The economic downturn did not provide Cott Corp with the bonanza one would have expected

The theory goes that, as times grew tighter, private label companies were well-placed to reap the harvest. Cott Corp, however, showed that this was not as straightforward a theory as one would believe. Richard Corbett looks at how the company has performed and what it has done to turn around its fortunes.

It was probably a fair assumption to make that, when the global economy hit the buffers seven years ago and we entered a period of financial fragility, there would be a collective consumer belt-tightening. In the post-credit-crunch era, people would adopt more frugal consumption habits, avoiding bars and restaurants and downgrading to more affordable and less extravagant products.

Fertile ground, then, for private-label products to flourish, you would think. And, that should have been good news for the likes of private-label soft drinks specialist Cott Corp.

An inspection of Cott’s share-price history, however, suggests that the operator has had a more challenging time of it than might have been expected. From its 2005 peak of US$25.36, the share price dropped to less than a dollar at its low point in 2009 and today stands at between $11 and $12. A steep fall in sales in 2013 gave way to losses in 2014.

The signs in 2015 are more upbeat and the 45% sales jump in first-half sales could signal the dawn of a more prosperous chapter in Cott’s history. If this is to happen, then it would be shrewd to assess why the company has struggled in recent times and why a turnaround might be on the cards.

The first port of call is to Canadean’s Wisdom database to see how the carbonates category and private-label have performed in Cott’s main strongholds of North America, Mexico and West Europe recently. CSDs have traditionally been Cott’s core business and in their main markets the news is far from rosy; according to the database, overall CSD sales in these markets have dropped by 5% in the last five years. This statistic is compounded by the fact that private-label volumes have fallen by 6% in the same period.

In their North American heartland, the decline is even more comprehensive, with CSD sales dropping by double digits. Cott has been trying to swim upstream.

The problem for the company was that the post-crash consumer did indeed evolve to become more price-conscious but the response of branded players was to use price promotional activity to prop up their ailing sales. Branded players have more scope to lower prices than private-label producers and this eroded the price gap enough to enable consumers to upgrade more easily to brands. Inevitably, some branded bottlers also began to produce private-label products themselves to maintain their production levels. This clearly had repercussions for Cott.

In Western Europe, the dramatic rise of the hard discounters has been a theme of the post-crash retail environment. This should have served as a considerable driver for private-label. But, the dominant hard discounters, such as Aldi and Lidl, are now softening and, in an effort to entice more mainstream supermarket users, they have begun selling more branded products. One of the first branded agreements to be secured was with Coca-Cola meaning that this valuable channel is no longer a closed shop for private-label producers.

The 2010 acquisition of the own-label juice supplier Cliffstar Corp broadened the number of products Cott could offer to its clients. From a retailer’s perspective, it is far more convenient to deal with one supplier rather than two or even three producers. Unfortunately, however, the juice market has fared worse in the main marketplaces than the CSD market, and private-label juice sales worse still.

Cott’s involvement in the energy drinks and other growth soft drink segments was not enough to offset the downward trend in the carbonates and juice categories. So, in December last year, the company opted to seek out new channels and acquired US operator DSS Group, parent company of DS Services of America. The deal made Cott a "national, direct-to-consumer provider of bottled water, office coffee and water filtration services".

The move also represented a change in strategy that was evident earlier in the year, when the company purchased Aimia Foods, a firm that is very involved in the food service and vending channels in the UK.

With the appropriate logistics, the food service channel will allow Cott to target a vast number of customers rather than just a few giant retailer chains who have a tendency to squeeze margins to the bone.

The cutthroat nature of dealing with just a few big retailers was illustrated in the UK in May this year, when the largest supermarket chain, Tesco, opted to switch its own-label drinks supplier from mainly Cott to rival Refresco Gerber in what is said to be at least a three-year agreement. But,by pursuing new channels in the future, Cott will be more immune to the loss of major contracts and can operate on much higher margins.

Already the company is yielding the benefits from this shift in strategy. This is perhaps borne out by the fact that they increased the comparable gross margin by 6.7% this year.

Has Cott finally found a roadmap out of the darkness? The share price graph for the last five years suggests many folk think so.