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On the rocks: Liquor industry faces losses of R10bn monthly in sales

by Louise Burgers. The sudden second ban on alcohol sales under lockdown will have catastrophic consequences for the liquor industry and its entire supply chain and production pipelines in South Africa.

by Louise Burgers. The sudden second ban on alcohol sales under lockdown will have catastrophic consequences for the liquor industry and its entire supply chain and production pipelines in South Africa, leading to losses of R10 billion in lost sales for every month lockdown prohibition continues. Industry pundits are fearful that the ban could last two to four months, which will all but destroy independents in the industry, as well as much of the restaurant trade. Massive jobs losses are predicted.

Leandra Wiid, liquor industry lead for Nielsen South Africa, said that never before have retailers and manufacturers been faced with the scale of the impact of the prohibition on the sale of alcohol and tobacco products, not once, but twice under lockdown; and the resultant change in consumer behaviour and mammoth impact on the industry. Prior to COVID-19, the liquor industry was healthy and R121 billion worth of sales were predicted for 2020, representing a 10% increase over the year. Of that spend, 60% was coming through the off-consumption (off-con) retail channel, but both off-con and on-consumption (on-com) channels were showing like-for-like growth, which was ahead of the overall 7% growth predicted for the FMCG industry in South Africa this year. Wiid was speaking during a webinar Nielsen held for liquor industry manufacturers and retailers on Wednesday, 15 July 2020.

What the industry lost

Ailsa Wingfield, executive director, Nielsen global intelligence team, said that during lockdown and continuing through prohibition, that the industry had to date lost far more than sales alone, such as; promotions, innovation, consumer confidence, critical month end sales periods; and now stood to lose another R10 billion per month in lost sales for every month the alcohol ban continued. Wingfield said that currently, the industry has lost 17% in sales for this year (R20 billion, or R304 million per day). The knock-on effect for all industries supporting the alcohol trade is also massive, particularly in the related beverages category – from carbonated soft drinks, juice, energy drinks, and water, which have also suffered double-digit declines in the month of April alone. “Notwithstanding the considerable devastation of jobs in the industry and excise tax; we will simply not be able to recover what we have lost in 2020. More than ever, we will have to act cautiously and responsibly as we adapt to this change,” she said.

Despite the stockpiling ahead of the first lockdown prohibition, the industry was underprepared for what happened on Sunday night when President Cyril Ramaphosa announced a second ban on the sale of alcohol under lockdown, with immediate effect. With the latest prohibition, there was no warning for the industry as Government did not consult manufacturers and retailers ahead of the latest alcohol ban. “This is the equivalent of the loss of sales of an entire confectionary group, for an entire year,” explained Wingfield, putting it into context.

Chilling industry impact

Well-known winemaker, Hein Koegelenberg, CEO of internationally recognised South African wine brands La Motte and Leopard’s Leap, and chairman of the Board of the Franschoek Wine Valley Association and chairman of L’Huguenot Wines (the first investment by China in South African winelands), said after the devastating Cape drought, the outlook for the wine industry was very good. Now, he said, he was cutting his production by 50% after Sunday night’s announcement.

Hein Koegelenberg.

“The reality is, I’ve lost international listings and now sales in South Africa under the first prohibition. We don’t know how long this second round of prohibition will be, but indications are that it could be two to four months. We just don’t know. From a production point of view, I’m sitting with way too much stock in my system… So, planning will be crucial and we will have to produce up to 50% less.” The 2020 harvest is in the cellar, but bottling and productions forecasts are dramatically down as they will probably sell only two thirds of what they would have sold this year – and that is if the ports backlog is cleared and they can get their wines to the international market for export. “All of this will have a serious impact on what volumes we can harvest in 2021,” Koegelenberg explained.

“I’ve lost big listings in Germany; I’ve lost the Sainsbury listing. So, after this period, if I can export, if I can get the containers on the boat, we will probably sell two thirds of what we would have sold,” said Koegelenberg. He fears that all the brand building that has gone into the wine industry will be lost; as in the next 12 months to two years in a depressed economy, wine will be seen as a commodity and pricing and deals will determine buying patterns, not brand loyalty. “We’re in for a rough ride as brand builders. We, as wine people, sell experiences, as part of our wine sales. We see wine as part of food. We are not in the category of people misusing alcohol.”

He  called on Government to work in partnership with the wine industry to safeguard wine tourism, instead of imposing punitive measures. “This will hurt not only the winemakers, but the entire industry, its communities, the staff employed, the entire winelands tourism business. This is devastating. Agriculture and tourism are the two things that South Africa can sell. There are no winners in this war. Whatever we need to do to survive, we need to do that. Keep your good people and do what you can to survive.”

Gavin Kelly, chief executive of the Road Freight Association told Retailing Africa that the whole liquor supply chain is now in jeopardy because of the ban. “Industries that support alcohol sales are at risk of closing down. The impact is huge. Some operating companies cannot take the knock – their inbound food routes being supported by outbound glass bottle routes to a brewery, others brought starch in one way and sugars out the other. Finished product in was covered by empties going back for refilling. Packaging production is down. Return loads are threatened.” Kelly said the loss of every load (and return load) means less opportunity to make ends meet (cover operating costs); and the more real the eventuality of closing business becomes.

“The road logistics supporting the alcohol industry is huge – it isn’t just the movement of finished product to the retail outlets – its far, far more. The base products (fruit, starches, yeasts, grain, wheat, molasses, sugars, water) all have to get to the manufacturing plant (mostly by road) and then the products as they progress through the cycle move to storage or bottling plants, distribution warehouses, and so on. The packaging materials have to come in (bottles, labels, corks, caps, glazing, wrappings, cartons, crates) and then these are stacked, stocked, vetted and moved. Transporters cannot keep absorbing costs.”

Structural societal shocks

Apart from the sales losses, Nielsen South Africa predicts significant consumer behavioural changes as a result of lockdown and prohibition, in not only the liquor industry, but also other consumer categories. “We’ve had to drink what we had, not necessarily what we preferred. We drank alone or online; we’ve had to ration our consumption; the cocktail culture moved in home; zero became hero; we became aspiring brewers with yeast sales increasing by more than 314% in the month of April alone; and pineapple sales increasing by 1.3 times more than usual. We’ve also searched and preordered online for when prohibition ended. We’ve also traded with friends and resorted to bootlegging. Many of these behaviours will be entrenched in the future.”

As Wingfield further warned: “If consumers end up spending nine months or more in restricted living conditions, they will face severe economic and social shocks, which will impact post-lockdown living standards and conditions. In these kinds of scenarios, business strategies will require significant reinvention to reestablish product portfolios [in the light of] drastically altered consumer needs and means. We are already seeing considerable societal shifts and how consumers will live, engage, socialise and shop after lockdown.”

Living among the pandemic, the impact on consumer sentiment has been immediate and “titanic”, said Wingfield. Since the inception of Nielsen’s tracking of consumer confidence, 15 years ago, this is the sharpest drop – a fall of 20 points – and the lowest level ever reached. The extent of the drop in South Africa makes it in the top 10 countries globally in negative consumer sentiment. The issue with this, is that in markets where this has happened previously, i.e., during the last financial crisis, it took  seven years for consumer confidence to recover to previous levels, globally. In South Africa, it never recovered. “Only 17% (12% drop from pre-Covid) of South Africans feel confident around their job prospects; 34% feel confident about their personal finances (24% drop). Our concerns around the economy have increased dramatically – 48% say it is their top concern; and 46% are worried about job security. And for the first time ever, health concerns have risen to the top, with 25% of South Africans concerned (up by 16%).”

 

The impact for the retail industry is that consumers are cutting back on household expenditure by:

  • Buying cheaper groceries: 45%
  • Buying cheaper alcohol: 23%
  • Cutting back on smoking: 24%.
Cheers to consumers

The one hope the industry has is to drive consumer purchases online, for delivery later. This is what online retailer OneDayOnly did under the first prohibition to assist independent wineries and alcohol brands; and are seeking advice on whether they can do the same under the second prohibition. Liquor industry lawyer, Danie Cronje’s advice to the industry and his retail clients is that this is indeed permitted, as he outlined in Retailing Africa.

OneDayOnly.co.za said on Monday that, while they understand and fully support the intentions behind the new government regulations, they feel for their suppliers and the knock-on effects for themselves and the industry as a whole. When asked what OneDayOnly.co.za would recommend in terms of process for the industry, spokesperson, Matthew Leighton said, “First prize would be the ability to continue to sell with deferred delivery, as this will enable us to help support those wine farms and other outlets that will desperately need the economic support. This was our sales structure during levels 4 and 5 of lockdown and, given the challenging situation, worked well.”

Leighton told Retailing Africa that the etailer hoped to be able to continue to assist independent alcohol producers as it did under the first prohibition. “Alcohol sales for us went up 500% under lockdown. It spiked insanely. Our thinking was: let people order and deliver to their homes. As far as we are concerned, all alcohol sales should be handled this way under lockdown. The solution lies in shades of grey… not in destroying an entire industry.”

Leighton said alcohol sales were not a priority item for them, but that they had a moral responsibility to assist the industry. “We can land a supplier and be up and running with their deals within a matter of hours. That is our plan of action. And everything on our site that is local, gets a local sticker. If we can help our consumers support those local wine farms, we will. We will never get rich as a brand off alcohol  sales, but at least we can allow them to trade when they can’t ship anything out.”

While industry bodies in the wine industry such as the Southern African Agricultural Initiative (SAAI) have launched a court challenge on behalf of 120 wine farms to challenge what they term the “irrational” ban on wine sales during the latest alcohol prohibition; Cronje said any liquor industry court challenge would be a matter for constitutional lawyers under the current State of Disaster regulations. He did however question the effectiveness of the ban and the subsequent economic impact on the formal liquor industry trade, when the illegal trade was estimated to be two thirds bigger. Genesis Analytics research from 2019, estimated that there were 180 000 unlicensed liquor outlets in South Africa; compared to 67 500 in the formal trade (including grocery retailers, liquor stores and taverns, both in the off consumption and on consumption trade).

 

Louise Burgers (previously Marsland) is the Publisher and Editor and Co-Founder of RetailingAfrica.com. She has spent over 20 years writing about the FMCG retailing, marketing, media and advertising industry in South Africa and on the African continent. She has specialised in local and Africa consumer trends and is a passionate Afro-optimist who believes it is Africa’s time to rise again and that the Africa Continental Free Trade Agreement (AfCFTA) will be a global gamechanger in the next decade.

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