Price Rise At Coke Bottler Raises Questions About Control

Price Rise At Coke Bottler Raises Questions About Control

By CHRISTINA CHEDDAR BERK October 1, 2004 5:06 p.m.

NEW YORK -- Although Coca-Cola Co. (KO) Chairman and Chief Executive Neville Isdell recently warned his company may have gone too far in raising soft-drink prices this summer, Coca-Cola Enterprises Inc. (CCE) is initiating a major price increase for its cold drinks.

"As we have said throughout this year, we are taking price increases to cover our costs and the average increase for 20-ounce across all channels is in the mid-single-digit range," said CCE spokeswoman Laura Asman.

Asman's comments came in response to a research note from Morgan Stanley analyst William Pecoriello, who said CCE, of Atlanta, is implementing an 8% to 15% price increase on 20-ounce carbonated soft drinks such as Coca-Cola Classic and Sprite as well as on its Dasani bottled water in cold-drink retail channels.

The analyst sees the price increase as a sign that tensions are high between Coke and its largest soft-drink bottler.

According to Pecoriello, a price increase in the cold-drink retail channels such as convenience stores carries a high risk. Consumers who purchase cold drinks for immediate consumption are typically less price sensitive, but this concept will be tested as high gasoline prices are already hurting volumes, he said.

Rivals such as Pepsi Bottling Group Inc. (PBG), the largest bottler of Pepsi-Cola, Mountain Dew, Aquafina and other PepsiCo Inc. (PEP) beverages, and Nestle SA's (NESN.VX) Poland Spring aren't likely to follow the increase immediately, Pecoriello said. He added that the increase could result in Coke losing market share in this highly profitable channel.

"While rising raw material costs at CCE are a catalyst forcing higher pricing, the key issue of contention between the two parties is ultimately control over the business, how to split the profit pie, and what returns the bottler should earn at a time when demand for Coke's products has been weakening," Pecoriello said.

A Coca-Cola spokesman said Coke and CCE continue to hold discussions to formulate a new soft-drink concentrate pricing agreement. However, the current priority for the two companies is the 2005 business plan, he said.

The two companies have been negotiating the pricing formula for the concentrate, which is the main ingredient in soft drinks and Coke's primary source of income, for more than a year.

The idea of the talks, which began under Isdell's predecessor, Douglas Daft, was to better align the goals of the two organizations. The companies were seeking an arrangement that would improve the profitability of both companies.

Under the companies' current arrangement, Coke's profits are tied to volume growth, while the bottler's earnings are driven more by the profit earned on a specific package type.

Pecoriello said he agrees with Isdell's decision not to rush into an economic agreement with CCE. However, he expects the ultimate fix for Coke's North America business will be a restructuring of its business model, and that solution is unlikely to be determined in time for Coke's upcoming analyst meeting on Nov. 11.

"With a resolution unlikely by Nov. 11, we believe Coke stock will remain weak until a CCE solution is identified and earnings impact understood," said Pecoriello, who doesn't own shares of either company.

Sales of 20-ounce bottles represent about 10% to 15% of CCE's North American beverage volume, and prices could rise to $1.19 or $1.25 from $1.09 average, Pecoriello said.

Both Coke and CCE recently warned that third-quarter profits would fall short of Wall Street's expectations, primarily because of weak sales in North America and Europe.

Coca-Cola shares closed Friday at $40.31, up 26 cents, or 0.6%, while CCE shares changed hands at $19.36, up 46 cents, or 2.4%.

Morgan Stanley has an investment banking relationship with both Coke, Pepsi and Pepsi Bottling Group.

-By Christina Cheddar Berk, Dow Jones Newswires; 201-938-5166; christina.cheddar@dowjones.com

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