Distell Group, South Africa’s largest listed wine and spirits producer, increased its marketing and advertising spending by 17% for the six-month period to end-December 2004, compared to a year earlier, in a bid to overcome extremely competitive conditions in the South African alcoholic beverages market, according to managing director Jan Scannell.
Briefing the media following the release of Distell’s interim results for the six months to end-December, Scannell said that conditions were particularly tough in the local wine market, due to a flood of wines that had previously been exported appearing on local shelves in response to the sharp appreciation of the rand in the past two years.
Faced with fierce competition, the company had experienced a 2,2% decline in sales volumes within its wine portfolio for the six months.
“The market for alcoholic beverages is not very buoyant right now,” he explained.
“Although consumer spending is rising on semi-durables, entertainment and communications, in the fast moving consumer goods category growth has not been that good, according to Nielsen statistics.
“On top of this, we are seeing a lot more export wine locally at competitive prices, which is putting downward pressure on wine prices across all categories. This is less true for higher-priced wines, but is particularly hurting the middle and lower-priced segments of the market. Our bigger branded wines like Graca and Chateau Libertas have experienced sales declines on the back of price competition from previously exported wines.”
However, the group’s South African performance was boosted over the six months by good growth in spirits, particularly brandy and whisky, with overall growth of 3,2% y/y, and in the ready-to-drink category, which posted 3,1% sales growth.
Recent data indicated that the growth in spirits had slowed down in the fourth quarter of 2004, however, Scannell noted.
“January also was not as buoyant for the industry as we would have hoped,” he said.
“There has been a cooling down in consumer offtake, so stocks are rising. This is a general trend and it is difficult to understand why.”
To combat the market downturn, Distell had been spending “substantially” more on
marketing and advertising its brands, and would continue with its special marketing drive in the months ahead with a focus on consumer groups.
More of the company’s operational savings from its efficiency gains would also be ploughed back into the marketing effort, Scanell added.
He did not expect the company’s advertising drive, or liquor advertising in general, to be restricted by the South African government in any way, despite new legislation published this week that requires health warnings to be printed on all alcoholic beverage labels and advertising materials.
Distell also has a rising amount of cash on hand, gained from a combination of its cost-saving drive and slowdown in capital spending and other investments. In December 31, 2004, cash retained from operating activities rose to R245-million from R235-million.
Scannell said the board was currently debating what to do with the cash, either by investing it or finding a way to pay it back to shareholders. A share buyback was also possible, but not easy to conduct given the tight shareholding structure, he observed.
Earlier, Distell reported a 32,5% rise in its headline earnings per share for the
six months to end-December 2004, to 149,5 cents from 112,9 cents a year earlier.
The group declared an interim dividend of 56 cents per share, a 21,7% increase on the 46 cents declared at the interim stage the previous year.
The group’s sales volumes rose 1,8% to 176,9-million litres from 173,8-million litres the previous year, while sales revenue was 7,3% higher at R3,4-billion.
With operating expenses 6,3% higher, the group’s trading income rose 14,4% to
R448,2-million versus R391,9-million previously. – I-Net Bridge