Coke wouldn't mind having Pepsi for lunch Strategy: With its earnings gone flat, the Coca-Cola Co. is taking aim at overseas markets while battling PepsiCo Inc. in court as well as on the shelf.

November 16, 1998|By BLOOMBERG NEWS

ATLANTA -- When Coca-Cola Co. Chief Executive Officer Douglas Ivester took charge in October 1997, the world's largest beverage company looked invincible.

How things have changed.

Sales in Eastern Europe, Asia and Latin America have slowed and weak overseas currencies are crimping profits. Rival PepsiCo Inc. has filed an antitrust lawsuit and rolled out new sodas. And France blocked Coke's $880 million bid for the Orangina beverage line, saying it would hurt competition.

"We've gone through a difficult year," Ivester, 51, said in an interview.

Ivester's plan is to invest more than $200 million in overseas bottlers, go after Pepsi with new marketing and a staunch legal defense, and try to persuade French regulators to relent.

It's a costly effort coming at a time when slowing sales will hurt Coke's earnings this year and possibly next. Coke's profit was unchanged in the third quarter, and the company expects fourth-quarter earnings will be below last year's.

If the plan works, Ivester says it will pave the way for an earnings rebound. "We are focused on building muscle," he said.

The pressure is on, given the record of Ivester's predecessor, Roberto Goizueta, who died in October 1997. During the 16 years Goizueta ran the Atlanta company, Coke stock gained $145 billion in market value, rising six times more than the Standard & Poor's 500 index.

Ivester is not doing badly so far. Since he took charge, Coke stock is up 22 percent, better than the 17 percent gain for the Standard & Poor's 500 and better than rival PepsiCo, down 5 percent. At Friday's close of $69.75, however, Coke shares are well below their mid-July record of $87.9375.

Coke's biggest challenge is overseas, where it gets 70 percent of sales and three-fourths of earnings.

Sales were unchanged in Japan, down 9 percent in Germany and down more than 30 percent in Russia in the third quarter, according to Morgan Stanley Dean Witter & Co. analyst Andrew Conway.

While sales in other overseas markets rose enough to lift international sales 3 percent in the quarter, Coke "runs the risk of decelerating economies and slowing consumption," said Alec Patterson, an analyst at RCM Capital Management in San Francisco, which owned 3.66 million shares as of June 30.

Ivester's answer: Buy overseas bottlers while prices are 50 percent cheaper than earlier this year. It recently bought or invested in bottlers in Russia, Turkmenistan, South Korea, China, Thailand and Vietnam, gaining enough capacity to serve 50 million more people.

That lets Coke cut costs in its bottling system by adding more efficient machines and shortening delivery routes.

"He and his associates are on the hunt for these kinds of opportunities," said Donald Keough, Coke's president under Goizueta and now chairman of New York-based investment banker Allen & Co., which owns 2.35 million shares of Coke.

A similar move worked after Mexico devalued the peso in 1994. Coke boosted spending on vending machines and delivery trucks. Today, Coke has 70 percent of Mexico's soft-drink market, up from 57 percent in 1994.

Ivester hasn't had that kind of luck gaining control of the Orangina citrus-drink line owned by France's Pernod Ricard SA.

PepsiCo lodged complaints with French regulators, who blocked the sale on the grounds that the transaction would let Coke stifle competition in restaurants. Orangina distributes Pepsi products in France.

Coke still wants Orangina, Ivester says, because it's a regional brand that Coke can market worldwide.

Ivester, a northern Georgia native who studied accounting at the University of Georgia, also has his hands full at home.

PepsiCo last month introduced its Pepsi One diet soda, a new rival for Diet Coke. Diet Coke is the leader in the diet-cola category, with 8.5 percent of the $55 billion U.S. soft-drink market, compared with Diet Pepsi's 5.5 percent, according to industry publication Beverage Digest.

Analysts say they don't expect Pepsi One to take much business from Coke, which is planning new advertising.

"We're not seeing any broad discounting of Diet Coke yet, which would be a sign that Pepsi One's sales aren't hurting it," said Sanford C. Bernstein & Co. analyst William Pecoriello, who thinks Pepsi One will take sales from other Pepsi products.

Ivester also is fighting Pepsi's lawsuit claiming that Coke shuts Pepsi out of U.S. restaurants by using exclusive contracts with distributors.

That's a $15 billion market where Coke has about two-thirds of sales, according to Beverage Digest. Losing the suit, filed in New York in May, would open more restaurants to Pepsi.

Ivester declined to discuss the suit, though in June he dismissed it as Pepsi's "tactic of the month."

Coke shares may be vulnerable if earnings don't snap back. Coke trades at 49 times 1999 estimated per-share earnings, more than double the S&P 500 average of 24.

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