Strength of Delta brands, philosophy and performance

“YOU can’t have a real country unless you have a beer and an airline — it helps if you have some kind of a football team, or some nuclear weapons, but at the very least you need a beer”.  — Frank Zappa.

“Crises, whether economic or political, lead to higher demands for the brewers’ product. It is the group’s forward planning policy that has maintained its strength in difficult circumstances. This has had three elements — to maintain full employment, complete major projects designed to reduce reliance on imports and increase liquidity and concentrate on traditional fields of investment. It is not marking time waiting for the political situation to clear — the group is planning for the post settlement era.” — The Rhodesia Herald October 1977.

 

Indivisible ‘beer’ reputation
Passing the glass around is a long standing reputation that predates the “corporatisation” of the drinking culture and the last man standing is usually the leader on the home pathway. It therefore takes greater control of instincts and conscious actions, perhaps something that Alexander the Great did not have, to win a “beer relay”.

 

Knowing where and when to stop is an unlearnt field or an abhorred study comparable to that about how to die. Leaders, great and small, political and apolitical, believers and atheists cocoon in power closets with no exit strategy only to efface great achievements. Against that background, all drinkers of water, cordials, wines, spirits, juices, soft drinks and beer should take a moment for a standing ovation to former Delta CEO Joe Mutizwa, Rob Maunsell and Sam Mushiri for spooking the succession ghost and ushering in new brands to the Delta board.
Until then, it is time for another glass of beverages.

Leading with determination
As Pearson Gowero takes the reins as Delta chief executive officer, it is difficult to overcome the temptation to climb up and down the time ladder with the gift of hindsight. Starting 2006, Delta had shortages of foreign currency and it acquired 40% of Ariston to facilitate a twinning arrangement to access the company’s FCA account. Operations were saved from grinding to a halt through better access to foreign currency.

 

But it was not over; the chill of a less competitive economy started to whip human capital out of the country and management had to craft a share option scheme to empower workers, allowing them to ride the hyperinflationary environment and also sweat its listing on the ZSE — an easily forgotten intangible asset. Although Delta is big, the economy is much bigger. In 2008, the going got tough and strategies became more inward looking with “Operation Thrift and Thrive” being implemented.

 

The thrust of the exercise was to increase barley malt exports, cut production of barley based lagers and introduce the sorghum based Eagle Lager alongside existing sorghum-based lines. Politics changed in 2009 and no one had money, including exporters with no offshore accounts. SABMiller, the controlling shareholder, injected US$19 million for a consideration of 38 million shares to fund the installation of a lager line in Southerton. That is where it all started.

Drinkers relive the 1990s
It must be impressionable that US$40 billion is required to restore the country’s GDP to levels reached in 1996, but beer consumers have surpassed the peak reached in 1998 of 1,6 million hectoliters (hls) by 21% to 1,98 million hls in F12. The ramp up in production pushed capacity utilisation to 100% in lagers leaving money at the table. Decommissioned capacity had to be brought to production in order to meet demand and this impacted negatively on margins.  New packaging capacity is planned at Southerton for a 600 000 hls packaging line to put total capacity at 2,6 million hls. In terms of consumption per capita, Zimbabwe still lags Namibia, Botswana and South Africa at an adjusted 19hls per capita and in that respect volumes may still push higher.

 

Mature market strategies
A three-year compounded annual growth rate of 58% in volumes shows that mature market strategies would be a strong avenue for growing value, going forward.  This perhaps explains why new Delta CEO Pearson Gowero would not be drawn into giving precise volume growth figures like his predecessors, preferring to benchmark on GDP growth.

 

Admittedly, soft drinks and sorghum would be difficult to push as these lines have proved to be heavy because of competition and low income growth. Standing on the shoulder of a giant, Delta is well equipped with mature market strategies ranging from “brand premiumisation”, new market offerings and hopping between different packages to manage price.  Benefits of these strategies were visible in F12 with the sales mix and “premiumisation” of brands increasing gross sales per hectolitre by an average of 10% per annum.

 

The Delta ‘banking model’
Banking is the most exciting way to make money and the closer an institution’s business model comes to a banking platform the more attractive it becomes.  Delta’s strong market position facilitated the generation of revenue amounting to US$554,7 million which translated to operating income of US$98 million representing a 44% growth in F12. Attesting to the company’s strong bargaining power on creditors, Delta increased credit finance by US$20 million more than it financed debtors resulting in a positive flow from working capital that grew operating cash flows by 32% to US$121 million.

 

This amount was sufficient to fund investing activities of US$77 million and retire short term debt of US$24 million. Instead, Matts Valela chose to be maverick contracting three-year debt of US$60 million at an average cost of 7,7% per annum. Quizzed over the decision, Valela said: “We will not hesitate to make money out of other people’s money.” With a funding cost of 7,7% per annum and a return on capital employed of 20% on a US$60 million base, Delta will positively lever performance.

A billion-dollar counter
Money oscillation is expected to continue at Delta denying the counter the much coveted US$1 billion market capitalisation by the end of the year. However, valuation metrics are steeped upwards with commitments to Capex and the cost of debt expected to fall. Naturally, maturing markets grow at rates comparable to the underlying economy leaving extra points to be gleaned from management acumen. Growth may therefore be comparably weaker going forward, but there is high probability that it will dwarf the equity risk premium, leaving the capitalisation of current earnings at the current cost of debt to pass the US$1 billion intrinsic value.

 

With limited room to tinker with prices the path ahead is daunting for the Delta team, but dreamers do not give up easily when the tell-tale signs are there. Good luck Gowero!