How Coca-Cola’s pulling out will impact on Delta

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.

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.

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.

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