Discounts, rising costs will hurt bottlers’ bottom lines

NEW YORK – A Longbow Research analyst told the Associated Press Monday that heavy
discounting and expected higher costs will likely cut into profits at soda
bottlers for the next year or more.

Analyst Alton Stump said in a note to investors that
according to a survey of retailers, soft drink volumes rose between 2 percent
and 3 percent year-over-year in May.

Those same survey results indicated that Coca-Cola
Enterprises Inc. and Pepsi Bottling Group Inc., were both forced to offer heavy
price discounts in convenience and gas stores to offset lighter consumer
traffic, the AP said.

UBS Investment Bank Analyst Kaumil S. Gajrawala also said
discounts could hurt bottlers’ profit margins.

“While cold drink sales represent a small percentage of
volume, we estimate it represent roughly 60-65 percent of total profits for
bottlers,” Gajrawala wrote in a note Monday.

Stump said the results were based on discussions with 80
U.S. retailers, including 40 Wal-Mart locations and 40 convenience and gas

He said both Coke and Pepsi offered two 12-packs for between
$5 and $5.50 – an over 30 percent discount to regular prices – at more than 80
percent of the convenience and gas stores he contacted last month.

Stump also said that the heavy discounts could outweigh any
share gains the companies have received from Wal-Mart reducing its
private-label shelf space.

Stump said Coca-Cola Enterprises will also face higher metal
can costs than Pepsi Bottling Group for most of 2008.

He added that Coca Cola Enterprises only plans to implement
a low single-digit rate price increase on average this year, below an expected
mid-single-digit or more total cost of goods hike.

Those concerns led Stump to lower his estimates for both
companies’ profits for both fiscal 2008 and 2009.

Stump cut his profit estimates for Coca-Cola Enterprises by
6 cents per share to 52 cents per share in the second quarter, lowered his 2008
estimate by 6 cents per share to $1.40 per share and cut his 2009 estimate by 6
cents to $1.52 per share.

Stump also lowered his profit outlook for Pepsi Bottling by
4 cents per share to 74 cents per share in the second quarter, $2.31 per share
for the full 2008 fiscal year and $2.52 per share for 2009.

Both companies did not return calls and e-mails seeking

Coca-Cola Enterprises shares fell 37 cents to $19.77 in
afternoon trading while Pepsi Bottling shares dipped 47 cents to $31.95.