What Coke needs now is more spritz

Illustration: John Spooner.After 12 years at the helm of Coca-Cola Amatil, Terry Davis will deliver his swansong on Tuesday with hundreds of millions of dollars expected to be written off his beleaguered SPC Ardmona acquisition.

It comes days after he managed to stitch together a $22 million deal with the Victorian government to keep SPC Ardmona from sinking.

Davis would have hoped for a more upbeat profit result, given it will be his last, but the market had changed and he ran out of time.

Instead of leaving the write-downs to his successor, Alison Watkins, who joins next month, Davis will do it himself. Between $400 million and $500 million could be written off SPC and other underperforming businesses. Davis bought SPC for $650 million, along with some other services businesses.

The write-downs, a weaker dollar and some big private label contract wins from Woolworths and Coles will give SPC a standing start when Watkins takes the reins.

But on Tuesday Davis will be left to report a set of 2013 results that are lower than last year’s. In a trading update last year he warned that earnings could be between 5 and 7 per cent lower than last year’s.

While some of the slump in earnings can be blamed on SPC, some is due to structural changes that need to be dealt with.

To put it into perspective, the latest Nielsen results reveal that CCA’s soft-drink category, water and sports/energy drinks were all down during a very warm summer. According to a report by Deutsche Bank, CCA underperformed in the soft-drinks category in the December quarter in volume and value. In water, Water CCA declined 1.8 per cent in the face of strong category growth, which was up almost 9 per cent, due to private label share gains. The group’s sports/energy sales dived 5.3 per cent. “We remain cautious that the persistent volume weakness is structural,” Deutsche says.

For investors, the results will be a side issue as they wait to see how Watkins can grow the business, and the executives who report to her.

One executive expected to depart sooner rather than later is Warwick White, the head of the group’s Australasian business, who has spent more than 28 years in the global Coca-Cola system and who got pipped by Watkins for the top job. This column speculated last week that he is a contender for the top job at Treasury Wine Estates.

Watkins is well regarded and highly credentialled but growing CCA will be challenging, as Davis knows, having generated double-digit growth for eight of his 12 full-year profit reports. The longer he was there, the harder it got.

CCA is now back in beer, albeit in a small way. How that will pan out is anybody’s guess given the beer industry is becoming more competitive as the big two players, Lion and Carlton & United Breweries, continue to dominate, the supermarkets have the power to negotiate down on prices and there has been a surge in craft beer operators.

CCA’s Australian business – which is the lion’s share of the operation – is mature and is in desperate need of a new product to breathe new life into a set of products facing savage competition from Pepsi, which has been selling products at up to 50 per cent lower in the supermarkets, and, as health becomes an issue among Australian consumers, sugary drinks will be swapped for healthier drinks.

What CCA is desperate for is a new product from The Coca-Cola Company (TCCC), which can lift its growth. Unfortunately for CCA, this has been a long time coming, with Coke Zero the last successful product released in 2007.

CCA is an anchor bottler for TCCC, which holds 30 per cent of CCA’s shares. This means there is a tension within the relationship, where TCCC wants volume to be the endgame, while CCA is more focused on profit margins.

For now CCA’s growth market is Indonesia, but it is still early days and it will require some heavy spending in capital expenditure to develop the market.

There is always the risk of its relationship with TCCC turning sour. There has long been speculation there is ”constructively discontent” and that TCCC would like to acquire the Indonesian Coca-Cola licence and business back from CCA or find a partner such as Mexican bottler Coca-Cola FEMSA. The speculation intensified in December when TCCC sold 51 per cent of its Philippines bottler to FEMSA.

Whatever the speculation, CCA has done a good job in Indonesia, generating earnings before interest and tax of $102 million for 2012, up 16.8 per cent and growing volume more than 10 per cent.

If its earnings in Indonesia are worse than its trading update suggested, it could put renewed pressure on its relationship with TCCC.

But that is where Watkins can weave her magic.