In the spotlight: Coca-Cola Enterprises
"I know what is top of mind for all of you — the current macroeconomic environment and its impact on our results," said Muhtar Kent, CEO of The Coca-Cola Company, yesterday (17 July) as he reported the soft drinks group's second quarter results.
Kent went on to unveil a largely lacklustre set of results for Coke, with the company reporting earnings per share of US$0.61, a decrease of 24% versus the prior year.
However, if the macroeconomic environment was at the top of Kent's mind, and the assorted analysts and reporters he presented to, you can bet that John Brock, CEO of Coca-Cola Enterprises, is thinking of little else.
Coke's biggest bottler yesterday reported a second-quarter net loss of US$3.2bn, as the company took a hit from a non-cash pre-tax impairment charge of US$5.3bn.
The charge resulted from the need to reduce the book value of the company's North American franchise license intangibles - largely the result of the deteriorating US economy and substantial looming increases in commodity costs.
"Continued significant declines in the North American economy, coupled with unprecedented escalating commodity costs, are negatively impacting our results and restricting our outlook for near term growth," said Brock. "This creates an immediate need to accelerate substantive operating changes in our business."
Brock's rhetoric yesterday suggested the company is looking to take some drastic action to right the business.
As well as looking to reduce its operating costs, the company said it will implement a post-Labor Day price increase targeted at future consumption packages in the US.
"In addition, we have initiated a 120-day review to evaluate how best to accelerate and expand the scope and pace of change in key operating areas and will look at fundamental issues and opportunities including our system supply chain, operations, and price-package architecture and put into motion the essential changes required to drive long-term profitable growth and shareowner value in North America," Brock said.
All well and good.
However, there are unlikely to be any quick fixes because CCE is being hit by some long-term factors largely outside its control. The economic slowdown in the US economy is biting hard. One might have easily forecast that drinks businesses such as Starbuck's, with its premium offerings, would be affected by a cutback in consumer spending. The fact that Coca-Cola is also in the firing line, however, demonstrates just how deep those spending cuts really are.
"We continue to recommend investors stay on the sidelines for several reasons," Goldman Sachs analyst Judy Hong said in an investor note. "The US business is likely to remain a drag with little signs of relief on the horizon."
And, if that weren't enough, the company has also been hit by higher commodity costs and weakening demand for soft drinks - a situation exacerbated by floods in the US that have seen corn prices rocket.
Beverage analysts at Stifel Nicolaus last week downgraded Coca-Cola Enterprises to "hold" from "buy", citing the recent spike in corn prices. However, the analysts also warned that increased sales of Coke's new stable mate vitaminwater at convenience stores was cannibalising the flagship brand.
CCE's volumes in the US fell 1.5% in the quarter, despite a rise in the volumes of vitaminwater. The problem that faces Brock and his management team is that the planned price increases are likely to hit volumes even harder.
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