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The Irish Times: Kevin Donnelly, CEO Britvic: ‘Our model is well positioned for a hard Brexit’

April 16, 2018 Profiles and Interviews

‘I don’t envisage a day in next 20 years where sugar is eliminated from soft drinks market’
Fri, Apr 13, 2018, 05:40
Ciarán Hancock

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.

Levy
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.

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.

Experience
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 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.”

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.

Bubbly
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.”

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C.V.
Name: Kevin Donnelly

Job: Managing director, Britvic Ireland

Age: 50

Family: Married with one son

Lives: Mount Merrion

Hobbies: “Cinema is massive. You’ve got to mention swimming. Golf and Dublin GAA.”

Something we might expect: “My fridge is full of Britvic products.”

Something that might surprise: He’s writing a book about his annual visit to the Open golf major in Britain. “I’ve got 27 chapters written. And it’s not going to be published until I have 52 done. I’ll be able to look back and say I’ve spent an entire calendar year at the Open. It’s kind of mad isn’t it? It’ll be in two volumes. And I might give myself a year off [from the Open] when I’m 74. I might.”

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