A new tax in Brazil won’t ruffle the feathers of most companies, but global Coca-Cola (KO) isn’t most companies. A proposed beverage tax in Brazil has Credit Suisse “concerned”, but not “alarmed”:
Nothing has been signed into law and many of the details are unclear, but the Brazilian Congress and Senate passed a bill for Presidential approval on Friday that would overhaul taxes on beer and soft drinks in Brazil, with negative consequences for Coke bottlers…
If approved in its current form, and there is intense lobbying underway from the branded beverage companies against the bill, the law would revitalize discount producers and impact the volume scale of…Coca-Cola bottlers.
Coke bottlers could need roughly 20% price increases to consumers to offset the tax….
Our industry contacts in Brazil indicate that it is unlikely that this bill will pass in its current form…[but] we are concerned.
Why is a Brazil tax material when KO generates only 10.6% of global revenue from Latin America? Because KO’s profit margin in the region is extremely high–57%–and as a result it generates 24.1% of its global profit from Latin America. Assuming Brazil is, say, a third of that (7%-8%), we suppose a debilitating Brazil tax could have a material impact on Coke’s overall profit. But not very material.