Water war as Woolies, Coca-Cola Amatil clash

Woolworths has picked another fight with Coca-Cola Amatil, swinging the axe against its Mount Franklin bottled water.

Coca-Cola Amatil chief executive Alison Watkins and Woolworths chief executive Brad Banducci.

Woolworths has picked a fight with one of its biggest suppliers, Coca-Cola Amatil, and its chief executive Alison Watkins, a former Woolworths director, by first refusing to stock its new No Sugar Coke brand and now swinging the axe against its market-leading Mount Franklin bottled water.

In what might be viewed as a blunt message to the rest of the nation’s grocery manufacturers that the largest supermarket operator in Australia is determined to squeeze every last cent in margins, Woolworths under chief executive Brad Banducci has shown it is prepared to play hardball if it doesn’t get its way, slashing shelf space for flagship brands even if they are the biggest sellers in their category.

Woolworths confirmed yesterday that from next month it will take at least three of Mount Franklin’s product lines off the shelves and replace them with Woolworths’ private label waters, which also attract much better margins.

While customers will have access to the two most popular products in the Mount Franklin range — the 20 pack and the six pack — Woolworths is stripping out the 12 and four packs as well as the 1 litre varieties.

The latest outbreak of hostilities between Woolworths and CC Amatil sent shares in the bottler sharply lower.

CC Amatil fell 33c, or 3.9 per cent, to $8.23.

The stock is down 23 per cent since April.

Mount Franklin is CC Amatil’s flagship water brand and is the strongest brand in the Australian bottled-water segment, with a market share of about 40 per cent.

This gives CC Amatil just under 50 per cent of the $736 million Australian bottled water category.

Only last month Woolworths refused to sell CC Amatil’s No Sugar Coke brand, the first new Coke product in many years, almost spoiling the launch as the bottler tried to attract customers to a healthier alternative to traditional Coke.

Now Woolworths has turned its back on Mount Franklin too, elbowing the popular brand out of the way to make room for its own supermarket bottled water.

CC Amatil has invested tens of millions of dollars in advertising and innovation at Mount Franklin to accentuate its positives in a crowded market, including hiring the former face of Myer, Jennifer Hawkins, as a brand ambassador.

Woolworths is searching for greater profits within the bottled water category, which is showing growth rates of 15 per cent a year at a time when many other grocery categories are flat or even negative, so it has decided to throw CC Amatil and Mount Franklin overboard.

All of a sudden the battle between Woolworths and CC Amatil has become very personal, pitting chief executive Brad Banducci and his supermarket team against Ms Watkins, who was a Woolworths director for three years until 2010 and who, like Woolworths chairman Gordon Cairns, is an alumni of consultancy firm McKinsey & Company.

It will make Ms Watkins’ attempts to turn CC Amatil around and deliver mid-single-digit earnings per share growth that much harder to achieve.

The CEO is facing a war on a number of fronts, led by declining sales for her flagship soft drinks, intense competition in water from private label, and now deteriorating relations with her biggest customer, Woolworths.

Bruce Smith, principal and portfolio manager of Alphinity Investment Management, said supermarkets were increasingly relying on private label products to replace brands and improve margins.

“In terms of some Mount Franklin lines being deleted from Woolworths, it has been a theme for some time in many categories and in both supermarkets to remove branded products and try to sell their own versions instead.

“This instance may be no more sinister than the normal give and take between a supplier and a retailer.

“It is very tempting for a retailer to substitute its own product in place of a brand, as it tends to make a much higher percentage margin, as long as the customer is willing to make the switch.

“Whether it makes as much dollar margin is a different matter: the unbranded product has to be a lot cheaper in order to entice customers to buy it, so the retailer sometimes makes less profit as a result of this sort of switch.”

The Mount Franklin brand has been under intense competitive pressure, especially in the supermarket space, for many years as it fights a price war with much cheaper private label waters sold by the likes of Woolworths, Coles as well as other retail outlets that have their own private label packaged waters.

The price war had forced CC Amatil to recently lower the price of its Mount Franklin brand to help protect its market share, with Ms Watkins recently conceding the beverage company had cut the prices for its premium water brand to bring it closer to value-end private label brands.

In 2016 pre-tax earnings at CC Amatil’s flagship Australian beverage business, which contributes two-thirds of group profits, fell 1.8 per cent to $455.3m as revenue slipped 3.4 per cent. A decline in volumes was the culprit, especially in the water category, as CC Amatil was forced to slash its prices to better compete with cheap, entry-level water brands.

A Woolworths spokesman yesterday said its customers were purchasing a wide variety of water products — both branded and non-branded — and as the category continued to increase in popularity the supermarket chain would respond to meet customers’ demands.

A spokesman for CC Amatil said Woolworths had not “targeted” the bottler.

The decision to remove some Mount Franklin product lines reflected Woolworths’ decision to reduce the availability of multiple brands across several manufacturers, and simultaneously expand the range of its private label water.

“This decision will have minimal effect on Coca-Cola Amatil.

“Our most popular grocery water offerings will continue to be ranged by Woolworths and our water strategy isn’t about just one brand — it is about a full portfolio including Mount Franklin, Pump, Neverfail and others with a strong focus on immediate consumption channels.

“Mount Franklin is extremely popular, with more of our customers demanding it as part of their range. Market penetration is at an all-time high for operational accounts, and is growing at 8 per cent retail sales value, year-to-date in Woolworths.”