Social Distancing Better With Coke!

Australia | Mar 18 2020

Coca-Cola Amatil has positives and negatives from the impact of the coronavirus outbreak but remains well-placed to deal with the crisis.

-Strong growth in grocery channel, declines in on-the-go channels
-After the crisis, consumption of Coca-Cola may surge
-Strong balance sheet should underpin the business during a period of uncertainty

 

By Eva Brocklehurst

The cancellation of much-loved sporting events will go better with a Coke! (or two), although the need for social distancing is still likely to weigh on soft drink volumes over the next few months. Coca-Cola Amatil ((CCL)) has decided to withdraw earnings guidance for 2020, given the uncertainty regarding the duration and impact of coronavirus.

Strong growth has, however, been observed in the grocery channel as consumers stock up on their soft drink, while declines are being experienced in the on-the-go channels. The company expects the latter weakness to accelerate, amid preferences for staying at home and the widespread cancellation of sporting events.

Also, the company has stated it expects to be able to operate its business and avoid significant disruption to the supply chain. Macquarie envisages limited risk to consumer staples, particularly when it comes to supermarkets, noting Coca-Cola Amatil has more staple characteristics than those of a discretionary consumer product.

Morgans assesses the petrol & convenience channels will be severely affected by coronavirus as fewer people will be commuting. The second half should benefit from the skew to Christmas activities in the Australian summer.

December alone can account for around 25% of sales in Australia. The broker also points out consumers are increasingly ordering more products online and this will advantage the company as volumes are shipped to food aggregators.

Ord Minnett speculates, given the potential timing of when constraints on activity are eased, there could be a build up of resentment from consumers to social distancing, such that they will "socialise with abandon". This is called a party, and could be positive for the consumption of Coca-Cola! At least in Australia.

While there is a structural decline in demand for the product, consumer choice is not likely to be adversely affected by the virus or economic shocks. Still, it is frustrating that the business has just returned to growth, Morgans adds.

UBS emphasises the headwinds facing carbonated soft drinks are structural, not cyclical, although company-specific initiatives are aimed at softening the blow. Hence, flat volumes are forecast out to FY22.

Indonesia

Meanwhile, in Indonesia there has been a reduction in foot traffic with volumes in Bali affected by severe decline in tourism. This is been exacerbated by the timing of Ramadan.


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