Is Coca-Cola Amatil Ltd headed below $8?

The latest new from Woolworths Limited (ASX:WOW) doesn't bode well for Coca-Cola Amatil Ltd (ASX: CCL).

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Fairfax media reported this morning that Woolworths Limited (ASX: WOW) is cutting the amount of shelf space it is giving to certain bottled water brands in its stores.

That's bad news because Coca-Cola Amatil Ltd's (ASX: CCL) Mount Franklin brand is reportedly one of the brands that is seeing its shelf space cut, as the two majors intensify their price-based competition (bottled water is a big earner for Amatil).

In this case, that's perhaps because our bottled water is expensive compared to almost everywhere else on the planet. I would suggest that recent events are just the beginning of serious price-based competition around bottled water, and there could be more in store.

A couple of weeks ago we wrote that Domino's Pizza Enterprises Ltd. (ASX: DMP) had added sugar-free soft drinks to its menu; I thought that these would be direct competition for Coke-branded drinks that Domino's stocked. There have been several other negative events for Amatil recently:

  • Domino's subsequently replaced its Coke contract with rival Pepsi
  • Woolworths refused to stock Amatil's new sugar-free soft drink

Amatil shares have fallen from $10.77 earlier this year to $8.56 at present. I would not be surprised to see them head below $8 in the near future as investors catch the latest headlines.

Taken together, this news is quite concerning because it directly targets one of Amatil's previously reliable strengths – its market position. Coca-Cola Amatil was always a story of 'it pays great dividends, it is growing rapidly overseas (Indonesia) and in other beverage categories, and the domestic soft drink business can be relied on to fund the company while it grows its way out of a stagnant core category.'

However, it is increasingly looking as though the domestic business can't be relied upon. Coke's competitive position definitely appears to be under threat, and when that has happened at other companies it has shown that their ability to command higher prices and wider profit margins is reduced.

There is a price at which I'd buy Coca-Cola Amatil Ltd shares, but I'm steering clear of it for now.

Motley Fool contributor Sean O'Neill 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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