Coke vs. Pepsi: The Delta Corporation and Varun Beverages Cold War

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Batanai Matsika

Varun Beverages (Pepsi-Cola bottler) has entered the Zim­babwean beverages market us­ing a price penetration strategy (a dollar for two) and Delta which has been struggling to get forex to import con­centrates for its soft drinks is feeling the pinch. Moreover, Delta is still hanging on to a Coca-cola bottling agreement that will terminate soon (AB Inbev now new shareholder). However, the war between Coke and Pepsi is not a new phenomenon. In fact, The Co­ca-Cola Company (TCCC) and PepsiCo stand out as two uniquely American corpora­tions that provide a consum­able good around the world that is inextricably linked with the USA. Each company – Coke, especially – occupies a special place in the world’s psyche because they deal with “happy, sugary and feel-good” ideals which are reinforced by the massive and relentless ad­vertising campaigns.

Coca-Cola has been the dominant non-alcoholic bev­erages player, with a wide-reaching presence in the world. However, in Southern Africa, this picture appears to be coming to an end as Indian based RJ Corp (through its Varun Beverages subsidiary) is leading PepsiCo’s charge across the region. Varun has been at­tacking the regional market from its bottling operations in Mozambique and Zambia. By producing locally and leverag­ing on preferential regional trade instruments such as the Common Markets for East & Southern Africa, the com­pany is managing to compete effectively in tough but prof­itable territories such as Zim­babwe. Pepsi is not entirely a new product in Zimbabwe. A look at history reveals that in 1960, Rhodesian Brewer­ies bought the entire share is­sue of Canada Dry (Rhodesia) Ltd, a company which held the franchise to bottle and dis­tribute Canada Dry and Pepsi Cola soft drinks in Northern and Southern Rhodesia. Pepsi products have largely been im­ported out of Zambia.

Newspaper adverts of Coca-Cola and Pepsi Cola in the 1960s (Rhodesia)It would ap­pear as if the walls are closing in on Delta’s soft drinks busi­ness given that Varun Bev­erages Zimbabwe has been ramping up production. In a recent update, the company indicated that it has increased production capacity at its new plant by over 150% and that it is currently churning out 36 million bottles of soft drinks every month. In addition, the firm is planning to invest US­D150m in Zimbabwe over the next five years.

Varun has been “steal­ing” market share from Delta through its products; Pepsi, Miranda and Mountain Dew, which are priced lower than Delta offerings. The beverages company is targeting a 30-35% market share in five to six years and then 50% market share in 10 years. In our view, the Zimbabwean market is price sensitive given that the aver­age person is finding it hard to earn an extra dollar to spend. Delta Corporation’s trading update for the third quarter and nine months to December 2018 showed that its Sparkling Beverages volumes declined by 66% compared to prior year for the quarter and decreased by 26% for the nine months. The company cited extended production stoppages arising from limited access to forex re­quired for importing key raw materials and the failure to clear arrear payments to The Coca Cola Company (TCCC) as the main hurdles. Group revenues increased by  5% for the quarter and 24% (19% organic growth) for the nine months, reflecting the growth in the beer businesses which was weighed down by de­pressed outturn in soft drinks.

Overall, the Sparkling Bev­erages business has been the weakest link (volumes down 26% for the nine months) given the need to import con­centrates. The beverages maker also lost out on the expected volumes peak during the fes­tive season (Q3 2019). The success of the interbank FX trading system should come as a relief for Delta. That said, Delta remains profitable and continues to generate positive cash flows. We also note that the investment thesis remains intact: a well-managed market leader with a diversified prod­uct portfolio which cuts across all income groups. The stock also provides a solid route to gaining direct exposure to the country’s consumer story.

Author – Batanai Matsika

Head of Research – Mor­gan & Co+263 78 358 4745batanai@morganzim.com