Sugar tax fails to take the fizz out of ef­fer­ves­cent Don­nelly

The Britvic man­ag­ing di­rec­tor main­tains a can-do at­ti­tude in the face of Brexit and a sugar tax

The Irish Times - Business - - BUSINESS INTERVIEW - Ciarán Han­cock Busi­ness Ed­i­tor

Kevin Don­nelly walks into the an­nex off his of­fice at Britvic’s plant in Kyle­more, south­west Dublin, and of­fers a warm greet­ing. “Wel­come to Bal­lyfer­mot,” he says. “This is my of­fice and it’s kind of open sea­son here. You use it when­ever you need to. We’re very in­for­mal here.”

The Dubliner is bub­bling with enough en­ergy to power the soft drinks fac­tory for most of the day. Af­ter a quick change into the oblig­a­tory hair net, boots and white jacket, we’re off on a whirl­wind tour of his soft drinks em­pire.

Britvic went through the mill af­ter the eco­nomic crash in 2008, as consumer spend­ing col­lapsed and it wres­tled with in­te­gra­tion pains fol­low­ing Britvic’s €249 mil­lion pur­chase of the Club brands and Bal­ly­gowan water from C&C in 2007.

Em­ployee numbers roughly halved to about 550, while fa­cil­i­ties in Belfast and on Nan­gor Road were closed. But there has been in­vest­ment in its near 50-year old plant in Bal­lyfer­mot – €130,000 was spent re­cently on paint­ing a ceil­ing in the main pro­duc­tion area. “We spent €70,000 just on the scaf­fold­ing,” he says.

More than 90 per cent of what Britvic sells in the Repub­lic is made here, which Don­nelly says is “unique”. That could yet turn out to be ex­tremely im­por­tant when Brexit takes ef­fect.

“Our ex­po­sure to po­ten­tial tar­iffs is very low. But there is some ex­po­sure on the raw ma­te­ri­als side,” he says, adding that the knock in po­ten­tial consumer spend­ing sig­nalled in a re­cent study by the ESRI could be the big­gest im­pact on its busi­ness.

“I hope a hard Brexit doesn’t hap­pen but, if it does, quite frankly, our model is well po­si­tioned for that,” he says, quan­ti­fy­ing the im­pact of a hard Bor­der in Ire­land, and po­ten­tial bor­der con­trols, at about a “ten­ner per truck”.

Eco­nomic re­cov­ery

The picture for Britvic in Ire­land be­gan to brighten in 2013 as Ire­land ex­ited its EU-IMF bailout pro­gramme and the eco­nomic re­cov­ery be­gan. Each year since then, the fizz has slowly re­turned to the busi­ness.

In the three months to De­cem­ber 24th (the first quar­ter of Britvic’s fi­nan­cial year), rev­enues in Ire­land rose by 16.5 per cent to £42.3 mil­lion, as­sisted by its pur­chase of East Coast, which im­proved its pres­ence in the whole­sale chan­nel.

For the year to Oc­to­ber 1st, 2017, Britvic’s Ir­ish rev­enues came in at €164.7 mil­lion, up from €131.7 mil­lion. Again, this was helped by the ac­qui­si­tion of East Coast.

The Ir­ish busi­ness is a sub­sidiary of Britvic plc, which is listed in the UK. In Ire­land, it is best known for the Club soft drinks, Bal­ly­gowan water, and MiWadi. Its par­ent’s port­fo­lio in­cludes Robin­sons, Tango, J20 and Fruit Shoot, and it also bot­tles and sells on be­half of Pep­siCo in Bri­tain and Ire­land.

De­pend­ing on which mea­sure you use, the Ir­ish unit ac­counts for be­tween 9-11 per cent of Britvic’s global busi­ness (it also has units in Bri­tain, France and Brazil).

In fur­ther good news, Don­nelly is pre­dict­ing price in­fla­tion in Ire­land of be­tween 2 and 3 per cent for the “first time in many years”.

There is also a move by con­sumers to more “pre­mium for­mats” and away from plastic bot­tles to cans. “There’s quite a de­gree of trad­ing up as peo­ple are buy­ing more pre­mium of­fer­ings,” he adds.

How­ever, there are clouds hang­ing over the sec­tor. In 17 days time, the Gov­ern­ment’s much-talked about sugar tax will come into force, hav­ing been de­layed from the orig­i­nal April 6th dead­line. It is one of a num­ber of pol­icy mea­sures de­signed to curb grow­ing lev­els of obe­sity.

From May 1st, drinks with be­tween five and eight grams of sugar per 100 ml will be sub­ject to a tax of 20 cent per litre. Above eight grams, a levy of 30 cent a litre will ap­ply. Drinks with less than five grams of sugar per 100 ml will be ex­empt from the levy, which the Gov­ern­ment (per­haps op­ti­misti­cally) ex­pects to yield €40 mil­lion in a full year.

Levy

First mooted in 2016, it could have a ma­jor im­pact on the €1.6 bil­lion soft drinks in­dus­try in Ire­land. As the State’s big­gest player, Britvic has been work­ing hard to mit­i­gate the ef­fect of the new levy. When the Gov­ern­ment first flagged its plan, roughly half of Britvic’s port­fo­lio of soft drinks was cap­tured by the tax.

To­day, about 25 per cent of its port­fo­lio would be af­fected, equat­ing to be­tween €40 mil­lion and €50 mil­lion worth of sales through re­tail tills.

“Eleven of our last 12 launches have been in no and low-sugar [prod­ucts],” Don­nelly ex­plains. “We have re­shaped our port­fo­lio away from sugar while still of­fer­ing choice. And to put some numbers on that, when the tax goes live . . . 75 per cent of our vol­ume will be tax-ex­empt.”

Th­ese launches have in­cluded zero-sugar vari­ants of its pop­u­lar MiWadi and Club drinks. It has also been work­ing with re­tail­ers and food ser­vice out­lets on ways to “nudge” con­sumers to­wards its low- or no-sugar drinks.

“In some cases, [that’s] re­mer­chan­dis­ing to have all the tax-ex­empt prod­ucts to­gether and then all the tax prod­ucts in a dif­fer­ent lo­ca­tion. That would break up some of the con­ven­tions that have been there for decades. Like you have to have all the brands blocked to­gether. One Coke block, one 7UP block. We’re mov­ing away from that with many cus­tomers.”

The big­gest un­known for Britvic and other man­u­fac­tur­ers is the im­pact the new tax will have on consumer be­hav­iour.

Many other coun­tries – in­clud­ing France, Por­tu­gal, Mex­ico and Chile, and some parts of the United States – have al­ready in­tro­duced a sugar tax, with the UK and South Africa do­ing so this year. What’s been their ex­pe­ri­ence?

“In most coun­tries where sugar tax has come in, two things mainly hap­pened. Within fizzy drinks, [there’s been] a move from full sugar to no sugar. Not just be­cause that’s the move any­way but now there’s a fi­nan­cial in­cen­tive to do so.

“Some peo­ple re­duce their fre­quency of pur­chas­ing of fizzies and ef­fec­tively come out of the mar­ket to some ex­tent, and that vol­ume tends to be dis­placed into a num­ber of cat­e­gories, par­tic­u­larly water-based prod­ucts such as sparkling water.

“So the over­all size of the mar­ket tends to re­main rel­a­tively un­changed be­cause peo­ple are still thirsty, they’re out and about, but the shape of the mar­ket can change sig­nif­i­cantly.

“That’s a lit­tle bit of a concern for the in­dus­try … be­cause if a consumer moves from a full sugar car­bon­ated prod­uct where they’re prob­a­bly on aver­age pay­ing €1.50 a litre on-the-go, to pure water, they’re pay­ing about 75 cent per litre, so there is a dan­ger of cat­e­gory de­fla­tion.”

Britvic’s guid­ance to in­vestors on the im­pact of the sugar tax is “neu­tral to pos­i­tive” be­cause “our mar­ket share is higher in low and no sugar than it is in full sugar”, Don­nelly says.

He ex­pects a “cou­ple of months of volatil­ity” as peo­ple ex­per­i­ment. “Peo­ple may be less on au­topi­lot than be­fore.” But he is con­fi­dent that the breadth of Britvic’s port­fo­lio leaves it well po­si­tioned to weather any mar­ket tur­bu­lence.

“But noth­ing can be taken for granted. The night­mare sce­nario would be that the mar­ket nose­dives, although I just don’t see that hap­pen­ing.”

The bad news for sugar ad­dicts is that Britvic will be pass­ing the tax rise on in full and there’ll be no blend­ing of pric­ing be­tween sugar and low or no sugar prod­ucts.

“We’re ex­pect­ing to see, in the spirit of the tax, that you walk into a shop and that full sugar prod­ucts will be more ex­pen­sive, even on pro­mo­tion,” he says. Not that Don­nelly wants to “de­monise” sugar. “If you want to buy full sugar, we’ll still have Club Or­ange, we’ll still have Pepsi reg­u­lar, we’ll still have 7UP reg­u­lar,” he says.

Nat­u­ral prod­uct

And he doesn’t think sug­ary soft drinks will ever dis­ap­pear al­to­gether. “I don’t think that day will come be­cause sugar is a nat­u­ral prod­uct. The taste of sugar is liked.

“The

I hope a hard Brexit doesn’t hap­pen but, if it does, quite frankly, our model is well po­si­tioned I don’t en­vis­age a day, cer­tainly in the next 10 or 20 years, where sugar is elim­i­nated from the [soft drinks] mar­ket

share that sugar prod­ucts will have of the mar­ket will go down. If you put the price up of some­thing rel­a­tive to oth­ers then it is go­ing to go down. I don’t en­vis­age a day, cer­tainly in the next 10 or 20 years, where sugar is elim­i­nated from the mar­ket, but do I see full sugar prod­ucts tak­ing a lower mar­ket share?”

Don­nelly reck­ons the share of tax-ex­empt drinks in Britvic’s port­fo­lio could go to north of 85 per cent “within three, maybe five years”.

The move to low- or no-sugar prod­ucts is also ex­tend­ing to en­ergy drinks. “We’re launch­ing our two new en­ergy brands, Purdey’s and Café Spark, that are both tax ex­empt… pow­ered from nat­u­ral sources. Purdey’s is pow­ered by vi­ta­mins and botan­i­cals, and Café Spark is pow­ered by the cof­fee bean.

“En­ergy is a very big sec­tor. It’s grow­ing fast but only one-in-nine adults ac­tu­ally reg­u­larly buys an en­ergy drink.”

Th­ese new drinks have also been given a softer brand image to ap­peal to women. It’s all part of shift in the soft drinks sec­tor de­signed to grow the mar­ket.

“We see it get­ting to €2 bil­lion by 2021. We see big growth com­ing but the shape of it will be quite dif­fer­ent.”

Plastic

An­other is­sue in the crosshairs of pol­i­cy­mak­ers is the use of plastic, and the im­pact it is hav­ing on the en­vi­ron­ment. Britvic pro­duces mil­lions of plastic bot­tles each year. Don­nelly says a plastic Club Or­ange plastic bot­tle is 100 per cent re­cy­clable, and 87 per cent of its pack­ag­ing is re­cy­cled. “Back in 1995, we were only talk­ing about 15 per cent of waste was re­cy­cled.”

He cites two key is­sues in this de­bate – lit­ter by con­sumers, and the avail­abil­ity of re­cy­cled PET plastic for its bot­tles. Britvic has com­mit­ted to us­ing re­cy­cled plastic (as op­posed to vir­gin plastic) in 15 per cent of its bot­tles by 2020.

“We’d like to do more of that but the avail­abil­ity of re­cy­cled PET is a chal­lenge for the in­dus­try,” he says, adding that he also ex­pects a shift to glass and cans.

Don­nelly is a mar­ket­ing man to the bone, with two de­grees to his name. He pre­vi­ously worked in se­nior roles for Unilever and Dairy­gold be­fore join­ing Britvic in Septem­ber 2008 as mar­ket­ing di­rec­tor. He took charge of the busi­ness here five years ago.

He has such a pos­i­tive and bub­bly per­son­al­ity that you’d be for­given for think­ing that he’s high on his own sug­ary drinks. His favourite Britvic tip­ple? “My drink of choice is MiWadi Zero ap­ple and pear with sparkling Bal­ly­gowan. It’s an ab­so­lutely mar­vel­lous com­bi­na­tion. I’d be a Rock Shandy man more than Club Or­ange. And I like full sugar ev­ery now and again.”

Don­nelly also likes to keep fit. He swims 3km a day, two in the morn­ing and one in the evening. “That just keeps me sane. It’s as much men­tal as phys­i­cal ac­tu­ally.”

He’s cur­rently try­ing to mas­ter cy­cling. “I bought a bike for my 50th birth­day and I’ve al­ready fallen off it twice. Dis­as­ter. And when you talk about mid­dle age men in Ly­cra, I mean hon­est to good­ness . . . its quite em­bar­rass­ing. I hadn’t been on a bike in 20 years but I’m go­ing to keep at it.”

He freely ad­mits to be­ing an ob­ses­sive per­son. “Yeah, whether it’s the swim­ming – this year’s tar­get is 525,000 me­tres – or some­thing else. If I’m into some­thing, I’ll go into it in huge de­tail.”

How would he de­scribe his lead­er­ship style?

“En­er­getic. For­ward-look­ing. Peo­ple-cen­tric. Pos­si­bil­ity driven. And in­clu­sive. It’s a bit of fun as well. There’s very lit­tle hi­er­ar­chy here. We’re very in­for­mal. Not be­cause we don’t take the job se­ri­ously, but I’ve worked for com­pa­nies that are too pompous in the hi­er­ar­chy.

“So, there’s a com­plete lack of pom­pos­ity in what we do. I be­lieve that ev­ery­body has a role to play and that peo­ple per­form their best and give their best when they’re ac­tu­ally al­lowed to be them­selves.”

PHO­TO­GRAPH: CYRIL BYRNE

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