FOOD & BEVERAGES: KWV's Disappointing Taste
Recent Western Cape Business News
KWV's financial results for the period from 1 July to 31 December 2011 were disappointing but in line with the assessment made at the time that the company’s 2011 year end results were published. KWV made a headline earnings loss of R6.5 million despite an 18.3% increase in revenue and a 19.7% increase in the volume of products sold. The loss was mainly due to a higher investment in advertising and promotion activities, investment in new product development, a deterioration in the mix of products sold and high restructuring costs.
Although revenue increased satisfactorily over the six months, the gross profit margin declined by 1.7% to 34.4%. This can be attributed to increase in income from contract bottling – a low margin contributor – in contrast to wine, which remained flat, and brandy, which is a declining market segment in South Africa.
Following the business restructuring (which resulted in a pre-tax retrenchment cost of nearly R12.9 million) the company initiated a recruitment drive to establish its own sales force in the local market. A number of new products were launched towards the end of 2011, including a ready-to-serve cocktail Ciao, a fusion wine spritzer jimmijagga and the Hometalk wine range. Developing, launching and promoting these products negatively affect short term profitability, but offer opportunities for growth in new market segments.
The lack of a high volume consumer product in KWV’s portfolio was identified by the board some time ago, but the implementation thereof was delayed due to the high investment costs and risk in launching such a product. However, the weakness in the wine and brandy markets locally has made it imperative that KWV expand its product portfolio, even if this involves significant capital investment and additional risk.
Conditions in international wine markets remain challenging, especially in KWV’s traditional European export markets. Despite this, Golden Kaan, in particular, performed better than expected in Germany. The investment into African distribution and partnerships will continue – with cost growth exceeding revenue in the short term as structures are established.
Several contract bottling agreements have been implemented since the end of the previous financial year, contributing 8.2% to total revenue growth and improving operational efficiencies and throughput. While the contribution from contract bottling is helpful in the short term, it is not expected that KWV will increase its activities in this area in future.
During the period under review, KWV also received some of the highest accolades in its 94 year history. The company was awarded the most double gold and gold medals ever won by a single producer at the Veritas Awards and the KWV 10 Year Old brandy was again the recipient of the best brandy in the world award at the International Spirits Challenge in London.
Recent valuations put the value of the group’s non-operational properties at about R152 million and that of works of art at R40 million. The carrying values of these assets are R15,6 million. If adjusted in the financial statements the revaluation of the non-operational properties and works of art would result in an increase of about R2,52 (after tax) per share in the net asset value of the business. As previously indicated, it is not the board’s intention
to liquidate these or any other capital assets in future and the policy of stating these assets at historical costs in the financial statements will be maintained.
KWV remains committed to its strategy of product diversification, brand focus and a global footprint, and will therefore maintain its levels of investment in advertising and promotions.
In addition the group will increase its investment in innovation and expand its sales infrastructure in the local and selected global markets. The turnaround of the group requires a long term view on the return from investments in key growth areas.
HCI’s recent increase of its shareholding in KWV beyond 35% triggered a mandatory offer to KWV shareholders, which closes on 2 March 2012.
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