Expensive whisky helped SA brandy sales rise

Today Finance Minister Tito Mboweni announced the latest Sin Taxes. Alcohol didn’t see that much of an increase, with beer increasing 8c per can, unfortified wine with 14c per 750ml bottle, fortified wine increasing with 23c per 750ml bottle, sparkling wine increasing with 61c per bottle, ready to drink beverages increasing with 8c per litre and spirits increasing with R2.89 per 750ml bottle.

South African brandy forms part of the wine industry, due to the fact that the base of brandy and potstill brandy is also made from grapes – or base wine. Brandy has been making inroads in the country, with graphs from South African Brandy Foundation showing an increase in Potstill Brandy Sales from 2013, growing to almost 2 million liters sold in 2018.

Director at SA Brandy Foundation, Christelle Reade-Jahn, gives insight into the new budget and how it could drive sales when it comes to brandy.

“For the 2019/20 tax year, the 7.4% excise tax as announced in the Budget was incorporated. Thereafter, it was assumed that excise tax increases will continue to outpace inflation over the forecast horison. Fiscal accounts are expected to deteriorate substantially amid various spending pressures, implying increased taxation. As shown earlier, excise tax on brandy in SA is very high by international standards. The VAT rate is, however, not forecast to increase further,” she says.

The foundation has seen that the consumption of spirits, including brandy, remains relatively low in the country compared to international standards. Beer is the main liquor category domestically and is also the most significant competitor product of brandy (according to market research as well as econometric evaluation).

“Ready to drink alcohol beverages are the second largest category, followed by still wine. Total brandy sales volumes contracted in 2018 after growing strongly in 2017, but remain higher than during 2016,” she says.

The good news is, even with the increase in sin taxes annually, domestic sales of brandy and pot still brandy has relatively stabilised.

“Volumes started to stabilise during 2015, after years of continuous decline. White spirits, in particular vodka and more recently gin, are leading sales volume growth in the spirits category,” says Reade-Jahn.

Whisky sales volumes has been declining over the last four years in the country, which means retail pricing is a strong driver of brandy sales volumes.

“The increase in brandy sales volumes during 2016 and 2017 was mainly the result of price restraint on the part of producers. This reverted in 2018 and likely contributed to the declining sales volumes during the year. Being mostly imported, whisky prices started to rise faster than that of brandy (on the back of prolonged Rand weakness) in 2015, at the same time when whisky sales volumes started to level off. The deceleration in vodka sales growth over the past two years was also accompanied by an acceleration in price increases. Gin is the exception, where volumes continued to grow as price increases accelerated.”

However, according to Christelle Reade-Jahn white spirits are currently favoured in South Africa.

The wine industry in total has seen a decline in wine produced, and it had an effect on the brandy industry.

“On top of the concerns related to the unstable supply of distilling wine, the price of distilling wine rose sharply (32%) in 2018. Wine for brandy has increased more or less in line with the average bulk wine price over the past two years. These input prices are forecast to continue rising and will, together with electricity price increases, place upward pressure on production costs,” says Christelle Reade-Jahn.

“While the long lead-time in production shields manufacturers to some extent, the continuous upward pressure on costs might limit the amount of margin absorption that can take place to boost demand. Over the longer term, this might undermine the sustainability of brandy manufacturers.”

The wine industry is currently looking at how to reinvest in the industry. Following last year’s budget speech wine industry organisation Vinpro had clear ideas on how to ensure the wine industry stays lucrative.

“Although there is a trend towards higher prices and premiumisation, most businesses still need volume in order to maintain its operations. The fact that the harvest is smaller and sales volumes have dropped, undoubtedly puts pressure on these businesses to rethink their models and consider mergers, acquisitions and partnerships.” says Rico Basson, MD of Vinpro.

“We are smaller, but more focused, confident and ready to invest in our future. It starts with every link in the wine value-chain. Forge and maintain relationships with the right partners and work together towards an adaptable, robust, profitable and globally competitive South African wine industry,” Basson said.

This impacts the brandy production as well.

“Brandy supports the greater Wine value chain with the resultant impact on job creation,stability, contribution to GDP and export earnings,” says Reade-Jahn.

What is clear is that the Brandy industry needs support to ensure it thrives. As it stands, South Africa is a world leader in the production of potstill Brandy, and if the wine industry doesn’t get the support it needs the house of cards could start to crumble. But it’s not that dire. Currently brandy outsells gin, flavoured spirits and rum in SA, and often going head-to-head with whisky – and less consumption isn’t all bad.

It takes five liters of wine to produce one liter of brandy and South Africa’s wine harvest in 2016 totaled 1098 million litres; of that 384 million litres was used for brandy production.

In 2006, whisky overtook brandy as South Africa’s favourite spirit, but the decline in volume and market share for this homegrown spirit made from grapes has finally turned a corner, and brandy’s popularity showed a remarkable increase by 2016.

Nielson Statistics revealed an increase in volume of 4.7% for brandy and Cognac between 2016 and 2017 in the off-consumption market.

“The South African spirits market has been turned on its head. Over the last decade, whisky was the star performer and taking volumes from the brandy market. This changed between 2014 and 2015 with whisky losing volumes and brandy volumes starting to stabilise,” according to SA Wine Industry Information and Systems researcher Elias Holtzkampf.

Distell, the country’s largest brandy producer, saw positive growth with total volume increase more than five percent in the same period. In the previous financial year, sales of premium
brand Van Ryn’s grew by 22% while Viceroy Five Year Old grew by 70%, showing growth on both ends of the market.

“Retail prices of popular mainstream spirits including imported big-brand whiskies have become increasingly expensive as the foreign exchange rate takes a beating. Aside from the excellent
value for money that brandy offers, South Africa’s finest potstill brandies are on a par with the best cognacs from France, and production of our blended brandies enjoy some of the strictest quality control regulations in the world. It’s no surprise that we are seeing brandy return to form,” said Distell Spirits Ambassador Nick Holdcroft.

“The first South African Brandy was produced in 1672 and we have spent the last 300 plus years perfecting the art of brandy distillation and maturation. Nowadays, South African brandies are held in the highest regard all around the world, given their stellar performances at competitions like the International Wine and Spirit Competition where South Africa has won the trophy for Best Worldwide Brandy for four consecutive years.”

The popularity of brandy among new markets continues to grow, especially within female and black urban consumers. This trend is driving innovation within the hospitality industry, with the launch of bars like Cause and Effect opening in Cape Town. The bar is focused around cocktails and drink that feature brandy.

“I like to believe brandy’s revival is not being driven on price point alone, but more on South Africa’s growing appreciation for the exceptional quality of our locally produced, world-class product. We need to harness this momentum to attract consumers to experiment with brandy in different occasions and investigate some of South Africa’s premium brandies such as Klipdrift Gold and Van Ryn’s,” said Holdcroft.

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