The rises comes as Schweppes, which owns brands such as Pepsi and Solo and has historically used discounting to grab market share from Coca-Cola Amatil, looks to locks horns over the growing energy drinks market.
Analysts said the change in pricing strategy by Schweppes could be explained by Japan’s Asahi Breweries’ purchase of the soft drink group in April for $1.185bn, and the pressing need to generate a return on its investment. The price tag reflected a multiple of 15.2 times Schweppes’ 2007 pre-tax earnings of $78m.
However, a spokesperson for Schweppes said the increase in the prices of grocery take-home packs (what the company charges retailers, not the price consumers might pay at the checkout) was made by the local management team.
Traditionally, Coca-Cola Amatil has used the strength of its Coca-Cola brand to recoup steeper commodity prices such as sugar, aluminium and PET plastic by passing this cost on to consumers, building up a significant price difference between Pepsi and Coca-Cola.
Evans & Partners analyst Paul Ryan said typically Coca-Cola would sell at a 20-30% premium to Pepsi as Coca-Cola Amatil recovered costs, and that price premium had blown out to as much as 40% recently.
Ryan said a decision by Schweppes to lift prices by as much as 10% could be good news for Coca-Cola Amatil, as it could either win volumes back and/or increase its own prices.
“At worse, this is a good event if it does signal that under new owners that Schweppes will be a more rational player,” Mr Ryan said.
Evans & Partners has a discounted cash flow (DCF) valuation of $9.26 a share on Coca-Cola Amatil.
“We currently assume pricing only keeps pace with costs, implying flat 20-21% earnings before interest and tax margins in the core Australian beverage business,” Ryan said.
“Under an upside scenario where Coca-Cola Amatil is able to lift margins to 23% over the next five years via price/mix outpacing cost of goods sold inflation and aided by capex-driven cost savings, our DCF valuation would rise to $10.50.”
Coca-Cola Amatil will release its half-year results on 13 August.
Schweppes has also announced the creation of a business support function in Melbourne, which will generate about 45 new jobs.
Source: The Age
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