CCL Cuscal Ltd

Coca-Cola Co.'s growth plan in Southeast Asia's biggest economy has hit a bottleneck, as its Indonesian affiliate slows the rollout of a US$500 million investment there, citing economic weakness.

The Atlanta-based beverage giant showed its resolve in the world's fourth-most-populous nation when it paid US$500 million in April for a 29.4% stake in the Indonesian bottling operations of Australia-based Coca-Cola Amatil Ltd., which bottles and distributes its products in Australia, New Zealand, Indonesia, Papua New Guinea and several Pacific island nations.

The investment was earmarked to boost capital expenditure in Indonesia, lifting production capacity, expanding warehouses and adding coolers at retail outlets.

Indonesia, a country of 250 million people where the beverages market is still in early development, is crucial for Coca-Cola. Southeast Asia accounts for about a quarter of Asia-Pacific's ready-to-drink beverage market, according to market research company Euromonitor International. As volume sales of carbonated soft drinks in developed markets decline or stagnate, emerging markets have become even more important.

But Amatil has spent only 31 million Australian dollars (US$22.7 million) in its Indonesia and Papua New Guinea division combined through the first half of this year, about a quarter of the total spent for all of last year and 16% of its 2013 expenditure.

Martin Gil, head of Coca-Cola Co.'s Indonesian subsidiary, PT Coca-Cola Indonesia, which oversees marketing and concentrate sales, said the joint venture was fully committed to spending the US$500 million eventually, and that Coke and Amatil are "fully aligned" in their plans.

"If you had a growth plan you wanted to achieve in 3-5 years, it becomes 5 to 7 years now, so a delay of about two years," he said.

Mr. Gil said that long-term, the company still sees Indonesia as a key growth source. "We are investing for that future," he said.

The slower pace is a response to Indonesia's most severe economic tumble in six years, with consumer purchasing power weakening and sales of everything from motorcycles to apartments suffering. Annual growth in Indonesian retail sales, as measured by a central bank index, was 7.2% in September, down from almost 18% a year earlier.

Indonesia isn't the only soft spot for Coke, which has relied heavily in the past on emerging markets for growth. The soda giant has warned it will miss sales targets for a third straight year, hurt by economic slowdowns in key countries including Brazil, Russia and China. It also estimated in October that weakening foreign currencies would have a negative impact of seven percentage points on revenue this year.

Coke also is in the midst of a five-year, $3 billion cost-cutting plan and is trying to shed bottling assets to focus on the more profitable business of selling soda concentrate. But it agreed last year to buy the stake in the Indonesian bottler amid concern that Amatil, which handles about 2% of Coke's global volumes, according to Citi Research, wasn't investing enough there.

Amatil, which initially said the US$500 million would be invested within four years, now says the spending will keep pace with volume growth. The company said volume in Indonesia rose a seasonally adjusted 3% year-to-year in the first half, below its expectations. Amatil declined to offer a new time frame for the investment, but noted its continuing construction of a distribution center.

Some industry observers question whether Amatil is a good fit for Coke in Indonesia, an underdeveloped market requiring more long-term investments than the mature Australian market that generates the bulk of Amatil's profit. The Indonesia-Papua New Guinea division accounted for almost half of Amatil's capital expenditure in 2013 and 2014 as the company sought new growth sources and reduced reliance on Australia.

"Amatil is a little bit on borrowed time," said Ian Shackleton, a beverage analyst at Nomura in London. He added that Coke could try to find another bottling partner in Indonesia or increase its stake if business doesn't pick up.

Coke watchers don't expect a deeper shake-up soon because the soda giant is busy on several other fronts. In China, where its sales have slowed after several years of double-digit growth, the company broke ground on two plants in August, part of a plan to invest $4 billion from 2015 through 2017.

A bigger and more pressing issue is Africa, where Coke's main bottler, SABMiller PLC, agreed in November to be acquired by Anheuser-Busch InBev NV. Coke now has to decide if AB InBev will become its chief bottler in Africa despite AB InBev being a key bottler in Latin America for rival PepsiCo Inc.

Indonesia's most popular beverage segment is bottled water, dominated by France's Danone SA. Carbonated drinks made up just 4% of total soft-drink sales in Indonesia in 2013 according to Euromonitor International, leaving Coke battling over a small segment with low-price competitors including Peru's Aje Group and Japan's Asahi Breweries Ltd. Coke also competes in bottled water and other noncarbonated drinks.

Indonesia's complex regulatory environment is another hurdle. A water law that served as the basis for its operations was revoked this year, and there is talk of taxing drinks with added sugar.

Write to Ben Otto at ben.otto@wsj.com and Mike Esterl at mike.esterl@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

December 04, 2015 06:55 ET (11:55 GMT)

Cuscal (ASX:CCL)
Historical Stock Chart
From Jan 2025 to Feb 2025

Cuscal (ASX:CCL)
Historical Stock Chart
From Feb 2024 to Feb 2025