Why the SPC fruit deal is healthy for Coca-Cola Amatil

Food processor inks $70 million, five year deal with Woolworths

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Fruit and vegetable processor, SPC Ardmona has signed a deal with Woolworths Limited (ASX: WOW) worth $70 million over five years, as the company attempts to turn around its business.

SPC boss Peter Kelly says the Coalition’s decision not to kick in $25 million generated a 60% surge in sales of peaches and pears in the first two months of this year, as consumers got behind the company.

“I’m not being cute when I say this, but the refusal of that $25 million from the Commonwealth, it triggered this huge response from the public and that’s led to Woolworths saying the customer is right,” he said.

Mr Kelly says he now needs to find more staff and 86,000 more fruit trees, according to The Daily Telegraph.

Last year, Woolworths agreed to take on more locally produced products for its private label brands, but it was for an indefinite period. SPC will now supply Woolworths with an extra 24,000 tonnes of product, and see SPC fruit used in all of the supermarket giant’s fruit packs and jelly snacks from 2015, as well as 100% of the private label Select multi-serve fruit range.

For SPC Ardmona’s parent, Coca-Cola Amatil (ASX: CCL), the news is fantastic. Instead of facing the prospect of having to invest millions into SPC, with the likelihood of little return, SPC Ardmona is now expected to break even.

The fruit producer also inked a deal late last year with Coles – owned by Wesfarmers Limited (ASX: WES) – to supply the grocer with 100% of its canned fruit from its Goulburn Valley growers, replacing previously imported products.

If SPC can do some similar deals with the likes of IGA supplier Metcash Limited (ASX: MTS), Aldi or US Giant Costco, its future should be all but assured.

It means Coca-Cola Amatil will have one less thing to worry about, and allow the soft drink bottler to focus on its other prospects such as the move into the beer market, and its Asian businesses.

Foolish takeaway

At one stage, SPC Ardmona was facing the prospect of closing down with an estimated 3,000 jobs lost. Now the future looks much brighter for both it and its parent.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Coca-Cola Amatil. You can follow Mike on Twitter @TMFKinga

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