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Send  Share  RSS  Twitter  05 Apr 2011

BEVERAGES: One Too Many For The Road?

 



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One has to ask whether HCI has swallowed too much in taking on KWV, the Paarl-based liquor group that seems destined to stand on the sidelines as the big boys (like Distell, SABMiller and Diageo) milk the local liquor market.

Last month PSG-controlled Zeder sold off a 34.9% stake in KWV to HCI in a transaction worth roughly R250 million.

Basically Zeder bailed after a transaction proposing that Pioneer Foods (in which Zeder also has a meaningful stake) buyout KWV was snuffed out.

While Zeder probably would have liked to facilitate the bundling of KWV into Pioneer, the company did not seem too unhappy to offload its KWV shares to HCI. Zeder was an ‘early bird investor’ in KWV, and has made a rather decent turn by selling out its holding.

Still, many liquor industry observers are of the opinion that there’s loads of value and profit potential to be unlocked at KWV – provided the iconic business has the right shareholder of reference.

In other words, HCI could roll out the profit barrel if it played its cards right.

But it was only a few weeks after HCI took receipt of its KWV shares that the liquor company brought out some truly dismal interim results.

Surely HCI, which is already sweating bullets to turnaround clothing and textile giant Seardel, hardly needs another problem child on its hands.

KWV CEO Thys Loubser admits results for the first six months of the financial year were below expectations with the core wine and brandy operations showing a loss of R7.2 million.

The income statement showed gross profits of R130 million, but these were wiped out by R137 million in expenses (promotional, marketing, distribution and administration).

Loubser says a strategic decision to increase selling prices on non-profitable product lines in the UK had a major impact - and the slow recovery of the global economy and the strong rand put further pressure on volumes and margins.

For HCI developments at KWV must be disturbingly déjà vu. Like Seardel, it seems HCI is lumbered with an asset rich business that has serious legacy issues and seems very dependent on the weakening of the rand for its future viability.

The wine market – like the clothing and textile sector – trades on the thinnest of margins because so many wine producers compete for supermarket shelf space. Naturally it will help no end if KWV can muster decent market share for its flagship brand Roodeberg and new age label Café Culture – if anything to offset the strong rand effect on exports (which make up the bulk of wine production). But it’s difficult, and CBN wonders if local wine sales even comprise 10% of KWV’s total wine production.

Loubser says global economic growth expectations have been adjusted downward for 2011, and the rand is expected to remain stronger for longer. “With modest demand-side recovery under way, KWV’s portfolio of premium wines remains under pressure.”

It’s not great in the local brandy market either. Loubser notes that the brandy category has been in decline for several years.

So what can HCI have up its sleeve to improve prospects at KWV?

Judging by what transpired at Seardel it seems reasonable to expect HCI to cut out all the corporate frills. That means no fancy headquarters and flashy receptions – and perhaps even the introduction of new senior management.

The big question, though, is whether HCI will broaden KWV’s portfolio to include other liquor categories. KWV has already moved into cream liquors, and there are persistent rumours that the company is developing its own RTD (ready-to-drink) range.

It will make sense for KWV to diversify away from the wine and brandy segments, if only to give the business a hedge against a ‘stronger-for-longer’ rand by having a range of high volume sellers in the local market.

The problem for KWV is that its export market focus is still weighted heavily towards the developed economies in Europe and North America. While volumes appear to be stabilising, consumers are still tending to trade down.

Loubser reports KWV is already shifting focus towards emerging markets in the Far East, Africa and especially South Africa. “KWV is aiming for more lucrative volume growth and better hedging against the exchange rate, which has a major impact on the business, and on the entire wine industry.”

What HCI fortunately does have at KWV (which it did not have at Seardel) is a strong balance sheet with a cash balance of R180 million. This should provide adequate support for the company’s future plans – including sorting out production facilities for any new liquor ranges that might currently be under consideration.


 
 
 
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