Coca-Cola Amatil produced decent first-half results but speculation that it may sell some of its international operations and its determination to look beyond the core soft drinks sectors for growth is thought to be creating tension between the Australian bottler and its largest shareholder The Coca-Cola Company. David Robertson reports.

Coca-Cola Amatil (CCA) is currently Asia's largest soft-drink bottler but difficulties in a couple of key markets have pushed the company towards an increasingly Australian focus.

CCA last month reported better than expected results for the first half of this year. Group profits were up 10.2% to A$267.4m and revenue rose by 14% to A$1.96bn. However, much of this growth in earnings came from the company's Australia and Oceania (New Zealand) divisions.

In South Korea, CCA continues to struggle with a culture that has not warmed to soft drinks and first-half pre-tax profits there fell by 93% to just A$900,000.
Indonesia and Papua New Guinea have also struggled in recent years due to poor economic conditions and last December's Tsunami had caused some concern that business in the region would continue to suffer.

As it turned out, Indonesia bounced back in the first half with pre-tax profits up 8.7% at A$11.3m. But analysts believe that the amount CCA is spending to build its position in Indonesia has yet to pay off in terms of profits, and margins remain thin compared with other parts of the company.

As a result of the slow progress in Indonesia and the problems in South Korea, CCA chief executive Terry Davis has announced that he will merge the Asian businesses into one unit in order to concentrate marketing and management efforts. The performance of this separate division will be reviewed at the end of  2006.

Davis, formerly head of Foster's Beringer Blass wine business, went to some length last month telling investors that the new division would not be sold off if it failed to produce better results: "The restructure should not be seen as anything other than us putting more resources into an area where we need to have improved returns," he said.

But despite these assurances, bundling South Korea, Indonesia and PNG into one division would certainly make selling the business easier in the future. A number of analysts have leapt on this as evidence of CCA's intention to shift out of Asia. This would leave CCA, currently Coke's most geographically diverse bottler, almost exclusively Australasia-focused.

Australia has been the standout result for CCA in recent years and in the first half of this year pre-tax profits there rose by 9.8% to A$217.8m  - accounting for about 82% of the company's total profit. CCA's success in Australia, and to a lesser degree in New Zealand, has been built on introducing new Coke flavours, like Coke with Lime, and continuing to increase the number of outlets it sells through.

But CCA recognised a number of years ago that carbonated soft drink sales were stagnating as Coke and Pepsi reached saturation point in the market.
The company has since been following a strategy of expanding into non-carbonated beverages and this category now accounts for 20% of all revenue, up from 5% four years ago.

In the last couple of years, CCA has bought the Neverfail and Peats Ridge water companies and has taken 4% of the fruit juice market through acquisitions like Crusta Fruit Juices. CCA has even made a move into the coffee market with the purchase of Grinders Coffee last month.

The company's biggest, non-core, acquisition was completed in February this year when it bought SPC Ardmona for A$685m. SPC Ardmona is a fruit and vegetable processor and this deal marks CCA's first foray into the food business.
By taking a stake in a food company, CCA seems to be saying that it believes growth in its traditional beverage market is limited.

A number of industry commentators told just-drinks that they saw this as CCA snubbing Coca-Cola in Atlanta: the move into non-carbonated beverages and food implies that Coke's products are no longer providing sufficient opportunities.
The alienation of the struggling Asian Coke business into a separate division has further emphasised this shift, though CCA declined to comment on the issue.

But rumour among Asian analysts suggests that Coke in Atlanta, which owns 35% of CCA, is concerned that its lead Asian bottler is abandoning the Asian business to pursue non-Coke interests in Australia. One analyst joked that CCA's move into non-carbonated drinks and food is revenge for Coke selling it the South Korean operation in the first place. CCA bought that business for A$1bn in 1999 and it is now worth half that.

If Davis does try to unload South Korea and Indonesia next year he might find that his major shareholder objects. Coke can hardly afford to just give up on countries like these. Coke's rivals in the drinks industry are rubbing their hands with anticipation at the prospect of a showdown between Davis and Coke in Atlanta though this could just be wishful thinking. However, if the Australian company continues to develop new income streams and abandons its Coke markets in Asia, the relationship with Atlanta could become strained.