Domino's shares, which have fallen 20 per cent this calendar year, rose 43¢ to $51.92 on Thursday, while CCA shares fell 3.4 per cent to $8.91.

"We're always very disappointed when customers choose not to make our products available to their consumers, but respect their decision to do so," the CCA spokeswoman said. "Our great range of globally iconic brands and local favourites are still available across the majority of quick service restaurants in Australia."

Another negative development

Deutsche Bank analyst Michael Simotas said the loss of the Domino's contract was another negative development for CCA, which is struggling to grow earnings amid falling carbonated soft drink sales and price pressure in bottled water.

Mr Simotas estimated that the Domino's contract accounted for about one million cases of beverages a year, or about 0.3 per cent of CCA's total Australian beverages volume.

Coca-Cola Amatil has suffered its second blow in two months, losing a major contract with Domino's to Pepsi/Schweppes. Wayne Taylor

"While large accounts tend to deliver lower margins to Amatil than smaller accounts, we note that Domino's was a ready-to-drink account and not a post-mix account, so it should have been relatively high margin for a QSR account," he said.

While CCA should be able to remove some of the costs associated with servicing the Domino's account, the volume hit would likely lead to operating deleverage.


The switch to Pepsi/Schweppes products, which are 30 to 40 per cent cheaper than Coca-Cola and Mt Franklin, may help Domino's franchisees reduce costs, although the lower prices would presumably have to be passed on to customers.

In April, Domino's added the sugar-free soft drink Next Gen, which is made by beverages start-up Nexba, to its beverages menu.

Mr Simotas believes Domino's latest move may be an attempt by the pizza franchisor to reduce the impact of penalty rates, which are expected to materially push up labour costs for franchisees.

Domino's franchisees have not been paying weekend penalty rates stipulated in the fast-food modern award. Domino's has been negotiating a new agreement with the Shop, Distributive & Allied Employees union and expects to finalise a deal early in 2018.

Innovations to protect margins

In the meantime, it has voluntarily increased rates for drivers and store staff and introduced a 10 per cent Sunday surcharge.

In reports last year, Deutsche Bank and UBS estimated that the introduction of award penalty rates could lift franchisee wage costs in Australia by as much as 14 per cent, crunching franchisee profits by between 14 per cent and 24 per cent.


However, Domino's chief executive Don Meij has said repeatedly that Domino's has been preparing for wage increases for years and that innovations such as GPS driver tracking and hotter faster ovens that enable franchisees to cook and serve pizzas in 10 minutes will help protect margins.

Mr Simotas also said Domino's was believed to be planning to reduce the size of its pizzas to provide additional cost relief for franchisees.

"Domino's has already conducted trials on selling Pepsi products and is about to conduct trials on the smaller pizzas, but we see some risk to consumer perception from both of these initiatives," he said.

Domino's said on Thursday the switch to Pepsi/Schweppes followed extensive customer testing, which showed customers were eager for a wider range of drinks.

Domino's plans to sell Pepsi and Pepsi Max as well as Sunkist, Solo, 7UP, Mountain Dew, Cool Ridge water and Nexba's Next Gen.