Coca-Cola Amatil spin on Woolies’ bottle wars

March 5, 2012
The Age

IF COKE does not have the brand power to stare down Australia’s largest retailer, Woolworths, who does?

That is the question Australia’s retail sector is asking after Coca-Cola Amatil released its full-year results, offering a clearer picture of its costly battle with Woolworths over profit margins in the supermarket aisle.

For Woolworths, the challenge is to protect its profit margins – probably the best for any supermarket operator in the world, according to Morningstar analyst Peter Warnes – in the face of food price deflation and the heavy discounting of food and alcohol that marred its December half-year.

Producers without the power of brand Coke are doing it tough. Brewer and milk processor Lion Nathan slashed $1.2 billion from the value of its milk and drinks business in December after being crunched by the milk price wars between Woolworths and Coles.

While neither side is offering details of the battle, CCA, though, has obviously pushed back. On the conference call following its results last week, CCA chief executive Terry Davis was diplomatic in his reference to a problem customer which he did not name.

”Whenever you have a scenario where, in this country, all consumer goods manufacturers have to deal with a very concentrated retail environment, you will go through periods of trading where you may not necessarily agree with their point of view, and they may not necessarily agree with our point of view.”

Brokers were a little more brutal in their assessment of the battle, clearly implicating it in CCA’s falling sales volumes through most of last year.

”We estimate CCA’s volumes at Woolworths’ fell around 6 per cent over the year and, based on recent reductions in front-of-supermarket shelf space, we believe this customer will continue to impact CCA’s volumes through most of 2012,” said Commonwealth Bank’s retail analyst team lead by Andrew McLennan.

A research note from Macquarie Equities said Woolworths buyers had a mandate to reduce its cost of goods sold by 200 basis points. ”For CCA this would equate to $11 million, or 1.8 per cent of Australian EBIT [earnings before interest and tax].”

Merrill Lynch retail analyst David Errington said the stoush might have hurt Coke’s volumes during the year but it also seemed to have played a role in the soft sales from Woolies supermarket business for the December quarter.

”What probably concerns us the most is that CCA is the leading food producer in Australia in terms of what it provides its customers”, so the cooling relationship in this context ”is of major concern to us”, Mr Errington said.

Woolworths needs its food and liquor business to perform. Its consumer discretionary businesses are under pressure and Coles is making inroads on the food front.

Woolworths reported last week that EBIT at the Australian food and liquor division, which accounted for 66 per cent of sales in the half, grew 6.3 per cent to $1.49 billion during the half-year – nearly doubling the earnings growth of the overall business.

Excluding a charge related to Woolworths’ exit from the Dick Smith business, overall group EBIT rose 3.3 per cent to $1.85 billion in the period.

CCA may be back inside Woolworths’ sales catalogues after a prolonged hiatus last year that marked the height of the spat, but Mr Davis confirmed there might be more trouble as the factors that brought events to a head continued to weigh on the industry.

”It’s a combination of slower consumer spending putting pressure on everybody. We’re putting pressure on our suppliers, our customers put pressure on us, and it goes right through the chain,” he said. ”I’m sure if the Australian trading environment was more buoyant there wouldn’t be the pressure on the whole supply chain to improve its cost, to improve its service offering

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