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
Frequently Asked Questions about this Article…
How has the Woolworths–Coca‑Cola Amatil dispute affected Coca‑Cola Amatil's sales volumes and profit margins?
According to the article, Coca‑Cola Amatil (CCL) showed clear signs of strain from the supermarket dispute: brokers estimate CCL's volumes at Woolworths fell about 6% over the year and reductions in front‑of‑store shelf space have weighed on volumes. Analysts also say Woolworths' drive to cut its cost of goods sold has squeezed supplier margins, with Macquarie estimating the buyer mandate could equate to about $11 million (roughly 1.8% of Australian EBIT) for CCL.
Why are Woolworths buyers putting pressure on suppliers like Coca‑Cola Amatil?
The article explains Woolworths has been protecting its profit margins amid food price deflation and heavy discounting in the December half. Morningstar and other analysts note Woolworths buyers had a mandate to reduce the retailer's cost of goods sold (about 200 basis points), which puts pressure on suppliers to lower prices or accept reduced margins.
What did Coca‑Cola Amatil's CEO Terry Davis say about tensions with large retailers?
Terry Davis was diplomatic, saying that in Australia’s concentrated retail environment manufacturers and retailers will sometimes disagree. He noted the pressure comes from slower consumer spending, suppliers pressing manufacturers, and customers pressing suppliers — pressures that run right through the supply chain and can drive disputes over cost and service.
What have brokers and analysts said about the impact of the Woolworths stoush on CCL?
Brokers were fairly blunt: Commonwealth Bank analysts estimated CCL volumes at Woolworths fell about 6% over the year and expected continued impact through most of 2012 after reductions in shelf space. Macquarie said Woolworths' buyer mandate could cost CCL about $11 million (1.8% of Australian EBIT). Merrill Lynch warned the cooling retailer–supplier relationship is a major concern for a leading food producer like CCL.
Is Coca‑Cola Amatil back in Woolworths catalogues after the spat?
The article says CCL may be back in Woolworths catalogues after a prolonged hiatus last year, but CEO Terry Davis warned there could still be further trouble because the underlying pressures that caused the dispute continue to weigh on the industry.
How did the supermarket price war affect other beverage and dairy producers?
The piece notes that producers without the brand power of Coke have struggled. For example, brewer and milk processor Lion wrote down about $1.2 billion from the value of its milk and drinks business in December after being hit by the milk price war between Woolworths and Coles.
What does Woolworths' recent performance say about its supermarket strategy and reliance on food and liquor?
Woolworths reported that its Australian food and liquor division — which accounted for 66% of half‑year sales — grew EBIT 6.3% to $1.49 billion. Excluding a charge related to the Dick Smith exit, the group’s EBIT rose 3.3% to $1.85 billion. The article highlights that Woolworths needs its food and liquor business to perform while other parts of the group are under pressure and Coles is making inroads on the food front.
What should everyday investors watch for in the CCL–Woolworths relationship?
Based on the article, investors should watch indicators such as CCL’s sales volumes (especially at Woolworths), changes in supermarket shelf space and catalogue listings, margin pressure from retailer buying mandates, analyst estimates of EBIT impact (for example the cited $11 million/1.8% figure), and broader signs of consumer spending weakness that can amplify supply‑chain tensions.
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