Coca-Cola Enterprises (CCE)

• Article
• Discussion
• Edit
• History
• Bookmark

See all Bulls Reasons Bulls: Reasons To Buy Bottling other beverages 0% agree Bottling other beverages The opportunity to bottle and distribute other than KO beverages - eg AriZona allows CCE to grow in new markets. View or Edit Reason 0 votes 0% agree CCE brands among the most popular carbonated soft drink brands in the world 0% agree CCE brands among the most popular carbonated soft drink brands in the world The Coca-Cola brands produced by CCE are among the most popular carbonated soft drink brands in the world. CCE benefits from this brand recognition and loyalty. View or Edit Reason 0 votes 0% agree Job cuts lower operating costs and support profit margins in near future 0% agree Job cuts lower operating costs and support profit margins in near future Coca-Cola Enterprise's job cuts have lowered operating costs and should help support for profit margins over the next few years. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Weakness in core North American market 100% agree Weakness in core North American market "Continued significant declines in the North American economy, coupled with unprecedented escalating commodity costs, are negatively impacting [CCE] results and restricting our outlook for near-term growth." -CCE Chief Executive- John Brock View or Edit Reason 1 votes 100% agree "CCE faces the high fixed costs, large capital investments, and low margins" 0% agree "CCE faces the high fixed costs, large capital investments, and low margins" Coca-Cola Enterprises faces the high fixed costs, large capital investments, and low margins characteristic of a bottling company, making it difficult for the company to maintain stable, high profitability. View or Edit Reason 0 votes 0% agree CCE faces the high fixed costs, large capital investments, and low margins 0% agree CCE faces the high fixed costs, large capital investments, and low margins Coca-Cola Enterprises faces the high fixed costs, large capital investments, and low margins characteristic of a bottling company, making it difficult for the company to maintain stable, high profitability. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

Top Contributors Sean Hinton Vincent McPhillip Related Articles Coca-Cola Company (KO) Pepsi Bottling Group (PBG) Corn Prices Aluminum Prices Cadbury Schweppes (CSG) Related Blog Posts » See All Related Posts powered by Wikinvest Wire

Coca-Cola Enterprises (NYSE: CCE) is the world’s largest bottler of non-alcoholic beverages by volume. CCE produces, sells, and markets beverages using concentrated syrups bought from concentrate manufacturers, utilizing an extensive distribution network to deliver the finished product to consumers. CCE serves as the largest bottler for the Coca-Cola Company (NYSE:KO), producing 20% of all Coca-Cola products worldwide. 85% of CCE’s beverages are classified as carbonated soft drinks, or CSD, with non-carbonated soft drinks forming the other 15%.

CCE’s concentration in North America and Western Europe are a significant challenge for the company. Both markets have recently shown declining growth rates as changing consumer tastes and heightened health concerns prompt a shift away from CSD to healthier, non-carbonated alternatives. The longer-term shift toward healthier drinks is being compounded in the short run by a consumer-led recession in the U.S. which is hurting typically recession proof drink sales. At the same time, prices for the raw materials necessary for CCE’s bottling operations have become more expensive, increasing CCE’s per-unit production costs.

Despite these challenges, CCE has remained profitable in recent years. Its Coca-Cola beverages are among the most popular in the world, giving CCE the benefit of outstanding global brand recognition. Also, CCE has been cutting expenses by reducing its number of employees and working to use its assets more efficiently. In addition, CCE’s strategic significance to KO provides an added level of security. Although recently both companies have wrangled over lackluster sales in North America^[1]

[edit] History and Corporate Overview

Originally a division of the Coca-Cola Company (abbreviated as KO), Coca-Cola Enterprises (abbreviated as CCE) was spun off as an independent company in 1986 by means of an initial public offering, or IPO. The purpose of this spin-off was to separate KO’s high-margin concentrate business, responsible for manufacturing the syrups and concentrates used to produce final products, from CCE’s lower-margin, capital-intensive bottling business. KO still maintains a 35% stake in CCE, however, ensuring that the two companies continue their interdependent business relationship.

Coca-Cola Enterprises bottles, markets, and distributes beverages for drink manufacturers, primarily the Coca-Cola Company. In 2007, CCE sold an estimated 42 billion bottles and cans, single-handedly accounting for 13% of all beverages sold in North America and 8% of all beverages sold in Europe. CCE is heavily focused on the U.S. market, with 70% of its $20.9 billion^[2] in 2007 revenues coming from domestic sales and the other 30% coming from sales in Europe.

KO is responsible for the manufacture of concentrated syrups for each of its drinks, which it then sells to bottlers. CCE, like other bottlers in the larger Coca-Cola system, uses these concentrates to produce, package, and distribute the finished products to wholesalers and retailers. CCE is Coca-Cola’s largest bottler, accounting for 20% of KO’s worldwide volume and 80% of its domestic can and bottle volumes. In turn, brands licensed by KO or its affiliates comprised 93% of CCE’s total sales volume in 2006, highlighting each company’s significance to the other’s performance.

Note: In 2007, CCE announced that an impairment charge of $2.9 billion would be included in the 2006 results, which explains the negative operating income for the year. This is an accounting charge related to the fact that the company's intangible assets, specifically its brands' trademarks, were not worth as much as the company had originally assumed. No actual money was lost.

[edit] Products

As a bottling company, Coca-Cola Enterprises’s product line is determined by the offerings of its concentrate manufacturers. Currently, CCE’s portfolio is composed primarily of the Coca-Cola Company’s products, though it does produce and bottle beverages for other companies. Although CCE’s products vary somewhat by region, many of its brands are similar across markets.

The drinks produced by CCE fall into one of three general categories: carbonated soft drinks (CSD), non-carbonated soft drinks (non-CSD), and water.

[edit] Carbonated Soft Drinks

Carbonated soft drinks are the most common of Coca-Cola Enterprises’s offerings, accounting for 85% of the company’s total sales in 2005. CCE bottles some of the world’s most popular brands of CSD, including:

• Coca-Cola classic
• Diet Coke
• Sprite
• Coca-Cola Zero
• Fanta

[edit] Non-carbonated Soft Drinks

Non-carbonated soft drinks include all beverages, excluding water, produced without carbonation, such as juices, tea, and coffee and dairy drinks. Sales for all non-CSD drinks totaled 9% of Coca-Cola Enterprises’s revenues in 2005. Some of CCE’s prominent non-CSD offerings are:

Coca-Cola Enterprises’s product line, by % volume

• Capri Sun
• Arizona Teas
• Nestea
• POWERade
• Minute Maid Juices to Go

[edit] Water

Though technically non-carbonated, water is often considered to be its own category due to the obvious differences between it and Coca-Cola Enterprises’s other products. CCE produces three different brands of water:

• Dasani
• Evian
• Chaudfontaine

These three brands accounted for the remaining 6% of CCE’s 2005 sales.

[edit] Relationship with Coca-Cola Company

As the name implies, Coca-Cola Enterprises and the Coca-Cola Company have a close professional relationship. Even though they separated in 1986, KO still owns 35% of CCE’s stocks, just below the level that would require consolidation. In addition, two of CCE’s thirteen board seats are held by KO executives. This intimate relationship with KO has both positive and negative implications for CCE.

[edit] Master Agreement

Coca-Cola Enterprises and the Coca-Cola Company have a master agreement that stipulates the conditions of their business arrangement. In this agreement, KO guarantees CCE exclusive rights to produce, market, and sell Coca-Cola products in certain geographic regions. In return, CCE agrees to buy all its concentrates from KO. KO sets the price for these concentrates at its own discretion, with no negotiation beforehand. Once KO sets a new price, CCE has 30 days in which to reject the price change. If CCE rejects the new price, the master agreement is terminated 90 days after the date of rejection.

[edit] Change of Control Provision

The master agreement also includes a provision that discourages any individual or company from obtaining a significant percentage of CCE’s stock. If one entity comes to own 10% or more of CCE’s shares, KO can cancel the master agreement. This clause effectively prevents hostile takeover attempts, but it also helps ensure CCE’s continued dependence on KO.

[edit] Benefits

• The Coca-Cola Company is a large, well-established corporation that can offer CCE a great deal in terms of support and protection from negative external events.
• The brands licensed by KO to CCE are among the world’s most popular, and CCE benefits from this brand recognition.
• KO depends on CCE to function. Without CCE, KO’s distribution network would be severely crippled, rendering it unable to deliver its products to consumers. This dependence ensures that KO will guarantee CCE’s continued viability as long as the Coca-Cola brands remain strong.

[edit] Drawbacks

• CCE depends on KO for all concentrated syrups. As part of the master agreement between the two companies, CCE is required to purchase all the concentrates for KO-licensed brands (93% of CCE’s total volume) from KO itself.
• KO sets concentrate prices at its discretion, often at a level that maximizes profitability for itself while decreasing CCE’s profit margins.
• CCE has minimal influence over the KO product line, limiting its ability to control beverage variety. This can hinder CCE’s ability to compete effectively in a fast-changing marketplace.

[edit] Trends & Forces

[edit] Consumer Slowdown in U.S. Threatens Sales

Soaring food and energy prices^[7], the housing slump^[8] and a weakening job market^[9] are putting the breaks on consumer spending in North America. Although the carbonated soda market is typically considered to be fairly recession proof, CCE has seen chronic weakness in North American sales over the course of fiscal 2008^[10] A potential collapse in consumer spending in the U.S. bodes ill for Coca-Cola Enterprises. Unlike KO which derives over 80% of operating income overseas, CCE is heavily concentrated in the United States and the United Kingdom which is also faces a serious threat of recession^[11].

[edit] Commodity Cost Inflation Pressures Margins

Fluctuations in the costs of production inputs can greatly affect CCE’s profit margins. In recent years, many of the raw materials necessary to produce and bottle beverages have become steadily more expensive, raising CCE’s per-unit cost of production. In an effort to compensate for the higher production costs, CCE has increased prices and reduced head count, or the number of employees. This helps to offset the impact of rising materials costs.

Some commodities that have a particularly significant impact on CCE's production costs are:

• Aluminum
  • Used to make cans for packaging.
• Corn
  • CCE uses high-fructose corn syrup, a corn derivative, to sweeten its non-diet, full-calorie drinks.
• PET Resin
  • CCE makes all of its plastic bottles from PET resin.
• Concentrates
  • Concentrates form the base of all beverages produced by CCE. These thick syrups are purchased from KO and a few other manufacturers.
  • KO is expected to raise CCE’s concentrate prices 4.5-6% this year, which could have a significant impact on CCE’s profit margins. KO does provide some relief in the form of "marketing support" refunds, which are basically refunds for concentrate purchases made in a given year, though these are given at KO's discretion and are not guaranteed.

[edit] US/European Market Saturation

• The United States and Western European non-alcoholic beverage markets have seen low growth rates and high levels of competition in recent years. These markets are more or less saturated with Coca-Cola products, and there isn't much room for future growth. CCE is heavily concentrated in these markets.
• The company has been slow to venture into other, emerging markets. These emerging markets are relatively risky, but they can be very lucrative and offer high consumption growth rates.

[edit] New Aversion to Soda Threatens Main Business

An 85% majority of Coca-Cola Enterprises’s products are classified as carbonated soft drinks, making it particularly sensitive to changes in demand for these CSD.

• Recently, consumer demand for CSD has been negatively affected by health concerns over obesity, diabetes, etc. This is true across most of CCE’s markets.
• There has been an increase in the number of regulations regarding CSD in the United States in response to the heightened concern over health risks.
  • Many public schools now ban the sale of soft drinks on their campuses.
  • The Center for Science and Public Interest proposed that a warning label be placed on all beverages containing more than 13g of sugar per 12-oz serving. This proposal would affect all non-diet, full-calorie drinks produced by Coca-Cola Enterprises.
• These factors have driven a shift in consumption away from CSD to healthier alternatives, such as tea, juices, and water.
• Within the CSD segment, consumers have been moving away from the sugared drinks, opting instead for diet beverages, which do not generally contain any sugar or calories. Though this trend has been in motion since 2000, sugared drinks still account for 72% of CCE’s total CSD sales.

[edit] Competitors

As the Coca-Cola Company’s major bottler, CCE faces the same competition as KO. The biggest competitor to the Coca-Cola system as whole is PepsiCo (NYSE:PEP) and its network of bottlers, the most important of which are Pepsi Bottling Group (NYSE:PBG), PepsiAmericas, Inc (NYSE:PAS), and Pepsi Bottling Ventures LLC. In 2006, Coca-Cola led the U.S. market with 42.9% of all domestic CSD sales, while Pepsi held a 31.2% U.S. market share. The third-largest company in the domestic market is London-based Cadbury Schweppes, which accounted for 17.6% of the 2006 U.S. market share.

As a bottler, CCE has somewhat limited control over its competitiveness, due to the fact that KO offerings essentially determine the CCE product line. CCE can and does, however, compete with other bottlers in terms of distribution efficiency, managing price fluctuations of production inputs, and marketing its products.

[edit] References

1. ↑ WSJ.com- Coke Bottle Takes Hit On Cost of Concentrate
2. ↑ CCE 2007 10-K Note 15 Operating Segments
3. ↑ CCE 2007 10-K Consolidate Statements of Operations
4. ↑ CCE 2007 10-K Consolidate Statements of Operations
5. ↑ CCE 2007 10-K Consolidate Statements of Operations
6. ↑ CCE 2007 10-K Consolidate Statements of Operations
7. ↑ The Boston Globe- Surging costs of groceries hit home
8. ↑ Bloomberg Case-Shiller Index Falls
9. ↑ NYTimes Unemployment Rising
10. ↑ AP- Coca-Cola Enterprises 3rt-qtr earnings fall
11. ↑ BBC News Recession 'looming' for UK firms