Distell bounces back, but so does pandemic
JSE-listed liquor group Distell is experiencing a better-than-expected recovery in sales but the outlook remains uncertain as a second wave of Covid-19 infections hits the US and Europe.
Distell CEO Richard Rushton said this week that the initial surge in demand following the relaxation of restrictions on alcohol sales in SA was expected, but the jury is still out on whether the recovery can be sustained.
It all hinges on how governments around the world respond to the new wave of Covid19 infections, as well as the effect on disposable incomes and consumer confidence, said Rushton.
“I’m preparing for the worst, but hoping for the absolute best,” he said.
Global brewing giant AB InBev this week also indicated concern about volatility.
AB InBev said in a third-quarter trading update that while the business was delivering improving results, with a 4% rise in revenue, it continued to face uncertainty and volatility arising from the pandemic and had therefore decided to forgo the interim dividend payment.
Earlier this month, Distell, in a firstquarter trading update, reported an overall “low single-digit group revenue decline and a low double-digit volume decline” for the three months ended September, compared with the same period last year.
The company said at the time that “shortterm trends in group volume and revenue have been encouraging and are tracking ahead of our expectations”. It emphasised that this result had to be “seen in a context of a 38% loss in trading days in the quarter due to the ban on alcohol”.
In the rest of Africa and other international markets such as Asia, Europe and the US, the group had double-digit volume and revenue growth.
The “breadth of our portfolio” and the fact that the group operates across the price spectrum means it is relatively resilient, Rushton said.
Distell is Africa’s biggest wine, cider and spirits producer and owns brands such as Nederburg wines, Savanna cider, Klipdrift brandy and Amarula liqueur. It also owns premium single malt whisky brands such as Bunnahabhain, Deanston and Tobermory.
Rushton said he was feeling more positive now than during the lockdown but tough times still lay ahead.
“What we’ve seen as a resurgence in demand is a result of a renewed ability of people to venture out and shop and perhaps socialise a little more than they had previously.
“That has benefited an industry like ours, but whether it can be sustained is largely going to be driven by disposable income and confidence, and by confidence I mean not just in my future and the future of the country, but also my desire and willingness to venture out, see friends and go out.
“A lot of this is going to be dependent on how people feel about how we are actually going to overcome this health challenge. We don’t know, but the signs are not good for next year.”
Rushton said the essential skills that businesses such as Distell needed to manage these unknowns were agility and the “ability to rebound from setbacks quickly … so far we have demonstrated both”.
He added that investments in building up inventory of aged single malt whisky in its international business, which had an initial impact on returns for Distell, were bearing fruit.
“We are starting to see really strong growth for those higher margin brands in international markets.
“We have pockets of strength around the world in small areas and high growth there.
We feel quite confident that the benefits of those longer-term decisions are starting to be seen in the start of a turnaround in the top line in our international business.”
Its rest-of-Africa operation was delivering strong double-digit sales growth before the pandemic and this trend appeared to be continuing.
“What is encouraging is even though there are still restrictions in place in many parts of Africa, we’ve returned back to strong double-digit volume and revenue growth. That sends a signal of strong resilience and bounce-back.
“The underlying fundamentals look good.”
In SA there was a strong recovery in wines and spirits, particularly take-home brands or packs. Boxed wines and spirits did particularly well. Rushton said that more recently there has been an increasing recovery in ciders and ready-made drinks.
As demand picked up the group had been able to respond rapidly to increase production.
“There is growth to be had for a company like Distell, and not many companies can talk about growth.”
But pent-up demand after the ban on booze sales might not be sustainable, and only time would tell how tough the consumer environment was as the group moves into the second half of its financial year, which falls between January and June 2021.
Sasfin Securities deputy chair David Shapiro said as far as Europe and other international markets were concerned, a worry was how extensive second lockdowns could be, especially ahead of the holiday season.
Shapiro said it was also not known what the pandemic’s “permanent damage” to the South African economy would be.
“We know our economy contracted. What we don’t know, as we come out of it, is whether there are going to be scars or permanent damage. In other words, a downward shift in the economy. We’re automatically assuming that we are going to get back to where we were, but we can’t be 100% [sure].”
Rushton said he does not see how the country could go into a second lockdown as that would be a “calamity”, with many people facing starvation.
Distell, with retailers such as Pick n Pay, is lobbying the government to allow liquor trading on weekends as this would help underpin the legitimate industry.