Pepsi Challenge: Will Delta stave off rival’s entry into market?

22 Nov, 2015 - 00:11 0 Views
Pepsi Challenge: Will Delta stave off rival’s entry into market? 15-11-2015 cartoon

The Sunday Mail

Business Reporter
THE vice-grip beverages giant Delta Corporation enjoys in the sector could be prised following new investments by Indian firm Varun Beverages, which intends to build a US$30 million mineral drinks plant in Harare, analysts say.
Already, Delta’s revenues are forecasted to drop 10 percent in the full year ending 2016 on the back of slackening demand ostensibly occasioned by a liquidity crunch.
The ground-breaking ceremony for Varun’s new plant – which will bottle the world’s second-most popular fizzy drink, Pepsi, and leading brands Mirinda, Mountain Dew and 7UP – was held on November 13, 2015 in Zimbabwe’s capital.
It is expected that the plant will be operational in the next 12 months.
Market watchers say the new investment will challenge Delta’s market dominance, heighten competition and dent revenues of the SABMiller-controlled unit.
Delta Corporation currently controls 97 percent of the sparkling beverages market, 96 percent of the lager beer market and 90 percent of the traditional beer market.
The entrance of a renowned brand such as Pepsi could exert pressure on the beverages behemoth, with the real impact coming in the 2017 financial year.
There is also a possibility of price wars.
“If consumers can go for Twizza, what will stop them from migrating to Pepsi products? Delta has enjoyed a near-monopoly in the sector and it is up to them to manage their house well,” said an equities analyst.
But there is a significant segment of the market that is bullish about Delta’s prospects.
“Measures being taken by management to stabilise volumes, reduce operating expenses and broaden product range in line with evolving styles and trends are not only defensive for this environment, but should result in much higher sales and better margins when the economy begins to recover,” said ABC Stockbrokers in a research note.
In Zambia, the price of soft drinks has remained relatively stable since the commissioning of a Pepsi plant there in 2010.
IH Securities sees Delta Beverages’ earnings before income, tax, depreciation and amortisation dropping 14 percent year-on-year for the year ending 2016.
“The likely commissioning of a US$30 million PepsiCo plant in Harare within the next 12 months will increase competitive pressure in this space.
“We revise our forecasts and now expect revenue to decline 10,5 percent decline to $516 million in FY16 as consumers remain constrained even over the festive season.
“Overall we believe Delta will remain captive to the larger macro picture and volumes will remain under pressure in the short to medium term. Given the operating leverage in the business we naturally expect continued pressure on margins as well,” said IH Securities.
Delta’s solid balance sheet, which includes strong operating cash-flows at US$59 million, will provide a buffer against these headwinds.
In the first-half period ended September 30, 2015, Delta reported revenue declines of eight percent to US$314 million from the same period a year on the back of falling volumes.
Operating margins fell 18,2 percent from a year ago while earnings per share tanked 19 percent to USc2,89 in the same period.
Lager beer volumes slid two percent on price adjustments effected earlier in 2015; while sparkling drink volumes declined 13 percent due to competition from cheaper imports.
Sorghum beer, all along spurred by Chibuku Super, suffered a 12 percent volume decline, but revenues for that segment climbed one percent due to the brand’s popularity.
“We believe pressure points stemmed from reduced prices, volume mix or shift in consumption towards the economy segment, higher input costs, as well as increased distribution costs for Chibuku Super.
“We do not see profit margins recovering immediately due to the negative effects of product mix and high costs of services and raw materials which would likely persist in the near term,” said Lynton-Edwards Stockbrokers.
Delta’s product mix should help it manage market demands.
“Delta’s ability to retain consumers within its product mix by migrating them up or down to accessible pricing points holds them in good stead.
“Independent market share data shows they maintained share in lagers at 98 percent and share in sorghum at 86 percent,” said IH Securities.

 

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