Sugary Soft Drinks Tax Levied in Middle East to Affect Vimto Sales
Middle East is considered as the most important market for the maker of Vimto drinks – Nichols. The firm has warned that profit could be severely hit in 2020 because of the tax levied in Saudi Arabia and the United Arab Emirates.
The Middle Eastern consumers make up for major sales of Vimto as most of the Muslims break their Ramadan fast with a glass of Vimto. The 50 percent tax on the retail price of non-carbonated sugary drinks was introduced in the beginning of December this year. Currently, Merseyside-based Nichols is not making any comments as to how badly the sales can be affected by the price hike and said that the reduction in sales can only be assured at the end of the Ramadan trading period.
But the firm claims that the tax could impact the 2020 profits falling “materially below current expectations”. As per an investment director at Stockbroker AJ Bell, Russ Mould, “The suggestion that profits could be ‘materially’ below current forecasts implies, by a crude rule of thumb, a downgrade of perhaps some 20% from the 2020 consensus of a pre-tax profit of £34.2m.”
He added that the losses could be seen as a short-term thing, because “Nichols has a net cash balance sheet and generates operating margins in the high teens with returns on capital employed to match”. This is despite the fact that ongoing regulatory pushback against sweetened drinks is a trend that should be followed with great care.
Prior to this, Vimto owner, Nichols had warned about profits due to issues in the Middle East in 2017. Since Yemen is deep in the throes of civil war, Nichols announced that profits would be shaken due to shut down of sales in Yemen.
Reports suggest that the UAE sales account for almost £7m each year while the rest of the Middle East accounted for nearly seven percent of its sales last year. Despite the taxes levied on sweetened drinks, Nichols refused to look for a new recipe for its fruit-and-herb-based Vimto. Unlike the UK soft drinks tax that came in 2018, Saudi and the UAE rules are on all sweetened drinks, irrespective of whether it has artificial sweeteners or natural sugars.
The tax levied in the Gulf states are mainly aimed towards promoting good health in the general public and to encourage people to find alternative ways to raise funds that are not dependent on oil. Besides sweetened drinks, taxes have been levied on cigarettes and vaping products too.
Despite the slowdown in the UK soft drinks market, the sales of Nichols have not been hit in 2019. Company expects sales to hike by four percent, estimating profits in line with forecasts of £32-£33m.
Since Vimto sales in the Ramadan trading period account for roughly 80 percent of Nichols’ in-country revenues, it remains to be seen how the firm will be able to overcome the expected loses. Sources claim that shares on Monday afternoon plunged by 11 percent, at £15.25.
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