Zimbabwean brewer and soft drinks company Delta Beverages has released its Q1 2019 results. Revenues increased by 33% in Q1 and 26% for the full year. But currency issues affecting imported raw materials have effectively shut down its soft drinks business and its Zambian brewery has seen volumes decline 24% in Q1 2019.
It’s a mixed picture for Delta Beverages, whose majority shareholder is AB InBev. The headline financials are strong but the picture for 2019 looks distinctly worrying. Delta says that demand has reduced due to the increase in RTGS $ wholesale and retail prices (Zimbabwe operates its own virtual currency, RTGS $, which is part of a failing economic policy to move away from dependency on US$). The issue is that as RTGS declines against the US$, tThe value of the RTGS $ deposits is being eroded, meaning price increases are being passed onto consumers (driving up inflation). The result: a severe decline in aggregate demand.
Delta’s revenues have actually increased by 33% in Q1 and 26% for the full year. But if you look underneath that picture, volumes are struggling. Beer volumes declined by 3% for lager and 2% for cheaper sorghum beer in Q4 2018 – a victim of Zimbabwe’s precipitous fall in exchange rates and subsequent inflation. Annual volumes have been rescued by a strong showing earlier in 2018. overall, beer volumes rose by 31% for the year.
Delta has flagged declining demand amid price rises. At the end of April it put prices up by 20% across the board. Consumers were already struggling with rampant price inflation elsewhere: bread prices have doubled, for example. The issues are not restricted to Zimbabwe: Delta subsidiary National Breweries in Zambia recorded a volume decline of 24% for Q1 and is flat on prior year for the 12 months. The company has said demand has reduced following price increases and trading down to subsistence offerings.
Its carbonated soft drinks business has effectively ground to halt because of issues importing (and paying for) raw materials. Volumes declined by 89% in the last quarter the period under review while and decreased by 44% on average for the full year. Delta requires between US$60m-US$100m in foreign currency annually to be able to import critical raw materials, and its carbonated soft drinks business accounts for around 50% of these foreign currency requirements.
The company has said that “operations have since resumed albeit at a slow pace. There are ongoing collaborative interventions together with The Coca-Cola Company (TCCC) to restore the business to sustainable footing.” In other words, Coca-Cola is facing exactly the same problems and almost certainly will be seeing significant declines in volumes.
Delta can’t switch to US dollars, as it wanted to. Delta probably can’t keep pushing prices up. Governments understand that no regime survives hyperinflation. Beer may not be as essential as bread, but it’s still important enough to consumers that prices rises become a deep-seated political issue. Unless the currency crisis resolves itself – unlikely – Delta is in for a rough year. Falling demand is a given – either because consumers can’t afford the product or because Delta can’t get hold of the raw materials. Delta is reasonably bullish about demand for sorghum beer, however. It can source the raw materials locally, and only requires foreign currency for the packaging. Perhaps the factor to really worry about is political meddling.
