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COCKTAILS TO RELIEVE KWV’S HANGOVER

21 Jan KWV Holdings

CAPE TOWN-based empowerment giant Hosken Consolidated Investments (HCI) can’t ever be accused of shying away from a challenge.

After all, HCI took on the enormous challenge of turning around clothing and textile conglomerate Seardel – and, to a degree, has managed to restore some operational dignity to frayed operations.

But HCI appears to have an even bigger challenge on its hands as anchor shareholder of Paarl-based liquor group KWV Holdings. KWV recently posted a loss of R50m for the year to end June – the company’s worst operational performance in a long, long time.

KWV chairman Marcel Golding – writing in the company’s annual report – reiterated that KWV has set an ambitious goal of becoming a global diversified alcoholic beverage business.

The past financial year saw the first endeavours to diversify KWV away from its staple brands in wine and brandy with the launch of ‘alcopops’ like jimmijagga and CIAO.

It’s difficult to assess the success of these endeavours other than to note that KWV’s turnover was up 12.4% to R762m. But the gain in turnover was negated by large increases in distribution and marketing costs – which would be the case when launching new high volume brands into a competitive local ‘alcopop’ market.

This may well be the trend for the next few years as KWV’s plans for 2013 are aimed to increase volume across its brand portfolio and to move the portfolio into higher-growth and higher-margin segments.

Obviously this strategy carries risks as KWV will have to incur substantial additional costs (development, marketing, production and distribution) well ahead of the seeing the returns in the form of revenue.

Golding acknowledged that in the short-term KWV needed to restore profitability. But he cautioned that the drive for short-term profits needed to be balanced against the longer-term requirement to support current brands and the products being launched in new categories.

“It is clear that the path to profitability and growth is a difficult one that requires a longer-term view of the business.”

More ominously he added that “building brands requires investment and the failure rate of new products is high in a very competitive market. Our responsibility as a board is to ensure that the rate of investment is balanced against the financial solvency and liquidity requirements of the group”.

It is clear KWV – which is still a major exporter of wine – is weighing up some rather dour trading conditions. Golding said growth in key European markets “does not exist”, while local trading conditions suffered from a decline in brandy consumption in SA.

This is a great pity because both KWV’s wine and brandy brands are winning top awards (the former dominating the prestigious Veritas awards). KWV was also listed as the 27th most recognised wine brand by Drinks International, the only South African wine brand on this list.

Golding said the weak trading situation exerted more pressure on the group to develop products in growing categories. Naturally this won’t be easy if government pushes through with plans to ban alcohol advertising.

While the key European markets for wine are flat, KWV CEO Andre van der Veen noted the company’s plans to expand sales into Africa and Asia were progressing well.

“Our investment in people and agents is already delivering results. This growth is, however, off a low base and it remains critical that we maintain volume in our European markets.”

KWV also appears to be making progress on establishing the KWV wine brand in SA (remembering that local sales only started relatively recently after the old export only restriction was lifted).

Van der Veen said that in SA KWV’s wine sales were improving through efforts to expand its distribution and on-shelf presence. “KWV enjoys significant brand recognition, but availability is relatively low across the product range due to route-to-market and distribution constraints. Where we increase availability we can immediately see the benefit of increased sales.”

He said KWV had invested a large amount in additional sales staff and route-to-market capability during the second half of the financial year to increase distribution.

Van der Veen stressed that the benefits of this investment “must be realised in 2013 in order to become profitable in the South African market”.

On the brandy side Van der Veen indicated that KWV 3 Year brandy has increased its market share and that overall brandy volumes increased from the prior year. But he anticipated the brandy market would continue to face pressure from malted whisky and cognac at the upper end.

With brandy and wine facing a prolonged hangover the quest by KWV for new high volume brands aimed at the local market becomes all the more important.

Van der Veen reports that CIAO volumes have exceeded initial forecasts – even though the readymix cocktail brand required a higher advertising spend.

The ready mix cocktail market was growing very fast in SA and ‘lite’ versions of KWV products were introduced to expand CIAO’s consumption appeal.

Van der Veen reckoned jimmijagga – the group’s first attempt at a ready-to-drink (RTD) product – was sufficiently differentiated in packaging and concept to have “stand-out potential’ in a cluttered market segment. He conceded the RTD market was very competitive and new brands were continually being launched. “The challenge to establish a new product is significant and very costly, but is ultimately required if KWV is to expand its product basket and access this high-growth market segment.”

Success in the tough RTD market would help wash some of the red off KWV’s financial statements, remembering that RTDs offer the benefit of lower working capital as there is no maturation requirement for the product. “The principal challenge is now to distribute the product as widely as possible, at the right price point. Distribution must be supported by a well-executed merchandising plan and we have to be vigilant to ensure that the marketing spend does not grow too far ahead of volumes.”

Source: Cape Business News