Following a profit downgrade and strategic review in April, the share price of Coca-Cola Amatil Ltd (ASX: CCL) was smashed and has not yet recovered. Many analysts have stated that the market over-reacted and the current share price of $9.41 represents a once in a lifetime buying opportunity. However, for the reasons outlined below, I believe Coca-Cola Amatil is facing structural headwinds and further earnings downgrades are likely.
1.The current price war with Asahi/Schweppes has significantly impacted recent earnings and will continue to negatively impact earnings over the medium term.
2. Indonesia has been the main growth driver of earnings over recent years, however growth will likely normalise in Indonesia over coming years as Coca-Cola Amatil continues to lose market share to low-priced competitors in the region which have significantly lower cost bases.
3 While bottled water is a key growth area for the business, the company has had trouble differentiating the Coca-Cola brand and therefore incorporating a price premium.
4. Price competition in the Australian supermarket channel is still strong, with the dominant Woolworths Limited (ASX:WOW) and Coles continuing to heavily discount. Discounting by Australia's largest two supermarkets shows no signs of easing over the medium term as they continue to exert their dominance.
5. Health trends in Australia are increasingly shifting demand away from traditional "unhealthy" carbonated soft drinks, such as Coke, and towards bottled water and other beverages with a greater perceived health value.
6. Coca-Cola Amatil's cost base is too high and needs to be lowered to match its lower growth outlook. This combined with an unprecedented level of quality competition, and over-reliance on price increases to drive earnings growth over the past decade, creates further downside risk.
