Distell’s short foray with Libertas Vineyards and Estates not fruitless
Reintegration of business unit into main company could compromise behemoth’s credibility in wine industry
wo weeks ago, as part of the release that accompanied its half-year results, Distell — SA ’ s largest wine and spirits company — revealed that it intended to sell its two most important wine estates, Alto and Plaisir de Merle. A further announcement confirmed that Libertas Vineyards and Estates (LVE), which had been hived off from the main wine and spirits business amid much fanfare at the beginning of 2019, would be reintegrated into Distell.
The news spread like an Australian bush fire through the wine industry. Su Birch, retired CEO of Wines of SA, tweeted: “Once again Distell chops and changes its wine strategy.”
Distell’s decision in January 2019 to create LVE and commit its major premium wine brands to the new entity had been greeted with scepticism by growers and competitors. This complete reversal must inevitably compromise the company’s credibility in the wine industry.
Distell’s major premium wine brand is Nederburg, whose volumes account for about 5% by value of the country’s premium (above R55 a bottle) wine sales. Its total wine business — including high-volume brands such as 4th Street and Two Oceans — represents 36% of total wine sales by value in SA. Its own farms contribute only 4% to its requirements: most of its grape purchases come from independent growers.
Given its size and reach, the company has never enjoyed an easy relationship with the industry. Its decisions have a direct and immediate effect on the livelihood of the country’s 3,000 grape growers and must necessarily have an effect on how the rest of the industry’s cellars operate.
Trying to persuade everyone that LVE would function independently from Distell and would in time acquire other shareholders was something of a hard sell. LVE CEO Kay Nash invested considerable effort at the initial stages, talking to growers but also producers, ranging from the most fashionable of the boutique cellars to the largest of the independents.
She took the Nederburg Auction into LVE and redesigned it under a new banner as the Cape Fine and Rare Wine Sale. She also attempted to persuade the managers of the other two important industry auctions (the Cape Winemakers Guild and the Cape Wine Auction) to come together
Tunder a single banner. She argued that the combined effort would raise the profile of SA’s best wines at home and abroad.
Despite her efforts, both of the events kept their distance: there can be no doubt that distrust of Distell and the company’s intentions trumped the merits of Nash’s proposition. Distell CEO Richard Rushton is clearly aware that the reversal of a position sold with much hype in January 2019 comes with reputational implications.
CHANGING DYNAMIC
He is at pains to stress that the decision was not driven by strategic or opportunistic considerations related to Covid-19. He says that as far back as July last year the Distell board began an assessment of the business in the context of the changing dynamic of the local and global liquor market.
Distell is the dominant player in the SA nonbeer liquor market. It is also the fastest growing of the major liquor companies trading in Africa. Consumer patterns and market forces on the continent must necessarily determine its future trading trajectory.
Rushton argues that the overall decline in impetus in both these areas — the rest of Africa less so than the SA domestic market — forced a rethink. Wine, which represents about 25% of
Distell’s revenues, competes for company resources against ciders, ready-to-drink beverages and spirits, which make up equal portions of the remaining 75% of its income.
The wine category has been under growing pressure from beer, whose price has dropped by 3% in real terms, as well as from a blurring of categories: the boom in gin sales has also eroded wine’s market share.
Put bluntly, Rushton argues that “given the changing context (low SA economic growth, intensifying domestic price-led competition) … and our primary growth priority being on African expansion, our core strategic priority after we play our part in SA’s response to Covid-19 by producing sanitiser in sufficient volumes to meet the nation’s needs, is to generate sustainable growth and returns rather than to focus on … [LVE’s brief of] ‘doubling of revenue and profitability’.”
In short, the LVE adventure foundered on the need to strip costs out of the business, to abandon the company’s super- and ultra-premium ambitions, and to upweight returns based on return on invested capital.
Chris Logan of Opportune Investments, long a critic of Distell (whose share price has pretty much halved in the past 12 months), commended the move. He sees no place for high capital value assets such as farms. Alto and Plaisir de Merle contribute less than 1% to turnover (admittedly at high GPs) while tying up 3% of assets.
Sweating assets, sticking to core competencies and avoiding expensive distractions are the basic plays detailed in Business Science 101. In this context the key question is not why it has taken Distell until now to implement them, but why it ever went down the road of LVE. Surely the long hard look at the future of its business that Rushton says the Distell board initiated six months after the launch of LVE should have been undertaken before hiving off the premium wine business?
Rushton is at pains to stress that in its brief existence LVE more than met the targets set for the business. It restructured a portfolio worth more than R1bn constituting nine brands across 110 countries in six months, launching new offerings at higher prices and bucking SA’s downward trend in markets such as Germany.
It created brand and sales teams who were wine literate to international standards. It redesigned and implemented fully revamped brand homes for Nederburg and Durbanville Hills. It delivered a 20% a litre increase in gross profitability, an almost five times improvement in earnings before interest and taxes with only a 7% decrease in global volumes. In SA, LVE delivered 15% profit growth with no volume losses.
Rushton plans to retain these skills and competencies when LVE merges back into Distell. Whether he is able to do so will depend on more than his powers of persuasion. Nash was able to shape her team at LVE on the promise of an existence wholly separate from the perceived unreconstructed corporate culture that has long been seen as a defining feature of the Remgrocontrolled wine business. To be fair, while she was building LVE, Rushton was transforming the mother ship. In the past two years the permanent headcount at Distell has come down by 7% while the percentage of previously disadvantaged individuals in top management has increased from 31% to 47%, with the female presence increasing from 19% to 32%.
Whether this will be enough to attract the key players at LVE back to Distell remains to be seen. If not, for all its resentment about the short and comet-like existence of LVE, the wine industry will be able to profit from its pool of talent now available to other players in the wine game.