Adele Ferguson
August 20, 2017
AFR
In the beverage industry, the NSW anti-litter “exchange for change” scheme set to kick off on December 1, will be a game changer.
Based on the initial costs released to the industry by the scheme coordinator on Friday, there will be 3.5 billion eligible containers a year in NSW that will be subject to costs ranging from 11¢ to 14¢ a container. This equates to hundreds of millions of dollars a year.
Who will ultimately pay the bill – consumers or suppliers – is yet to play out.
Leading analyst David Errington from Bank of America Merrill Lynch has crunched the numbers and believes the NSW Container Deposit Scheme will hit the discount end of the market hardest.
“The price increase is particularly pronounced for multipacks (such as 24x water) which may increase by about $3,” he says.
“Given that private label multipack water currently retails for $6, this has the potential to change consumer behaviour significantly.”
The scheme is based on the assumption that suppliers will recover the costs by passing them on to customers, who then return the bottles to a designated spot and receive 10¢ a bottle. In the case of the cheap 24 packs of water, that’s $2.40 a pack.
How consumers will respond to the rising prices, is uncertain, so too is the redemption rate.
For Coca-Cola Amatil, which produces 25 per cent of the containers caught up in the scheme, it could increase costs by $100 million a year.
“Simplistically, this imposes a cost increase of at least $100 million for Coca-Cola Amatil – which is made of 10¢ per container in deposition and between 1¢ and 4¢ per container in handling costs,” Errington says in a report.
At an investment briefing held on Friday, Coca-Cola Amatil (CCA) boss Alison Watkins told investors she intended to pass the cost to its customers who then are responsible for returning the bottles and cans to a designated handling spot and collect the 10¢ a container. But as Errington says, the impact of the price (cost impost) increase on volumes is uncertain.
The scheme will become effective from December 1, which is the biggest and most important month for the beverage industry from a sales point of view. Not surprisingly, suppliers such as CCA are in discussions with retailers as to when prices will increase. The scheme’s impact on promotional programs is another unknown.
There will have to be a big educational program to change customer behaviours.
One thing is certain: retailers won’t like the optics of a price hike in a low-inflation and highly competitive market. The name of the game for retailers is low cost and convenience.
It is uncertain how consumers will behave, but many believe the price rise will lead to a fall in volumes, which are already under pressure from changing tastes. If suppliers such as CCA pass on the entire cost, volumes will fall, hitting earnings.
It will be interesting to see how players such as Schweppes respond. Schweppes, which includes brands such as Pepsi in its portfolio, has been heavily discounting in supermarkets to win market share. Separately, Pepsi recently won from CCA the soft drinks contract for Domino’s Pizza. The contract loss was a blow to CCA and prompted speculation that it could be the start of more contract losses for CCA in the fast food market.
The introduction of the scheme and the uncertainty to sales that it brings couldn’t come at a worse time for CCA as consumer tastes continue to turn to health and wellbeing products and away from sugary carbonated soft drinks, of which CCA is over exposed.
On April 21, CCA released a trading update warning that underlying net profit in the six months to June 30, 2017 would be lower due to pricing and volume pressure due to competition and category trends away from sugary drinks in Australia. It said full-year profit would broadly be in line with last year’s.
Since the downgrade, CCA’s shares have fallen 20 per cent to close on Friday at $8.47 a share.
It is part of a continuing decline in its Australian business, which accounts for the bulk of earnings. To put it in perspective, in 2012 Australian beverages generated $624 million in earnings before interest and tax. In 2016 it was generating $455 million of EBIT.
Besides changing tastes from sugary drinks, there was also a move by consumers to buy discounted water, which Schweppes exploited and the retailers jumped on with their own home brands.
When Watkins fronts the investment community on Wednesday with CCA’s interim results, the big question will be her strategy and her ability to execute as the headwinds continue to build.
Investors will also be looking for a trading update for the full year, given the current state of play, including the power shift that continues between retailers and suppliers.
This was put on full display in July when Coles supermarket chief John Durkan launched a report on the cost of living pressures and took a swipe at a number of multinational suppliers for charging Australians more for their products than they do in other countries. Coca-Cola was one of a few he singled out. He also warned CCA that the bottler’s Mount Franklin range of water products risked being pared back on its supermarket shelves. “The product is far more expensive than Coles’ home brand [mineral water],” he said.
His threats came at a delicate time for CCA, as days earlier Woolworths had cut back the number of varieties of Mount Franklin stocked on the supermarket shelf and refused to stock its newest product, Coca-Cola No Sugar.
The move by the country’s biggest retail giant to boycott the new product on its release cannot be underestimated.
Meanwhile, Coles is stocking the new product at deep discounts. Online, Coles is selling two 10-pack cans of Coca-Cola No Sugar for $12, which is a saving of $15.06.
The point is retailers are going head-to-head to win market share. Coles released its full year results last week which showed earnings fell 13 per cent.
Watkins has been in the top job for more than three years and she inherited a mess, including a product portfolio dominated by premium high-priced products largely in decline as well as a tense relationship with major shareholder The Coca-Cola Company (TCCC).
She has done a fine job cutting costs, improving the relationship with TCCC to become more aligned, and re-educating investors that CCA is no longer a growth stock but a yield stock.
But it won’t be enough.
Consumer tastes are changing, governments globally are introducing sugar and litter imposts, and supermarkets want a greater share of profitability.
Watkins needs to navigate the headwinds and adapt to the changing relationships. TCCC takes a huge chunk of profit and holds a majority stake in many of its anchor bottlers.
For its favoured anchor bottlers it provides new territories, but over the years CCA has been noticeably absent.
Until it can demonstrate it can work its way through key challenges including its disappointing food business SPC, build up Indonesia and make its alcohol and coffee businesses meaningful contributors, it is unlikely to be on the list for new territories that might become available. Watkins has a reputation as a good strategist. She knows the challenges and she knows the relationships she needs to manage. The endgame is execution
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