Election 2012: How Presidential Winner Might Affect Major Categories

Published in CSP Daily News

From beverages to foodservice to tobacco, analysts weigh in on pros, cons; fifth in a series

By  Steve Holtz, Online News Director & Beverage Editor

NEW YORK -- Debate over specific, high-level issues often win the day in today's presidential election, but how could a Mitt Romney presidency affect the beverage industry? How would another four years for Obama affect the restaurant industry or retailing in general?

The stock-analyst research team from Wells Fargo Securities LLC, New York, considered each of the business sectors it covers and how a Republican or Democratic presidential win might affect each. Here is a digest of their findings.

Beverages

In the most general terms, a Democratic win would likely mean more rigorous regulation for the beverage industry, which, with a pending investigation of energy drinks by the Food and Drug Administration, could be particularly painful for retailers.

This regulation "could manifest in product bans or limitations like the New York City limitation on serving size for sweetened beverages," wrote analysts Bonnie Herzog and Frank D. Henson Jr. "Second, we think a Democratic regime implies a greater likelihood of higher consumption taxes, which could reduce consumer demand for beverage products."

A Republican administration, meanwhile, "would leave more beneficial regulatory and tax policies in place. In addition, we think a Republican regime may look more favorably upon a tax holiday for funds domiciled overseas, which could benefit Coca-Cola Co. and PepsiCo.

Restaurants

The biggest issue for restaurants under a continued Obama presidency would remain the Patient Protection & Affordable Care Act (or "Obamacare"), leading to higher health-care and compliance costs, according to analysts Jeff Farmer and Bryan C. Hunt.

"CKE Restaurants (Carl's Jr., Hardees, etc.), for example, estimates that its annual health-care costs would increase 150% to $30 million under the new health-care legislation," the analysts wrote. "Restaurants are labor-intensive industries, and many operators employ a significant number of minimum-wage staff that works more than 30 hours per week. In our opinion, restaurants may either increase staffing levels and reduce work hours or pay a predetermined fine for noncompliance."

Another issue for restaurants should the Democratic candidate win would include menu labeling, which could "affect consumer demand for 'unhealthy' food items and/or encourage restaurants to reduce portion sizes to keep calorie counts down."

"A victory for President Obama could cause consolidation as smaller restaurant chains may not survive," the analysts wrote.

However, if Romney should win the presidency, he will "defund the unpopular parts of [ObamaCare] if they lack the votes to repeal the legislation outright. In addition, we believe a Republican administration and a Republican Congress would pursue policies that promote job growth and regulatory certainty."

Additionally, a Romney victory increases the likelihood that Congress will pursue corporate tax reform, which may include the elimination of payroll tax credits or other business-friendly loopholes, such as bonus depreciation.

"Although too early to tell, any plan advanced by a Romney administration would likely offer reduced corporate tax rates in exchange for fewer deductions or credits," the analysts wrote. "In our opinion, tax reform would reduce complexity and level the playing field for competitors operating in the same industry."

Retail

A Democratic win in the White House would likely men increased support for government assistance programs, which could benefit low-income consumers and encourage them to spend more.

"Although it is difficult to predict the specific details of each candidate's socioeconomic plan, a Democratic victory is expected to result in easier access to Medicaid, the continuation of the Affordable Care Act, which allows for lower Medicare costs, and the continuation of welfare largely in its current form," wrote analyst Matthew R. Nemer. "As a result, we would expect lower- to lower-middle income consumers to benefit from higher levels of discretionary income. This could be a positive for discount retailers, including Dollar General and Family Dollar, and to a lesser extent Dollar Tree and Walmart."

Should the Republican candidate win, however, the opposite is likely.

"We would expect negative margin implications as the sales mix at Family Dollar and Dollar General would likely continue to shift toward more needs-based consumables, with softer higher-margin discretionary sales, given lower discretionary income," Nemer wrote.

Tobacco

A Democratic win may be slightly negative overall for the tobacco sector due to the likelihood of increased tobacco taxes and regulation, Herzog wrote.

"Tobacco could be an area of focus for increased tax revenue, particularly to pay for national health care. Historically, for instance, in 2009 under the Obama Administration, federal excise taxes on cigarettes were increased by 62 cents per pack, to $1.01 per pack (from 39 cents per pack). This increase was to expand health care coverage for children. If the Democrats continue to hold the presidential office, we think the chance for another substantial federal excise tax increase is minimal given the large increase in 2009."

A Republican president, however, could benefit the industry on multiple levels.

"Typically, tobacco stocks perform better when Republicans hold office given limited tax increases and regulatory pressure," Herzog wrote. "Therefore, a Republican win may be a slight positive overall for the tobacco sector. Furthermore, if the dividend tax rate remains the same, at 15%, this also bodes well for the attractiveness of high-dividend-paying tobacco stocks."

See Related Content below for previous installments in this series.

By Steve Holtz, Online News Director & Beverage Editor
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