The possible impact of Coca-Cola pulling the plug on Delta

CHICAGO, IL - APRIL 17: Bottles of Coca-Cola soda are offered for sale at a grocery store on April 17, 2012 in Chicago, Illinois. The Coca-Cola Co. reported an 8 percent increase in net income for the first quarter of 2012 with global volume growth of 5%. (Photo by Scott Olson/Getty Images)

HARARE,– The decision by the Coca-Cola Company (TCCC) to terminate the Bottlers’ Agreements with Delta Beverages and its associate Schweppes Holdings Africa Limited will hit Zimbabwe’s largest listed firm hard, as it stands to lose nearly a third of its income.

The Coca-Cola Company is the world’s largest beverage company, with more than 450 sparkling and still brands. The company has a Bottlers’ Agreement with Delta for 12 brands, which include popular products such as Coke, Diet Coke, Fanta, Sprite, Coke Zero, Powerade among others.
These products form Delta’s sparkling beverages business.

Over the years, Delta has been working collaboratively with the Coca-Cola Company to strengthen its product portfolio, leveraging on the unparalleled strong brands and wide range of its flavour and pack offerings. It has also leveraged on its association with the Coca-Cola Company in areas of training, market development programs, productivity improvements and implementation of best practice in distribution, workplace safety and consumer marketing, and this has resulted in improved market execution and focused engagements with the customers through tailored consumer-focused promotions.

Revenue

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From the table above, the impact of the termination of TCCC’s Bottlers’ Agreement will have a great impact on Delta’s business. The company could lose at least 30 percent of its income based on average financial performance since 2012.

In terms of sales, the sparkling beverage unit has been contributing on average 30.36 percent to total gross sales since 2012. In its latest trading update of the first quarter 2017, it reported that the segment contributed 27 percent to total revenue realised in that period. Therefore the termination of the agreement will see Delta’s top line falling rapidly as it loses sales from the sparkling segment, a situation that will worsen its margins since some of the segments are performing poorly as well, with the lager segment losing 7 percent for the quarter relative to the same period last year and 11 percent down for the six months.

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The sparkling beverages contributed 29.32 percent and 23.45 percent to the company’s operating income in 2015 and 2016 respectively. Given such a significant contribution to operating income, the termination of the TCCC deal will have a material impact on its margins and result in low profits. Had the termination happened in 2016, Delta could have lost $22,53 million operating income from the $96,1 million it achieved in the full year.

Since operating income is a measurement that shows how much of a company’s revenue will eventually become profit, the decline will have a significant negative effect on the earnings given such a large decline. Therefore profit attributable to owners which amounted to $80.09 million recorded in 2016 would fall significantly in the next reporting period if the termination goes ahead.That will lower shareholders value as well.

Schweppes impact

Delta Corporation has a 49 percent stake in Schweppes Holding Africa Limited, a manufacturer and distributor of non-carbonated, still beverages under licence from The Coca-Cola Company. Schweppes was acquired by TCCC in 2001 as part of its global acquisition of Cadbury Schweppes International’s beverage brands. Its product portfolio includes cordials, fruit juices, bottled water and flavoured drinks which are marketed under well renowned brand names; Mazoe, Minute Maid and Schweppes Water.

As such, the termination of the The Coca-Cola Company (TCCC) Bottlers’ Agreements with Schweppes Holding Africa Limited further worsen Delta’s financial performance since this will reduce the group’s profit from associates.

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Profit from associate contributed by Schweppes has been increasing in the past two years, with the associate contributing $2.4 million which is 2.3 percent of Delta‘s profit before tax in the previous financial year ended 31 March 2016. As such the termination of the agreement with Schweppes will definitely spill over to Delta because it will mean that the profit that used to come from Schweppes will no longer be realised and this will further worsen its financial performance.

Sources close to developments say Delta is ready to sell off the unit.

Previous reports have suggested that TCCC has the prerogative to buy out sparkling beverage operations from SABMiller units, this may well happen because it is unlikely that the global giant would want to exit market in Southern Africa where is has held a near monopoly.

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