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In war of words, Coke boss points out golden ASX investing rule

Terry Davis, chief executive of Coca-Cola Amatil (ASX: CCL), has upped the ante in his continuing war of words with Australia’s supermarket superpowers, Woolworths (ASX: WOW) and Coles, owned by Wesfarmers (ASX: WES).

As The Australian Financial Review has reported, Davis blasted the chains while speaking at the Australian Israel Chamber of Commerce in Brisbane. And, it can be argued, he also pointed out what many investors should take to be a golden rule of ASX investing. Here’s the rub.

War of words and earnings downgrades

“For many manufacturers the big retailer is not only a customer but also a competitor,” said Davis, referring to the difficulties many suppliers encounter in the face of Woolworths and Coles’ overwhelming market dominance and intense focus on low prices and margins. Coca-Cola Amatil, for instance, distributes products to the stores but must also compete with the chains’ private label products.

Smaller suppliers have an even more difficult time of it than giants like Coca-Cola Amatil, Davis implied: “I think you are OK if you are No. 1 and you might be OK if you are No. 2, but if you are No. 3 and you can’t see a way of getting out, find an investment bank to sell your business.”

Davis has blamed CCL’s May earnings downgrade – including a predicted 8% to 9% drop in operating profits– in part on pressure and competition from Woolworths and Coles. (In recent months, Coles boss Ian McLeod has said that Coke products are too expensive in Australia, far more expensive than in Thailand or Indonesia — while Davis has responded that wages and rents in Australia accounted for the price discrepancy, and cited his belief in supporting a domestic manufacturing industry.)

Still, Davis went on to say in Brisbane that, “I wake up every day and I say thanks that we have got customers like Domino’s Pizza that are outside the supermarket business.”

Coca-Cola Amatil’s relationship with Domino’s (ASX: DMP) is a close one, with one bottle of Coke sold for every two Domino’s pizzas sold in Australia.

Davis points to a golden ASX investing rule

There’s little question that Davis’ statements are largely accurate as to many suppliers’ lack of negotiating or pricing power in their relationships with Woolworths and Coles. What’s more, investors should bear this significant risk in mind whenever considering buying shares of any business that relies in large part on the major chains to shelve its products and make money.

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 Motley Fool contributor Catherine Baab-Muguira does not own shares in any company mentioned in this article.

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