Tax increase hurts brandy market

Retailers will be reluctant to pass on the increase in excise duties - from R36 per 750ml bottle of spirits to R39.60 - to consumers and the cost recovery is likely to trickle down the value chain to the primary producer of wine grapes, said Rico Basson, executive director of VinPro.

"The fact that the increases are still higher than inflation is not conducive to reducing the cost pressure on wine producers of more than 20% year-on-year," Basson said. About five litres of wine, which saw an excise duty increase of 8% in last week's budget, is used to produce a litre of brandy.

Local brandy distillers are buying less wine from local producers as consumption has dropped 20% over the past five years, to 37.1m litres in the year ending June 2012. It is expected to fall to 32.7m litres this year, according to statistics from the SA Wine Industry Information and Systems (Sawis). This compares with a 23% increase in vodka, 17% increase in whisky and a 20% increase in rum consumption over the same period.

While brandy remains the market leader in the spirits market, its share has fallen from 41% in 2006-07 to 33% in 2011-12. Whisky, with 32% of the market, is set to overtake it as the leader in volumes this year, said Sawis. It already leads the market in value, with R6.5bn, or 43%, spent on whisky in 2011-12, an increase of 73% in five years.

The value of brandy consumption was R4.9bn in 2011-12, up 20% over the same period. Vodka saw the biggest jump with the value of consumption doubling to R1.9bn.

"Brandy is in a price squeeze," said Elias Holtzkampf, independent consultant for the liquor industry. Various whisky brands, including First Watch and Harrier, are available at lower prices than well-known cheap brandies like Wellington VO and Olof Bergh. On the more expensive side, attractive brands like Smirnoff vodka are available at significantly lower prices than Richelieu and Klipdrift Export, he said in the Sawis report.

"As a result of the price attractiveness of white spirits, products like vodka, cane and gin sell better during tough economic times at the expense of brandy. Brandy also struggles with an image problem," Holtzkampf said.

"Drinking is to a certain extent an expression of status. Brandy has now become a 'familiar product'. Consumers say that they have been drinking brandy for five to eight years and now want to move on to something new and exciting," he added.

Source: Business Times via I-Net Bridge