E-Malt.com News article: South Africa: SAB’s position on the beer market under scrutiny

After decades of South African Breweries’ (SAB) complete control over its domestic market, two of the world's biggest drinks companies, Heineken and Diageo, have combined their strengths to do battle with SAB on its home ground, the Business Report posted on April, 16.

For decades SAB had supplied just about all of South Africa's beer requirements. But within the past three years SAB's market share has dropped from its long-term monopoly level of 97.5 percent to a still-dominant level of about 87 percent. That drop was sort of technical as it resulted from the loss of the Amstel licensing agreement in 2007, but this did mark the beginning of the new era.

In 2007 Heineken, which owns the Amstel brand, was able to cancel the licensing agreement as a result of SABMiller's acquisition of Bavaria beer group in Colombia. That transaction involved the controlling shareholders of Bavaria acquiring a 15 percent stake in SABMiller, which Heineken argued represented a "material change" in ownership of SABMiller. It won a court battle and was allowed to bring the production and distribution of Amstel back in-house.

Ironically the Amstel brand had done extremely well under SAB management. Aggressive marketing had succeeded in building up a market share of nearly 9 percent for Amstel. For more than two years after reclaiming the brand, Heineken imported Amstel at a loss to hold onto as much as possible of its valuable market share. In September production started at a 300 million litre state-of-the-art brewery in Sedibeng owned 75 percent by Heineken and 25 percent by Diageo, which has Guinness in its stable.

Heineken and Diageo are two of the three partners - the third is Namibian Breweries - who have set up a joint venture in South Africa. Called brandhouse (yes, with an irritatingly trendy small b), the joint venture is aiming to secure a share of the lucrative alcohol market in this country.

For now much of the capacity from the Sedibeng brewery will be devoted to producing Amstel in 660ml returnable bottles. The brewery's initial capacity will be expanded late this year by an additional 100 million litres. Management says that in the long term, capacity can be bumped up to 600 million litres. This is certainly fighting talk given that the total South African beer market is currently only 2.7 billion litres and SAB's current capacity is 2.8 billion litres.

Since production resumed in South Africa, Amstel has been able to reclaim some of its former market share. According to the latest Nielsen figures, as of December last year Amstel accounted for 6 percent of the local beer market. At that stage the Heineken brand had managed to lift its share to 3 percent. In addition Windhoek Lager, which is owned by Namibian Breweries, also had a 3 percent share of the market.

This means that Amstel, Heineken and Windhoek have a combined 12 percent of the total beer market. Much more significantly however, this combined stake accounts for about 56 percent of the premium market, which in turn accounts for about 20 percent of the total beer market. The major attraction of the premium segment is not only the better margins but also the fact that it is growing at a considerably faster pace than the almost stagnant mainstream segment. It is what you might call a good start for SAB's opponent in what is the first major challenge to SAB's dominance in about 40 years.

There have been a few half-hearted challenges in the years since the South African economy opened up in 1994. There was an effort by home-grown National Sorghum Breweries, which set up the Vivo Brewery in Midrand but failed despite the intervention of India's United Breweries. This and the very weak challenge by Anheuser-Busch seemed to add to the almost mythical status SAB enjoyed as being unassailable on its home territory.

And so it has been almost 40 years since SAB faced an opponent of any significance on its home turf. You have to go all the way back to 1971 when Louis Luyt set up Louis Luyt Breweries and, according to his autobiography, managed in a remarkably short space of time to acquire a 14 percent market share. However, the challenge was short-lived and by the end of 1974 Luyt had withdrawn, leaving Anton Rupert to reach an agreement with SAB, which essentially determined the shape of the country's alcohol market for the next few decades.

In the previous war SAB launched an assortment of brands in an expensive bid to smother the competition. This time around, while SAB will be able to draw on the wide range of offerings in parent SABMiller's portfolio, Heineken will also be able to draw on its international collection of brands.

The primary battlefield will be the premium market in the townships and the weapon of choice for both sides will be the 660ml returnable bottle. For SAB the 660ml bottle will contain Castle Lite and for Heineken it will be Amstel.

South Africa now has a competition authority that is far more robust than the former Competition Board. The Competition Commission and the Competition Tribunal will be the referees tasked with ensuring that this latest beer war doesn't get too dirty. Of course, the fact that SAB has a dominant share of the market does not automatically imply it is anti-competitive. The commission or a competitor would have to prove SAB was abusing this dominance. Such abuse could be in the form of "tied" arrangements with wholesale and/or retail links in the distribution chain, which would restrict competitors' market access.

To this end it might just be that the current case brought by the commission against SAB is too early. While smaller players may be stymied in their efforts to compete in this market, many of them may feel they are too small, and vulnerable to SAB retaliation, to approach the competition authorities for relief. Heineken will have no such reservations. But it may feel it is a little too soon to fight the battle on this particular field.

Perhaps the biggest challenge for a foreign competitor such as Heineken is its lack of familiarity with the all-important township market. This challenge is compounded by the fact that a huge chunk of this market operates outside the formally legalised system.

Over the decades SAB has become amazingly adept at managing this situation to its advantage. Although Heineken has made significant inroads into this market, it still faces a steep learning curve.

It is in this context that we should consider SAB's Zenzele* empowerment scheme and judge it to be an inspired move.

While the competition authorities and Heineken will be watching closely for any tied agreements between SAB and the crucial retailers, there is nothing they can do about loyalty created by an empowerment scheme, as long as the participants do not refuse to carry non-SAB products.

Heineken is not in a position to match the size and generosity of the Zenzele scheme.


*The Zenzele scheme, announced in February this year, involves the formation of the SAB Employee Trust and the SAB Foundation, which were first mooted in July last year.

The scheme will place 8.45 percent of the brewing giant's local shares in the control of black hands and it is estimated to be worth R7.3 billion.






16 April, 2010