GERMANY: Coca-Cola Enterprises deal would be risky - analyst
Analysts have cited Germany's difficult consumer, retailer, economic, and demographic environments, as potential risks for Coca-Cola Enterprises
Coca-Cola Co acquired the North American operations of its largest bottler CCE in February last year. As part of the deal, CCE purchased Coca-Cola's bottling operations in Norway and Sweden and also gained the right to acquire Coca-Cola's 83% stake in its German bottling operations between 18 and 36 months after closing the original North America.
CCE's time window for acquiring the German bottling operations opens in August this year and the deal could boost the bottler's annual volumes by 50%.
However, in a note yesterday (7 February), Bernstein analyst Stephen Powers said that, while an acquisition of the German bottling asset would be a "transformational deal", it could also be "dilutive to annual top-line growth" for CCE.
"CCE (and investors) should view this potential acquisition cautiously," Powers noted. "It would represent a natural geographic extension of CCE's current territory, but would be with great risk."
Powers cited Germany's difficult consumer, retailer, economic, and demographic environments, as potential risks.
"Germany is a famously difficult consumer market," Powers said. "In the beverages category specifically, Germany has been the slowest growing country in Europe since 1998, and the only one to experience negative pricing. Private label holds 37% of the total soft drink market in volume terms, whereas Coca-Cola brands hold only 10%."
In addition, Powers notes that Germany's retail infrastructure is heavily consolidated, with discounters and hypermarkets making up a large portion of the retail landscape.
"In our view, the entrenched nature of this discount retail environment and private label's more established presence has worked to pressure Coca-Cola Erfrischungsgetränke's (Coca-Cola's German bottling operations) profitability in a way that we do not foresee CCE being easily able to overcome," Powers noted.
"Germany is also plagued by a particularly poor and deteriorating demographic situation. Germany's population has remained flat over the last ten years, and going forward it is expected to decline by a CAGR of -0.1% over the next 15 years," he added.
CCE was not immediately available for comment when contacted by just-drinks.
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