FIFI PETERS: Despite four alcohol bans in the past year, Distell increased full-year profits by 227%. I know some of you are familiar with their ciders, spirits and wines that you went to buy before the 6:00pm cut-off today under the current lockdown, which prevents us from buying alcohol from retail stores – that is, from Friday to Sunday. To discuss the results and the impacts of the ban I’m joined by Distell CEO Richard Rushton.
Richard, thanks so much for your time. Just looking at your numbers and the strong profit growth that the group reported on today, what would you say the impacts of the alcohol bans have been on your business?
RICHARD RUSHTON: Fifi, thanks and hi to all your listeners. I think our performance has been broad-based, so all of our business units, our African and international operations, have contributed materially to volume and revenue growth and to stability of the group. And then of course, South Africa has shown tremendous resilience. So it’s been a broad-based all-round performance that has seen this profit growth.
We also took extreme measures to protect our balance sheet and to stringently control costs at the onset of the lockdown. Lastly, and most importantly, we took an approach to be highly responsive either whenever bans were imminent or at the resumption of normal trading. And we tried our best to operate to be first out of the starting blocks.
Our portfolio of brands that spans occasions and price points played, I think, to a lot of home-consumption shifts that took place. That was also aided to some extent in South Africa by pantry-loading by consumers, or buying ahead of the bans and emptying the pipeline in South Africa once we saw trade resume. So all those factors helped us deliver this excellent result.
I would also say that it is the culmination of a number of years of hard work to reorganise our portfolio, to streamline it, to modernise our supply-chain footprint, to extend our route-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 strongest growing brand in the period?
RICHARD RUSHTON: Our premium cider and ready-to-drink portfolio was a standout, with growth in excess of 30% in revenue on the prior year. And in fact growth was ahead of the pre-Covid period. Again, that was led by Savanna, which is really experiencing rapid growth, and growth both in South Africa and in other parts of Africa.
So we were delighted with the performance of our premium cider portfolio and with our ready-to-drink business.
As I said a little bit earlier, it was broad based. So our white spirits portfolio performed very well. Our African businesses did well, as did our premium spirits internationally. Amarula for the first time breached a million litres sold in Germany, despite the lockdowns there. So it was one of those years where a number of brands and markets performed exceptionally for us. To some extent our strategies also paid off.
FIFI PETERS: It is interesting that your product has done so well internationally, because you speak with a lot of South African companies that export, and many of them cite difficulty in getting their products out. Any loss of sales on your part as a result of perhaps the ports not functioning as efficiently as they should have?
RICHARD RUSHTON: Wine has been affected and exports in general have been affected by disrupted supply chains out of our ports, and also shipping times – not frequenting as they normally do our ports, and passing Durban Harbour and Cape Town. So we’ve had all of those disruptions and we continue to experience them.
I think the watch for the coming six- to eight-month period is (that) the cumulative impact of lockdowns throughout the world is creating supply-chain disruption and, as a result, putting pressure on our ability to meet all the demands out there for our business.
FIFI PETERS: What’s that going to mean for price, Richard, the price that you pay to produce your product and ultimately the price that you have to pay to sell it?
RICHARD RUSHTON: Fifi, a good question. We’ve all seen commodity-price pressure. We have guided that we think we’re going to see second-half financial year pressure. We’ve seen all prices tick up and other commodities. Obviously for us we’ve always aimed to prudently pass those on in the form of price increases.
The consumer environment is soft in South Africa, as you will know, and so our ability will be tested to pass on the full impact of input-cost increases to the consumer in the year ahead.
We’ll have to balance up the requirements to protect margin and profitability against market share in the consumer environment.
We’ve done that reasonably well historically, and I’m confident we’ll be able to weather some of these storms, although they will be tougher in the second half of this year, undoubtedly.
FIFI PETERS: Talking about market share, Richard, I know that the industry has looked at how the market share of the illicit traders in alcohol has grown throughout these lockdowns. My question is one around solution, and how you think it can be controlled at this stage.
RICHARD RUSHTON: There’s a combination of factors that we think to be put in place. One point is that there is an extensive universe of smaller customers that are unlicensed. We believe that the more we can bring those unlicensed customers into the licensed metric, and then complement those businesses with perhaps a food offering and another basket of products beyond just alcohol beverages, the better. It’ll create jobs on the one hand, and it’ll help us offset some of the impact of illicit and illegal trade. Clearly bans don’t help. We’ve seen Illicit trade and illegal sales pick up and ramp up significantly in the periods of outright bans. So we, again, appeal to government to avoid banning the sale of our products because that simply supports criminal networks to evade tax.
And then, honestly, we also have to deal with tax rates.
Excise tax rates are high in this country, and the more you increase and levy higher rates of excise, the more that opens up opportunities for arbitrage, for people who choose not to pay tax.
That then points to enforcement, but I know Sars are trying their best to close these loopholes and are certainly doing the best they can.
And of course law-enforcement agencies are going to have to work with us to prevent this from growing any further. It’s just a missed opportunity for our country, aside from the unintended consequences of crime.
FIFI PETERS: I’m not sure how this market really works and operates, but I wonder if there’s anything that suppliers such as yourselves can do in trying to combat this illicit-trade market, given that, unlike cigarettes, there’s a view that the legal cigarettes are imported, whereas with the alcohol that’s sold illegally it’s bought from local suppliers.
RICHARD RUSHTON: A lot of the illegal sales would be product on the one hand that should be locked up in the periods of bans but is then sold. It’s an enforcement issue to ensure that that doesn’t happen. And then there are illegal operators who are actually distilling alcohol from either a sugar source or another scotch form. Those networks also need to be shut down. What we can do as an industry is, I guess, to 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 ensure that we sell only to licensed premises, which at Distell we certainly do as a minimum policy per requirement, and then to support as much of the licensed players as possible so that they can compete with any of those sort of unlicensed parties that don’t pay tax. But there’s no short answer. Actually, all parties need to cooperate to tackle this problem together in this country.
FIFI PETERS: Richard, just lastly, many of our listeners I do know are regular or maybe part-time consumers of Heineken, and some of them may not be aware of this big deal that could potentially happen between Heineken and Distell, in which Heineken would essentially buy Distell. What can you tell us about that transaction? I know there’s a lot of sensitivity regarding the talks, but what can you share with us at this stage?
RICHARD RUSHTON: Fifi, today we issued another caution in relation to those talks, and essentially what we are saying is that the talks are progressing and we are making advances. There are still further aspects that need to be considered and agreed mutually between the parties. If such a business combination were to see the light of day there’s still work to be done on that front.
We have agreed in good faith, as we’ve made progress on some principles and conditions if a business combination were to manifest. One of those principles was not to pay a dividend and not to distribute proceeds of cash at this point.
So we are not going to pay a dividend now. But we’ve also committed to work with Heineken to make material progress by the end of September, and then to obviously report back to shareholders on the progress made. At that point, quite frankly, we would either have done all the work needed to bring this potential business combination to fruition, or we will have been unable to have dealt with the remaining aspects, in which case it’ll be business as usual for Distell.
We’ve done really, really well and we’ve got a number of opportunities for growth that we will continue to pursue, and we’ll do that with a great deal of confidence, knowing that we’ve got brands and capability and people to back up the long-term growth of our business.
FIFI PETERS: All right, Richard, thanks so much for your time. We are all keeping a close watch on that September deadline to see exactly what the outcome of this these talks will be. Perhaps (we’ll have) a catch-up conversation, regardless of the outcome. That was Richard Rushton, the CEO at Distell.