CCEP's Philippines Acquisition Increases Its Emerging Market Exposure

Equity Analyst

Dan Su

Since its asset swap with The Coca-Cola Company, or TCCC, in 2010, Coca-Cola Europacific Partners, or CCEP, has been transformed through a series of acquisitions from a US bottler to Coca-Cola's second-largest distribution partner by volume and largest by revenue in 2023, with territories in Northern Europe, Asia, and Australasia.

This strategy to grow its footprint has made CCEP central to the route-to-market of the Coke system. The company, in partnership with TCCC, has been integrating digital route-to-market capabilities such as business customer portals with Coke's traditional advantages of direct distribution in the physical route-to-market.

We see growth opportunities from several sources. First, per-capita consumption of soft drinks are relatively low in some of CCEP's acquired territories. In the Philippines, for example, where CCEP expects to enter by early 2024, per-capita consumption of non-alcoholic ready-to-drink beverages is 39 liters, around half that of the 77 liters in the U.K. Per-capita consumption will likely increase with economic growth. Second, CCEP's advanced route-to-market apparatus provides opportunities to win share by broadening the beverage portfolio. Although its share of the portfolio is steadily declining, sparkling soda products represented 85% of CCEP's volume in 2023. This is relatively high compared with 70% of Coca-Cola HBC's volume last year, and we expect the company to look for ways to diversify away from this declining category.

CCEP has set out some medium-term targets that we think look slightly optimistic on an organic basis. Management expects 4% medium-term revenue growth, which seems achievable in the next two years, driven mainly by mix and with a positive contribution from volume. The guidance of 7% comparable operating profit growth looks a little more aggressive, however. CCEP will continue to drive efficiencies as it digitalizes its processes and has guided to up to EUR 400 million in productivity savings by 2028. Such efficiencies are finite, however, and we suspect further acquisitions will be required if CCEP is to continue to generate efficiencies beyond the next couple of years.

Business Strategy & Outlook

We assign CCEP a narrow economic moat due to the strength of its route-to-market operations, an intangible asset. The most significant competitive advantages of the Coca-Cola system exist in the operations of its bottlers, and we think the largest bottlers have robust economic moats.

Intangible Assets

TCCC’s bottlers are differentiated from other consumer product manufacturers because the brand equity is owned by the parent companies, and the bottlers generally record little or no brand intangible assets on their balance sheets. CCEP recorded EUR 32 million in brand intangibles in 2023, just 0.2% of their total gross intangible assets, while TCCC’s carrying value of trademarks was $14.3 billion (EUR 13.2 billion). The bottlers do the heavy lifting within the system, manufacturing the majority of TCCC’s volume and distributing and selling it via all platforms, while the parent company owns, manages, and markets the brands and manages the portfolio through merger and acquisition and research and development strategies. We believe that it is in the distribution function that the key competitive battleground lies, where shelf space is gained and lost, and where relationships with retail intermediaries are critical.

In our opinion, one of the biggest challenges facing consumer product manufacturers, and the primary reason for the intense competition among the leading players, is the finite nature of shelf space. Retailers, whose business model is dependent on volume, give priority shelf space to high-velocity products to optimize fixed-cost leverage and only assign shelf space to new entrants if they receive slotting fees large enough to transfer the risk of slow consumer adoption to the vendor. For manufacturers, owning category captain brands makes them an important partner to retailers, which, in turn, puts them in a strong position to negotiate for limited physical shelf space. In the case of CCEP, the decades of marketing spending behind the Coca-Cola brands invested by the parent company (TCCC routinely spends 10% of annual revenue on advertising) make Coke a leading cola brand in most markets, or at the very least the number two brand in a duopoly with PepsiCo. CCEP holds market-leading positions in most of its footprint, notably the U.K., Germany, and Australia. Coke’s favorable position in the industry has provided a platform from which the major bottles have adapted to 21st-century retailing by creating competitive advantages in distribution, execution, and revenue management.

One such advantage is the digitalization of operations, made possible by the scale of production. Digitization allows CCEP to integrate and standardize shared services across its markets, creating a common platform for back-office functions including payments, payroll, and taxes. Digitization at scale also helps execution through revenue and inventory management, improving just-in-time delivery efficiency, and monitoring sales. Data collected through distribution and selling is a competitive advantage that informs retailers and distributors of regional selling patterns, which allows bottlers to optimize the portfolio at a granular level.

The history of Coca-Cola shows that the relationship between TCCC and its bottlers is cyclical. The bottling system began in the U.S. in the early 1900s and grew through the establishment of a high number of small independent operations into a fragmented national and eventually international network. In the 1980s, under CEO Douglas Ivester, TCCC began acquiring independent bottlers and reselling them to larger bottlers to improve profitability throughout the value chain. In the 1990s, TCCC attempted to capture that incremental value for itself by persuading the bottlers to commit to contracts that allowed for increases in the price of concentrate, in return for continued distribution consolidation. The combination of a greater proportion of the system profit pool accruing to the parent entity and the increased debt levels assumed by the bottlers for consolidation pushed some of the bottlers into financial distress, however, and by the mid-1990s, TCCC was forced to moderate concentrate prices to allow the bottlers to prosper. Another cycle emerged in 2010, as the growth of soda substitutes, such as water, juice, and energy drinks, made the soft drinks business more fragmented. To adjust to this new operational complexity, both TCCC and competitor PepsiCo acquired bottlers to install operational best practices and provide capital to the bottlers. Since then, TCCC has again spun off most of these operations, while PepsiCo has not.

Today, the economics of soft drinks manufacturing appears more balanced throughout the system than it has been in the past. We estimate that roughly two-thirds of the retail price of Coke products accrue to the bottler as gross revenue, of which just under half is allocated to marketing activities including slotting fees. Roughly 17% of the retail price goes to TCCC and the retailer. The high-cost structure of the bottlers and retailers, however, means that TCCC’s share of the industry profit pool at the EBIT level is greater than its share of the retail price. We estimate that the bottler retains around 60% of the system profit, while one-third accrues to TCCC. The ROIC picture looks different again, with TCCC’s asset-light business model meaning it generates 50% ROIC (adjusted and excluding goodwill because the entire system benefits from TCCC’s acquisitions), while CCEP generates ROIC in the high single digits and low double digits.

The more balanced distribution of the profit pool may be partly explained by the falling influence of concentrate prices on the economics of Coke’s business. Sparkling drinks are steadily losing share of CCEP’s portfolio and represented 85% of volume in 2023. Cola volume, while still growing, is losing portfolio share faster, down to 59% in 2023 from 64.5% in 2016, although it ticked up by 50 basis points last year over 2022. Hydration and ready-to-drink products have taken share in CCEP’s portfolio over the same period. Most of this volume, however, is initiated from TCCC and still requires transfer pricing between the parent company and its bottlers.

There is evidence in CCEP’s financial statements that TCCC retains sway over the economics of its system. During the inflation spike of 2021-2022, concentrate and finished good prices, the costs of the materials CCEP buys directly from TCCC, increased faster than other raw material costs sourced from third parties. Concentrate and finished goods costs increased to 50% of CCEP’s cost of goods sold in 2021, up from a consistent 45% in previous years, implying growth of roughly 40%, faster than the 25% growth in other commodities. On this occasion, CCEP was able to pass through those price increases on an absolute basis, and the two-year stacked growth in cost of goods sold of 54% in 2021 and 2022 was matched in its entirety by growth in revenue. In periods of weaker consumer sentiment, however, it may be more difficult to pass through concentrate price increases. We estimate that all else equal, an additional 8% increase in the concentrate price at the start of the year would have wiped out CCEP’s economic profit in 2023.

Although the brand equity resides on the balance sheet of the parent, the benefits of the Coca-Cola brand flow through the entire Coke system, which we think further strengthens CCEP’s intangible asset, albeit we think this is secondary to its distribution advantages. The Coca-Cola brand has 125 years of marketing behind it and a rich heritage and is one of the most recognizable brands globally. Trademarks such as Coca-Cola and Coke have become eponymous for the sparkling cola category. However, the business model of the Coke system is transitioning from one built on the strength of its namesake brand to a portfolio of beverages that grow thanks to the distribution advantages of the existing infrastructure. The Coca-Cola label represented 59% of CCEP’s volume in 2023, although its portfolio share is in decline, having fallen from 64.5% in 2016. The remainder of the portfolio is made up of brands owned by Coca-Cola, such as Fanta, Sprite, Powerade, Glaceau Smartwater, and Honest, and others distributed but not owned by Coca-Cola, such as Monster Energy. 

In general, CCEP’s competitive advantages have led to stable market share. Based on Euromonitor data, we estimate that in five of CCEP’s largest markets (Germany, the U.K., France, Australia, and Indonesia) representing 63% of its 2022 volume, share declined modestly to 10.3% in 2022 from 11.4% in 2014. CCEP suffered its largest share loss in Australia, where it is the leading manufacturer by volume, and where share declined to 23.0% in 2022 from 31.1% in 2014, as challengers such as Bundaberg and Bega Cheese grew to a low-single-digit aggregate share. Most of the share was lost when this territory was under the ownership of Coca-Cola Amatil prior to CCEP’s acquisition in 2021, however, and excluding Australia, volume share was stable across the period in the other four markets, in aggregate.

Cost Advantage

We see insufficient evidence to prove that CCEP possesses a cost advantage. In capital-intensive operations such as bottling and distribution, scale can leverage the fixed cost structure and lower average and marginal costs of production. There appears to be an inverse correlation between volume and average cost of production. Using reported 2023 data, converted to U.S. dollars at spot rates on Mar. 25, we estimate that CCEP’s average cost per unit case was $5.28, well above Coca-Cola Femsa's $3.12 and CCHBC's $3.53 in unit case costs on slightly lower volume. The much smaller Coca-Cola Bottlers Japan Holdings, on the volume of 492 million unit cases, around 15% of that of CCEP, reported unit case costs of $6.10. It is very likely that CCEP operates at a lower cost structure than smaller bottlers. However, in its sales regions, it competes against some large operators. PepsiCo runs its own bottling operations in much of mainland Europe, Britvic bottles for Pepsi in the U.K., and Asahi does it in Australia. Although PepsiCo has a minimal presence in Indonesia, we do not see sufficient evidence to believe that CCEP possesses cost leadership in its key markets. 

Wide Versus Narrow Rating

Although CCEP’s returns are much smaller than those of TCCC, they are comfortably above our 7% estimate of the company’s cost of capital, in no small part because bottlers retain a reasonable share of the systemwide profit generation. We believe CCEP’s significant footprint, distributing around 9% of Coke’s global volume, the complexity of the fragmenting portfolio, TCCC’s equity stake and the importance of the bottlers to the success of Coke’s system mean TCCC is incentivized to ensure its largest bottlers can earn their cost of capital regularly. However, the warning signs of share loss in Australia, and the risk that bottlers’ economic rent could be eliminated by fairly mild concentrate price increases by TCCC if it chooses to grab an increased share of the profit pie, as it did recently by increasing concentrate prices above the food products inflation rate, are significant enough that we do not have confidence CCEP can generate excess returns for 20 years, the threshold for our wide moat rating.

Narrow

Economic Moat

Coca-Cola European Partners plc

Coca-Cola Europacific Partners plc engages in the distribution and sale of non-alcoholic ready to drink beverages. It operates through the following geographical segments: Iberia, Germany, Great Britain, France, Belgium/Luxembourg, Netherlands, Norway, Sweden, and Iceland. The company was founded on August 4, 2015 and is headquartered in Uxbridge, the United Kingdom.

Coca-Cola Europacific Partners plc engages in the distribution and sale of non-alcoholic ready-to-drink beverages. It operates through the following geographical segments: Iberia, Germany, Great Britain, France, Belgium and Luxembourg, Netherlands, Norway, Sweden, and Iceland. The Iberia segment refers to Spain, Portugal, and Andorra. The France segment includes continental France and Monaco. The company was founded on August 4, 2015 and is headquartered in Uxbridge, the United Kingdom.

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Preliminary unaudited results for the full year ended 31 December 2023 Solid end to a great year, well placed for FY24 and beyond UXBRIDGE, UK / ACCESSWIRE / February 23, 2024 / (NASDAQ:CCEP)(LSE:CCEP) FY 2023 Metric[1] As Reported Comparable [1] Change vs 2022 As Reported Comparable [1] Comparable Fx-Neutral [1] Total CCEP Volume (M UC)[2] 3,279 3,279 (0.5) % (0.5) % Revenue (€M) 18,302 18,302 5.5 % 5.5 % 8.0 % Cost of sales (€M) 11,582 11,576 4.5 % 4.5 % 6.5 % Operating expenses (€M) 4,488 4,353 6.0 % 6.5 % 8.5 % Operating profit (€M) 2,339 2,373 12.0 % 11.0 % 13.5 % Profit after taxes (€M) 1,669 1,701 9.5 % 9.0 % 11.5 % Diluted EPS (€) 3.63 3.71 10.5 % 9.5 % 12.0 % Revenue per UC[2] (€) 5.70 8.5 % Cost of sales per UC[2] (€) 3.61 7.5 % Comparable Free cash Flow (€M) 1,734 Dividend per share[3] (€) 1.84 Maintained dividend payout ratio of c.50% Europe Volume (M UC)[2] 2,644 2,644 0.5 % 0.5 % Revenue (€M) 14,553 14,553 7.5 % 7.5 % 8.5 % Operating profit (€M) 1,842 1,888 20.5 % 13.0 % 14.0 % Revenue per UC[2] (€) 5.56 8.0 % API Volume (M UC) [2] 635 635 (5.0) % (5.0) % Revenue (€M) 3,749 3,749 (1.0) % (1.0) % 5.5 % Operating profit (€M) 497 485 (11.0) % 3.5 % 10.5 % Revenue per UC[2] (€) 6.30 11.0 % DAMIAN GAMMELL, CHIEF EXECUTIVE OFFICER, SAID: "2023 was a great year for CCEP. This is testament to the hard work of our colleagues to whom we are extremely grateful, alongside our customers and brand partners.

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UXBRIDGE, UK / ACCESSWIRE / February 23, 2024 / Coca-Cola Europacific Partners (CCEP) (NASDAQ:CCEP)(LSE:CCEP) today confirms it has, together with Aboitiz Equity Ventures Inc. (AEV), completed the acquisition of Coca-Cola Beverages Philippines, Inc. (CCBPI) from The Coca-Cola Company (KO) • Further to the announcements on 2 August 2023, 20 November 2023 and 30 January 2024 (see links below), CCEP today announces it has, together with AEV, completed the acquisition to jointly acquire 100% of CCBPI from KO • The key terms of the Share Purchase Agreement comprise: ◦ 60:40 ownership structure between CCEP and AEV with comprehensive governance arrangements in place ◦ Valuation of 100% of CCBPI at $1.8 billion on a debt-free, cash-free basis • To aid comparability, FY23 adjusted financial information for selected metrics is provided in this release The acquisition builds on CCEP's successful expansion into Australia, Pacific & Indonesia (API) in 2021, further strengthens its partnership with KO and supports its long-term growth strategy and focus on driving shareholder value. CCEP's acquisition of CCBPI, with AEV, one of the leading conglomerates in the local market, is a great opportunity to co-own an established, well-run business with attractive profitability and growth prospects.

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UXBRIDGE, ENGLAND / ACCESSWIRE / November 20, 2023 / Coca-Cola Europacific Partners plc (NASDAQ:CCEP)(LSE:CCEP) today announces it has, together with Aboitiz Equity Ventures Inc. (AEV), entered into a definitive agreement to jointly acquire Coca-Cola Beverages Philippines, Inc. (CCBPI) from The Coca-Cola Company (KO) Share Purchase Agreement (SPA) Further to the announcement on 2 August 2023, CCEP today announces that it has completed its due diligence and entered into a definitive agreement, together with AEV, to acquire 100% of CCBPI from KO The SPA confirms the key terms of the proposed acquisition: 60:40 ownership structure between CCEP and AEV1 Values 100% of CCBPI at US$1.8 billion on a debt-free, cash-free basis Comprehensive governance arrangements agreed between CCEP and AEV The SPA is subject to a number of customary closing conditions, including receipt of required regulatory approvals Compelling strategic rationale The acquisition will build on CCEP's successful expansion into Australia, Pacific & Indonesia (API) in 2021, further strengthening the partnership with its significant shareholder KO, and positioning CCEP as the world's largest Coca-Cola bottler by both revenue and volume while supporting its long-term growth strategy and focus on driving shareholder value. CCEP's acquisition of CCBPI, with AEV, one of the leading conglomerates in the local market, offers a great opportunity to co-own an established, well-run business with attractive profitability and growth prospects.

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Coca-Cola Europacific Partners PLC (NASDAQ:CCEP ) H1 2023 Earnings Conference Call August 2, 2023 5:30 AM ET Company Participants Damian Gammell – Chief Executive Officer Nik Jhangiani – Chief Financial Officer Sarah Willett – Vice President of Investor Relations and Corporate Strategy Conference Call Participants Ed Mundy – Jefferies Lauren Lieberman – Barclays Charlie Higgs – Redburn Bonnie Herzog – Goldman Sachs Eric Serotta – Morgan Stanley Mitch Collett – Deutsche Bank Bryan Spillane – Bank of America Sanjeet Aujla – Credit Suisse Nik Oliver – UBS Robert Ottenstein – Evercore ISI Richard Withagen – Kepler Carlos Laboy – HSBC Sarah Willett Thank you all for joining us today. I'm here in Manila with Damian Gammell, our CEO; Nik Jhangiani, our CFO.

Coca-Cola Europacific Partners PLC (CCEP) H1 2023 Earnings Call Transcript

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News for Coca-Cola European Partners plc Stock (CCEP)