Regional performance report
Rest of Africa
Integrating new acquisitions
|Revenue||2 167,3||1 763,8|
|Volumes||2 167,3||1 763,8|
Domestic trading conditions have been challenging in an environment of persistently sluggish growth, worsening unemployment, protracted labour unrest and reduced output from the mining and manufacturing industries.
Household consumption expenditure on non-durable goods (food, beverage and tobacco) declined considerably, with a reduction in real growth in consumer disposable income from 3,2% a year ago to 2,1% in 2014.
This decline, coupled with a significant deterioration in the South African consumer confidence index, has had a major impact on non-durable consumer spend. Inflation has also remained above the South African Reserve Bank’s target of 6%.
Against the backdrop of sluggish economic conditions and poor consumer sentiment sales volumes in the South African alcoholic beverage market decreased by 4,2%, while value rose 3,9%, according to Nielsen data for the off-consumption trade. A steep increase in excise duties contributed to increased prices and increased sales value. Mindful of the price pressures already faced by consumers we have maintained competitive pricing in the market.
Distell’s domestic sales volumes grew by 2,6%, with revenue rising 5,2% to R12,1 billion. We have succeeded in maintaining our value share of 21% of the total liquor market, even with the entry of additional players and competitor products. Our decision to exercise price restraint, coupled with our broad portfolio offering of both premium and accessible brands, has enabled us to compete and grow effectively in the market, despite mixed results in some segments. During the year under review we conducted an evaluation of many of our segments and brands and as a consequence some of our priority brands are being repositioned and are undergoing packaging upgrades. This is an extensive process which will continue in the year ahead. Significant investment is being made in our priority brands to support these changes.
At the same time we are embarking on a major project to enhance the efficiency and effectiveness of our domestic sales force. Intended to expand our national market reach, this initiative is introducing new ways of working, tools, technology and systems to improve our real-time market insights and to raise our trade marketing and sales capabilities. Our sales teams are now better equipped to enhance their productivity and service levels. We expect these efforts to translate into improved growth during the current year.
Ciders and RTDs
Led by Distell brands, the cider category has continued to significantly outperform the average volume and value growth of most other alcohol categories in South Africa over the past few years. However, after a phase of rapid expansion, the pace of growth is slowing and the segment is becoming increasingly competitive.
Hunter’s cider was the star performer this year, benefiting in particular from a resurgence in support for Hunter’s Gold. The introduction of the 440 ml can has also proved very appealing to consumers. Klipdrift’s RTD offering also put in a very good showing.
Savanna, now one of South Africa’s most successful and iconic alcoholic beverage brands with a strong presence in the social media space, also experienced growing demand for its larger-sized, 500 ml bottle format. The recently launched Savanna Dark, a longer-matured, fuller-bodied cider, is bringing new consumers and consumption opportunities to the brand.
SALBA data reflect a 2,5% decline in domestic spirits sales volumes for the reporting period and we also saw a slight deterioration in our value share of the market according to Nielsen data. This was largely because of the continued weakening of the brandy segment, which experienced an 8,4% volume decline over the same period.
The whisky category has proven more resilient, posting 2,2% volume growth, with strong gains coming from the premium segment. We have been able to sustain our value share of whisky and believe that we are well positioned to benefit from future growth in this category with a portfolio of both strong local brands and Scotch whisky brands. Our Bain’s Cape Mountain Whisky has tested very well in both local and export markets and we are excited by its potential.
Distell has frequently highlighted the impact of increasingly onerous annual hikes in excise duties on brandy sales in particular. With this year’s 12% spirits hike in the Southern African Customs Union the tax burden specifically on brandy has increased to the extent that excise and VAT together account for an estimated 50% of the average brandy retail price. This significantly exceeds the government’s tax burden target of 48% for the total spirits market in South Africa.
In our efforts to stem the decline of brandy we have repositioned and invested substantially to drive the premiumisation and growth of our leading brands. In particular, the launch of the luxury Klipdrift Black Gold liqueur, a blend of potstill brandy infused with coffee and chocolate, has been well received by the market. We are also working on accelerating the growth of our sophisticated Oude Meester offering, with a new marketing campaign unveiled recently. The brand’s credibility has been significantly boosted with the 18-year-old Souverein winning the best brandy title at the 2014 World Brandy Awards.
We are confident that our strategy will ensure that we recover ground in the brandy segment utilising a targeted, well-positioned range of brands. This is a long-term initiative and we expect gains to be modest in the immediate term but to pick up pace over the next few years.
The revival of the total brandy category in South Africa is not only a company strategic imperative but also one of great importance in realising the strategic aspirations of South Africa’s National Development Plan. Brandy contributes substantially to the agricultural sector and to the growth of local manufacturing value added, as well as employment creation in both spheres.
Despite the overall decline in total spirits sales volumes, South Africa’s premium whisky, cognac and most white spirits categories have reflected healthy growth and this is mirrored in our results.
Three Ships and Bain’s Cape Mountain Whisky both delivered exceptional growth, demonstrating the demand for top-quality whiskies of South African provenance. They continue to earn international acclaim, winning best-in-class, gold outstanding and gold medals at the International Wine & Spirit Competition, the International Spirits Challenge and the New York International Spirits Competition. Vigorous marketing and activations by both brands to introduce newcomers to the South African whisky category have seen sales volumes rise by double digits.
Our cognac brand Bisquit is enjoying a growing penetration of the top end of the spirits market and achieved strong volume growth for the reporting period.
Amarula, arguably South Africa’s most famous export alcohol beverage brand, was able to further enhance its relevance with the launch of Amarula Gold as a companion to Amarula Cream. The new 30% ABV clear, golden spirit, made to be mixed and served as a tall drink, was launched in March. Consumer response has dramatically exceeded even our most ambitious expectations. This new brand extension is heightening Amarula’s visibility and strengthening brand equity at a time of intensified competition in the cream liqueur category.
SAWIS figures show a relative buoyancy in the wine market compared to other alcohol categories, with a 3,8% growth in natural wines in South Africa for the 12 months ending May 2014. The performance of sparkling wine, however, faced strong headwinds, with local sales volumes declining by 3,4% over the same period. From a value perspective, data from Nielsen indicated 4,2% value growth for domestic wine retail sales.
South Africa’s per capita consumption of wine, at less than seven litres a year, remains one of the lowest amongst wine-producing nations. With government earning more from each bottle of wine sold through VAT and excise than the producers, concerted and co-ordinated industry efforts are required to successfully communicate the job multiplier of the wine industry, whilst improving pricing, profitability and the long-term accessibility of wine in South Africa.
Distell was able to maintain its volume share of natural wine and we are still the leader in the sparkling wine category. We also gained market share in basic wines priced at the value end of the wine price continuum.
Our premium portfolio held its own, thanks to excellent volume gains achieved by Durbanville Hills, Zonnebloem and Fleur du Cap, as well as estate brands Neethlingshof, Allesverloren and Uitkyk. The performance of all these brands, now managed by the Distell Cape Legends team, underscores the merit in the decision to expand this specialist wine division to address the very specific needs of the premium end of the wine market. Cape Legends, which will operate within the Distell Vineyards & Estates business unit, also successfully represents Nederburg’s connoisseur wines, which are selling well.
The entire sparkling wine segment proved particularly susceptible to the drop in disposable consumer income and J.C. Le Roux sales have come under pressure. However, as South Africa’s dominant player in the category, it enjoys considerable brand equity and has achieved top wine brand status for the fourth consecutive year in the TGI Icon Brand Survey. The brand’s non-alcoholic sparkling range performed extremely well, indicating both the extent of the brand’s status, as well as the potential in the domestic market for alcohol-free sparkling wines. Pongracz, positioned as an exclusive MCC sparkling wine brand and catering to a less price-sensitive audience, produced strong sales growth.
The innovative, everyday and accessible 4th Street brand maintained its outstanding growth momentum whilst Drostdy-Hof remained stable. This brand has now been revitalised with a more distinctive positioning, premium packaging and a new advertising campaign. Early reaction from trade and consumers has been very promising.
Rest of Africa(including the BLNS countries bordering South Africa)
(BLNS: Botswana, Lesotho, Namibia and Swaziland)
Despite several disruptions to trade in Africa, intensified competition from the major global players, the strong presence of cheap Indian imports and the imposition of high import duties in several countries, Africa delivered pleasing growth. Sales volumes grew by 9,6% and revenue by 20,0%, reflecting improved margins and a more favourable sales mix. Investment in brands and infrastructure to grow the Group’s presence on the continent continues. As a result EBIT rose 29,8%. The region now contributes approximately 28,0% to Group EBIT. The four countries bordering South Africa are key markets for Distell, representing an important revenue stream. They also account for healthy sales volumes across the overall brand portfolio. As a unit they delivered a sales volume increase of 17,0%, with revenue rising by 21,7%.
In Namibia, one of the most significant regional markets outside of South Africa, ciders and RTDs recorded excellent gains, together with Amarula, Klipdrift and Tassenberg, while relative newcomer 4th Street has also proved to be very popular. In Lesotho a similar pattern has emerged, with ciders, RTDs and 4th Street all delivering outstanding growth. In Swaziland, in addition to Hunter’s, top-performing brands have included Autumn Harvest Crackling, Cellar Cask and Drostdy-Hof. In Botswana performance was impeded by an already very high alcohol levy raised to 50% during the review period (2013: 45%).
The market hardest hit by high increases in duties on imports was Angola. Over the review period import taxes were raised from 30% to 50% on an ad valorum basis on most alcoholic beverages (excluding wine), notwithstanding the conditions on import duty increases set in terms of the Southern African Development Community (SADC) trade protocol. Whilst the more accessibly priced Hunter’s was able to maintain satisfactory growth momentum, sales of Savanna and Esprit declined, in a market characterised by aggressive discounting. However, since introducing a smaller, more affordable 250 ml format, Savanna sales have begun to regain momentum. Angola has become an increasingly important market for J.C. Le Roux, as well as for Amarula, which saw volumes increase substantially.
To comprehensively address the import duty setbacks to which our RTD brands are proving vulnerable, we are pursuing in-market production in Angola. Such facilities will also allow us to further explore the manufacture of local beverages that has already begun on a modest scale. We have acquired land in Luanda and production is expected to come on stream in 2015.
In Zambia both Savanna and Hunter’s performed very well, along with wine brand Autumn Harvest and spirit brands Richelieu and Klipdrift.
In Nigeria wine brands Drostdy-Hof and Two Oceans delivered very good results, as did Amarula. However, J.C. Le Roux and Savanna were both negatively impacted by competitor discounting. Savanna came under further pressure with the entry of cheaper alternatives into the RTD market. Plans are under way to establish in-market production in Onitsha. We are the major stakeholder in a joint venture with local partners and the intention is to start bottling RTDs, as well as a selection of popular, well-priced spirits.
In Ghana Distell is now the lead partner in a venture with established distribution strengths in the country, as well as in neighbouring markets. The operation, trading as Distell Ghana, opened a bottling facility in Accra in April 2014. It is producing both RTDs and a range of spirits, bringing these popular brands to Ghanians at more accessible prices, given the cost-efficiencies of producing in-market. The premium-positioned Savanna, as well as Hunter’s and our local spirits, stand to benefit from this development.
Despite the security setbacks that have impacted the tourism sector, Kenya delivered excellent sales in wines. Brands that excelled included Cellar Cask, Drostdy-Hof, 4th Street, Overmeer and Nederburg, whilst Amarula also achieved strong volume growth. The impact of counterfeit spirits, however, inhibited the growth of Viceroy brandy sales, which remained flat.
The purchase of a 26% stake in the formerly government-owned KWA Holdings East Africa Limited (KHEAL) was confirmed after yearend, following the passing of legislation in July 2014 to permit its privatisation. Our relationship with the company dates back to 1998 and our equity acquisition takes the partnership to a more sustainable level. We are able to focus on growth, build new capabilities and extend the brand strengths already established in Kenya. KHEAL is the country’s dominant spirits player, operating five distribution centres in Kenya, one in Uganda, as well as a wholly-owned subsidiary in Rwanda. The company also sells products through duty-free outlets in Kenya and Rwanda.
Sales of RTDs and wines were uniformly buoyant in Mozambique, benefiting from the country’s continued strong economic growth, thanks to intensified investment in infrastructure and the raised output from the extractive sector. Stellar performances were delivered by Hunter’s and Savanna and, amongst the wine brands, by Drostdy-Hof, Cellar Cask, J.C. Le Roux, Nederburg and Autumn Harvest.
In the DRC, brands performing well include Savanna, Amarula, Nederburg, Fleur du Cap and Two Oceans.
The Zimbabwean economy has continued to ail, contrary to expectations that there would be a recovery after the July 2013 elections. Limited disposable income, compounded by a 25% import surcharge, saw our brands such as Savanna, Hunter’s and Amarula, that are imported into the country, come under pressure in this market. However, local spirits produced by Zimbabwean-listed company, African Distillers Limited, in which Distell is a significant shareholder, sold well. Its production facilities are currently being expanded to enable the production of our cider and RTD brands towards the last quarter of 2014. The company’s financial results are very pleasing, spurred by volume growth, cost management and improved productivity, despite the very difficult trading environment characterised by a slowdown in consumer spending and tight liquidity conditions.
We look forward to the positive outcome of the continued trade negotiations to establish free trade areas between the members of the Common Market for Eastern and Southern Africa (COMESA), the SADC and the East African Community (EAC). Should a single market materialise for goods and services by 2017, as is hoped, it could ultimately lead the way for a continental customs union that would facilitate trade significantly and allow Distell to further capitalise on the continent’s growing affluence.
International markets outside of Africa
We have reported on our international markets on an organic growth basis and have excluded the results of the newly acquired Burn Stewart Distillers. Performance details of this operation appear separately in this report on page 44.
Our international business outside of Africa produced subdued revenue growth. Market conditions have proved extremely difficult in many of the regions where we trade. The subdued growth in most of the Eurozone and ongoing discounting by our competitors has made this a challenging area of our business. We have however remained steadfast in our view that brand equity must be protected. As a consequence sales volumes dropped by 10,3%, although there were some notable and very positive exceptions which are highlighted in detail below. Overall, sales revenue rose 7,1% on the back of rand depreciation.
In our wine category we were able to achieve notable gains in key strategic markets such as the US. Amarula was once again the only South African representative on the Impact Databank World’s Top 100 Premium Spirits Brands for 2013. It also features as one of the IWSR top-selling spirits brands currently sold in the travel retail environment.
EBIT derived from international operations outside of Africa rose 23,6% and contributed approximately 15,5% to Group EBIT.
Europe’s EBIT contribution grew by an impressive 57,9%, with revenue rising 8,0% on the back of a weaker rand. However, an uneven performance on the continent saw sales volumes contract.
We saw pleasing revenue growth from Germany, Denmark and the Netherlands, as well as from Belgium, Finland, Norway and Eastern Europe. However, the UK proved a disappointment, with volume losses sustained in wines, spirits and ciders. In the UK wine sales were affected by a disruption in route to market and aggressive competitor discounting. Nederburg’s 56HUNDRED tier of contemporary, bright, fresh
During the review period distributors SHS maintained distribution for Savanna in multiple grocers and we can expect cider sales to accelerate now that the brand has extended its packaging formats with a 330 ml can, which is very popular in this market.
In Germany Amarula has further strengthened its popularity, growing sales from an already well-established base.
In Sweden Drostdy-Hof, one of Systembolaget’s most enduring and successful wine brands, has continued to hold its own and initial responses to its updated packaging have been encouraging.
A positive outcome to the continuing negotiations between the EU and SADC on the Economic Partnership Agreement will raise the amount of wine allowed into Europe on a duty-free basis from 47 million litres to 110 million litres, with significant potential benefits for the South African wine industry and for Distell as a major wine exporter. The agreement still has to undergo legal vetting and all signatory States still have to ratify the accord.
North American markets
Volume increases in North America were modest, largely because of disappointing sales of wine and Amarula in Canada. EBIT declined 10,6%.
Two Oceans in Canada came under volume pressure and has since been given a packaging update to better reflect the refreshing and contemporary styling of the wines in the range. Early results are encouraging.
In response to market demand for a contemporary styled premium red wine blend, Distell launched Inception into the Canadian market with excellent results.
Amarula came under pressure from regional Canadian competitors in an already subdued market for the cream liqueur category. A stronger promotional focus during the current year will allow the brand to recover lost ground.
In the US Distell has taken the first step towards direct importation. Brands have responded well, significantly increasing share of the South African bottled wines segment. Two Oceans, Nederburg and Fleur du Cap delivered excellent volume growth.
The South African wine industry currently benefits from duty-free access for wine exports to the US under the African Growth & Opportunity Act (AGOA) which is set to continue until September 2015. South Africa’s status as a beneficiary under AGOA thereafter is currently under review by the US Government. We firmly believe that the extension of South Africa’s duty-free access is crucial if we are to sustainably grow our wine exports in this strategic market.
Asia Pacific markets
EBIT contribution remained stable, despite revenue declines of 5,1%. Results in Asia Pacific were mixed with some highlights but overall performance was disappointing and volumes declined.
Amongst the markets delivering good growth were United Arab Emirates, South Korea, Hong Kong, Malaysia and Thailand, where brands to benefit included Amarula, Savanna and Cellar Cask.
Wine sales in both Australia and New Zealand suffered because of aggressive discounting by competitors.
As was to be expected, sales of Bisquit were adversely affected by China’s austerity measures, including the crackdown on government ostentation and gift-giving.
In order for Distell to increase its focus on future opportunities in China we recently acquired full ownership of CJ (China) Wine & Spirits. We are in the process of establishing a management team in China to drive not only Bisquit and Amarula, but also Scottish Leader and selected wine brands.
Latin American markets
EBIT contribution rose by a significant 60,8%. Revenue grew by 16,0%, although volumes remained flat in the face of volatile market conditions.
Over the review period Distell brands accounted for over 50% of South Africa’s packaged wine sold in the region, with both Fleur du Cap and Two Oceans performing well.
Amarula remains the brand leader in the cream liqueur category in Brazil, even though the devaluation of the real has forced up prices in this market.
South Africa’s continued efforts to strengthen trade ties within BRICS has created the scope for improved trading opportunities for South African exports, which should impact positively on Distell’s brands.
Our travel retail arm has pursued a programme of focused expansion, recently appointing seasoned leaders to manage duty-free business in Europe and Asia Pacific. The benefits have been immediate with sales values for the year rising by double digits.
This increasingly important channel to Distell’s business responded very enthusiastically to Amarula Gold, launched in March 2014 in duty-free markets in South Africa, Mauritius, Dubai, Brazil, Germany, Russia and Australia. The launch has augmented interest in the parent Amarula Cream brand and its African Original brand story, to see it recording double-digit volume and revenue growth over the past financial year.
Several wines in the Cape Legends portfolio sold well, as did Scottish Leader.
Integrating new acquisitions
Burn Stewart Distillers
In April 2013 Distell acquired Burn Stewart Distillers Limited (BSD), a fully-fledged producer of both blended and single malt Scotch whiskies. Global whisky sales are on the rise and all indications are that this trend will continue. This confirms that the acquisition of BSD was prescient and will contribute significantly to Distell’s future growth. First steps have been taken to integrate the BSD business and much work in this regard will continue in the immediate future. In addition to its brands and products, the acquisition of BSD has also provided Distell with a strong route to market in Taiwan, where Scottish Leader is the market leader.
Efforts to integrate the BSD acquisition have included investigating new ways of extracting value, adjusting marketing priorities, realigning the total whisky portfolio, tailoring offerings for specific geographies and recalibrating whisky stocks. We have begun implementing our refocused marketing strategy and whilst we have seen promising initial results, the full impact will take some time to fully reflect. We are confident that BSD will add significant value as the business becomes fully integrated and aligned into Distell structures.
Revenue for the year ended 30 June 2014 rose 2,4% to £62,1 million. Promising growth in both blended and single malt portfolios was partly off-set by declines in revenue derived from non-core private label business. Growth in the single malt portfolio, while impressive, was constrained by inventory availability.
The recently repackaged Black Bottle was also successfully launched in both the UK retail and on-trade environment and the demand for single malt whiskies from the Burn Stewart portfolio has continued to climb.
BSD’s earnings for the first year was impacted by increased investments in marketing and inventory. These investments position the business well to drive sustained brand revenue growth in the years ahead, both within the current key market distribution footprint and through expanded distribution in regions such as Africa and South East Asia.
KWA Holdings East Africa Limited (KHEAL)
KHEAL is Kenya’s leading spirits manufacturer, bottler and distributor with strong and established local mainstream brands. Subsequent to the financial year-end Distell has entered into a definitive agreement to acquire 26% of KHEAL for 860 million Kenyan shillings (about R105 million).
Our stake in KHEAL will allow us to fully develop brands such as Viceroy Brandy, Amarula, Savanna, Castle Brand Aperitif, Clubman Punch, Drostdy-Hof and Cellar Cask in Kenya. Given our newly-cemented partnership with KHEAL, we can now accelerate our growth in this important region.
The transaction also paves the way for us to expand our production and distribution footprint in leading East African markets.