Can Coca-Cola Amatil Ltd turn things around in 2015?

Management changes announced yesterday are the latest attempt to spark life into the company – could it turn things around in 2015?

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2014 was a year to forget for investors in Coca-Cola Amatil Ltd (ASX: CCL), with the stock falling nearly 23%. Although the operational review announced in late October was well received by the market, the optimism around the stock has fizzled since. Management changes announced yesterday are the latest attempt to spark life into the company – could it turn things around in 2015?

The SPC Ardmona business has struggled against cheaper South African and European imports due to the high Australian dollar, culminating in a $404 million write-down in its FY13 results. With various commentators forecasting rate cuts this year, the business may get some relief on this front. The alcohol portfolio is also likely to perform strongly in the coming years, with consumers looking for premium products such as craft beers and ciders according to IBISWorld research.

However the Alcohol, Food & Services segment only made up 15% of FY13 revenues. The Non-Alcoholic Beverage segment is the key division, and unfortunately the outlook is not as upbeat. The Australian operation is the most significant and has suffered a myriad of issues.

Over one-third of the revenues are derived from the grocery channel, and tighter pricing from the major supermarkets has been a drag on performance. Consumers are increasingly value conscious which has allowed cheaper alternatives like Aldi and Costco to threaten the supermarket duopoly of Woolworths Limited (ASX: WOW) & Wesfarmers Ltd (ASX: WES). Based on this it would appear pricing pressures for Coca-Cola Amatil will not abate in the near term.

Of more concern is the long-term trend of consumers shunning sugary soft drinks for health reasons. The company's answer to this conundrum is to launch "better for you" products. One such product is Coke-Cola Life which is due for rollout in April 2015 – a cola sweetened with a blend of cane-sugar and stevia based on the existing U.S. formula. Initial feedback based on store owners from an early U.S. launch in August has cited 'satisfactory' sales, but also suggested that the product has not generated as much excitement as hoped for. This is clearly not a good sign for Coca-Cola Amatil.

Whilst Australia is the current engine room, the company expects the future to lie in Indonesia and has committed to a US$500 million capex program over the next 3 – 4 years to strengthen its position as market leader.

It's clear to see why – the country has a fast-growing middle class and half of its population of 250 million is aged under 30. The problem is a lot of other soft drink companies see the same long-term potential and are pursuing the same strategy. The heightening level of competition will hurt profitability, and will be exacerbated by the fall in discretionary income from the reduction in fuel subsidies that took place in November.

To make matters worse Indonesian consumers are very price sensitive and have low brand loyalty. The entrant of AJE, seller of Big Cola is a great example of this. Although the company only entered the market four years ago, it has managed to grab more than a third of the carbonated drinks market because its drinks cost 25% less than its bigger rivals.

It was outlined in the operational review that the company will address this. However I'm not sure if it can ever close this gap, and if it does it will probably be in the medium term. This suggests that investors could likely be in for more pain during the interim.

Buy, Sell, or Hold?

Coca-Cola Amatil is in a tough place but it's not doomed – its launch of a smaller 250ml can is likely to tempt even the most health conscious. Also it is plausible that the strength of the Coca-Cola brand can help them through this battle. However the recovery is likely to be in the medium term so for now I would recommend that you put it on your watchlist.

Motley Fool contributor Simon Chan does not own shares in any of the companies mentioned in this article.

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