Beverage acquisition with a twist

The world has a severe case of drink fragmentation. The dominance of a drink is associated with the dominance of a culture, and we live in an age when global cultural dominance isn’t what it used to be

Despite my wife averring that whisky, gin, and red and white wine constitute the four basic food groups, there are actually five important drinks in the world: beer, coffee, rum, tea and Coke. I say this with great authority based on being considered by my friends to be an excellent drinker. My tipple of choice is wine, and I decide which wine to drink on a case-bycase basis. Ba-dum-tiss!

The reason these drinks are so important is not only because they are fabulously popular, but because they changed history. Beer, invented and brewed first, we think, in the Mesopotamian Empire, encouraged the development of farming.

Wine is important because it’s associated with the rise of Greek and Roman civilisations. The ancient Greeks considered beer kinda low, so the societal elite began drinking wine.

Coffee has arguably the most significant history, because early coffee houses became meeting places for the privileged. Coffee houses were places where serious conversations were held, and where coups were planned and international trade initiated.

Tea was associated with the British Empire and gradually outclassed coffee, becoming a royalty-endorsed favourite in the 17th century, partly because the British controlled a bigger slice of the tea trade than it did of the coffee trade. Once again, a drink was associated with global prowess, which increased its market size and tradability.

Rum changed the world for different reasons. It is associated with the European colonisation of large swathes of the world as European powers sought places with the climate to grow sugar cane. Silver and gold were the jackpots in the voyages of discovery, but sugar was a crucial ingredient of global expansionism, and, as it happens,

the slave trade. And the alcohol associated with that expansion was rum.

And then there is Coca-Cola, forever associated with US global dominance. It spread with US soldiers during World War 2 and became arguably the first truly global brand.

This brings us to Distell. And in case you think that introduction is irrelevant, it is not, because the world has a severe case of drink fragmentation. The dominance of a drink is associated with the dominance of a culture, and we live in an age when global cultural dominance isn’t what it used to be.

What has happened is that the Dutch beer brewer Heineken has made a bid that seems now almost certain to succeed for the South African drinks group Distell.

Why would a company that is almost entirely focused on brewing beer buy a small and very diversified drinks company in SA? Some of the reasons are obvious, some less so. Heineken has a big range of ciders and so does Distell.

But the larger story is that while, globally, beer holds its own, it is not particularly a growing market. You can slightly see this in Heineken’s share price, which has been remarkably strong in the current downturn, but is more or less where it was in 2016. That’s actually good compared with AB

InBev, which is still about 50% down since its purchase of SABMiller in 2016.

Some of that is a consequence of the Covid pandemic and the decline of the drinks and restaurant industries, but compare the performance of the beer companies with the drinks companies, and the comparison is stark. The leader in the drinks industry, Diageo, is up by 60% over the past five years, just to take one example.

Fragmentation is leading Heineken to dip its toe in the “waters” of a new focus.

You can tell how keen Heineken is about the potential acquisition by what it has agreed to in order to pass muster with the Competition Commission. The commission agreed to the merger on condition of a R10-billion investment in SA over a fiveyear period. This is in addition to a moratorium on the reduction of employees for five years, and the sale of one of the cider brands, Strongbow.

This is just bizarre; there are no real competition issues here. Heineken has a very small slice of the South African beer market. But this is the kind of buy-out leverage that our government now indulges in, and you know, in this case, at least, they played their cards right because Heineken agreed.

Something about the deal still worries me, though. If you look at Distell’s brands, you can see quite a lot of innovation in the group.

My experience of many corporate acquisitions is that a company is often bought for its innovative prowess, and immediately on acquisition, that disappears.

I hope this acquisition goes well, but like so many drinks, they often come with a twist.