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Bottles of Cott ginger ale move down the bottling line a the company's plant in Mississauga

New Cott Corp. chief executive officer Jerry Fowden has a turnaround plan. But the sagging fortunes of the soft-drink industry's twin giants might get in his way.

With a brutal recession cutting into sales at Coca-Cola Co. and PepsiCo Inc., the beverage heavyweights are increasingly turning their sights on the low-cost segment of the market.

And that could be bad news for Mississauga-based Cott, the world's biggest maker of private-label soft drinks, which warned yesterday that it's worried about discounting from cola's biggest brands. Cott's shares fell 25.9 per cent, ending the day at $6.16.

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"While our performance in the first half of 2009 has been encouraging, we are mindful of challenges that may still lie ahead, such as heavy summer promotions from the national brands, higher commodity costs compared to the first half of 2009 and a changing competitive landscape," said Mr. Fowden in a statement, even as the company announced its second straight quarterly profit.

Cott, Pepsi and Coca-Cola are all battling a slump in sales of beverages in North America. For Cott, an uptick in sales of carbonated drinks was offset by a dip in bottled water sales.

Pepsi has also been struggling with sales of its non-carbonated drinks, particularly Gatorade and Tropicana juices. Low sales for those drinks led to a 6-per-cent drop in Pepsi's overall second-quarter beverage sales in North America and Latin America. Last week, PepsiCo chairman and chief executive officer Indra Nooyi said during an earnings conference call that the company would have to refocus its marketing efforts.

"Clearly some of those [former]users switched to cheaper alternatives," Ms. Nooyi said.

Coca-Cola has also seen a contraction in sales volume in North America as it weathers the industry-wide slowdown in the United States, but has been buoyed by higher sales in India and China.

Cott hasn't had the same luck, as its international sales in Britain and Mexico were also down, with Mexico marking the biggest decline at 32.5 per cent. Cott said sales already plagued by difficult economic conditions were made worse by the outbreak of the H1N1 virus in Mexico in March.

Such concerns cooled the company's forecast for the rest of the year, despite a profit of $33.7-million (U.S.), or 48 cents a share, for the quarter ending June 27. The results beat the analysts' consensus, which had predicted 15 cents a share.

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UBS analyst Kaumil Gajrawala downgraded Cott's rating from "buy" to "neutral" yesterday, citing the possibility of a new share offering. He noted that while the offering would likely drive down the share price, it would in the long run enable Cott to pay down its debts.

Cott's second-quarter revenue declined 5.9 per cent, because of the impact of foreign exchange, dropping to $438.8-million from $466.5-million in the second quarter of 2008. Cott noted that if foreign-exchange items were excluded, revenue would have increased 2.3 per cent.

The results mark the first full quarter under the tenure of Mr. Fowden, who took over as CEO in February, a month after Cott announced that its exclusive contract to supply store-brand pop for Wal-Mart would be phased out over the next three years. The loss of the Wal-Mart contract was a major blow for Cott, given that the retailing giant represented 40 per cent of its business.

Q2.............. 2009.............................2008

Profit...........$33.7 million...............($1.8 million)

EPS............ 48 cents.....................(3 cents)

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Revenue..$438.8 million.............$466.5 million


Source: Company reports

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