Coca-Cola Amatil Ltd (ASX: CCL) has reportedly slashed the prices of its soft drinks on supermarket shelves in an effort to regain its dominance over long-time rival Schweppes.
According to the Fairfax press, a survey undertaken by Deutsche Bank showed that the price of soft drinks had fallen by 7% during the June quarter compared to the year-ago period. This was driven mainly by Coca-Cola Amatil whose products fell a whopping 11%, compared to Schweppes' products (such as Pepsi and Solo) which dropped just 2.5%.
Fairfax also highlighted that the price drop was so significant that Coca-Cola products became only 20% more expensive than those of Pepsi during May, which compares to a long-run average of being 40% more expensive.
So What: Coca-Cola Amatil has taken its shareholders on a bumpy ride over the last couple of years due mostly to a lacklustre performance in its core Australian non-alcoholic beverage division. Sales and volumes have both declined since 2012 with earnings before interest and tax (EBIT) also taking a big hit during that time.
While part of this can be attributed to pricing pressures from supermarket chains Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Ltd (ASX: WES), its poor performance has also been due to its intense rivalry with Schweppes.
Coca-Cola Amatil's products have traditionally earned a price premium to those offered by Schweppes, such is the strength of the brand of its products, but a 40% differential was enough to see market share swing in Schweppes' favour.
Notably, the most recent price decrease appears to have coincided with the launch of Coca-Cola Amatil's new Coke Life product, which Credit Suisse analysts believe may have experienced a difficult first few months on the shelves. According to Credit Suisse, estimated sales fell significantly short of those recorded for Coke Zero and Coke Vanilla during their respective launches.
Personally, I don't think investors should spend too much time worrying about the early results of Coke Life. A month or two is not enough time to judge the success or failure of a product for a company like Coca-Cola Amatil – a fact that was reiterated by the group's Managing Director, Ms Alison Watkins, at the time.
Now What: In light of the issues faced over the last few years, Coca-Cola Amatil recently undertook a company-wide strategic review in which it found a potential $100 million in cost-cutting initiatives. While the company recognises the importance of greater marketing and product development, it also said that it intended to pass some of those savings on to consumers.
Indeed, Coca-Cola Amatil was losing market share to its primary rival with such a massive price differential between their products, so I personally believe some price-cutting was necessary. However, I also believe that one of the most attractive things about Coca-Cola Amatil is the strength of its brands and the competitive advantages that it carries by owning rights to them.
Reducing prices on its products could certainly help to win back market share while it could also strengthen the company's dominant position within the market. However, investors should also watch to ensure it is not having a negative impact on overall sales, and that the group's competitive advantage (i.e. the ability to charge more for its products) is not being eroded.
Coca-Cola Amatil's shares currently trade for just $9.38 per share with the market's concerns largely baked into the price. While management expects a return to earnings per share (EPS) growth in the very near future, Coca-Cola Amatil appears to be a reasonable buy for long-term investors, although they should also continue to watch for those issues highlighted above.
