By Andrew Main

The bad news seems to keep on coming for Coca-Cola Amatil, whose shares were knocked down 2.6% to $8.26 on the opening yesterday thanks to a report in the AFR’s Street Talk column. 

The paper said that three of the five varieties of CCL’s Mount Franklin mineral water brand are about to be removed from Woolies’ shelves to make way for cheaper private-label products.

This comes on top of an announcement by Woolies in early July that it wouldn’t be stocking Coca-Cola No Sugar, which CCL says is the biggest launch of a new Coca-Cola product in the Australian market since Coke Zero came on over a decade ago in 2006.

Coca-Cola Amatil is a stock whose share price was over $10 as recently as late April. It's now bumping around in the low $8s after a first-half profit warning, followed by these recent lurches. CCL shares closed down 3.9% yesterday at $8.23.

Coca-Cola Amatil (CCL)

Source: CommSec

Woolies isn’t CCL’s only outlet of course. Indeed, did you know that Rekorderlig Cider, Coors beer and Jim Beam whiskey are also distributed locally by CCL?

But we’ve all been brought up on those stories about how the 2-litre bottle of Coke was the big retailer’s fastest-moving stock item. The only change of consequence lately has been that because people like to put a drink in their handbag or backpack, they’ve moved away from the giant bottles, but Classic Coke is still Woolies’ biggest seller.

The good thing about looking at a big retailer’s decision about stock is that there’s almost always a logic to it, or should be. 

Woolies revealed in April that it was holding off stocking Coca-Cola No Sugar because sales of Zero were actually doing very nicely, thank you. No Sugar has been rolling out elsewhere since mid June.

Image: Cans of Coca-Cola No Sugar. Source: AAP

In case you are wondering, and I was, the difference between Zero and No Sugar is that the latter has been extensively tested to taste pretty much like Classic Coke. So now you know. I understand that Woolies also pointed out to CCL that you can’t just plonk a new product on their shelves without something else having to give.

So is there a Big Picture conclusion for us to reach here?

In terms of yesterday’s news about Mount Franklin, CCL doesn’t seem to think so. Spokesman Patrick Low noted in a release yesterday that “it reflects Woolworths’ decision to reduce the availability of multiple brands across several manufacturers, and simultaneously expand the ranging of their private label water.’’

He also took the opportunity to trumpet that Mount Franklin sales by Woolies have grown by 8% at the retail level year-to-date. If you look at that statistic from Woolies’ perspective, then, they must have big margin expectations for the bottled spring water they were selling yesterday for 25 cents a 600ml bottle (if you buy a pack of 24).

What’s clear is that CCL is fighting a number of distribution battles, none of them particularly material on its own, while at the same time doing what it can to mitigate a more ominous trend.

Which is that in developed countries, we are slowly but surely weaning ourselves off sugary drinks.

A further complication is that demographics are also against them, since older people don’t go much on fizzy drinks, and as you know, the average age of the population is rising.

So what do the analysts think? They haven’t sprung into action over the latest ripple but they’re actually pretty sanguine about the stock recovering somewhat this year from the dud 2016 year, when EPS fell, earnings fell 37%, and the only reason the dividend grew slightly was because the payout ratio jumped from 84% to 139%.

Credit Suisse lifted it to Outperform from Neutral back in April, noting bravely that the analysts didn’t think the profit warning at that time was a harbinger of structural decline so much as temporary headwinds. Those headwinds might well be able to blow a dog off a chain at the moment.

More realistic and up to date are the likes of Macquarie and Morgan Stanley, both of which reassessed the stock as of July 7, when it emerged that Woolies wouldn’t be stocking No Sugar.

Macquarie noted the decision to launch No Sugar might have been overly ambitious, adding balefully that CCL lost to Pepsi the contract to supply drinks to the Domino’s Pizza franchise as from September.

Morgan Stanley, which expects the CCL share price to ease to around $8 in the next 12 months, didn’t see Domino’s as a disaster as it represents less than 1% of CCL’s Australian revenue. And it concluded that the decision not to stock No Sugar is aimed at reducing complexity and cost as Aldi grows its market share, which says a lot more about Woolies than CCL.

Both brokers were neutral on the stock. Given that the only broker upgrade I could find was Credit Suisse’s back in April, you’d have to conclude that there will need to be a jolt of positive news on the stock before the current price slide is likely to be arrested. 

At the moment, the outlook for CCL is dominated by the long-term negative trend on fizzy drinks and the other positives can’t yet make up for that.