Prepared Foods December 20, 2004 enewsletter

Coca-Cola Enterprises (CCE) hopes new products will help boost sales and profits in 2005 after a year of disappointing results.

The Atlanta-based bottler said it expects sales volume to grow by 1% to 2% in 2005 after a fall of about 2% this year. CCE blames 2004's slide on several factors, including soft retail sales and health-and-wellness trends that continue to pull some consumers away from regular soft drinks.

CCE expects new products to help renew sales growth in 2005. "We simply lacked sufficient product innovation this year," said chairman Lowry Kline.

New products are largely the duty of Coca-Cola.

CCE, which works closely with Coke, said it expects to offer a range of new drinks to consumers.

The lineup will include Full Throttle, a caffeine-charged energy drink meant to compete with Red Bull, and new flavors of Dasani bottled water.

Later in the first quarter, CCE expects to add a new, regular soft drink. One possibility is a lime-flavored version of Coke Classic. Coke also has tested concepts that include Coke Zero, a diet cola, and Vault, which would be similar to Pepsi's Mountain Dew.

CCE provided few details.

"We have a very robust innovation pipeline for 2005, with great product news in every category," said president and CEO John Alm.

When it comes to existing products, CCE plans to emphasize diet drinks. "The diet category is the fastest-growing segment in the soft drink market today," Alm said.

Sales of regular soft drinks declined 7.5% in U.S. supermarkets during the first 10 months of the year, while sales of diets increased 5.2%.

Previously, Coca-Cola said it plans to spend millions on marketing to help boost demand. In 2005, Coke's extra spending will be a "key element" in CCE's push to sell more products, Alm said.

CCE is under pressure to produce better results, given all the shortcomings this year. The bottler is likely to end 2004 with earnings per share of $1.21 to $1.23, including a one-time charge of 5 cents related to a switch in concentrate pricing.

For 2005, CCE predicts earnings per share in the low- to mid-$1.30s.

As the new year begins, CCE will need to deal with a host of challenges, including higher costs for raw materials and a 2% increase in the price of concentrate the bottler buys from Coca-Cola.

Altogether, CCE expects costs of sales per case to grow by about 4%. The bottler will offset the increases by boosting prices by 4%.

CCE also is trying to reduce operating expenses, especially labor and benefits. The company said about two-thirds of its expenses are tied to its work force, which totals about 74,000 people in North America and Europe.

CCE's chief operating officer, David Van Houten, said the company is not aiming to reduce staff. "This is about becoming more efficient with the people that we have out there," he said. CCE also plans to use more part-time workers.

Analyst Marc Cohen, of Goldman Sachs, questions CCE's belief that new products will lead to a rebound in sales volume.

"Coca-Cola's weak recent innovation record -- and CCE's own missteps in executing what Coca-Cola has delivered -- make it difficult to gain conviction," he said in a report.

John Faucher, of JPMorgan, said innovation and extra marketing should help short-term results in North America, but he wondered whether long-term performance will be affected.

There have been questions this fall about the level of cooperation between Coke and CCE, including speculation about possible management changes at CCE.

Coke chairman and CEO E. Neville Isdell has said discussions between the companies are "on the right path."

Kline noted that Coke and CCE are working closely. This week, two Coke executives, including North America chief Don Knauss, presented plans to CCE's board of directors.

"This action illustrates our close linkage with the Coca-Cola Co. on the important components of our business: innovation, demand creation, pricing and marketplace execution," Kline said.