Coca-Cola and Bottler To Work On Goals

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Coca-Cola and Bottler To Work On Goals

ATLANTA -- Coca-Cola and its biggest bottler -- Coca-Cola Enterprises (CCE) -- face plenty of risks in an expected revamp of a decades-old system that sets prices for soft-drink concentrate.

But, according to The Atlanta Journal-Constitution, one analyst thinks the downsides will be offset by the possibility of solving a problem -- the divide between how Coke and Coca-Cola Enterprises make money.

As the year comes to a close, Coke and CCE are continuing to work on a new plan that could dramatically shift how the bottler pays for the concentrate used to make soft drinks.
More details could be forthcoming this month, notably Dec. 17, when CCE executives meet with Wall Street analysts in New York. Coke has an analyst meeting Dec. 12.

In the meantime, company observers are trying to figure out how the changes might work and what hazards lie in wait.
In a report, analyst Bill Pecoriello of Morgan Stanley said the key is whether the companies can develop a system that generates more profits overall and forges a system that gives Coke and CCE similar goals.

At issue is a major difference in the workings of these closely aligned companies.

Coke earns money by selling concentrate to bottlers like CCE. In the United States, where CCE dominates the market, concentrate prices are set at a single level for a brand like Coke Classic.

CCE uses this concentrate to make finished drinks. But CCE's profits vary according to the prices the bottler gets in the marketplace.

Basically, CCE is better off when it sells drinks that yield higher profit margins, such as those sold in vending machines. Coke benefits when sales volume is as high as possible -- thus giving Coke a different viewpoint from CCE.
This pricing system has remained the same for years, despite changes in the U.S. market. Today, for example, carbonated soft drinks, or CSDs, are sluggish performers in comparison to the past.

"In this era of little or no CSD volume growth, achieving profit growth may well require some new thinking on product, package and channel mix," John Sicher, editor and publisher of Beverage Digest, told the Journal-Constitution. "And that, in turn, could involve some changes in the concentrate pricing architecture.
"This is important and complex stuff."

Pecoriello estimates that CCE gets 60 percent of its gross profits from so-called cold channel sales, like those in vending machines and convenience stores. The remaining 40 percent comes from take-home sales, including lower-margin multipacks sold in supermarkets.

Coke's U.S. profits reverse this picture. Pecoriello estimates the company can attribute 60 percent of its gross profits to take-home sales generated by bottlers and 40 percent from the cold channel.

To get into better alignment, Coke and CCE could move to what is known as an incidence-based pricing model. Coke uses such systems elsewhere in the world, including Japan and Latin America.

In this scenario, Pecoriello said, Coke could link concentrate prices to the net wholesale prices that bottlers are able to get.

There are other methods that could be used, too. For now, Coke and CCE aren't saying what changes are likely.
John Alm, CCE's president and chief operating officer, said executives are involved in an "intense planning exercise" to get a system implemented over the next two years.
Pecoriello sees the possibility of disruptions. The biggest, he said, would be making a new system work, given that it would be a major change. He said Coke and CCE could try test markets first, then a full rollout.

Coke also would run a risk if the moves aren't followed by competitors, notably the Pepsi system. Pecoriello said that could result in a loss of market share for Coke.

According to the Journal-Constitution, the new ties between the companies might be close enough that Coke could eventually be forced to consolidate CCE's financial results with its own, which would be a sea change for the companies. But Pecoriello still supports a change in concentrate pricing. "We believe a new system would be the right decision for the longer term," he said.