Coca-Cola Co. has placed a $500 million bet that it can re-energize sales of its soda brands in Southeast Asia, which have faced stronger competition from rivals based in countries including Japan and Peru.
The Atlanta-based beverages giant agreed to buy a 29.4% stake in the Indonesian business of Coca-Cola Amatil Ltd., which plans to use the funds on new factories, warehouses and fridges that house its products in gas stations and convenience stores. Coca-Cola Amatil–itself 29%-owned by Coke and operating as its Australian distributor–recently reported that earnings in its Indonesia and Papua New Guinea division fell more than 80% year-over-year in the six months through June.
The push to right the business in Indonesia comes as Coke battles slumping sales elsewhere. Coke’s profit fell 14% in its third quarter, with the company blaming weak consumer spending and macroeconomic volatility across much of the world. It has also faced consumer campaigns that tie obesity to soda consumption.
“This investment will allow us to capture the growth opportunity in one of the largest and most dynamic countries in the world as we enable our system to be even more responsive to consumer and customer needs,” Coca-Cola International President Ahmet Bozer said in a statement.
Coca-Cola Amatil is Coke’s sole distributor in Indonesia, the world’s fourth most populous country, where it has profited from the rise in income growth in recent years. But lately rising fuel bills and higher employee salaries have pressured the business, while a sharp devaluation in the rupiah against the Australian dollar has squeezed profits further. The vast market has also drawn rivals such as Peru’s Aje Group, known for its Big Cola product, and Japan’s Asahi Breweries Ltd, which makes fizzy and tea-based drinks.
Price cuts and marketing costs linked to the intensifying competition have hurt Coca-Cola Amatil’s earnings. The company reported in August that its first-half net profit fell 16% as its Australian soft-drinks unit also remained locked in a retail price war, and subdued consumer spending meant promotions didn’t bolster sales as hoped. Some analysts have questioned whether it was worth keeping the Indonesian division.
On Thursday, Coca-Cola Amatil Managing Director Alison Watkins said the company considered all options with regard to Indonesia but strongly believed it would be wrong to exit the business at this time given the investment it has made in the business over the past 22 years.
“We’ve got a real strong position in Indonesia and the growth that lies ahead for decades is really exciting for us,” Ms. Watkins told journalists.
Coke’s investment will help the company to offer more products tailored to the Indonesian market, such as water and juice products, while being more competitive on price, she said.
The announcement was made alongside the outcome of Coca-Cola Amatil’s strategic review. The company has been cutting costs, including factory closures, and attempting to boost productivity across its food and drinks operations to shore up profits.
Ms. Watkins said the Indonesian business would likely be “modestly profitable” this year, and management are targeting returns above the cost of capital by 2020. Overall, Coca-Cola Amatil expects its earnings per share to return to mid-single-digit growth over the next few years, with no further decline expected after 2014.