyclical, it’s structural, analysts observed. The FNArena broker database shows only two Buy ratings amongst seven, alongside two Holds and three Sells. Coke has lost its fizz.
The data are clear. From the sixties to the new century, CSD consumption grew by an average 2.9% per year. In FY99, Australians consumed around 115 litres of CSDs per capita. In FY13 that figure has fallen to 100 litres. By FY09, sales of CSDs were declining by 1.1% per annum. In FY13, sales were still declining by 0.3% per annum.
It seems cut and dried, except for one problem. All other data suggest Australians are not becoming more health conscious by any means. The analysts at Citi point out that in 1995, 65% of Australian adult males and 49% of females were considered overweight. In 2012, those numbers had increased to 70% and 56%. Fizzy drinks are not the only no-no on the healthy consumption list. So if Australians have decided to get healthy, why do sales of fast food, chocolate, chips and other sugary or salty snacks keep rising?
The answer, says Citi, is price. From 1999 to 2004, CCL’s average Australian pricing growth was 1.9%. From 2005 to 2009 that growth was 4.9%. The introduction of PET plastic bottles last century allowed CCL to provide larger bottle sizes per weight than glass. Larger bottles meant increased consumption. But more recently, CCL has been reducing its bottle sizes while increasing prices. Every Australian knows that so many grocery items, and particularly non-healthy items, have been shrinking over the years.
If Australia is becoming more health conscious, it is the likes of CCL responding, not the consumer. A war is being waged in this country against obesity and purveyors of non-healthy products have decided they better be seen to be doing their bit. McDonalds has introduced salads, for example. No one buys them, but they are there. CCL has stopped super-sizing. The danger for the likes of McDonalds and CCL is that the Australian government might one day bow to pressure and put a tax on non-healthy foods and beverages.
Another response from the purveyors of beverages has been the production of lower sugar content alternatives. Diet Coke, for example, has long been popular. When Coke Zero hit the market, it was an immediate success. But sales of Zero have plateaued. Australians are not, says Citi, consuming less fizz because of obesity concerns. They are drinking less because CCL has decided to chase price rather than volume as a means of growing profits.
The issue is thus not structural, Citi argues. The only structural element is the ageing population, reducing the proportion of younger Australians who are the largest consumers of CSDs. If CCL wants to sell more CSDs, it can do so by reassessing its pricing policy and by looking at further product innovation.
Product innovation is driven by US flagship The Coca-Cola Company. While Coca-Cola Amatil CSD sales represent only a meagre proportion of total TCCC sales, Coca-Cola Amatil is TCCC’s gateway to Indonesia, Citi notes. Therein lies a significant growth opportunity. CCL is about to welcome a new managing director. That MD will be charged with the task of maximising earnings through the right policy mix of pricing, volume and product offering.
“We think the market is overly focused on declining CSD volumes without factoring in the upside from higher pricing,” say the Citi analysts “The outlook for Coca-Cola Amatil’s Australian business remains positive and its attributes as a stable, high cash-flow business should continue”.
Citi retains a Buy rating and $15.10 price target for CCL.
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