Coke searches for fix to SPC woes

Domestic producers are feeling the squeeze from the big supermarkets.

The Australian Financial Review has reported that Coca-Cola Amatil (ASX: CCL), which purchased the iconic SPC canned fruit business in 2005, is undertaking drastic moves to improve the profitability of the packaged fruit business by slashing the processor’s fruit intake and production. The company has also called on the Gillard government to use powers under the World Trade Organisation to protect fruit growers and the domestic fruit and vegetable industry.

There appears little doubt that the power of Coles and Woolworths supermarkets, owned by Wesfarmers (ASX: WES) and Woolworths (ASX: WOW) respectively, is causing a squeeze on shelf space and profit margins for domestic producers. At the same time imported goods — particularly in the home brand space – add to the squeeze. The issue is much wider than supermarket buying power though, with other factors at play such as the high Australian dollar and changing consumer preferences.

Given the spectacular share price gains in recent months by some companies in the food processing space, investors may wonder if it’s not a case of specific problems at SPC. As the chart below shows, health food manufacturer Freedom Foods (ASX: FNP), nut producer Select Harvests (ASX: SHV) and baker Goodman Fielder (ASX: GFF) have all outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) in the past 12 months. Whether the market has been bidding up the price of the sector without paying attention to economic realities, as SPC’s predicament would appear to suggest, remains to be seen.

tmchartKO

Source: Google Finance

Foolish takeaway

It’s an odd and sad situation when, on the one hand, Australia is meant to have the potential to be “Asia’s food bowl”, suggesting farmers have huge potential to export their produce to the growing economies in Asia,  while on the other hand, businesses such as SPC are struggling and in turn forcing farmers to bulldoze their fruit trees. It’s just another example of the difficulty of investing in the agricultural sector.

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