O’Brien likely to test Amatil in quest to cut business costs

by: John Durie
From: The Australian
December 01, 2011 12:25PM

COCA-COLA Amatil appears to be benefiting from the index effect, with its stock price rallying some 4 per cent this week ahead of Foster’s tomorrow departing from the S&P/ASX 200 index.

Foster’s market value of $10 billion has to go somewhere and Amatil is as good a proxy as anyone else. It will also benefit from a $380 million windfall from the SAB Miller-Foster’s deal, which will mean the end of its joint venture with Amatil.
Just how Amatil is trading is not known, given the company has delayed its regular late-November market briefing for a few weeks, and the latest word is that it will be released in a couple of weeks.

In the first-half, volumes were down 2.6 per cent; this followed a 4.7 per cent fall in the last half of calendar 2010.
Woolworths boss Grant O’Brien has taken direct aim at Amatil’s excess profit margins.
Merrill Lynch analyst David Errington in a report today noted that, between April 25 and September 5, Coke products appeared in one in 20 Woolies promotional leaflets.
Last year it appeared in every single flyer.

The stoush between the two cost Woolies around $30m in the second quarter. Just how much it has cost Amatil remains to be seen.
The supermarket giant is reportedly happier with the terms it is getting from Amatil after the punch-up.

At his recent strategy day, new boss O’Brien said costs of goods sold represented 75 per cent of sales revenues, and cost of doing business stood for around 18 per cent. The latter is hard to cut, so O’Brien is gunning for the former through a range of tactics – from direct importing, doubling house-brand goods and more aggressive dealings with branded suppliers.

Historical figures show Amatil’s parent, Coke, with 29.1 per cent earnings margins, ranked second-highest in the fast moving goods world, just behind drugs maker GlaxoSmithKline.
Throw in bottler margins of over 20 per cent and O’Brien with his six per cent margins would obviously look at Amatil as fair game in his hunt for lower costs.
Amatil boss Terry Davis has diversified away from Coke products so that just 40 per cent of his sales today are now Coke brands, against 95 per cent seven years ago.
Some 60 per cent of these products are sold in supermarkets and that’s where the battle is being played.
The Woolies story is out. Now, we are waiting to hear Davis’s side of the battle.