Two Latin American Coke Bottlers Go Public
With Their Unhappiness Over Concentrate Prices.
Coke Femsa and Arca Warn Coke
They'll Cut Their Future Marketing Spending.

Two big Latin American Coke bottlers are upset with Coke over concentrate price hikes and -- in unusual move -- go public with their displeasure. Coke plans to increase some concentrate prices during 2007 through 2009 in some Latin American markets. Coke Femsa and Coke Arca fire warning shots at Coke in their 3rd quarter earnings press releases (see below). Coke Femsa CFO Hector Trevino told investors on October 28 that his company had "recently" received letter from Coke notifying Femsa of increases. Adds, 13 other bottlers in Mexico and 16 in Brazil received similar letters. Source close to Coke tells BD that there were "face-to-face meetings with bottlers ... This was not a case of the letters suddenly appearing."

Bottlers respond. Femsa -- biggest Mexican and Latin American bottler -- states: "We have informed (Coke) that in order to offset the impact to our profitability that such concentrate prices represent, we intend to reduce our contribution to marketing expenditures of its soft drink brands in Mexico and Brazil, effective the same dates as (Coke's concentrate) cost increases." Arca -- second largest bottler in Mexico and Latin America -- states: "Should this occur, Arca will analyze a series of actions aimed at minimizing its impact, including the possibility of reducing marketing expenses related to Coca-Cola brand products, effective the same dates as the cost increases."

Concentrate pricing. In Latin America, Coke uses "incidence-based pricing"; that means what bottlers pay for concentrate is a percentage of their sales of product to retailers, etc. Coke system executive says in Mexico, Coke has had different percentage rates for one-way and for returnable packaging, with one-way being lower. He explains that this change -- which is on one-way packaging -- will bring percentage on that closer to returnable. Adds, volume is shifting toward one-way packaging, and Coke has not increased percentage on one-way packaging in "many years." Informed source says lower concentrate price structure on one-way packaging goes back many years to when Coke began to encourage bottlers to phase in that kind of packaging both to increase consumer usage occasions and to prevent competitor from beating Coke into market with one-way.

Profit pie. Coke system executive explains, "this is about Coke getting its appropriate share of the profit pie (between company and bottlers.)." But acknowledges, "no one likes a price increase." Morgan Stanley's Bill Pecoriello says Mexican bottlers get a much bigger slice of the profit pie than do bottlers in the U.S. Suggests in Mexico, bottlers take 65% of profit pie vs 45%-50% for U.S. bottlers. He estimates that what Mexican bottlers pay for concentrate is about 18% of their sales; e.g. an incidence rate of 18%. In contrast, U.S. bottlers -- though they are charged flat amounts for concentrate -- pay about 24% of their sales. View. Bernstein's Robert van Brugge notes Coke's "argument for taking higher concentrate price increases is that it has transferred a significant share of system profits back to the bottlers over the past five years, and that it is ready to take its 'fair share' going forward." Adds: "This claim is corroborated by our analysis of Coke's global system economics."

Public nature. Though Coke and its bottlers often have disagreements, such public expression is unusual. One source close to Coke notes: "Neither (Coke nor bottlers) are happy about this." Several Wall St analysts use words like "mutiny" and "stalemate" to describe situation. But even Coke Femsa's Trevino notes: "We are not trying to say that because of this situation we have a specific conflict. We were surprised by the movement, it took us a little bit off guard."