Cold Stores sees rising demand for ice cream and fizzy drinks

As disposable incomes rise, the listed firm is investing in a new ice cream factory, adding capacity to a bottling plant and expanding its supermarket chain

Anticipating consumption growth as incomes rise, listed Ceylon Cold Stores (CCS; Rs43.5 billion in revenue), which makes ice creams and fizzy drinks under the Elephant House brand and operates supermarket chain Keells Super, is investing Rs10 billion to add manufacturing capacity and build a central distribution centre for fresh produce.

CCS is part of listed John Keells Holdings (JKH; Rs106 billion in revenue), a conglomerate with businesses in port terminal operations (SAGT), banking (Nations Trust Bank) and hotels (Cinnamon Hotels & Resorts). Cold Stores is the highest contributor to JKH group revenue, at 40%, and will be the main driver of growth for the group, LOLC Securities, a stockbroker firm, says in a report.

John Keells’ revenue grew 7.5% annually during the last three years ending March 2017. LOLC Securities forecasts growth to average 19% over the next three years. “We expect the Consumer Foods and Retail (led by Cold Stores) segment to continue to be the major contributor to the group’s topline, despite rising inflation slowing down consumption in the short term,” the report says.

According to John Keells’ 2016/17 annual report, Cold Stores’ opportunities are two-fold. First, annual per capita consumption of fizzy drinks at 10 litres and ice cream at 2 litres are the lowest in the region. Sri Lanka’s share of supermarkets to total retail at 15% is among the lowest in the region compared to Singapore’s 71%, Thailand’s 45% and Malaysia’s 43%.

CCS manufactures 37 flavours of ice cream and 24 beverages including Ginger Beer, Cream Soda and Necto. The beverages and ice cream manufacturing businesses combined contributed 30% to Cold Stores’ revenue in 2016/17. Sri Lanka consumes 216 litres of carbonated drinks each year and indulges in 40 million litres of ice cream, primarily impulse buys; consumption has grown 10-15% in 2016/17 from a year earlier.

To meet growing demand, Cold Stores is investing Rs3.8 billion in a new ice cream manufacturing facility on a 9-acre property in the Seethawaka Export Processing Zone. It’s investing another Rs2.5 billion in a bottling plant in Ranala.

The company is also responding to growing health concerns impacting sales. It’s substituting sugar in its fizzy drinks with natural sweeteners like stevia. The company claims that 83% of its beverages are in the Amber and Green range, denoting a sugar content less than 11g per 100ml. Anything over this is labelled Red, according to government sugar content disclosure requirements. Cold Stores also has sugar-free ice creams.

Of Cold Stores’ revenue, 70% is from the supermarket business, which reported a Rs30 billion turnover in the year ending March 2017. The company added 15 outlets during the year, and plans to add 40 more in 2017/18. The company is investing Rs3.2 billion on a centralised distribution centre for fresh fruits, vegetables and fish.