Carroll attended an analyst visit to the Coke bottler’s facilities in Verona, Italy, and writes in a note today that the country is Coca-Cola Hellenic’s (CCH’s) second-largest market after Russia, with 14% of group volume and 15% of revenue, and (Shore Capital estimates) a 16-17% profit contribution.
Despite challenging conditions in recent years Carroll says he believes Italy offers strong future growth potential for CCH, despite unemployment up from 6.1% in 2007 to 12.4% in 2014 and an EBIT decline of circa. 40% over the past four years.
Shore Capital believes that retailing patterns in Italy echo those seen in the UK 3-4 years ago, with consumers downtrading to private label and channel shifting towards discount supermarkets, with consumers cutting household waste and managing their shopping on a strict budget.
Italian retail lanscape similar to UK circa. 2010-11
“We also expect product mix to have skewed towards more value-based bulk purchase. Whilst there is talk of some improvement, our experience in the UK suggests it will be a number of years before the Italian consumer is in a significantly better place,” Carroll writes.
Hellenic’s management sees two opportunities for driving growth in Italy, Carroll said. The first is growing per capita consumption of sparkling soft drinks, the second is building a stronger market share in water and stills.
Honing in on the first, he says that Italy materially under-indexes versus similar European countries in CSDs, and CCH has a dominant circa. 54% market share by volume and 59% by value.
Hellenic hopes to win with 'food at home'
Average per capita consumption in Italy was 166 servings/annum in 2013, versus 204 servings in France and 321 in Spain, and Carroll says management see this deficit as evidence of a strong opportunity to grow consumption.
“To achieve this Hellenic intends to target growing share in the ‘with food at home’ and ‘socializing out of home’ occasions in particular,” he writes.
“It aims to do this by making the brand more available for shoppers with its retail customers, and is broadening its brand offerings to attract more adult consumers,” Carroll adds.
The analyst cites examples including Fanta Lemon Pulp and Kinley Tonic Water (both pictured), and other brand extensions.
We asked Carroll if he worried at all about management talk of strong growth prospects for soft drinks in a Western European market, even if they under-index compared with regional neighbors?
Italians prefer waters to soft drinks
Worried due to health concerns in other western countries – flat or falling sales for Coke soda brands in the US and UK, for instance – and the rise of teas and waters?
In Italy consumption is unusually low – it’s very much a water market rather than a soft drinks market. The way CCH markets – teenagers say in the UK don’t differ much from those in Italy, for example – so there is an opportunity to increase consumption,” Carroll told BeverageDaily.com this morning.
“I’m not saying it will get to Spanish levels, but it does look very low. Compare it to the States – the States is at ridiculous levels, so the fall there doesn’t surprise me, with obesity such a big issue," he says.
Coke Zero outsells Pepsi in Italy, Hellenic improves adult offering
Carroll also points to Coca-Cola Light and Coca-Cola Zero as healthier, zero-calorie products that already exist, with the latter CCH’s fastest-growing brand in all its markets.
“Actually in Italy that brand alone is even bigger than Pepsi, which isn’t really in Italy,” he says.
“CCH brought out Fanta Lemon with pulp just a year ago, and that’s all about broadening their horizons with the adult consumer. That was very successful. And they’re re-launching Nestea as an RTD tea – changing it to an infused version, which is apparently what the Italians want,” Carroll says.
The analyst said he did see CCH as innovative, despite its size. “As a soft drinks producer you have to be innovative, but I’d see recently that the main movement has been around packaging size, with smaller packs – quick six-packs of 250ml, that sort of thing.”
“And 150ml cans at tills – the margins for the retailers and CCH are really high on these kind of products,” Carroll says.