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What the stock market free-fall means for the drinks industry today and tomorrow, and PepsiCo's hopes to become a rock star - The just-drinks Analyst

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As stock markets go into meltdown, our in-house analyst, Ian Shackleton, is here to walk us through the madness. This month, Ian looks at what the coronavirus effect will be for listed drinks companies, as well as considering the longer-term fall-out. He also turns his attention to PepsiCo's recent acquisition in the energy drinks area.

With everyones attention focused on the coronavirus, PepsiCo turned heads last week by buying Rockstar Energy Beverages

With everyone's attention focused on the coronavirus, PepsiCo turned heads last week by buying Rockstar Energy Beverages

Market panic - not a good place for the sell-side analyst

They say a week is a long time in politics. Well, a month certainly seems an eternity in financial markets. It was only mid-February when I wrote that, after the latest reporting period: "These are now positive times for all alcoholic drinks companies."

Since then, beverage share prices have fallen by well into double digits. To put this into perspective, over the last month through to the weekend, the FTSE 100 in the UK is down by around 28% with some of the European markets down more (the CAC 40 index in France is down 32%) and the US a bit less (Dow Jones average down 21%). By contrast, the 'blue-chip' consumer companies, such as Diageo, Nestle and Unilever, have seen their share prices fall in the high teens.

Elsewhere, other factors can explain weaker performances. Pernod Ricard's shares, for example, are down nearer 30%, not helped by its China exposure and relatively high gearing. Indeed, these factors have also weighed on Anheuser-Busch Inbev and Carlsberg (down nearer 40% and 30%, respectively).

The markets still remain pretty volatile this week.

In these crisis situations, the market tends to be fairly simplistic in its reaction. I remember from previous crises, 2008 in particular, how sell-side analysts could only watch and wait until the dust settled before coming up with a fundamental view on what the future holds for individual companies.

It's important to bear in mind that it's only been a couple of weeks since analysts were focused on how much exposure companies had to China as the first wave of coronavirus made its impact. Ironically, the newsflow now appears to be improving in the country, while deteriorating dramatically in other regions. It may not be that long before the market looks to buy China exposure!

Not all of what's happening is necessarily bad news. Lower oil prices should reduce transportation costs and some packaging costs, which could help drinks company's margins. Of course, this may become irrelevant if far fewer consumers are buying your products.

I saw one analysis across consumer companies last week that concluded revenue growth estimates could be impacted by about 2% this year. Let's hope this is correct - clearly, a market fall of around 30% assumes something much dramatic.

What does this all mean for the long-term?

Looking back at my time as a sell-side analyst, I could have done a better job by forecasting how long-term industry trends could develop, especially when a major dislocation event occurred. Nowadays, there is so much pressure on where the share price is going, coupled with the demands of short-term analysis of quarterly reporting. This has been exacerbated in recent years by regulatory changes and a squeeze on revenues that have obliged analysts to go wider and less deep in their coverage.

If analysts don't have the time to lock themselves in their ivory towers and don their thinking caps, perhaps I can offer a few thoughts on what the coronavirus crisis might bring for the drinks industry in the long-term.

Global v local. After many decades of globalisation, the world seems to be moving rapidly towards protectionism, with countries now closing borders and looking to protect their own citizens. We've already seen recent signs of this, with the imposition by several countries of tariffs for selected imported products, and with the Brexit vote in the UK. Recent days have taken this to a new level.

Consumers have started to buy more 'local' and less 'global' in recent years, and many consumer companies have tried to react to this. For the major spirit companies, though, the business is built on large brands with a global footprint. Many of these - I'm thinking of whiskies, brandies, Tequila - are required to be produced in a specific location. Does this model need a fundamental rethink?

On- v off-premise. Although the off-premise is the largest sales channel for beverages, the on-premise has historically had an important role to play: It tends to be more profitable (rarely do consumers shop around for the cheapest product) and it provides a shop window for brands, particularly for innovations. This is particularly true for spirits, but also has relevance for beer and soft drinks.

Looking at my recent behaviour, I am certainly not drinking less (perhaps a bit more), but there's been a material channel switch towards drinking at home. And now, several countries have moved to close bars and restaurants.

We might all head back to the on-premise once the virus 'red flag' is lowered. Or, we could decide that entertaining at home, which is usually cheaper, often more comfortable and certainly safer, becomes the new normal. And, if working from home becomes a longer-term trend, that could put paid to the Friday night pub sessions.

This raises some questions about how brands will access consumers in the future, as well as whether the long-term trend of premiumisation continues. In turn, what would happen to companies' profits?

Now is the time for companies to reassess their long-term strategies. However, I suspect that, like the sell-side analysts, they are currently doubly-focused on the short-term and have little time to spend in ivory towers.

  • PepsiCo still active in M&A

In times of market turbulence, when companies have a lot of other things to worry about, corporate development, especially M&A, tends to be put on hold. As a result, 2020 does not look like it will be a good year for investment bankers.

It was a bit of surprise to see the news last week, then, that PepsiCo is buying energy drink producer Rockstar Energy Beverages. To be fair, despite a US$3.85bn price tag, this looks more like a 'bolt-on' deal, compared with PepsicC's market cap of $177bn.

Analysts weren't surprised by the move, as there is already an existing distribution agreement between the two in the US. A full acquisition will make it easier for PepsiCo to develop an overall energy drink strategy, which will include its already-owned Mountain Dew brand. Although the timing is surprising, I suspect that, like a lot of M&A, discussions had been underway for a long time.

What struck me is that, after the SodaStream acquisition in late-2018, this is PepsiCo's second beverages deal since Ramon Laguerta took over as CEO. In my analyst days, PepsiCo came across very much as a food company - focused particularly on snacks - that happened to have a soft drinks business.

This seems to be changing.

Could this be as a response to a much more vibrant Coca-Cola system? There definitely seems to be a desire from PepsiCo to widen its soft drinks presence into other categories.

There's a possibility also of a more fundamental change. Is there a rationale for still owning asset-heavy bottling operations, both in the US and in some parts of Europe, while The Coca-Cola Co has effectively moved to an asset-light model? Is there a need for a more coherent international bottler network where PepsiCo is well behind Coca-Cola?

Over the last month, PepsiCo's shares are only down by just over 10%, less than The Coca-Cola Co. I suspect this reflects the market's belief that a more US-focused business base is more resilient.

This certainly leaves the company in a strong position to think about further corporate moves.


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