Takeover could help Coke regain its fizz: Coles chief Steven Cain

Coles CEO Steven Cain welcomes the innovation and focus on higher-margin beverages that could flow from the $9.3bn takeover of Coca-Cola Amatil.

Coles CEO Steven Cain says a takeover could make Coca-Cola Amatil more innovative. Picture: Jake Nowakowski

Coles chief executive Steven Cain, one of the largest sellers of Coca-Cola in Australia, welcomes the innovation and focus on higher-margin beverages that could flow from the $9.3bn takeover of Coca-Cola Amatil by a European Coke bottler.

“The bigger some of these consumer goods companies are, the more they can innovate in many ways, and if you look at The Coca-Cola Company worldwide there are a lot of different innovations going on in different countries,” Mr Cain told The Australian.

“If that is used as a force for good, that is if that brings more global innovation to Australia, then that is a good thing.

“If it brings more innovation to Australia it will be welcomed with open arms by Coles.’’

The comments come as investors in Europe cast their eye over the bid launched last week by Coca-Cola European Partners for Coca-Cola Amatil, with analysts increasingly impressed by the growth opportunities up for grabs if the bottler’s laggard operations in Australian can be turned around after years of underperformance.

A combined Coca-Cola European Partners and Coca-Cola Amatil business would draw 80 per cent of revenues from western Europe and the remainder in Asia. Australia would only represent 12 per cent of the new company, similar to France.

While analysts advising clients in Europe have also been upbeat about the added rewards coming from a plan to resuscitate Coca-Cola Amatil’s Indonesian bottling operations, the real prize seems to be Coca-Cola European Partners bringing its considerable experience and management expertise to improving revenues and profits in CC Amatil’s flagship Australian arm.

“The turnaround of Australia, Coca-Cola Amatil’s biggest market, is potentially the biggest value-creation opportunity in this deal,’’ said Richard Withagen, an analyst at Netherlands-based Kepler Cheuvreux.

“Coca-Cola European Partners management believes it can run CC Amatil better than current management, and we think this is probably the key reason for Coca-Cola European Partners’ move. CC Amatil’s revenues, operating profit and return on capital employed have been stable in recent years. The Australian business in particular has been under pressure, with revenues declining by low-single digits and the operating margin declining by 250 basis points in the last five years.”

A combined Coca-Cola European Partners and Coca-Cola Amatil business would draw 80 per cent of revenues from western Europe and the remainder in Asia. Picture: NCA NewsWire/Joel Carrett

Coca-Cola Amatil’s biggest customers in Australia are preparing to deal with a much larger European-based bottler for Coca-Cola, as well as a large stable of other beverages in the local market in categories such as bottled water, coffee and juice.

One of those major customers, Mr Cain’s Coles supermarkets, believes the takeover, priced at $12.75 per Coca-Cola Amatil share, could usher in a new period of innovation in the beverages market — including Coca-Cola European Partners introducing health drinks that generate stronger margins than cans of Coke.

“What you have got to recognise is The Coca-Cola Company worldwide has expanded into Costa coffee, for example, in Europe. They have got a whole host of different types of drinks available in other countries in the world, and in Australia obviously they have invested in things like Mount Franklin water and whatever to grow their product base outside of the traditional Coca-Cola product,” Mr Cain said.

He is looking for more investment in innovations around health-focused drinks in the Australian market. This could come from Coca-Cola European Partners owning Coca-Cola Amatil.

“The more that we can service this demand for health drinks and drinks like kombucha the better, because when you look at most Coca-Cola — I’m talking especially about the red cans now — most Coca-Cola goes through on promotion whereas most kombucha is sold at full price.

“So it is a big difference in the economics, and part of this healthy consumer trend is a good trend for supermarkets because people spend more money in that arena.”

Meanwhile, Mr Withagen is advising the clients of Kepler Cheuvreux that Coca-Cola Amatil has overseen a flat bottling operation in the key Australian market that has lagged the overall performance of the carbonated drinks market and is now ripe for improvement under the lead of a new owner in Coca-Cola European Partners. This was particularly so for digital innovations, he said.

“In recent years, Coca-Cola European Partners has especially developed its digital strategy, channel segmentation and the price/pack mix of its beverages portfolio. We believe these are some of the areas that Coca-Cola European Partners is probably more advanced than CC Amatil,” he said.

“CC Amatil has not shown the best execution in recent years. In addition, CCL has lost market share in Australia in recent years. We estimate it has grown around 2 percentage points slower than the overall soft drinks market between 2010 and 2018. Overall, CC Amatil’s revenues and operating profit have been flat in the past five years.”

There was also potential to improve Coca-Cola Amatil’s struggling business in Indonesia, the analyst said.

“The historical performance of CC Amatil and the conference call made it clear that Australia and Indonesia are the two markets where most of the value should be created. Coca-Cola European Partners management divulged very few details about how it would run CC Amatil’s businesses differently compared to the current management team, but we do think there will be some substantial changes.

“It appears that Coca-Cola European Partners is some steps ahead of CC Amatil in tackling the specifics needed to turn around the business. Coca-Cola European Partners’ experience should help to accelerate the change at CC Amatil.

“CC Amatil has been executing its ‘Accelerate to Transform’ program in Indonesia. We expect that Coca-Cola European Partners and The Coca-Cola Company will formulate a next version of this strategic plan, which should both result in regaining market share, accelerating top-line growth and improving profitability.”