Analysts say the energetic Kent is up to the task, with a combination of aggressiveness and broad international experience
SEVEN months ago, when Muhtar Kent's rise to the top spot at Coca-Cola was confirmed, the chief executive's job at the world's largest beverage company would have looked a bit easier than it does today.
Kent's predecessor, Neville Isdell, had alre
ady done much of the hard work in getting a sluggish and insular company back on fighting form. After years of management disarray that allowed arch-rival PepsiCo to gain ground on Coca-Cola in its coveted home market, Isdell had injected a new sense of purpose into the Atlanta-headquartered corporation that Kent was expected to build upon when he took up the chief executive's post last week.
However, seven months is a long time in the corporate world, and especially so these days. While Kent and his colleagues at Coca-Cola were fully aware of US consumers' growing disenchantment with fizzy caramel-coloured drinks, they could not have anticipated the extent of the impact on their business created by a combination of surging inflation and sagging economic growth.
Unprecedented fuel prices in the US finally seem to be curbing the drive of American motorists. This has been confirmed in separate surveys released in the past fortnight by MasterCard Advisors and JPMorgan Securities, which suggest that gasoline costing $4 per gallon has led to drivers cutting back on both the frequency and length of their car trips.
This is deflating the fizzy beverages market in two ways. With fewer drivers on the road, there is less opportunity to sell high-margin individual bottles of drinks at petrol stations and convenience stores. Coca-Cola is also suffering from weaker spending in restaurants as consumers grapple with higher prices and uncertainty amid the credit crunch.
These challenges are not restricted to Coca-Cola. In the wake of rising costs for ingredients and packaging, Coke and Pepsi are both experimenting with smaller bottles priced at a more attractive level. This involves pulling 20-ounce bottles, priced as high as $1.49, in favour of 12 and 16-ounce containers costing as little as 99 cents.
Leading US beverage industry analyst Bill Pecoriello noted that although the industry was experiencing one of its weakest years in decades, PepsiCo appeared to be navigating troubled waters better than others. When Pepsi confirmed earlier this month that it still expected to meet its earnings outlook for 2008, the Morgan Stanley analyst remarked in a research note that the firm had so far been successful in passing on price increases.
"Pepsi's strong innovation pipeline, productivity initiatives and success thus far in managing the price/value equation in passing on commodity increases is allowing it to still deliver on its goal in this difficult environment," Pecoriello said.
One area in which Coca-Cola's past stumbles have allowed PepsiCo to steal a march is in the category of so-called "ready-to-drink" coffee, one of the many emerging sectors both companies are targeting as consumers increasingly reject carbonated soft drinks that are deemed unhealthy.
Pepsi and Starbucks, the iconic US coffee retailer based in Seattle, Washington, launched its North American Coffee Partnership in June 2002 with a high profile advertising campaign. Although Coca-Cola is now preparing to introduce its Full Throttle Coffee in partnership with Italy's Illycaffe group, the canned and bottled versions of Starbucks' Frappuccino and DoubleShot products remain dominant.
It has not, however, all been smooth sailing for Coca-Cola's rivals. Starbucks last week announced plans to close down 600 of its 7,000 stores across the US, bringing an end to the high-riding retailer's insatiable thirst for expansion during the past two years. Up to 12,000 baristas and other employees will lose their jobs.
Commentators were quick to point out that mounting job losses, stagnating wages and plunging house prices had soured US consumers on the notion of stumping up $4 for a latte – particularly when it takes the same amount and more to buy a single gallon of gas.
However, analysts also pointed out that many of the problems at Starbucks were of its own making. Although the company admitted that many of the axed shops would be in Florida and California – two areas where the collapse of house prices has been particularly acute – closures are slated "across all major US markets".
"I don't think there is any question that they over-built and really got ahead of themselves," said Ron Paul, president of food consulting firm Technomic. "Does the economy help? No, but the Starbucks problem is a Starbucks problem. I live in downtown Chicago, and I have half a dozen Starbucks all just five minutes away. I don't need that many Starbucks on my doorstep."
Paul added that the US restaurant industry as a whole is over-built, with an estimated 800,000 dining establishments in operation across the country. With cost-conscious consumers cutting back on eating out, he predicts a correction that will see between one and two in every 100 of these establishments closed in the next 12 to 18 months.
"We expect to see restaurant closures outpace restaurant openings in the current year," he said.
This poses a significant problem for Coca-Cola as fewer diners means fewer orders for high-margin drinks to accompany those meals. In the first quarter of this year, Coke posted a 4% drop in volumes sold through its food service and hospitality arm in North America. This includes its fountain-soda business in restaurants.
However, the biggest challenge lies in how to cope with an overall shrinkage in the market for fizzy drinks in the US, as consumers opt for what they see as healthier choices. In its latest annual study on the carbonated drinks business, industry magazine Beverage Digest reported a 2.3% slide in sales for 2007, which followed a dip of 0.6% the previous year.
Both Coca-Cola and PepsiCo have been tackling this through the acquisition of products such as enhanced and fortified waters, energy drinks and sports drinks. The biggest spend by both companies at this year's Superbowl contest – the most expensive advertising time in the US television market – was in support of such products: a low-calorie Gatorade called G2 in the case of Pepsi, while Coca-Cola splashed out on a high profile campaign for its Vitaminwater featuring NBA star Shaquille O'Neil as a jockey in a horse race.
Coca-Cola acquired Vitaminwater last year as part of its $4.1bn purchase of Glaceau. In that same year, Isdell also oversaw the purchase of Fuze, a juice and tea line meant to further bolster the non-carbonated business and help take on rival products developed by Pepsi and another of its key partners, Lipton Tea.
These purchases, together with his uplifting management style, gained Isdell universal credit for putting Coca-Cola back on an even keel. Irish-born Isdell took over at Coca-Cola in 2004, not long after the company had lost out to PepsiCo in a battle for control of Gatorade. The Atlanta firm was also smarting from a botched launch of its Dasani water brand in Europe.
Isdell recruited Kent back to Coke in May 2005, and a year later the two achieved a hit with the introduction of Coca-Cola Zero in the US. Billed as Coca-Cola's biggest launch since that of Diet Coke, Coke Zero gave much needed new life to the carbonated drinks sector.
Nonetheless, challenges remain for Isdell's 55-year-old heir apparent as concerns about the domestic economy have knocked more than 20% off Coke's share price since Kent's appointment as chief executive was confirmed last December. To date, flat sales in North America have been offset by international growth, but this may not remain the case. Earlier this month, Coca-Cola Hellenic Bottling, whose territory includes Eastern Europe, warned of slowing sales in Italy, Romania and Ukraine.
Analysts say the energetic Kent is up to the task, with a combination of appropriate aggressiveness and broad international experience. The son of a Turkish diplomat, he was born in the US, raised in Asia and attended college in the UK before he began working for Coke in 1978. He left the company in 1998 after Australian regulators accused him of insider trading in 1996. Kent repaid profits and costs, but never admitted guilt, and described the incident as an "honest mistake".
Directors at Coca-Cola paid for a full private investigation into the matter before allowing Isdell to recall Kent. The findings were never made public, but Kent's ascendancy indicates that all has been laid to rest.
Now he must prove that his frenetic energy levels can turn Coca-Cola into a nimble company capable of dealing with constantly changing consumer tastes, as well as a shifting economic landscape.
Shoppers have lost their appetite for Marks & Spencer's food, and shareholders are finding its performance equally hard to swallow, writes Nathalie ThomasOne of the questions asked is why isn't Stuart Rose getting sacked? He's the one who pursued the expansion of Simply Foods
WHEN Sir Stuart Rose walked into his office at Marks & Spencer's towering headquarters in Paddington, West London, last Monday, he was in a deeply contemplative mood.
Laid out in front of him were the high street retailer's latest trading figures and they did not make for good reading.
With the first quarter showing a 5.3% slump in sales, the chain's chief executive knew the returns would do little to improve his standing with shareholders ahead of M&S's annual meeting on Wednesday.
His instincts were right: by the end of the week M&S shares had fallen 32%, not helped by a surprising admission from John Lewis that weekly sales had slumped 8% as shoppers shied away from buying items such as TVs and sofas.
Rose is already facing a battle with leading shareholders, who continue to voice opposition to his elevation to executive chairman – a move which they say drives a coach and horses through UK corporate governance guidelines.
As Rose held strained conversations with fellow board members over what the stalwart of the British high street should do, the knives were sharpening for the recent new boy who would be offered as a sacrificial lamb.
Rose announced that Steven Esom, M&S's director of food, would leave with immediate effect only a year after joining from Waitrose where he was the managing director and a rising star in the John Lewis Group. It was also just four months since his promotion to the M&S board along with Kate Bostock, director of clothing. Both had been tipped to succeed Rose when he steps down in 2011.
Rose insisted there was "no disagreement" between him and Esom, but added that "consumer confidence levels have deteriorated markedly". Despite the presentation of Esom's departure, sources were quickly suggesting a clash of personality and strategy between the two men, who one source described as "chalk and cheese".
While Rose's upfront, confident style is well known in the City, people familiar with Esom describe him as a quieter, sturdier, less impulsive type.
There were also questions over whether Esom's strategy veered markedly from what Rose wanted him to achieve.
Neil Saunders, consulting director at Verdict Research, said Esom's experience at Waitrose differed from M&S, whose food division operates differently to the rest of the grocery market.
Despite introducing a basic ingredients range, shoppers still don't view M&S as a destination where they can do their entire week's shop. Instead, they'll cherry pick select items such as ready meals, pre-cooked soups or cakes from its shelves.
"Steve Esom came from a strong, traditional grocery background. M&S is not a player in that traditional grocery background," he said.
Freddie George, retail analyst at Seymour Pierce, said he suspected the direction in which Esom was taking the food division – modelling it on Waitrose – was probably not appropriate to its position in the market. "He was moving it more upmarket than it really is," he said.
When pressed on why he let Esom go, Rose declared he had done a good job "on some things" but cited the speed of M&S Food's development under Esom as a sticking point. "I'd like to have seen a bit more pace," he admitted before adding that Esom was appointed at a time when M&S was enjoying a period of solid growth.
"We felt now we needed to have someone who has a longer, core experience of M&S to get us through this difficult period. If we all had the benefit of hindsight we would not do a lot of things we do in our life.
"We have had to change horses mid-race because we now need to do some different things at a different time."
He described Esom's replacement, John Dixon, who until now has been heading the home and M&S Direct operations, as an M&S "stalwart" who has worked in the company for some 15 years.
Dixon has been quick off the block. Before Rose had even sat down to answer the string of questions fired at him from analysts and City scribblers on Wednesday morning, Dixon had already been down to the food department to inspect his new kingdom.
But as he settles in at his new desk, and gets to work on improving figures in a climate of falling consumer confidence, there is uncertainty about what Dixon can do to turn things around. As analysts continue to chew over the data this weekend, speculation is mounting about whether Esom was, in fact, the right man to get the axe. Are poor food sales M&S's greatest problem? What, if anything, can the retailer now do to return figures to health?
Many in the City were quick to point out that while like-for-like food sales fell 4.5% over the 13 weeks to 28 June, this compared favourably with the 6.2% decline in general merchandise over the same period.
Even so, says George at Seymour Pierce, food was a particularly sore point as sales at other supermarkets are holding up relatively well in the credit squeeze.
The group has admitted to losing market share to competitors which have been waging an aggressive war on prices.
George said: "People are concerned about food and non-food but the big surprise was the food. They (sales] are down further than people expected, by 4.5%. We know roughly what the market is doing, The performance was disappointing in that context."
Rose admitted the price of M&S food is a problem. While he said 80% of the retailer's food customers are loyal devotees who don't change their habits whether there is a recession or not, 20% of customers are more vulnerable to changes in economic sentiment and may view M&S products as more of a discretionary purchase. Meanwhile, the likes of Tesco are pushing hard to keep prices as low as possible in order to maintain customers at a time when shoppers are tightening the purse strings.
He said: "There is a lot of behavioural change taking place. There is a more occasional shopper to whom we might be seen as a discretionary purchase. We have got to find a way of saying, 'How do we keep you with us?' What we have got going on at the moment is the biggest price war in the past 20 years."
However, M&S is unlikely to start engaging in that price war. Although recent initiatives such as its "Dine in for £10" offer are expected to be ramped up as Britons cut back on eating out during the consumer slowdown, Rose insisted M&S would not join the ranks of the bargain bucket supermarkets any time soon. "We offer the very best quality in foods and that will be our continuing stance. Our customers like that (schemes such as Dine in for £10] rather than the bog standard 20% off and three for two."
Dixon will also press ahead with plans to trial 350 external brands such as Marmite in a number of M&S stores in the north of England this week – a scheme that has already drawn a mixed response from analysts.
Mike Dennis at Piper Jaffray warns it could cause customers to reassess the price of M&S's own brands compared with the more competitively priced external brands sitting next to them on the shelf. "Why pay £2.99 for own-label chocolate biscuits?" he asked.
Saunders of Verdict Research says the plans won't necessarily do M&S Food damage, but they will not lift it out of the mire. "I don't think it is going to harm the business but I think it misses the point. I don't think it's going to be a solution to M&S's problems in food. M&S is about a premium food offering and that has got to be the space where they need to continue playing."
However, according to both Nick Bubb of Pali International and Robert Clark of the Retail Knowledge Bank, the food division's problems are even more fundamental. They place Rose's ambitious plans for the separate Simply Food stores firmly at the heart of its troubles. "They have over-expanded. They have taken on too much space in food," said Bubb.
The expansion of Simply Food is thought to have cannibalised custom from M&S's traditional stores, rather than seizing significant market share from competitors.
Clark pointed out that a substantial proportion of Simply Food outlets are also franchised. "M&S don't receive the full benefits of Simply Food," he said. "They are having to share it with the franchisees."
So as Esom starts the hunt for his next role this weekend, many in the City are left wondering if he was the right man to be shown the door. As Bubb stated: "One of the questions asked... is why isn't Stuart Rose getting sacked? He's the one who pursued the expansion of Simply Foods. Steve Esom may well feel hard done by. Clothing is doing even worse than food so it seems a tad harsh that it's the managing director of the food division that has been sacked."
Analysts highlighted that clothing and general merchandise, which suffered even poorer like-for-like declines, are the mainstay of M&S's business. With this in mind, fears are now growing for annual profits.
Analysts at Landsbanki said they are now likely to cut their forecasts for annual pre-tax profits by 10% to around £800m, while Citigroup said consensus forecasts could fall to as low as £700m to £750m in light of last week's events. Consensus before Wednesday's update stood at about £870m.
David Buik at BCG Partners says it's certain that Rose will get an even rougher ride from his already disgruntled shareholders when he faces the music at this week's AGM. "The 'King of Gowns and Blouses' has lost his crown," he said. "The market perceives a touch of arrogance from retail's premier CEO."
It is understood that four of M&S's biggest institutional shareholders will vote against its annual reports and accounts on Wednesday. Although Rose is expected to survive the face-off, the pressure will only increase in the next six months as the spotlight falls on him and the remainder of his board to avoid a repeat of 1999 when, one year after reporting profits of £1bn, M&S underwent its worst slump in history, and pre-tax profits fell to £650m. The spectre of 1999 is likely to loom large in the board's mind after it reported annual profits of £1bn earlier this year.
Avoiding a repeat of history may be easier said than done though, and despite the accusations laid at Roses and Esom's doors last week, several analysts argued that M&S's position is far from unique, and the blame doesn't necessarily lie with its own strategy. John Lewis added weight to this sentiment with its update on Friday. Sales in its home and electrical divisions showed "big ticket" items are suffering particularly badly in the slowdown, with electrical sales plummeting by almost 16%, and homeware falling 13% in the week to 28 June.
Matthew McEachran at Kaupthing agreed with Rose that M&S has just become another victim of the consumer slowdown. "A raft of downgrades (from other retailers] appears likely," he said in a research note.
Saunders of Verdict Research confirmed that M&S's position is "not exclusive".
In the markets on Wednesday the 25% fall in M&S stock spread to other high street retailers, and Next closed down 8% at 837.5p, while Debenhams shares reached an all-time low of 37.25p on Wednesday, a 12% loss in one day.
Aside from continuing to enact its strategy, maintain high levels of customer service and remind shoppers why they should continue to opt for quality in the credit crunch, Saunders says M&S, along with the rest of the high street, may just have to weather the storm as best it can.
"There are a lot of people doing quite badly. There is an element that it is simply about battening down the hatches and riding the storm," he said.
