Michael Fridjhon: Distell’s exit from premium wine – implications for the industry
By Michael Fridjhon, 15 April 2020
Distell’s decision to ditch its newly created premium wine business, Libertas Estates and Vineyards (LV&E), did not come as a surprise to many of the old hands in the industry (though I have to confess I was surprised and disappointed by the news). Those who took it in their stride explained to me that Distell has never been able to apply any hyped policy for any length of time. “On the law of averages it wasn’t going to last,” said one. Another simply dismissed the prospect of Distell ever succeeding in premium space.
This doesn’t explain why South Africa’s largest wine and spirits business closed down an enterprise which had only been launched in January 2019, and into which it had housed all of its premium wine assets. It also doesn’t explain why LV&E wasn’t allowed to complete the task it had been established to perform, especially as – at least on paper – it had been doing a pretty decent job. CEO Kay Nash and her team had already restructured the R1bn portfolio, launched new offerings at higher price-points and bucked South Africa’s downward trend in markets like Germany. The brand and sales teams had all completed WSET courses so that they could engage with agencies and clients in a wine-literate way. The brand homes of Nederburg and Durbanville Hills had been revamped. At the same time, gross profitability had improved by 20% per litre, earnings before interest and tax had improved five-fold and, in the South African market, profits were up 15% without any loss in volumes sold.
Distell CEO Richard Rushton says that the decision was not motivated by the Covid meltdown. He claims that it arose from a board-mandated examination of the whole business – a process commissioned in the middle of 2019. While there is no reason to doubt the veracity of this, it does raise serious questions about what the board thought it was doing by hiving off LV&E six months earlier. Presumably decisions of this kind – separating out the entire premium wine business, creating a parallel structure (separate head office, separate admin, separate brand teams etc) – are not lightly undertaken. They should be the result of an intense scrutiny of the business and should be the outcome of a strategic study, not the precursor to one.
There are two complementary explanations for this sudden about-face, which have more to do with management and shareholders and less to do with LV&E. If they are correct, then what happened at LV&E is what the American military calls “collateral damage.” The first explanation relates to the constant refrain of financial analysts who have been lamenting the ongoing decline in Distell’s return on invested capital since 2011. While capital invested has increased by about 160% in this period, sales have only grown by 110% and operating profit by only 60%. Under pressure from shareholders the incentive scheme for Distell’s management was recently amended. Instead of rewarding growth in revenue and EBITDA, it’s now about performance. Management is under pressure to shed costs and earn returns. High value assets – like Alto and Plaisir de Merle – may be profitable, but not in relation to the capital tied up in them.
There is another less evident reason which fits well with the “sweat the assets:” approach. Rumour has it that Remgro, Distell’s main shareholder, is planning to sell the company. Since Distell’s core business is is in high volume affordable product, the likely buyers would have no use for niche products and nuanced brands. Even if the Covid crisis puts deals like this on hold, removing the duplication of the LV&E overhead makes sense in this context. If you’re going to sell the business to a company which has no interest in premium brands, why carry the cost of creating a machine designed to optimise their value?
There’s no doubt that some of the palpable unhappiness in the industry relates to Distell’s inability to step up to the plate on behalf of Brand South Africa. One commentator said “as the industry leader, Distell has signalled to the world that it does not back premium SA wine.” Is this fair, and what does this mean for Brand SA? Perhaps very little, except for the negative message implicit in the country’s biggest wine business walking away from the premium segment. For the last twenty years the country’s mid-size producers have been waiting for Distell to do for Brand SA what Treasury Wines (and before them Southcorp) did for Australian wine. It never happened and there was never much evidence that this was a concept Distell believed in or embraced – that is, until it launched LV&E with so much fanfare in 2019.
So actually, we’re back where we started before the idea of Libertas was ever trawled before an incredulous industry – only now we know exactly where we stand for sure. The Big Gorilla is going to sleep wherever the Big Gorilla wants to sleep, and the only fuzzy warm feeling you can expect from it will be at the moment it lies down and flattens you.
- Michael Fridjhon has over thirty-five years’ experience in the liquor industry. He is the founder of Winewizard.co.za and holds various positions including Visiting Professor of Wine Business at the University of Cape Town; founder and director of WineX – the largest consumer wine show in the Southern Hemisphere and chairman of The Old Mutual Trophy Wine Show.
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