Coke loses its fizz in battle of the margins with Woolies

Coca-Cola Amatil is showing the bruises inflicted by supermarket muscle, writes Colin Kruger.

Coca-Cola Amatil is showing the bruises inflicted by supermarket muscle, writes Colin Kruger.

If Coke doesn't have the brand power to stare down Australia's largest retailer, Woolworths, who does?

That is the question being asked across Australia's retail sector after Coca-Cola Amatil (CCL) released its full-year results, offering a clearer picture of its costly battle with Woolworths over profit margins in supermarket aisles.

For Woolworths the challenge is how to protect its profit margins - probably the best for any supermarket operator in the world, according to the 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.

The Australian brewer and milk processor Lion slashed $1.2 billion from the value of its milk and drinks business in December after being crunched by the milk price war between Woolworths and Coles.

While neither side is offering details of the heavyweight battle, CCL has obviously pushed back.

On the conference call following its recent results, its chief executive, Terry Davis, was diplomatic in a reference to a customer 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 CCL's

falling sales volumes through most of last year.

"We estimate CCL's volumes at Woolworths fell about 6 per cent over the year, and based on the recent reductions in front of supermarket shelf space, we believe this customer will continue to impact CCL'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 CCL this would equate to $11 million, or 1.8 per cent of Australian EBIT."

Merrill Lynch retail analyst David Errington said the stoush may have hurt Coke's volumes but it also appeared to have played a role in the soft sales from the Woolies supermarket business for the December quarter. "What probably concerns us the most is that CCL, in our view, is the leading food producer in Australia in terms of what it provides its customers," Mr Errington said. The cooling relationship in this context "is of major concern to us".

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 earnings before interest and tax for 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 - nearly doubling the earnings growth of the overall business. Excluding a charge related to the company's exit from the Dick Smith business, overall group earnings (EBIT) rose 3.3 per cent to $1.85 billion.

CCL may be back in Woolworths catalogues after a prolonged hiatus last year that marked the height of the spat, but Mr Davis confirmed that there may be further trouble as the factors which brought events to a head continue to weigh on the industry.

"I think 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.

"I'm sure if the Australian trading environment was much more buoyant, there wouldn't be the pressure on the whole supply chain to improve its cost to improve its service offering," he said

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