just the Answer - Nichols FD, Tim Croston
just the Answer returns. This month, we speak to the group finance director at Nichols plc, Tim Croston.
After a short break, our 'just the Answer' interview returns. This month, Michelle Russell talks to Tim Croston, the group finance director at UK-based soft drinks producer, Nichols plc.
just-drinks: In Nichols' first-half results earlier this month, chairman John Nichols said that the company is confident of maintaining strong trading going forward, in the face of tough economic conditions. To what extent has the company been affected by rising commodity costs and is anything in place to offset these?
Tim Croston: It's been well publicised, probably beyond the soft drinks industry, that the price of sugar is affecting a lot of the grocery market. But, we would concur with the information you are seeing from the likes of AG Barr and Britvic: We have seen unprecedented rises in all our key commodities, which have gone up double-digit. Sugar increases are continuing to do so. Aluminium is a big cost for us which has gone up, and so is PET. All three are top of the tree in terms of commodities for us, and yes we have been affected.
Unlike our competitors, we have quite a significant international business - there is about two-and-a-half times as much Vimto consumed overseas as there is in the UK. The reason why it doesn't show so much in our accounts is that it is sold as Vimto concentrate to overseas bottling plants. In terms of cost inflation, Vimto concentrate doesn't contain any sugar and nor, of course, has it got aluminium or PET packaging. So, over half of our business is immune to cost inflation, which has affected the UK.
But, in the UK, we would absolutely concur that, in a full year, you are looking at something like 8% to 9% cost inflation. We've mitigated that in the UK where we can by pushing price increases through.
j-d: To what extent have you had to rely on price increases?
TC: It's been tough. But, when something like sugar, which affects so many products, is increasing, there is obviously a lot of substance behind our claims for price increases.
Tim Croston, group finance director at Nichols plc
We've also made some cost savings where we can in terms of our warehouse, distribution and logistics chain but, at the end of the day, our UK gross margin has been dented by a couple of percentage points year-on-year.
Fortunately, because of the strong international business and our business model, which is outsourcing all production, as we make growth at the top line, we don't have to reinvest in more plants and machinery. So, our profits fall down to the bottom line quite well. All of that together means that we've managed to maintain our margins at the operating profit level bottom line. So, it's quite pleasing for us.
j-d: Flagship brand Vimto aside, the bulk of Nichol's other brands, including Sunkist and Panda, are only available in the UK. Do you have any plans to roll these out in other markets?
TC: Panda no. We would keep that brand within the UK. Sunkist is a globally-recognised product. It is still a very good brand in the US in particular, where the brand is owned, of course; we have Sunkist under licence in the UK. But yes, we have thought long and hard about putting Sunkist into Africa, we've had discussions about it. It's not yet progressing but we've had discussions in that the drink flavours would go down very well with the African palette.
j-d: You have put a lot of investment behind Vimto, spending GBP6.5m (US$10.5m) on a multimedia campaign this year. Do you have any plans to expand the reach of the brand further?
TC: I guess the answer is lots, really. We are still a relatively small company, therefore our resources aren't huge, so we have to take it steady. But, we typically try to see two or three markets per annum and, of course, not all three will come off. The ones we are working on at the moment are China and South Africa in particular, which is a very different market from the rest of Africa in terms of the consumption of soft drinks, which is very high per capita. The retail and distribution route-to-market is also quite similar to the Western European model. We are also looking at the southern US states, the ones with a big population of Hispanic communities, again who would suit the Vimto offering in terms of a sweetened fruit drink.
j-d: How far along are you with these plans?
TC: In China, we have established a presence and have been there for about 18 months in a small way, but we are working towards getting a local partner, similar to the model in Saudi Arabia where we have a bottling partner. So we will sell concentrate to an established bottling and drinks firm. They would then produce and distribute Vimto concentrate on our behalf. In South Africa, we have already found a partner in the Cape and we have been trading for about a year. We are moving into Johannesburg this year, so we are quite excited about that. Thirdly, we are already working with a partner in the US to produce and distribute Vimto into Florida and California.
j-d: Are there any markets that you have found particularly difficult to penetrate?
TC: I think we did, certainly, before my time. We tried Russia and we didn't do very well; we ended up pulling out for various reasons. In terms of other markets, in China we are doing well but it's not easy. Everyone says it's a growing market, it's populous, the individuals are becoming richer in terms of being able to afford soft drinks and all the other western-style values. China is a very different country in terms of its bureaucracy and trading, hence our need to find a Chinese partner that is already embodied in the business culture of China and already has the routes to market.
The US has a huge population, it's a big opportunity and quite an affluent society, but it is also dominated by some very big players so it's not an easy one to crack. If we think we can go in and distribute Vimto from north to south and compete with Coca-Cola then I think we'd have a rude awakening. As long as we are realistic there are opportunities there.
j-d: Would you consider any acquisitions in order to enter a country?
TC: Certainly acquisitions are on the agenda but I would say it is more likely to be a UK-based acquisition rather than international. We have great plans to keep growing the business as we have done for the last few years but, given the size of the business, to start an overseas presence is a big logistical issue. If there was an acquisition on the agenda, it is more likely to be a UK business to add to our UK soft drinks division.
j-d: In terms of innovation, are you seeing any new trends coming through in soft drinks this year that you might focus on?
TC: Certainly, fruit-based drinks would be an area of interest to us and one that we see growing. The other areas that we are not in yet would be sports and energy, which is one of the biggest growing categories. And, healthy-based sports and energy drinks - in terms of preservative-free and natural products - would be of interest to us, more so than core energy products.
We are hoping to make an announcement later in the year, but it would be fair to say that healthy drinks interests us greatly.
j-d: What's next for Nichols? Where do you see the company and its portfolio in five years time?
I am going to give you a very boring answer and say more of the same, which would be quite good. In the UK, certainly more growth for Vimto, more distribution into more channels, more Vimto brand stretch, and we see more license arrangements in terms of brands like Levi Roots. And, finally, we are certainly on the lookout for acquisitions to add to our UK portfolio.
In the second part of just-drinks' review of 2011, Michelle Russell looks at how the soft drinks category has fared in the last 12 months....
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