The mix of the mass-market appeal of beers and ciders with the acquired taste of fine wines was always going to be a difficult blend. No real surprise, then, that Heineken Beverages (HeinBev) — the Africa-focused liquor venture in which investment behemoth Remgro is a meaningful shareholder — has its sluggish wine segment under review. Some punters may even ask what took HeinBev so long to grasp the nettle.
Any investor who followed the fortunes of the old KWV, which was one of the most popular unlisted shares in South Africa before the main operational assets were sold off about 10 years ago, will know how difficult it is to make a decent return from grapes. When Heineken finally took over liquor group Distell from controlling shareholder Remgro a handful of years ago some were intrigued about what the brewing giant would do with the group’s sprawling fine wine and spirits segment.
Distell’s big attraction for Heineken was the best-selling cider brands Savanna and Hunter’s Dry as well as the ready-to-drink (RTD) brands like Bernini and Esprit. Distell’s strong-selling liquor brands, such as Klipdrift, Amarula, Three Ships Whisky and 4th Street, seem to fit the mass market bill at HeinBev. But Distell’s premium wine segment was always going to be hard to handle.
Curiously, HeinBev did not want Distell’s premium scotch brands but seemed content to accommodate the wine brands. Wine has been a tough market, especially at the top end, where there is a proliferation of premium brands competing for tipplers’ attention.
I doubt HeinBev will ditch the entire wine business, as 4th Street — and perhaps even Tassenberg and a couple of other affordable vinos — are very much mass-market products with viable market share. I’d say the review would be restricted mainly to the top-end wine brands, which Distell, interestingly, was in the process of “ring-fencing” before the Heineken deal. At that time Distell noted: “We have eight [wine] brands and 40 sub-sub-brands operating in 88 markets globally across 22 grape varietals and spanning 384 codes. The cost of this complexity is significant and it hinders our ability to focus and support winning propositions.”
I’d say that pretty much still applies today. It’s also worth remembering that Distell also sold Plaisir de Merle and Alto — two of its well-known premium wine brands — in 2020.
The wine segment review stemmed from last week’s earnings call on Heineken’s third-quarter performance. Group CFO Harold van den Broek was elaborating on HeinBev’s strong performance in the quarter on beer across all the brands — those being Heineken, Windhoek and Amstel, plus, I’m assuming, the two cider brands. Van den Broek added that the RTD business was also doing well, with Klipdrift getting a positive mention too.
But in response to a question about the underperformance of the wine brands, Van den Broek noted: “You’re right that wine continues to be a drag on the portfolio. This is a very important part of our business, so we are not making rash decisions about what to do. But we have it under strategic review, because we are looking at the relevance of wine in our total beverage portfolio. How we are going to compete in certain segments of the wines is an active discussion with our South Africa business.”
If I read between the lines, it seems this might be a discussion that could be brought to a decision sooner rather than later. Van den Broek indicated: “Once we have made a decision, we will update you on that, but we are going into the granular detail of how to win in or with wine.”
Quite frankly, there are best-selling affordable wine brands and there are premium brands. I assume the latter’s pricing points stanch sales volume and the thicker margin does not compensate at profit level.
This is a difficult proposition in a large diversified liquor concern and a drag that won’t be reversed easily or quickly. I suspect HeinBev will retain wine brands that can dominate the affordable drinking segment as well as win market share in new territories in Africa. That would mean retaining brands such as 4th Street, Tassenberg and possibly Two Oceans and Drostdy Hof. But taking out the bigger-selling (and more profitable) brands does make marketing the remaining wine segment in its entirety to potential buyers quite difficult.
It’s not the greatest time to be marketing any liquor assets, with drinking — especially among the younger generation — tempering markedly. But I have no doubt redoubtable and enduring brands like Fleur du Cap, Nederburg, Durbanville Hills, JC le Roux, Chateau Libertas and Zonnebloem will find interest … at a price.
Buyers might range from wannabe gentleman wine farmers to larger wine producers, foreign buyers and liquor conglomerates. For instance, would AdVini, listed on the Euronext Paris stock exchange and already the owner of a handful of top wine estates in the winelands, look to increase its local portfolio? AdVini owns the L’Avenir Estate in Stellenbosch as well as Le Bonheur Estate, Ken Forrester Vineyards, Stellenbosch Vineyards and Kleine Zalze Wines. Any of HeinBev’s premium wine brands could slot snugly into AdVini’s local wine portfolio. Would KWV, recently recapitalised, be interested in one or two of the premium brands? And there are other large liquor players like Halewood and DGB.
But do premium wine brands really fit their respective operational profiles? A few of the premium wine brands, of course, must be close to the heart of the Rupert family, which effectively controlled Distell through Remgro. Would the family, which has extensive wine farming interests, step up to buy any of the legacy brands? It would need to be a Rupert-family tilt, because I doubt Remgro shareholders (myself included) would happily fork out for wine brands with their low return on effort.
