Vimto maker issues profit warning triggered by Middle East sugar tax
The firm which makes Vimto has issued a profit warning after a tax on sugary drinks was announced in the Middle East.
Vimto, first manufactured in Manchester in 1908, is popular in Muslim countries during Ramadan, with 31 million bottles sold the Middle East in 2011 alone.
Following the announcement Nichols share price dropped by almost 15 per cent knocking £125m off the value of the firm.
But a proposed tax of 50% on sweetened drinks in Saudi Arabia and the Middle East is expected to have a huge impact on sales.
Thirty-five million bottles of the soft drink are sold in the Middle East each year, with a sales spike during the holy month of Ramadan.
Saudi Arabia is the biggest non-domestic market for Nichols followed by Kuwait and the United Arab Emirates.
Nichols, which is based in Newton-le-Willows, issued an update this morning which included the profit warning.
The firm said group sales in 2019 are expected to be four per cent ahead of the previous year.
The firm said it was pleased with the performance given the slowdown in the UK soft drinks market and the challenging broader consumer environment.
Across the group, sales in both the UK and International businesses were ahead of 2018.
In the UK, the Vimto brand continues to deliver growth against strong prior year comparatives and increase market share.
In international markets, Ramadan 2019 has been one of the brand’s most successful campaigns across the Middle East region.
The firm currently anticipates full year profit before tax to be in line with market expectations.
But Nichols added that the propose drinks levy will have a major impact in 2020.
The Saudi Arabian and UAE tax authorities recently implemented an excise tax of 50%, to be levied on the retail price of non-carbonated sweetened drinks.
This tax will be applied to all non-carbonated drinks containing either natural or artificial sweeteners, including sales of Vimto products.
Unlike the UK soft drinks levy, product reformulation is not an option.
A statement said “Whilst it is difficult to estimate the future effect on sales volumes of the Vimto brand in these regions, at this point in time, we have to assume the increased retail price will have a negative impact from 2020.
“In order to mitigate the impact, we are currently developing plans in collaboration with our long term in-market partner which will require increased investment in the Vimto brand to maintain its strong market position.
“The actual impact on sales in the Middle East will not be known until after the Ramadan trading period, which accounts for approximately 80% of annual in-country revenues, and we will update the market accordingly in our 2020 Interim Results Announcement in July.
“Whilst there is a broad range of possible outcomes, we believe the impact of the tax could be material to the group and may result in profit before tax for 2020 being materially below current expectations.
“The company’s annual sales of concentrate to the Saudi and UAE markets is £7m and the Middle East as a whole, remains a key strategic market for the Vimto brand.
“In addition, the group remains highly profitable and cash generative, allowing continued investment in our future growth plans.”
Nichols will issue a further trading update on Thursday 9 January.