FIFI PETERS: Despite four alcohol bans in the past year, Distell increased full-year earnings by 227%. I know some of you are familiar with your ciders, spirits and wines that you went to buy today before the 6:00 pm close under the current lockdown, which prevents us from buying alcohol in retail stores, that is, Friday through Sunday . . To discuss the results and impacts of the ban, I am joined by Distell CEO Richard Rushton.
Richard, thank you very much for your time. Just looking at your numbers and the strong earnings growth the group reported today, what would you say the impacts of the alcohol bans have been on your business?
RICHARD RUSHTON: Fifi, thank you and hello to all your listeners. I believe that our performance has been extensive, so all of our business units, our African and international operations, have contributed substantially to the volume and revenue growth and stability of the group. And then, of course, South Africa has shown tremendous resilience. Therefore, it has been comprehensive broad-based performance that has seen this growth in earnings.
We also take extreme measures to protect our balance sheet and strictly control costs at the start of the lockdown. Last, and most importantly, we took an approach to be very responsive, whether when bans were imminent or in the resumption of normal trade. And we did our best to operate to be the first off the starting grid.
I think our brand portfolio, spanning occasions and price points, influenced a lot of changes in domestic consumption that occurred. That was also helped to some extent in South Africa by consumer loading of the pantry, or by buying before bans and emptying the pipeline in South Africa once we saw the resumption of trade. So all those factors helped us to get this excellent result.
I’d also say it’s the culmination of several years of hard work reorganizing our portfolio, optimizing it, modernizing our supply chain footprint, expanding our path-to-market platforms, and our reach in Africa. It has been the result of that hard work, more than anything.
FIFI PETERS: What would you say was the fastest growing brand in the period?
RICHARD RUSHTON: Our portfolio of premium cider and ready-to-drink products stood out, with a growth of more than 30% in revenue over the previous year. And indeed, the growth was ahead of the pre-Covid period. Again, that was led by Savanna, who is really seeing rapid growth and growth in both South Africa and other parts of Africa. So we are delighted with the performance of our premium cider portfolio and ready-to-drink business.
As I said a bit earlier, it was broad based. So our white spirits portfolio performed very well. Our African companies did well, as did our premium spirits internationally. Amarula broke the million liters sold in Germany for the first time, despite the blockages there. So it was one of those years where various brands and markets performed exceptionally for us. To some extent, our strategies also paid off.
FIFI PETERS: It is interesting that his product has done so well internationally, because he talks to many South African companies that export, and many of them mention difficulties in getting their products out. Any loss of sales on your part as a result of ports perhaps not operating as efficiently as they should?
RICHARD RUSHTON: Wine has been affected and exports in general have been affected by the interruption of supply chains outside our ports, and also by shipping times, which do not frequent our ports as they normally do and pass through the port. from Durban and Cape Town. So we’ve had all those interruptions and we continue to experience them. I think the forecast for the next six to eight month period is that the cumulative impact of blockages around the world is creating supply chain disruptions and as a result is putting pressure on our ability to meet all the demands that exist. for our business.
FIFI PETERS: What does that mean for price, Richard, the price you pay to produce your product, and ultimately the price you have to pay to sell it?
RICHARD RUSHTON: Fifi, a good question. We have all seen the pressure of commodity prices. We have guided that we believe we will see pressure in the second half of the financial year. We have seen all prices and other commodities go up. Obviously, for us we have always intended to pass them on wisely in the form of price increases.
The consumer environment is soft in South Africa, as you may know, so our ability to pass on the full impact of increases in input costs to the consumer in the coming year will be tested. We will have to balance the requirements to protect margin and profitability against market share in the consumer environment. We have done reasonably well historically, and I am confident that we will be able to weather some of these storms, although they will certainly be tougher in the second half of this year.
FIFI PETERS: Speaking of market share, Richard, I know the industry has watched the market share of illicit alcohol dealers grow throughout these lockdowns. My question revolves around the solution and how do you think it can be controlled at this stage.
RICHARD RUSHTON: There is a combination of factors that we believe will be implemented. One point is that there is a wide universe of smaller clients that are not licensed. We believe the more we can bring those unlicensed customers into the licensed metric and then supplement those businesses with perhaps a food offering and another basket of products beyond alcoholic beverages, the better. It will create jobs, on the one hand, and help us offset part of the impact of illicit and illegal trade. Clearly, bans don’t help. We have seen illicit trade and illegal sales rebound and increase significantly in periods of outright bans. So again, we call on the government to avoid banning the sale of our products because that simply supports criminal networks to evade taxes.
And then honestly, we also have to deal with tax rates. Excise tax rates are high in this country, and the more it increases and applies higher excise rates, the more arbitrage opportunities open up for people who choose not to pay taxes. That points to law enforcement, but I know that Sars is doing everything it can to close these loopholes and is certainly doing the best it can.
And, of course, law enforcement agencies will have to work with us to prevent this from growing. It is just a missed opportunity for our country, in addition to the unintended consequences of crime.
FIFI PETERS: I’m not sure how this market actually works and operates, but I wonder if there is anything vendors like you can do to try to combat this illicit trade market, given that, unlike cigarettes, there is a view that Legal cigarettes are imported, while illegally sold alcohol is purchased from local suppliers.
RICHARD RUSHTON: Many of the illegal sales would be, on the one hand, products that should be locked in the prohibition periods, but are then sold. It’s a compliance issue to ensure that doesn’t happen. And then there are the illegal operators who actually distill alcohol from a sugar source or another form of whiskey. Those networks must also be closed. What we can do as an industry is, I suppose, point out where these operators may be operating from and guide our law enforcement agencies towards those networks.
For us as an industry, what we have to do is make sure that we only sell to licensed venues, which at Distell we certainly do as a minimum policy per requirement, and then support as many licensed players as possible so they can compete. with any of those kinds of unlicensed parties that don’t pay taxes. But there is no short answer. In reality, all parties must cooperate to address this issue together in this country.
FIFI PETERS: Richard, lastly, many of our listeners I know are regular or maybe part-time Heineken consumers, and some of them may not be aware of this huge issue that could happen between Heineken and Distell, in which Heineken would essentially buy Distell . What can you tell us about that transaction? I know there is a lot of sensitivity regarding the talks, but what can you share with us at this stage?
RICHARD RUSHTON: Fifth, today we made another warning in relation to those talks, and essentially what we are saying is that the talks are progressing and we are progressing. There are still other aspects that must be considered and mutually agreed between the parties. If such a business combination were to see the light of day, there is still work to be done on that front. We have agreed in good faith, as we have advanced on some principles and conditions should a business combination arise. One of those principles was not to pay dividends and not to distribute the income in cash at this time.
So we are not going to pay dividends now. But we have also committed to working with Heineken to make material progress by the end of September and then obviously to report back to shareholders on the progress made. At that point, frankly, we would have done all the work necessary to bring this potential business combination to fruition, or we will not have been able to address the remaining aspects, in which case things will continue as usual for Distell. We have done very, very well and we have a number of growth opportunities that we will continue to seek, and we will do so with great confidence, knowing that we have brands, capacity and people. to support the long-term growth of our business.
FIFI PETERS: All right, Richard, thank you very much for your time. We are all watching that September deadline closely to see exactly what the outcome of these talks will be. Maybe (we’ll have) a conversation to catch up, regardless of the outcome. That was Richard Rushton, the CEO of Distell.