Why Coca-Cola Amatil is worried about a New Zealand container deposit scheme

Coca-Cola Amatil Ltd (ASX: CCL) share price has had a stellar 2019 so far, but the New Zealand Container Deposit Scheme is weighing on the company

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The Coca-Cola Amatil Ltd (ASX: CCL) share price has had a stellar 2019 so far. Coca-Cola shares started the year going for around $8.40, but today a slice of the company will set you back $10.79 (at the time of writing) – meaning CCL shares are up nearly 30% for the year (not including dividends).

But things could take a turn for the worse for the famous red and white bottler.

According to a report in the Australian Financial Review (AFR), the New Zealand government announced this week that it is launching a container deposit scheme (CDS) across the country by August 2020. A CDS is a government-mandated recycling program that is already in place across many states of Australia. It consists of a tax placed on each new beverage container (e.g. each can of Coke) sold in a jurisdiction in conjunction with the ability to return used containers for a refund of said tax. In Australia's state-based CDS programs, a refund amount of 10 cents per can/bottle is standard.

Why is this bad for Coca-Cola Amatil?

Coca-Cola is one of the consistent leading opponents of CDS programs, virulently resisting the NSW scheme introduced in 2017 and Queensland's CDS which came online last year. A CDS makes each beverage sold by Coca-Cola more expensive, therefore reducing demand for its products.

According to the AFR report, Coca-Cola has claimed that the NSW CDS contributed to a 3.4% fall in beverage sales volumes in NSW in 2018 and that the Queensland scheme has resulted in a 3.8% drop in sales volumes for the first half of 2019. So it's obvious why the company is concerned about a New Zealand CDS. New Zealand is one of Coca-Cola Amatil's highest-growth markets, with nearly 20% of its earnings coming from the Land of the Long White Cloud.

Foolish Takeaway

Although a CDS is clearly not a beneficial program for Coca-Cola's balance sheet, I think its general support amongst governments and the public as well as its success in reducing littering rates means that it's a reality that the company will have to deal with going forward. I think that once the scheme is implemented, consumers will get used to it and Coca-Cola's sales will eventually balance out. Sometimes companies and investors just have to take one for the environment!

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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