The announcement of major restructuring and 3,500 job losses at Coca-Cola Enterprises (CCE) says as much about The Coca-Cola Company as it does about its largest bottler. Annette Farr examines the underlying reasons behind CCE's current malaise and suggests it is Coca-Cola's failure to keep pace with rival PepsiCo in product innovation that has been the bottler's prime problem.

This week's news from the US that Coca-Cola Enterprises is to cut some 3,500 jobs and restructure its North American and European operations came as no surprise to industry insiders and those analysts who had been predicting drastic action was needed to bring the Coca-Cola bottler back into profit. CCE posted a fourth-quarter net loss of US$1.71bn - its worst in 10 years- and a total loss for the full 2006 fiscal year of $1.1bn.

The company's difficulties relate to a combination of rising raw material costs - aluminium used in cans, high fructose corn syrup (sweetener) and concentrate for colas - whilst experiencing an unprecedented fall in demand for carbonates, its principal product.

Further, the reliance on Coca-Cola's longstanding distribution network has come under pressure from the plethora of new product launches. As CCE's CEO John Brock told analysts last year: "Our model honestly hasn't evolved at the same pace as our customer base and the marketplace in general has changed." Retailers seek just in time deliveries and part of CCE's restructuring plans would, according to the company, "create a highly efficient supply chain and order fulfilment structure".

Rising raw material costs and an out-moded distribution system play their part, but at the root of CCE's difficulties has been The Coca-Cola Company's signal failure to evolve into a broader beverage company at a time when a new breed of health conscious consumer is seeking out juices, waters, teas, energy and functional drinks. TCCC's past executives had a seemingly evangelical belief that nothing could threaten the world's No 1 brand and most recognisable logo.

Brock is reported to have told analysts last October that his company relies too heavily on carbonates because "we have not adequately adjusted our portfolio to the realities of today's marketplace". Since then CCE has reached agreement with a Coca-Cola rival - Hornell Brewing Co. Inc. - to distribute AriZona Iced Teas (Lemon, Green Tea with Ginseng & Honey and Sweet Tea variants) thereby boosting its portfolio of 'healthy' beverages.

Although CCE acts autonomously as an independent public company, its fortunes very much depend on Coca-Cola, which with 36% of the company is its major stockholder. Coca-Cola Enterprises is the Atlanta-based giant's biggest bottler, producing and distributing beverages in 46 US states, 10 provinces of Canada, the UK, Belgium France, Luxembourg, Monaco and the Netherlands. The loss of around 3,500 jobs represents a 5% cut in its global workforce.

When Neville Isdell was appointed as CEO of Coca-Cola in 2004, TCCC's third CEO since 1997, he admitted the company had failed to respond quickly enough to market demands for a wider offering of non-carbonated drinks based on consumer and government concerns over obesity and health issues. In catch-up mode, the company set about researching new drinking opportunities and launching ranges of new non-carbonated beverages such as Dasani Water, Powerade and Full Throttle, as well as new flavour extensions for carbonates, along with low calorie, diet variants.

But these launches all followed in the footsteps of PepsiCo, a company which had already embraced the total beverage group concept. Its Aquafina water brand had spearheaded the growth of the bottled water sector in the US and its Gatorade sports drink and Tropicana juices were enjoying leading positions in the sports and juices categories. PepsiCo was also acquiring innovative young companies such as SoBe, thus tapping into a new generation of young adult drinkers seeking energy refreshment.

It must be galling for Atlanta executives that, although it too has had to face rising raw material costs, Pepsi Bottling Group Inc., PepsiCo's largest bottler, reported full-year net income of $522m in 2006, up 12% from 2005. PBG president and CEO Eric Foss said it was the company's strongest top-line growth ever on a comparable basis. He added: "In the US and Canada, our volume growth was fuelled by strong brand performance across non-carbonated beverages and our ability to capture the growth in emerging channels."

CCE nonetheless reported a solid performance for 2006 in Europe. Volume across the region grew by 3.5% and comparable operating income rose by 3%.
How the restructuring will affect the company's activities in the UK is not yet clear.

CCE corporate affairs communication manager Natasha Vromen told just-drinks: "The announcement on 13 February does not change our 2007 business plan in Great Britain. Already today, there are a lot of great things happening that justify this ambition, including the creation of Boost Zones for intensive location activation, the Coke Zero launch which has been the biggest product launch for CCE in over 20 years and excellent World Cup in-store execution in 2006."

On the thorny question of job cuts, she noted: "There is no specific commitment or target for job losses in Europe. We will talk to employees and employee representative on specific projects when we have actual proposals."