CO2 Shortage Limits Britvic's Capacity To Breathe: Analysis
Soft drinks giant Britvic has posted a solid third quarter, reporting an increase in sales of 3.4%, compared to the previous year, to £366.9 million, or a relatively flat performance (-0.6%) if the impact of the soft drinks industry levy is excluded.
Given that this performance followed a strong comparative third quarter the previous year, when revenue was up 4.5%, Britvic can be fairly happy with its performance.
As chief executive Simon Litherland explained in the group's trading statement, on the back of a good Q3, the group is now "confident of achieving market expectations for the full year".
But a shortage of carbon dioxide across Europe, a fundamental ingredient in the production of fizzy pop, has meant that Litherland and his team might also be rueing the lost opportunity that the most recent quarter - bathed almost entirely in warm sunshine - presented.
"Britvic has delivered a strong underlying performance in the third quarter through continuing outstanding execution of no sugar carbonates and substantial growth from our stills brands," Litherland commented. "Whilst the industry-wide shortage of carbon dioxide held back our ability to fully capitalise on the exceptional weather in GB and Ireland, we leveraged the breadth and strength of our portfolio to moderate the impact."
Carbon dioxide stocks are low across Europe due to the closure - in many cases for essential maintenance - of factories that produce ammonia for use in fertiliser. Carbon dioxide, as used in beverage production, is a by-product of this process.
In Ireland, Patricia Callan of the Alcohol Beverage Federation of Ireland warned in June that a Europe-wide shortage of food grade CO2 could lead to the closure of drinks factories and short-term lay-offs due to the gas being an essential product for packaging beer and cider, as reported by RTÉ. Callan added that should the CO2 shortage continue for long, it would be hugely damaging to the Irish drinks sector.
Meanwhile, a spokesperson for Guinness brewer Diageo said that the company is mindful of the CO2 situation and is keeping in close contact with suppliers and customers to mitigate any potential issues, but has observed no adverse impact to date.
As Russ Mould, investment director at AJ Bell put it, the summer of 2018 should have been one of the "best ever" sales drivers for Britvic.
"Sadly it hasn’t been able to make the most of the sun due to the industry-wide shortage of carbon dioxide," he said. "There are many different levers in action with Britvic at present and the end result is that trading should still hit market expectations, which is quite impressive given several negative factors at play."
"On one hand, it has had to contend with the sugar tax with a shift to low or no sugar products. In normal market conditions, this year would have been a period of monitoring how some product recipe changes have gone down with the public."
This changed, however, when Mr. Blue Sky made his first appearance in May, commencing a two-month heatwave in the UK.
“The warm sun making the public very thirsty has distorted the situation which meant Britvic still hasn’t been able to get a handle on how the sugar tax has changed consumer buying habits," said Mould. "Add in the CO2 shortage and you’ve got a whirlwind of push and pull levers.
“The task for Britvic is to therefore try and milk the sunshine while it lasts, particularly as the carbon dioxide issue now seems to be going away. The assessment of the sugar tax will have to be done at a later date.”
Difficult To Measure
Phil Carroll of Shore Capital echoed his comments, saying that it was difficult to measure the impact of the sugar tax on Britvic's operations, due to the twin influence of the weather and the CO2 shortage.
"The implementation of the sugar tax may also have had some impact [on Britvic's performance], but it is difficult to say at this stage," Carroll noted.
"However, on a more positive note, full year market expectations were set ahead of the surprisingly beneficial weather, so overall, whilst we will not be upgrading our profit expectations post today’s update, we won’t be downgrading numbers either."
Shore Capital has retained its hold stance on Britvic, with Carroll pointing out that there is still potential for Britvic to make the most out of the remainder of what remains a promising summer.
"The question now is will the hot weather continue and can Britvic take advantage of the increase in demand with the CO2 issue behind them?" he asked.
Following the publication of its Q3 figures, one suspects that the next most important report Litherland will have his eye on will be the weather forecast.
© 2018 Hospitality Ireland – your source for the latest industry news. Original by Stephen Wynne-Jones for European Supermarket Magazine, edited for Hospitality Ireland by Dave Simpson. Click subscribe to sign up for the Hospitality Ireland print edition.