Woolworths could cancel contract with Coca-Cola Amatil Ltd’s SPC business

Credit: Woolworths

Supermarket giant Woolworths Limited (ASX: WOW) is said to be reviewing its contract with SPC Ardmona, creating yet another potential headache for Coca-Cola Amatil Ltd (ASX: CCL).

SPC Ardmona is a food processing business that has supplied packaged fruit and vegetable products to Australians for almost 100 years, and is part of Coca-Cola Amatil’s ‘Corporate, Food & Services’ segment.

The business has struggled in recent years as a result of cheaper alternatives, including imports. In another potential blow, the Herald Sun reported on Monday that Woolworths was considering tearing up a long-term rescue deal it had with the company.

Just two years into the five-year $70 million contract to buy SPC Ardmona’s products, the newspaper said Woolworths would instead look to switch to other suppliers to help its cost-cutting program. Woolworths could instead look to purchase goods supplied by companies from both China and Italy as it continues to make its stores more competitive with the likes of Aldi and Coles, the latter of which is owned by Wesfarmers Ltd (ASX: WES).

As quoted by the Herald Sun, a Woolworths spokesman said: “Woolworths regularly reviews our sourcing agreements to ensure we are getting great products at the best value for our customers.”

Indeed, the contract with Woolworths played a pivotal role in keeping SPC Ardmona alive in 2014. At the time, the Victorian Government also chipped in $22 million to ensure the business remained afloat to support local jobs. If Woolworths were to pull the pin now, it could certainly impact Coca-Cola Amatil’s ambition to restore SPC Ardmona to being a profitable, modern food business.

Coca-Cola Amatil reaffirmed its commitment to SPC Ardmona as recently as last month, despite the headwinds facing the business unit. The ‘Corporate, Food & Services’ segment as a whole contributed $374.3 million in revenue to the group in financial year 2015 (FY15) and a mere $15.2 million in earnings (before interest and taxes, or EBIT), which was down almost 42% on the prior year. It generated just $5.7 million in EBIT during the first half of FY16.

Neither Coca-Cola Amatil nor Woolworths have issued an official announcement to the market at this stage, although the reports themselves could be a concern for CCA’s shareholders.

Coca-Cola Amatil Ltd shares have rebounded strongly in recent months. After trading at around $8 in June, the shares are now fetching close to $9.50, although that is still significantly below the high of $15.43 achieved early in 2013.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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