The Russian damage to brand owners, the end of globalisation and the ongoing margin pummelling – The Just Drinks analyst

The beverage reaction to Russia's invasion There are times when analysts feel very important. There are also times when they're quite irrelevant. When there are potentially volatile macro-economic issues at play, investors pay little attention to individual stocks. Their concern is more: Will the whole Stock Market halve? than: Will Company A meet its financial guidance? Granted, analysts do have a role in, for example, working out the size of a company’s exposure to Russia. Once that's done, they might as well head to the bar and come back when investor interest in individual stock fundamentals returns. Quantifying the Russia exposure for historic sales - and, more importantly, for profits - isn't that tough. Among the large beverage brand owners, Carlsberg and Coca-Cola Hellenic top of the tree: The pair are well into double-digit percentages. Then, we work down through the other big names; like Diageo, Pernod Ricard, Heineken and Anheuser-Busch InBev are all certainly under 5%. What's been interesting to see is how quickly and comprehensively brand owners reacted to reducing their involvement in Russia. We had a company the size of The Coca-Cola Co announce a suspension of all its business in the country. In some ways, that was an easy move for the group to make. This was then followed by an announcement by Coca-Cola Hellenic: The company is in a tricky situation as it has all the infrastructure on the ground. Talk centred around “working in close alignment” on implementation, but also saying it will be considering the interests of its employees. In spirits, Diageo and Pernod have little on the ground in Russia, so it's been an easier decision to stop their exports. PepsiCo suspended its soft drinks sales but stayed with the food business, which was described as selling “daily essentials”. Among the brewers, Carlsberg and Heineken have stopped selling their eponymous brands and halted investment. Similarly, A-B InBev is trying to suspend the licence for Budweiser production for its joint venture with Efes. Media - and possibly investor - pressure continues for a full withdrawal by the brewing giant. As for Russian brands, they can expect to struggle overseas. You've got to feel sorry for Stolichnaya, which sounds thoroughly Russian but which, for international markets, is produced in Latvia. The vodka brand owner, Stoli Group, has firmed up Stolichnaya's name change to Stoli, I assume, to try to get away from its Russian roots. It'll be interesting to see whether consumers turn away from Diageo’s Smirnoff vodka - which has very little to do with Russia. The death of globalisation? For several decades, we've been living in a world where companies thought that continuing globalisation was the norm. With Brexit and other recent moves, however, trade barriers have reappeared. The now fairly universal business boycott of Russia only adds to my sense that globalisation is starting to reverse. If China were to be emboldened by Russia's move on Ukraine and attempt something similar in Taiwan, could this lead to an even larger trading boycott by Western nations? Would that indicate a full-steam reversal on globalisation? There are a few beverage companies for whom China represents a material amount of current profits, such as Pernod and Remy Cointreau. For them, this would become a big issue. Even for other companies where China is less material, though, the market is seen as a potential future growth driver in a way that Russia never was. Stating the obvious, none of this would be good news for global beverages. The spirits category, with its focus on developing international markets, would probably be the biggest loser. Yet, the global footprints of several brewers and the two large soft drinks companies would really come into question in this potentially new environment. Meanwhile, pressure on margins continues In company results for 2021, the pressure from higher input costs on operating margins was regularly referred to. A number of food companies, such as Unilever and Danone, have formally reduced their financial targets to reflect this. Heineken, meanwhile, raised this as a concern for the future. There's no sign of this issue abating, with the Russia crisis, literally, adding oil to the fire. Only last week, Fever-Tree updated its full-year-2022 margin guidance again, only six weeks since providing guidance in a trading statement that dramatically reduced its profit expectations due to higher inputs. As we approach the Q1 reporting season next month, I'd expect many other companies to be revisiting their guidance on this front. And, I suspect my dear old competitor analysts will be taking a red pen to their company spreadsheets.