Strict regulation strategy in liquor industry: briefing by Distell

NCOP Economic and Business Development

10 September 2012
Chairperson: Mr F Adams (ANC, Western Cape)
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Meeting Summary

The roles of the government and the liquor industry in addressing the problem of alcohol abuse without creating job losses and causing damage to the economy, were the major issues when the possible impact of the Control of Marketing of Alcoholic Beverages Draft Bill was discussed by the Committee and representatives of Distell, Africa’s leading producer and marketer of spirits, wines, ciders and ready-to-drink alcoholic beverages.

Distell believed that the government’s concerns about the liquor industry related to social, health, transport, policing and education issues. On the other hand, the liquor industry had a role to play in helping other departments to achieve their objectives in areas such as job creation, skills development, economic growth, international competitiveness, sustainable use of natural resources and rural development. The liquor industry was therefore appealing to the government to adopt a “balanced approach”, so that it could operate in a mainly self-regulated environment, combined with strict enforcement of legislation, increased corporate social investment contributions and closer partnerships with government bodies.

The industry was appealing for the government to take a balanced approach by tackling alcohol abuse without strangling the economy which was, in part, driven by the liquor industry. Research had shown that warning labels and the banning of advertisements did not work, and attention should rather be focussed on parental involvement, strictly enforced self-regulation, and partnerships with government – as the problem of alcohol abuse was too big for individual entities to handle on their own. In order to divert young people from irresponsible drinking, it was necessary to create a society which embraced sport, arts and culture, and this would require the establishment of recreational centres.

Members described their personal experience of the misery and hardship created by alcohol abuse, which was described as “destroying the fabric of society.” There was extended debate over whether alcohol advertising should be banned altogether, or partially restricted, or whether advertisements should all depict the negative consequences of alcohol abuse.

Beerhalls, which had once destroyed family lives, had now been replaced with a proliferation of illegal shebeens. The great majority of shebeens were long established, operated over weekends and sold low volumes to an established client base. Most shebeen owners were women, who traded liquor as a means of survival. The scale of informal, unregulated, liquor trading in the townships was too large – too many entrepreneur livelihoods were at stake and the demand for a diversity of outlets for drinking (and access to liquor) was too high - for law enforcement to control illegal trade. Regulation could provide a means of empowerment for a broad base of micro-entrepreneurs in the liquor industry.
 
Distell warned that a blanket ban on liquor advertising would result in job losses throughout the value chain, affecting advertising agencies and their suppliers, media houses and sponsored sports bodies.

A Member proposed that in the light of the impact of alcohol abuse, the liquor industry needed to make major contributions through their corporate social investment (CSI) programmes. A way to address the matter was to link the industry’s CSI contributions to a percentage of its profits. He was supported by the Chairperson, who said the Committee was hammering mining houses, over which it also had oversight, and other companies for not taking charge of their CSI programmes

Meeting report

The Chairperson advised Members that Distell had been invited at short notice to engage with the Committee on issues surrounding the strategy to introduce strict regulations for the liquor industry through the Control of Marketing of Alcoholic Beverages Draft Bill. The schedule had had to be changed following an apology from the Minister of Mineral Resources that she would be unable to brief them, as planned, because of an important announcement concerning the mining sector.

Mr K Sinclair (COPE, Northern Cape) said he was uncomfortable with the way the Committee’s schedule had been changed. Issues of strategic importance had been put on the Committee’s agenda, but these had not included the matter to be discussed at this meeting. The Minister was making a public pronouncement on shale gas “fracking”, and she could not have had a better platform than this Committee to brief the media.

Ms E van Lingen (DA, Eastern Cape) agreed that “fracking” was a burning issue, and should have been discussed with the Committee.

Ms M Dikgale (ANC, Limpopo) and Mr D Gamede (ANC, KwaZulu-Natal) proposed that the Minister’s apology should be accepted and that the Distell briefing should proceed.

The Chairperson supported this view, and pointed out that the Distell briefing would deal with an industry that was fundamental to the whole of South Africa. He had noted the concerns of Members, and would ensure that the communication of schedule changes would be improved in future.

Distell briefing
Mr Vernon de Vries, Director, Corporate Affairs, Distell, provided a broad overview of the company, which was established in 2000, following a merger between Distillers Corporation (founded in1945) and Stellenbosch Farmers’ Winery (founded in1925). It employed nearly 5 000 people worldwide, with an annual turnover for the latest financial year of R14.2bn - R12.2bn (85%) of which came from southern Africa. It now had a global footprint, but remained proudly rooted in South Africa. It was on Level 4 in terms of Broad-Based Black Economic Empowerment (BBBEE), compared to a Level 8 four years ago.
Over a ten-year period, Distell had delivered a total shareholder compound annual growth return of 24,6%, compared to the JSE Top-40 index’s return of 12.6%, and contributed R37.4bn to the country’s economy. It had distributed R34.1bn in cash to stakeholders, of which the government received 63.4% (R21.6bn) by way of taxes, employees 25.9% (R8.8bn) by way of emoluments, and shareholders 10.7% (R3.7bn). It was increasing its presence in Africa, operating successfully in Europe, America and the Far East, and was showing growth, despite the recession.

Distell realised that the path to sustainable growth involved
promoting only the responsible enjoyment of alcohol. This entailed, among other things, discouraging consumption of alcohol by pregnant women, discouraging the selling of alcohol to minors and already intoxicated people, and fully supporting the industry’s Association for Responsible Alcohol Use (ARA) Code of Commercial Communication. It involved minimising the impact of alcohol abuse, dealing with Fetal Alcohol Syndrome (FAS), the problem of drinking and driving, lifestyle diseases, youth education, and emphasising that the tot system was illegal. The company was starting to achieve success with programmes aimed at equipping young people to make healthy choices about alcohol, sex and drugs, and was in regular engagement with government about taking a balanced approach to managing alcohol abuse – balancing economic development with health and social concerns.

Mr Michael Mokhoro, Manager: Regulatory Affairs, Distell, said he was the nominated chairman of the ARA, which had achieved successes in reducing FAS, the promotion of “don’t-drink-and-drive” campaigns, and support for the “Goodfellows” programme. It also played a major role in combating abuse through ”Age Watch”, making retailers aware they should not sell to customers under the age of 18.

Mr De Vries said that Distell realised job creation was a top government priority, so a lot of emphasis was placed on skills development to avoid “setting up people for failure.” These skills development programmes had been spread to the company’s social investment programmes. Human rights issues were also closely monitored at its own farms, and rigorous examination had indicated it met the United Nations human rights criteria.

The company was
committed to reducing its impact on the environment and had two environmental specialists who focused on climate change and carbon footprint, water usage to sustain water supplies, primary waste management, packaging material, energy efficiency, effluent / waste water, and responsible farming.

Distell believed that the government’s concerns about the liquor industry were spread across five departments:

           Social Development: Alcohol abuse reduced disposable income of breadwinners in poor families, leading to family pressures; and youth become addicted due to easy and abundant availability of alcohol.
           Health: The cost of health care increased because of the association between trauma care and alcohol abuse; and the high incidence of fetal alcohol syndrome in South Africa.
           Transport: Increased road accidents because of drinking and driving.
           Police: Increased person-on-person assaults/violence.
           Education: Learners with fetal alcohol syndrome struggled at school.

On the other hand, the liquor industry had a role to play in helping other departments to achieve their objectives. These included the National Planning Commission, the Department of Trade and Industry, the Department of Tourism and the Department of Agriculture, Forestry and Fisheries. They were focused on issues such as job creation, skills development, economic growth, international competitiveness, sustainable use of natural resources and rural development.

The liquor industry was therefore appealing to the government to adopt a “balanced approach”, so that it could operate in a mainly self-regulated environment, combined with strict enforcement of legislation, increased corporate social investment contributions and closer partnerships with government bodies.

Mr Mokhoro said the industry was aware that with the Control of Marketing of Alcoholic Beverages Draft Bill, the government was considering a total ban on liquor advertising. However, if the industry was allowed to regulate itself, it would be able to subject its members to arbitration and disciplinary action – a process which had in the past led to the expulsion of a member.

Mr De Vries said there was a distinct difference in approach between the finance/economic/trade cluster on the one hand, and the health/social cluster on the other. The latter group was driven by the view that if all advertising were banned, young people would not know that liquor products existed, and therefore would not make the decision to drink prematurely, or to excess. The industry was aware that binge drinking was a serious problem, which needed to be addressed, but believed it was naïve to think young people would not know about liquor products if advertising were banned. Besides, the aim of advertising was not to encourage people to drink, but rather to inform people to make a choice between alternatives. A ban would seriously affect new entrants to the market. The health/social cluster should rather place more emphasis on education to deal with the problems of alcohol abuse. France had placed limited restrictions on liquor advertising, but had conceded it was not working. Russia, where alcoholism was rife, had introduced a total ban on an experimental basis. The ARA had commissioned research into where advertising bans had been introduced, where it had worked or not worked, and what impact it had had on jobs. The Committee could be provided with the findings of this research when it became available.

Mr Mokhoro said alcohol abuse and alcoholism emerged from a complex interaction of biological, socio-cultural and psychological factors in the environment. These factors would not respond to simplistic and cosmetic prevention measures. Harsh social and economic living conditions contributed to alcohol abuse, and Distell agreed with the World Health Organisation that in order to reduce alcohol-related harm it was crucial to address social deprivation. Alcohol abuse was a multi-faceted problem and there was no ‘silver bullet’ solution, but targeted interventions sought to reduce the potential for harm by specifically and selectively focussing on problematic drinking patterns

Mr De Vries said severe restrictions or the banning of liquor advertising would not reduce abuse and would have negative consequences. There would be an increase in job losses, direct and indirect, in the industries that worked in the liquor-beverage value chain. State security risks would increase, as unrest arose when basic needs were not met. There would be increased pressure on the social grant system, the economy would not grow, there would be an increase in cheap illicit products and illegal syndicates, new BEE partners or emerging BEE partners would struggle to market their products, while well-established players would benefit.

There were 180 000 to 265 000 informal liquor traders country-wide. Shebeens were important micro-enterprises in the township informal economy, providing informal employment for South Africans, and exerting strong economic multipliers. The great majority of shebeens were long established, operated over weekends and sold low volumes to an established client base. Most shebeen owners were women, who traded liquor as a means of survival. The scale of informal, unregulated, liquor trading in the townships was too large – too many entrepreneur livelihoods were at stake and the demand for a diversity of outlets for drinking (and access to liquor) was too high - for law enforcement to control illegal trade. Regulation could provide a means of empowerment for a broad-base of micro-entrepreneurs in the liquor industry.

Mr De Vries put forward the following suggestions to deal with alcohol abuse:
           Alcohol policy must operate within a reasonable regulatory framework that balanced individual freedoms against the well-being of society;
           Alcohol policy must recognize the cultures and religions that affect consumption patterns;
           Government should appropriately and effectively regulate alcohol beverage sales;
           Governments should set a minimum age for the purchase of alcohol beverages;
           Laws should penalise those who illegally supply alcohol beverages to those under the legal purchase age;
           Government should enforce laws against drinking and driving and impose severe penalties on those that violate them;
           Illicit production and trade in alcohol can cause serious health problems and governments should enforce laws to prevent this.

He said the industry was appealing for the government to take a balanced approach by tackling alcohol abuse without strangling the economy which was, in part, driven by the liquor industry. Research had shown that warning labels and the banning of advertisements did not work, and attention should rather be focussed on parental involvement, strictly enforced self-regulation, and partnerships with government – as the problem of alcohol abuse was too big for individual entities to handle on their own. In order to divert young people from irresponsible drinking, it was necessary to create a society which embraced sport, arts and culture, and this would require the establishment of recreational centres.

Discussion
Ms M Dikgale (ANC, Limpopo) questioned Distell’s claim that it was achieving success with its programmes aimed at informing children on how to make healthy choices in their lifestyle. The programmes were not working in rural areas, where alcohol abuse was destroying communities. She said liquor advertising should show the disadvantages of alcohol abuse.

Mr K. Sinclair (COPE, Northern Cape) said the issue of regulation was a difficult and complex matter. In the Northern Cape, alcohol abuse was “a crisis.” He saw the misery and hardship, and degrading behaviour in the community, and while regulation was not always the answer, the government had a responsibility to address the problem. It needed to close down illegal liquor outlets, despite the “multiplier” economic benefits. He did not believe self-regulation would be the answer.

Ms B Abrahams (DA, Gauteng) said alcohol abuse was also rife in her area, and expressed concern over the number of unlicensed traders operating in the community, which had been estimated at around 250 000. Ways had to be found to bring all the traders into line. It was being suggested that government adopt the same approach as it had done with the tobacco industry, but it was very difficult to determine what the best approach would be.

Mr D Gamede (ANC, KwaZulu-Natal) traced the problem back to the days when there were beerhalls in all the black townships, and these had led to the total destruction of family life until they had been broken down – mostly by women – and now no longer existed. As a wheelchair-bound victim of an accident involving a drunk driver, he was proof that liquor was a major contributor to road accidents, and this was borne out by research. His understanding was that advertising sought to promote drinking among young people, who saw it as being “cool.” There should be advertisements which said that if one started drinking at the age of 15, this is what one would look like at 30. This would be responsible advertising, showing the good and the bad.

Mr De Vries said that he was born on the Cape Flats and had grown up and lived there for 50 years, so he had seen at first-hand the horrors of alcohol abuse in the community. The liquor industry did not dispute that alcohol abuse was a terrible thing, and agreed it should be tackled with enormous energy. The industry was seen as part of the problem, and did not deny this. However, more than 60% of South Africans did not drink at all, and this meant that the minority who abused alcohol had the power to overshadow all the other elements in the industry’s value chain. Blanket bans seemed attractive, and addressed the problems “on paper,” but in reality, the problems would persist.

Mr Mokhoro said parents had a responsibility to guide their children, and material was being distributed in targeted areas to assist them. He pointed out that the industry already adhered to an advertising code which restricted their advertisements to appropriate times and places where they could promote their products.

Mr De Vries referred to several programmes aimed at reducing alcohol abuse among young people. These included creating opportunities for activities like homework and recreation to divert attention away from drinking. The result had been youngsters claiming that while they would continue to drink, they now knew how to control it, or that they were now able to withstand peer pressure and stop drinking completely.

Ms Dikgale said the industry had to come up with advertisements which showed the negative effects of drinking, as its glamorous advertisements would destroy the efforts of parents to influence their children.

Ms E van Lingen (DA, Eastern Cape), said the presentation had provided information which was vitally important in assisting Members to make good decisions before the Bill came before them. Blanket legislation – such as the national speed limit – could still be adapted, as was the case in the Western Cape, which was seeking to lower it in the province. The effect of the ban on tobacco advertising should also be considered.

Mr De Vries said the industry was concerned that beerhalls had been replaced by illegal shebeens, which were still affecting family lives in the communities. For this reason, it supported proposals that shebeens should be sited outside residential areas, and was working with government to try to eliminate the problem.

Mr Mokhoro said the industry was actively supporting responsible drinking with a series of advertisements showing the effects of excessive drinking. These showed episodes involving a roadblock, children having to prepare food for themselves when the parents had abandoned their responsibility, and a drunken parent interfering with a referee at a school rugby match. This campaign would be reinforced by new material in the future.

Mr Gamede said that Distell was in the business of making a profit, and wanted to see an increase in its sales. The government, on the other hand, had the responsibility to intervene and balance this against what was being done in the private sector. It did not want to halt production or see sales go down, but felt that some measure, such as curtailed advertising, should be considered.

Mr Sinclair said the crisis required crisis management, and gave the example of China, where the problem of over-population had led to legislation restricting parents to only one child. The government had an obligation to take strong action to address a situation which was destroying the fabric of society. He asked how much Distell allocated to corporate social investment (CSI) programmes.

The Chairperson said he was concerned about the impact of the proposed legislation on job losses, and whether a ban on advertising would have a chain reaction in this sector.

Mr De Vries responded that the ban on tobacco advertising had coincided with a boom in cellphone sales, and cellphone advertising had therefore filled the gaps left by the tobacco industry. Tobacco companies were still making huge profits, but were now facing the problem of illicit imports.

During the past year, Distell had spent just over R10m on CSI, and this would be increased fairly significantly. The company’s approach was that it could not expect to be in business very long if it harmed communities to the extent that the government would withdraw its licence to operate. This was a team effort that required a balanced approach.

Mr Mokhoro said there would be job losses at advertising agencies, media houses and other entities in the value chain.

Mr De Vries added that an advertising ban would have a ripple effect if it resulted in a drop in sales of legal products. It would have an impact on sports bodies, which were sponsored by the liquor industry, while the SABC expected it would lose R400m in revenue a year. The industry had been criticised because its advertisements were so persuasive, and so it had withdrawn advertising from cinemas where children might be exposed, and removed billboard and banner advertising from sensitive areas such as libraries and churches.

Ms Van Lingen said Distell’s CSI programmes needed to be investigated to establish to what extent they were being implemented, and also how successful they were.

Mr Sinclair said that in the light of the impact of alcohol abuse, the liquor industry needed to make major contributions through their CSI programmes. He described Distell’s R10m as “a pittance,” and suggested a way to address the matter was to link the industry’s CSI contributions to a percentage of its profits.

Mr De Vries said the company’s budget of R10m represented just over 1% of its R900m profit.

The Chairperson described this allocation as “a disgrace.” The Committee was hammering mining houses, over which it also had oversight, and other companies for not taking charge of their CSI programmes. He suggested that the Committee should make unannounced visits to Distell farms to check on working conditions, housing and employment practices. Distell could do more, and the percentage should be higher.

Mr De Vries said he agreed with the Chairman’s comments. Distell was increasing its CSI expenditure each year, but the Committee’s views would bolster arguments for a bigger budget. He extended an invitation to the Committee to visit the company’s farms.

The Chairperson thanked Distell for making its presentation at such short notice, and proposed that engagement should continue so that an amicable solution could be found – one that would not result in job losses or damage to the economy.

The meeting was adjourned.

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