Rawle Lucas is a Guyanese-born Certified Public Accountant and Assistant Vice-President of the Lending Services Division. Mr. Lucas has agreed to serve as a columnist with the Stabroek Business and will be contributing articles on economic, financial and development matters.
With the turn of the year, the shareholders of Demerara Distillers Limited (DDL) are no doubt looking forward to learning how the company performed in 2009. It will probably not be for another five months before the 58th Annual General Meeting is convened and shareholders get an opportunity to discuss with management the results of their performance during the past year. Only the privileged company insiders know what is coming but the distribution of the annual report in advance of the meeting will give the most avid followers of the company a preview of the story being told of DDL in 2009. The rest of the owners would just have to wait for the moment of public disclosure and discourse.
Of interest would be the story about the business and corporate level strategies of DDL in 2008 and their impact on the performance of the company in 2009 in an uncertain economic environment. Shareholders are excited about the new bottling plant that DDL commissioned last year and what it means for future sales of the company. Shareholders would be looking keenly also to determine if the decision by management to contract out the retail distribution function in 2008 led to improved performance and greater returns on their investments. They would also be wondering if the business-level strategy pursued in 2008 was continued in 2009 and what was the outcome. A good story about DDL in 2009 would vindicate the decision of its management to contract out the retail distribution function of DDL and to alter its business-level strategy.
DDL, despite the acronym, is not a single entity but it is by far the largest and most important enterprise in the group of companies that make up the organization. For many Guyanese, DDL means one thing, good quality alcoholic beverages. That was its starting point and alcoholic beverages remain its core business today. It makes alcoholic beverages well, but like so many business organizations, DDL has evolved as a result of its success and does much more than give customers desirable consumable spirits. DDL now contains many more operations than when it first started many years ago. While the name DDL easily slips off the tongue of Guyanese like the beverages it produces, it is only one of several businesses that make up the DDL Group of companies.
DDL is the oldest, as well as the most dominant and important enterprise in the DDL group of companies. The revenue generated by DDL in 2008 constituted 73 percent of the sales of the entire group of companies. Though its share has fallen by 10 percent from where it was in 2007, DDL remains the driving force of the group and the one with the widest geographic spread. As the parent of the group, DDL owns seven other companies, four in Guyana and three overseas. Many Guyanese would be familiar with local companies like the Demerara Shipping Company Limited, the Distribution Services Limited, the Tropical Orchards Products Company Limited and the Demerara Contractors and Engineers Limited. Less familiar to Guyanese are the DDL businesses that operate in Europe, North America, India and the Caribbean. In Europe, DDL operates the Breitenstein Holdings BV. In the USA, it has the Demerara Distillers Inc. and a company with a similar name on the island of St. Kitts. A joint venture in Hyderabad, India is also part of the resource base of the company. All of the foreign holdings of DDL focus part or all of their resources on the sale of alcoholic beverages.
In addition to exercising control over the aforementioned entities, DDL exerts significant influence over the operations of BEV Processors Inc., National Rums of Jamaica and Diamond Fire and General Insurance Incorporated. The make up of DDL changed slightly towards the end of 2008 when it sold one of its subsidiaries, Solutions 2000 Inc in a cost saving move. Despite disposing of Solutions 2000 Inc, DDL remains a related-diversified organization. With the ownership of several businesses, DDL is no longer the single entity that it once was.
Shareholders would have to wait and see if the story in the DDL 2009 annual report tastes the same way to them as the DDL flagship brand, El Dorado, does to its many customers in Guyana and around the world. According to the management of DDL, the strategy of outsourcing the retail distribution function to its subsidiary, Distribution Service Limited, contributed to a reduction in revenue in 2008. Revenue from sales declined by 10 percent over the 2007 level. The contribution of the strategy to the decline in sales is not so obvious from the 2008 annual report. The impact of the strategy on the performance of the company was significant and should have received greater coverage in the annual report.
In absolute terms, the move had a favourable impact on the cost of sales and operation. For a manufacturing entity like DDL, the cost of sales represents the production costs, including inventory costs, recovered through sales. These costs declined by 5 percent over the 2007 level. The selling and distribution expenses also declined by 63 percent, suggesting that the decision had an immediate positive effect on the company and the group as a whole. Even with such positive outcomes, the 2008 annual report left one question unanswered. Why did the gross profit margin fall against the 2007 level, despite the favourable changes in product costs?
Undisclosed Business Strategy
Maybe a response was given at the shareholders’ meeting last June. For the uninvited public, the answer points to an undisclosed business-level strategy that might not have yielded the anticipated results. Readers know that revenue is the result of quantity sold and the price at which the product is sold. With DDL reporting stability or growth in its market share, the only way sales revenue could have tumbled was if DDL had reduced prices. There was room for a price-cutting strategy in DDL since the corporate-level strategy of outsourcing retail distribution meant it did not have to pass on as much of the distribution cost to customers as before the change. Judging from the disclosures in the 2008 annual report, DDL only had to use about 10 percent of its sales to recover its distribution costs compared to about 17 percent in 2007.
If lowering prices was part of the DDL business strategy, it clearly did not work well in 2008. One indicator of this result is that DDL used nearly 66 percent of its sales to recover its production costs, despite the lower expenditure on product costs. Compared to 2007, DDL sacrificed about four cents out of every 2008 sales dollar to pursue its business-level strategy. Another indicator that the business-level strategy might not have worked well was that both the income and substitution effects of the price change were negative, causing gross profits to decline by nearly G$700 million. In a case where prices are reduced, the expectation is that the substitution effect, a higher demand by customers, would be positive. It was not, raising questions as to how strong demand for the products of DDL were in 2008.
Shareholders ought to be curious about the impact of the business-level strategy on demand and whether it was continued during 2009, especially since DDL experienced a rise in unrecovered costs in 2008. The raw materials inventory of DDL increased by 37 percent while the finished goods inventory grew by 33 percent. These developments were significant and raise questions about the investment value of the strategy. Despite the importance, the company did not give sufficient attention to the issue of its business-level strategy in the 2008 annual report. This lack of information must have shareholders waiting in anticipation for the 2009 performance of the company.