The Bottleneck At Coca Cola Enterprises

When it comes to volume, Coca-Cola Enterprises Inc. is hard to top. The Atlanta company bottles and distributes Coke, Sprite, Fanta, and other Coca-Cola brands in 37 States, accounting for more than half of Coca-Cola Co.'s U.S. volume. But big profits are another matter. Four years of brutal price wars with PepsiCo Inc. have pounded CCE's operating margins from 10% in 1987 to 6.7% in 1991. Lately, its profits have been even more erratic than usual (chart).

CCE's sorry condition is not lost on 44% owner Coca-Cola. Last year, the beverage giant leapt into action, tapping third generation bottling executive Summerfield K. Johnston Jr. to lead a turnaround. As head of the nation's No. 2 Coke bottler, with 11% of U.S. sales, he had gained a reputation for flexible, hands-on management. To bring him and his team on board, CCE paid $375 million for his Johnston Coca-Cola Bottling Group, the Chattanooga (Tenn.) company his grandfather founded in 1901.

Johnston, 59, has jumped in with both feet. Since moving to Atlanta nine months ago, the chief executive has laid off 100 people, mainly from management, decentralized operations into 10 regional units, raised prices, and continued CCE's efforts to modernize plants and cut operating costs. "From a structural point of view, he's doing all the right things," says Martin Romm, an analyst with First Boston Corp. But he doesn't have much to show for it yet. On a pro forma basis, CCE's first half income fell 66%, to $6 million, on sales of $2.5 billion. The second quarter brought $9 million in profits - a steep drop from 1991's $20 million. Cooler-than-usual summer weather in many of CCE's territories was part of the problem, along with the consumer spending slump.

Wall Street remains wary, to say the least. CCE's shares, which went public at 16 in 1986, have been in a profound slump since peaking last year at 19 1/2. They're now at around 11 3/4. Over the same period, Coca-Cola's shares have climbed from about 26 to over 42. The fact that Coke's goals may differ from CCE's doesn't make investors any more comfortable. Coke, which sells soft-drink syrup and concentrate to bottlers, is most concerned with upping volume. When retail prices fall, bottlers, take the hit, while Coke's sales may well increase. "The question we have is, will new management protect shareholders or the interests of Coca-Cola," says greg A. Villany, an analyst with Gabellie Funds Inc., which lowered its CCE stake from 6.1% to below 5% late last year. Johnston declined to be interviewed, saying through a spokeswoman that it's too early to comment on his changes.

PROFIT JOLT. All the cost-cutting and reorganizing in the world won't adddress the central problem at CCE: price pressure. Johnston must raise prices to give the company the profit jolt it needs. But Coke and Pepsi have been battling on price for so long that consumers are trained to wait for sales of their favorite brands. "If either side tries to up the ante, consumers will simply defer their purchases," says Lee D. Wilder, an analyst with Robinson-Humphrey Co. When CCE hiked prices 2.5% in the second quarter, volume fell 3%. Sales aren't likely to pick up again any time soon: Analysts figure U.S. soft-drink sales will increase only 1% to 2% this year, compared with double-digit growth a decade ago.

Johnston's former company isn't helping matters much - at least on the bottom line. Laden with $ 1 billion in debt from several acquisitions in the past few years, it posted a loss for each of five years before the merger. In 1991, it lost $43 million on revenues of $1.1 billion. Its debt now rests on CCE's books, raising the company's debt to 70% of capital, from 61%. Moody's Investors Service Inc. recently downgraded $2 billion of CCE's debt to A-3 from A-2 because of the changes in CCE's capital structure and the lackluster industry environment.

CCE has always been something of a poor relation to Coca-Cola Co. The young company was created in 1986, when Coke bought and consolidated several bottlers, primarily in the West and Southeast, then spun off 51% of the new company's shares to the public. CCE was managed from Atlanta, and its centralized structure helped cut costs and duplications among the various bottlers. But centralizaiton also kept executives from making the crucial day-to-day marketing decisions needed to compete, analysts say. If Pepsi came out with a special on six-packs in, say, Ann Arbor, Mich., executives had to wait for approval from headquarters to match it. In the meantime, CCE lost valuable market share.

NEW AUTONOMY. So far, Johnston has made CCE look a lot more like his former bottling company. There, Johnston ran a decentralized outfit with nine regional divisions spread throughout its Midwest territory. He has done the same thing at CCE, dividing the combined company into 10 regions run by autonomous executives who are expected to make quick decisions. "We want each of them to be Mr. or Mrs. Coca-Cola in their area," Johnston told analysts in June.

Division managers have quickly embraced their new autonomy. In the wake of Hurrican Andrew, the Florida division manager began distributing free drinking water, shipped from other CCE locations, to residents of hard-hit Homestead and Florida City. He made the decision the day after the hurricane hit, without having to wait for approval from headquarters. The decentralization seems to be especially popular among smaller retailers, who feel their needs are being better addressed. Keith Cianciolo, who runs a produce and grocery market in Cincinnati, recently asked his CCE division manager to change the minimum order from 25 cases to 15. The rep agreed on the spot, without calling Atlanta. "That helps, because we don't have a whole lot of floor space here," he says.

Now, Johnston hopes to boost profits by wringing more costs out of production. The company has just put the finishing touches on a prototype plant in Cincinnati. It uses automated vehicles to take cases from the end of the production line to the warehouse and loading docks, saving on labor costs. Johnston has also conserved warehouse space in Cincinnati with an elaborate trucking system in which semitrailers double as storage facilities.

Eliminating redundancies between CCE and Johnston's old company should unearth further savings. CCE is still consolidating its accounting and financial systems, for instance, with the goal of having all 10 divisions completely uniform in the next 18 months. Granted, none of these moves will give profits that much of a lift. But unless he can figure out a way to stop the price wars, there's little else Johnston can do.