Christopher Niesche: Coca-Cola chief puts fizz back into result

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Coca-Cola Amatil's underlying net profit is up. Photo / AP
Coca-Cola Amatil's underlying net profit is up. Photo / AP

Coca-Cola Amatil has used a clever trick to increase its fizzy drink sales over the past year - it's putting its products in smaller cans.

The company, which has the rights to bottle the soft drink in Australia, New Zealand, Indonesia, Papua New Guinea, Fiji and Samoa, has delivered its first profit growth in three years.

About 18 months ago, it launched a 250ml slimline can alongside the 375ml can we're used to. This is clever for a few reasons.

First, it means we're paying more for less. My local corner store sells the small cans for A$2 ($2.16) each, or A$8 a litre. It also had a two-litre bottle on special for A$2.99.

But there's another less obvious reason. When we eat or drink smaller portions, we feel as if we've done something virtuous, according to David Just, a professor of behavioural economics at Cornell University who studies consumer food choices.

"People upon consuming them are either left wanting or feel they have done something virtuous by not consuming more," Just recently told the New York Times.

"If they are left wanting, they may be much more likely to move to a second can, which could be a bad thing for the consumer, but a good thing for Coke.

"If they feel they have done something virtuous, they might feel they have licence to consume more elsewhere, and most often overcompensate."

Following a 33 per cent decline in profits over the previous two years, Coca-Cola Amatil's underlying net profit rose 4.8 per cent to A$393.4 million, helped in part by lower interest charges after CCA sold off part of its Indonesian business to its United States parent.

But sales are up too. Coke has managed to eke out a 0.5 per cent increase in sales of beverages in Australia, in part thanks to what the company calls the "small format" and new products.

It's hardly what you'd call a surge in sales, but it was the first growth since 2012 and with sugar under attack from health professionals it's not a bad result.

The challenge now will be for Coke to launch new products that tap into consumers' desire for low- or no-sugar beverages.

It's already made a good start with Coca-Cola Life, which the company packages in a green label instead of the usual bright red. It is sweetened with cane sugar and stevia, a plant-based sugar substitute which is up to 150 times sweeter than sugar.

The company says Coke Life has been its most successful product launch in eight years and has increased Coca-Cola trademark household penetration to 60 per cent.

Coke Life has about two-thirds of the sugar and kilojoules of regular Coke, and the company hopes it and similar products will lure health-conscious consumers back to fizzy drinks.

In an paper last year, investment house Platinum Capital argued that, while sugar remains the dominant global sweetener, it is regarded as "the new tobacco" by many and so there is an opportunity for alternative sweeteners.

"People are not abandoning their sweet tooth [if it were only so easy to give up an addiction!], but are instead looking for alternatives that have a reduced impact on their livers and waistlines," it said.

The report also noted that alternative sweeteners cost only a fraction of sugar and soft-drink manufacturers don't appear to be passing on the savings.

The challenge now will be for Coke to launch new products that tap into consumers' desire for low- or no-sugar beverages.

Alison Watkins had big shoes to fill when she took the chief executive role at the start of 2015. Her predecessor, Terry Davis, delivered eight years of double-digit profit growth between 2001 and 2010, although earnings had been slowing since 2010.

She has got off to a good start and what's pleasing is that she's a CEO who is aiming to build sustainable earnings growth, of about 5 per cent a year.

"We don't want to achieve earnings-per-share growth only through doing clever things on our finance or tax line - we want to achieve it throughout our business," she said after the result.

"We'd like to grow this business slowly and steadily.

"We need to go about this thoughtfully in a way that balances what shareholders expect today while building a stronger tomorrow."

This certainly makes for a welcome change from the attitude of so many other chief executives who are aiming to boost profits in the current climate with spending cuts instead of growth.

Watkins is essentially saying that she will resist pressure from fund managers and analysts for decisions that would push the share price up today, but not be in the long-term interests of the company.

Many other chief executives are not so strong.

With any luck Watkins and Coke's shareholders will be rewarded with a rising share price and dividends, paving the way for other CEOs to look to growth and the long-term.

- NZ Herald

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