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IS KWV’S CIAO A NEW STRATEGY

27 Jan KWV Holdings

STRUGGLING Paarl-based liquor group KWV has finally shifted away from its (over)reliance on its wine and brandy ranges with a much anticipated shift into the Ready-to-Drink (RTD) market.

In November last year KWV launched ‘Ciao’, a real fruit juices range infused with a selection of sprits that will be available in cartons in three variants – Appeltini (gin and apple), Yellow Cab (brandy and orange) and Paradise Bliss (vodka and passion fruit).

The new product comes in a two litre box which retails at under R70, suggesting KWV is well aware that it is treading into a competitive market where consumers – faced with an array of brands – are extremely price conscious.

The decision to diversify into this high volume sector comes a long time after Distell, KWV’s much more profitable rival from Stellenbsoch, made its inspired shift into RTDs and ciders. In fact, Distell probably has its range of RTDs and ciders to thank for its stout bottom line despite tough trading conditions throughout the traditional wine and spirits segment (locally and abroad).

So the question really is whether the launch of ‘Ciao’ means KWV will be saying hello to a new operational strategy under its new anchor shareholder Hosken Consolidated Investments (HCI).

HCI certainly does not have the luxury of slowly switching strategies at KWV. The business, although still well capitalised after a recent rights issue (when Zeder was still the main shareholder), delivered a rather ominous R22 million loss in the previous financial year. And that loss included substantial once-off gains from the sale of assets, without which KWV actually generated operating losses of over R50 million.

Acting CEO Andre van der Veen certainly suggested there was significant change afoot at KWV during a presentation to shareholders at a recent AGM.

Van der Veen says the future of KWV is as a diversified alcoholic beverage business that is brand focussed, enjoying a global footprint.

He is very keen to dismiss notions that KWV is a high volume/low margin producer, a bulk supplier and limited to just brandy and wine.

But the shift into new liquor segments does present KWV with a predicament. Van der Veen indicated that sales expenses had not declined in line with revenue (revenue in the latest financial year being down 7% with sales expenses up almost 10%), and that indirect and other expenses are still too high at KWV.

With new products set for launch (Ciao, in CBN’s opinion, is probably the first of a series of new KWV products set to hit the shelves) there’s no doubt investment in innovation will be increasing.

Van der Veen says advertising and promotion spending (a hefty R82 million in financial 2011) will probably remain at around 11% to 12% of revenue.

One suspects KWV’s turnaround will take time. Significantly Van der Veen cautioned shareholders at the recent AGM that the new strategy would require a longer term view of the business.

He also conceded there was a higher risk considering the increased investment in new products and brands. On the other hand, if KWV (or HCI, which is pulling off a minor miracle at Seardel) gets the new strategy right then shareholders will have a more sustainable business model and higher long-term returns.