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The Coca-Cola system on the mend, the growing reluctance to drink and the good old days for analysts- The just-drinks Analyst

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Every month, Ian Shackleton, just-drinks' resident analyst, takes a look at the drinks industry through an investor lens. Here, he considers the improving relationship between The Coca-Cola Co and one of its bottlers, the cooler relationship between younger consumers and alcohol and how the drinks industry used to live.

Relationships are clearly improving within the Coca-Cola system

Relationships are clearly improving within the Coca-Cola system

  • Are The Coca-Cola Co and Coca-Cola Hellenic becoming the best of friends?

I've written before about how the relationship between The Coca-Cola Co and its leading bottlers has been improving in recent years. The investor event held by Coca-Cola Hellenic last month provided further evidence of brand owner and distributor singing from the same song sheet.

In the past, there hasn't always been a good alignment between Coca-Cola and CCH. Post-2008, the bottler saw its volumes come under pressure, particularly in its emerging markets, which is never pleasing to see for the brand owner. The company also seemed to go out of its way at times to antagonise the brand owner, such as when it signed up to distribute spirits products in some of its markets, or by being seen as a bit slow to bring new Coke products to market.

So, when CCH hosted its first Capital Markets Event for three years in May, I was interested to see how the relationship was looking. The agenda for the day sent a strong message, as did the attendance of Lana Popovic, Coca-Cola's business president for C&E Europe. This certainly made clear that, if there had been historic disagreements, they were now in the past.

And, that's what she basically said at the event. 
  
So, what's changed? There has been a bit of management evolution at CCH, which may have improved the chemistry with the brand owner. In addition, several analysts have discussed the possible interest from CCH in buying out Coca-Cola's majority stake in Coca-Cola Beverages Africa, so that might also explain why the mood music is better (although Coca-Cola has recently committed itself to keeping the business for the time being. The chances are they couldn't sell it for what they paid).

Looking at the presentations by CCH management, they focused on a lot of the issues that are close to Coca-Cola today; targeting faster growth, with a 5%-to-6% pa revenue growth objective; growing sales through the wider portfolio, including areas where Coca-Cola is putting increased emphasis such as energy, coffee and even plant-based drinks, and much less talk about selling non-Coca-Cola products through its distribution system.

At the same time, the opportunity for CCH to make a potentially game-changing acquisition in CCBA may not be off the agenda forever. Popovic told investors she hoped the bottler might get the opportunity to buy this asset at some stage.

Certainly, CCH has set some aggressive targets for future growth, not just for sales, but also for margins, as well as addressing sustainability commitments. The group's wide exposure to C&E Europe, as well as markets like Nigeria, should offer a better-than-average topline opportunity. The shares are not bargain basement at 23x 2019 PER, but if it can achieve anything like those growth targets, you've got to be a bit excited about the future.

It's reassuring to hear, then, that CCH now appears to be working alongside Coca-Cola, rather than trying to point-score in any of its negotiations.

  • Alcohol on the naughty step

During a long walk in the English countryside last week, conversation turned to alcohol. I was a bit surprised that two of my good friends, who have historically been committed lovers of the grape and the grain, were now planning semi-abstinence, at least during the working week (ironic, as both are effectively retired now), citing their worry that alcohol can have negative health effects.

Last week, the Financial Times analysed the changing consumer tastes in beverages, where beer is under pressure and spirits is still seen as a gainer, but with some risk from adult non-alcoholic drinks.

This brought home to me that alcohol is facing a new reality.

We are now in a world where 25% of younger LDA consumers are now non-drinkers and even the middle-ages are starting to question their consumption. This is starting to shape the way companies look at their business. Diageo has for some years been investing in non-alcoholic spirits, with brands like Seedlip.

You'd be forgiven for being a bit cynical if you said that selling Seedlip at spirits prices, without paying any duty, is a great business to be in. However, there's a strong consumer need here. Perhaps not surprisingly, several soft drinks companies have been eyeing this opportunity. Britvic has recently launched a non-alcoholic aperitif called Monte Rosso while, last week, AG Barr bought a 20% stake in Stryyk, which makes alcohol-free rum, vodka and gin.

Beer, meanwhile, is trying to fight back, with no-alcohol offerings and a wider portfolio that can include RTDs, spritzers and spirits-type products.

What does all this mean for investors? Firstly, this does start to blur the edges between investing in alcoholic beverages and soft drinks. Investors like to say that they prefer spirits to beer, or beer to soft drinks - that's not easy to do when the portfolios get wider.

Secondly, it starts to make soft drinks a more attractive area for investment. After all, if my friends are genuinely giving up the booze for five out of every seven days, they're likely to be new consumers for alcohol-free drinks.

Having said all of this, I can assure you that I have no intention of following my friends' example. I suspect a lot of other complaints are likely to finish me off before the booze. Consequently, there's nothing to change my selection of Diageo as my stock of the year.

  • Nostalgia for the old days – and little to report from the conference season

A company's financial reporting calendar sets the agenda for much of corporate life. Most listed companies, including Anheuser-Busch InBev, Carlsberg and Heineken, have December year-ends, while the likes of Diageo and Pernod Ricard work to the end of June. Britvic, meanwhile, has a a September year-end.

Generally late-January/February and July/August are when we receive full-year and interim results. There are a few windows in the year, then, for other things.

June, in particular, tends to be when companies communicate their longer-term plans. This can involve Capital Markets Events, comprising wide-ranging presentations on the business. These often include market visits overseas.

Analysts with long memories will recall the famous Allied-Lyons Concorde trip in 1987. Allied, which ended up being carved up into Beam Suntory and Pernod Ricard, had just bought the Hiram Walker spirits business, which had facilities in Canada and France (Cognac). The company decided that hiring Concorde was the best way to ferry investors around its newly-acquired assets.

Those were the days.

I also remember in 2005 when Heineken organised a Capital Markets trip to Austria to focus on their Central & Eastern European business. The brewer also added a leg to Istanbul, which just happened to coincide with the Champions League Cup Final. I was lucky enough to be in the stadium to see Liverpool come back from 0-3 down to beat AC Milan.

This all came back to me recently with the sad death of the racing driver Niki Lauda - I remember we were flown to Istanbul in a Lauda Air plane, piloted by the great man - "no danger of being late", we joked on the way.

Today, the agenda is less exotic. A combination of budget constraints at corporates and increased compliance in financial markets have eradicated the 'boondoggles'. So, Diageo held a day of presentations in New York last month. The location can be justified as about half the group's profits come from North America.

Equally importantly, we are now in conference season, where investment banks organise a series of presentations and one-to-one meetings between corporates and institutional investors. The biggest conference for European consumer companies, the Deutsche Bank conference, took place in Paris last week. In some ways, it was disappointing as I didn't see anything dramatically new from any of the major companies presenting. On the other hand, as an investor, you might take the view that "no news is good news".

Of course, spending a few days in Paris is no bad thing for an investor. But, it does bring home to me that the fun days of Concorde trips and flying with Niki Lauda are a long time ago.


Expert Analysis

Key Trends in Alcoholic Beverages: Powerful changes shaping the wine, beer, spirits and alcohol-free beverages industry

Key Trends in Alcoholic Beverages: Powerful changes shaping the wine, beer, spirits and alcohol-free beverages industry

Key Trends in Alcoholic Beverages: Powerful changes shaping the wine, beer, spirits and alcohol-free beverages industry...

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