Investors will pay a fairly stiff premium for a round of shares in liquor conglomerate Distell, which, to be honest, has not posted cork-popping numbers in the past few years. The company has been steady rather than spectacular, but sentiment has been fortified around the global possibilities that CEO Richard Rushton (ex-SABMiller) and anchor shareholder Remgro can bring to the party.
Distell’s profit base has largely been underpinned by the enormous success achieved in the cider category over the past two decades. Distell created the local cider category, and it dominates the market with its bestselling Hunter’s and Savanna brands. Such are the volumes in SA and Africa that Distell is the second-biggest cider company in the world (behind Heineken, owner of the Strongbow brand).
In its latest annual report, Distell reiterates its aspiration to become the number one cider company in the world. With Remgro and the Rupert family (who both know a thing or two about building global businesses) backing it, it’s an ambition that can’t be dismissed easily.
Remgro’s enthusiasm for Distell pushing its cider agenda globally will be abundantly clear if the investment company buys SABMiller’s significant minority stake in Distell. Remgro CEO Jannie Durand confirms there is a preemptive arrangement in place, but hints that the price of SABMiller’s shares in Distell will be critical to a deal. Gut feel is that a conservative Remgro won’t pass up on SABMiller’s Distell shares, even if the price is a tad toppy.
While Distell’s divisional reporting won’t sate curious investors, the investment presentation for the year to end-June shows that the broad ready-to-drink (RTD)/cider category represented 53% of Distell’s production volumes. Even though RTD/cider revenues grew only 8% (well behind spirits and wine), this category represented a chunky 36% of Distell’s revenue. More impressive — because it suggests enduring pricing power — was that adjusted gross profit from RTD/cider grew 14.2% to account for a whopping 40.6% of group gross profits.
While cider profits from SA and Africa will still slosh around reassuringly at Distell’s bottom line, the medium term might be characterised by efforts to shift cider into China. The company recently announced its intention to launch Savanna and lesser-known Bernini in China, and it has concluded a joint-venture agreement with China Haisheng Juice, a longstanding partner for the sourcing of apple juice concentrate. More importantly, the venture will build a portfolio of locally produced Chinese cider brands, which Distell regards as "a very important step in building our long-term cider aspirations around the world".
It’s early days, though. The venture will only launch Savanna in Shanghai and Xi’an later this year — and Bernini will be poured into the market early next year. Initial successes will result in Distell building a production facility next year.
It’s no exaggeration to say that traction in the Chinese cider thrust would be a game changer for Distell, perhaps creating a market in the medium term — as Rushton has suggested — that is roughly the same size as the SA cider market. Cider brands would presumably also command a frothier margin than that achieved in the competitive beer market. If Distell can create a meaningful cider platform quickly, the opportunity also opens up to piggyback on this success by marketing top-range wines, whiskies and cognac.