Coca-Cola Enterprises to Cut 3,500 Jobs As Coke Sales Fizzle

By Duane D. Stanford, The Atlanta Journal-Constitution

Feb. 14–Coca-Cola Enterprises said Tuesday it will cut 3,500 jobs during the next two years, including 300 in metro Atlanta, as the company struggles with a fading taste for the great American soft drink.

The exclamation point on that reality came in the form of a $2.9 billion one-time charge against the company’s fourth-quarter profits.

The reason for the noncash charge: Coca-Cola Enterprises says its North American franchise rights to bottle Coke products are less valuable now than they were a decade ago. That’s mostly because the bottler’s core product, carbonated soft drinks, is no longer growing in North America by 2 percent to 5 percent a year as it had for 20 years.

In 2006, CCE sold 1 percent fewer cases of carbonated soft drinks in North America than it did in 2005. The decline was 4 percent for the quarter.

Such declines are significant because carbonated soft drinks account for roughly four-fifths of CCE’s sales in North America. That market, which includes the U.S. and Canada, is CCE’s largest, accounting for roughly 70 percent of the company’s profits.

CCE, the world’s largest Coke bottler, also operates in six European countries, including Britain.

To help boost sales and profits, Chief Executive Officer John Brock said Tuesday the company will cut costs and streamline operations by reducing its 74,000-person work force by about 5 percent.

Most of the job cuts will come from operations in North America, but the breakdown is still being decided, company officials said. Cuts in Atlanta will come primarily through attrition.

“As this effort moves forward, we will communicate our plans with our employees as quickly and thoroughly as possible,” Brock said.

Separation expenses and other costs associated with the job cuts will cost CCE $300 million during the next two years. The company expects to save between $50 million and $100 million a year for the next two years, and roughly $275 million a year by 2009, once all the cuts are made.

Stock analysts were generally optimistic about the announced restructuring and impairment charge, predicting investors would see both as positive. Shares closed Tuesday at $20.95, up 42 cents on the New York Stock Exchange.

Morgan Stanley’s Bill Pecoriello said the cost savings will give CCE needed flexibility to hit its financial goals.

Coca-Cola, which owns 35 percent of CCE’s stock, may have to take an impairment charge of its own when the company reports its earnings today. CCE has struggled to grow in recent years as consumers in North America have shied away from sugary carbonated drinks that are high in calories.

Instead, teas, coffees, juices, waters, energy drinks and other noncarbonated drinks have captured the attention of North American consumers. Some customers want healthier drinks, others just want something different. Either way, sales of noncarbonated drinks are growing fast. CCE and Coke have said they expect to introduce an array of new drinks this year to take advantage of the opportunity.

But Brock said the Coke system is far from writing off the profitable carbonated soft drink market. One way to boost sales, he said, is to add more “healthful benefits” to the company’s carbonated soft drinks. There is already talk of a vitamin-enhanced Diet Coke.

Brock added that packaging for carbonated soft drinks in North America is “broadly boring.” He said CCE will look to Coca-Cola to share some of the successful packaging changes it has made to carbonated soft drink brands in Europe.

Just recently, Coke changed its Coke Zero package in North America from silver to black after the darker color proved to be a hit in Europe.

“We’ve got to walk and chew gum,” Brock said during a conference call with stock analysts Tuesday. “We’ve got to get carbonated soft drinks back on track. We’ve also got to continue the growth we’ve had with energy drinks and water and sports drinks and we’ve also got to broaden the portfolio.

“We believe we have the plans in place to do that,” Brock said. “But boy it’s early days. … We’ve got a long way to go.”

In Europe, case sales of carbonated soft drinks were up 3 percent in 2006 but still weaker than usual.

Making matters worse for CCE, the cost of aluminum for beverage cans and high-fructose corn syrup used as a sweetener are on the rise. The company expects its total cost of goods to increase 9 percent per case next year, which will lead to price increases. That is nearly four times higher than the 2.5 percent average increase in the cost of goods during the past five years.

Company officials insist CCE’s underlying performance is solid, despite reporting a $1.1 billion loss on paper for 2006.

Excluding one-time charges, earnings per share totaled 20 cents, the company reported. Analysts on average had expected earnings of 16 cents per share.

Net operating revenue in the fourth quarter was nearly $4.8 billion, up 6 percent from a year ago.

For the full year 2006, earnings beat expectations by three cents, coming in at $1.30 per share, excluding one-time items. Earnings in 2005 were $1.23 per share.

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