THE BIG BOOZE WAR 2.0
Heineken’s takeover of Distell has been given the green light, with investors in Johann Rupert’s Remgro in prime position to benefit from this pan-continental drinks empire. And, ironically, this sets the stage for a redux of the 1970s booze battle, in which the Rupert family came off second-best to SA Breweries
Will the froth fly in the local beer market as an imposing new-look competitor goes toe-to-toe with the long undisputed champion? This is a distinct possibility, now that the Competition Tribunal has finally greenlighted the sale of Remgro’s controlling stake in diversified liquor group Distell to Dutch brewing giant Heineken. Namibia Breweries, owner of beer brand Windhoek, will form the other leg of an enlarged and more imposing Heineken South Africa. It will be squaring off against liquor heavyweight AB InBev, which houses South African Breweries (SAB).
For investment behemoth Remgro, and its controlling shareholder Johann Rupert, it’s a deal that means more than most people know.
This is because Remgro, under its previous Rembrandt guise, was battered in a brutal beer war in the 1970s, with the Rupert company coming up second best against SAB. Now, Remgro has taken a major slug of the new, unlisted Heineken South Africa venture, setting the stage for Rupert’s second assault on the sub-Saharan beer market. And this time, he has some serious reinforcements.
Heineken has come a long way in South Africa since gaining a toehold 15 years ago, when SABMiller had to give up the Amstel licence. That the brewer is pressing on with the Distell deal — despite onerous conditions imposed by the competition authorities
speaks volumes for its confidence around Distell’s assets over the longer term.
Officially, Heineken expects the Distell deal to add to its earnings by “the low single digits” this year, and then boost its margins to a greater extent in later years. The group, which will be investing €2.4bn in return for a 65% shareholding in Heineken South Africa, doesn’t expect its debt to increase markedly.
Heineken CEO Dolf van den Brink says the combination of Distell and South Africa’s specific capabilities should increase the number of outlets reached for its products by about 25%. It means customers will get a far greater selection on the shelves.
“This will bring significant benefits in terms of both potential revenue and cost synergies,” Van den Brink tells the FM.
As it is, Heineken and Distell are far behind AB InBev, with its market share in South Africa estimated at 20%-25%. But this could eat into that position, as both Heineken and Distell are growing faster in their respective markets across the continent. Some liquor experts suggest Heineken South Africa could snaffle as much as 33% of the market in the next few years.
Of course, you don’t want to come out swinging against such a formidable opponent as AB InBev — the Muhammad Ali of the local booze market.
After all, as Allan Gray investment analyst Jithen Pillay reminds clients in a recent note, AB InBev is the world’s largest and most profitable brewer, with more than 500 beer brands and operations in nearly 50 countries.
“AB InBev brews one in four beers globally — more than twice that of its nearest rival, Heineken,” he says, adding that the group earns much higher operating profit margins than its main rivals.
Pillay says AB InBev’s new management is focused on organically growing the group’s “share of throat”, with new, innovative beverages and by promoting beer consumption in previously underserved areas.
In other words, wrestling market share from
AB InBev will be a real scrap.
In the beer category,
Heineken is focused on promoting its premium brands, as well as extending into nonalcoholic, flavoured and less bitter variants. A Heineken spokesperson tells the FM that between 2016 and
2019, the premium beer segment of the South
African market achieved growth rates significantly higher than in the mainstream beer market.
“Within this segment of the market, Heineken SA increased its market share of the premium category to more than 42% with the combination of the Heineken, Amstel and
Windhoek brands,” the spokesperson adds.
Second time lucky?
Remgro — a pivotal long-term investor in the Heineken South Africa venture — would have thought hard and long before backing the new contender. After all, it was almost 50 years ago that the old Rembrandt Group — the forerunner of Remgro, founded by Johann Rupert’s father Anton — became embroiled in a take-no-prisoners beer war with SAB.
The early 1970s saw the first attacks on SAB’s dominance in the beer market. Larger-than-life businessman and rugby strongman Louis Luyt was the first in the ruck, in 1972 (remember Sportmans Lager and Luyt Lager?). By 1973, a punch-drunk Luyt had sold out to Rembrandt’s grandly named Intercontinental Breweries (ICB).
SAB and ICB slugged it out until 1979, when Rembrandt probably thought it prudent not to sink more money into a losing cause.
One of the abiding memories of the time was ICB’s launch of Colt 45, known as the “beer with a kick”, as its alcohol content was higher than other brands available. This triggered SAB into stepping into the ring too, launching its own version, named (uncreatively) Stallion 54. It’s a crisp illustration of the levels of attrition in that beer war.
In the end, Rupert relented and SAB bought ICB. And after that, plans were made to merge Stellenbosch Farmers Winery (SFW) with Distillers/Castle Wine. The competition authorities, however, wanted the merger dismantled. This gave
rise to two separate companies Distillers Corp and SFW (where Rembrandt and SAB were the major shareholders). Basically, SAB reinforced its dominance in the beer market, and SFW dominated the wine segment.
In the late 1980s, SFW and Distillers both prohibited from entering the beer market listed on the JSE. Roughly 10 years later the two groups merged to form a new-look Distell Group, with Remgro as the dominant shareholder and SAB still holding considerable influence.
Even as SAB morphed into SABMiller, there were no signs of the brewing giant relinquishing its 30% stake in Distell even though the holding represented only a sliver of value.
Ultimately, however, when AB InBev bought SABMiller for a record £79bn in 2016, the Distell stake was sold to the Public Investment Corp. This coincided with Distell’s concerted push into new African markets, and the emergence of its carefully crafted cider lines, Savanna and Hunter’s Dry, as powerhouse brands.
One might surmise that Distell’s venture into ciders stemmed from the agreement with SAB not to launch beer brands. Cider, one suspects, was the next best thing in building a high-volume liquor brand. Hunter’s was launched in 1988 and Savanna hit the shelves in 1996. At launch neither would have troubled SAB, but both brands were smartly marketed under Distell’s then-CEO Jan Scannell, who carefully kept the cider expansion low-key at first.
In recent years, Distell was successfully leveraging both ciders’ brand power
launching a variety of product extensions that experimented with flavour and size.
Ultimately, the current Distell deal is a most remarkable, richly ironic and satisfying return to the beer sector by Remgro. The new venture which carries considerably more operational bulk, slicker route-tomarket arrangements and big financial muscle will give Remgro more than a fighting chance this time.
Aside from a muscular balance sheet, the brand power of Heineken South Africa alone is impressive it includes Heineken, Amstel and Windhoek, Savanna and Hunter’s, and popular affordable wine brands including 4th Street. Its reach into African markets is enviable, and likely to extend markedly over the next few years.
There will be lots of benefits from combining production too. A Heineken spokesperson says the joint business will be able to use the manufacturing footprint of all three companies, leading to “more efficient use of assets and driving increased profitability of the combined business”, and bringing “production of key products closer to the end market”.
There’s an added irony, which is that the fortification of Distell’s best-selling cider brands and the incredible growth in its affordable wine category stemmed from the
2013 appointment of former SABMiller executive Richard Rushton as CEO.
Rushton changed things radically, putting mass-market ambitions in South Africa and Africa ahead of past notions of dominating developed markets elsewhere in the world. He might initially have been hugely unpopular with Distell stalwarts, but in less than 10 years he turned the group into a coveted asset with an enviable coverage of key markets in Africa, and many more customers.
He recalls that there was a shareholder desire to expand globally, but really no bandwidth to shift into Europe and Asia. “If you looked at the brand portfolio there were natural opportunities to build a bigger business in
Africa,” he says.
There is a demographic dividend that will pay into this business combination. It’s a business that will provide choice for consumers in Africa over a long-term period
Battle of the brands?
There can be little doubt that Distell’s success in ciders it is the secondlargest cider player in the world and the more recent gains in mainstream wine fitted neatly with Heineken’s African growth ambitions.
On the cider side, there will be no resting on laurels. Van den Brink says that, as the world’s leading cider producer, Heineken remains committed to remaining top of that category. Within the flavoured alcohol beverages segment, the combined business in South
Africa will have the No 1 and No 2 brands, with a market share of just over 61%.
This is despite the fact that AB InBev has, over the years, launched a number of brands to challenge Savanna and Hunter’s, including Redd’s, Solantis and Sarita.
The real potential for Heineken is extending the reach of ciders into Africa. “There is a demographic dividend that will pay into this business combination,” Rushton tells the FM. “It’s a business that will provide choice for consumers in Africa over a long-term period.”
Statistics from the local liquor market (the largest in Africa) are quite telling in this regard. The International Wine & Spirit Record for 2021 shows that AB InBev dominated the local alcoholic beverage market with a 63% share of volumes.
Distell held 14%, Heineken 9% and Namibia Breweries 3%. Today a combination of these entities probably holds closer to a 28% share.
On a value basis, AB InBev’s share in 2021 depreciated markedly to 47%, while Distell shifted up to 18%. Heineken and Namibia Breweries had 8% and 1% of the value pie respectively. So new-look Heineken SA might well kick off its corporate history with a value share close to 30%.
It is probably more appropriate to reduce the local liquor pool to beer, cider and wine to better gauge the potential of Heineken South Africa. Looked at this way, AB InBev held a 72% share of total volume and 68% of the value of these markets in 2021. Distell held 10.3% of volume and 13% of value, Heineken held a 10.2% share of volume and 11% share of value, while Namibia Breweries held 3% of volume and 2.6% of value.
Heineken has already committed to developing, within five years, a greenfields brewery in South Africa at a cost of R5.5bn. There can be no doubt it will be challenging aggressively for market share.
Of course, while consumers may relish the thought of a beer war, current conditions might not allow for immediate hostilities.
AB InBev shareholders, who have had a rough ride since the SABMiller takeover, have just started to see some blue sky, after a generous hike in the dividend. And with higher interest rates and testy inflation, margins are fairly precious these days.
At a fourth-quarter presentation AB InBev CEO Michel Doukeris said: “We love our margins. We really like the fact that this brings us lots of flexibility to invest and navigate when things turn tougher.”
Africa was, indeed, one of the standout markets for AB InBev in financial 2022, growing volumes by mid-single digits. In South Africa, Brutal Fruit and Flying Fish
which would be competing head-on with Distell’s cider and ready-to-drink (RDT) brands delivered 18% revenue growth.
Heineken doesn’t separate Africa from its Eastern Europe-Middle East-Africa hub, but it appears revenue is growing apace too. For its most recent financial year, the group reported that Amstel, the second-largest brand in the region, also showed good momentum, with volume growing by more than 10% and revenue growth above 30%. Importantly, Heineken continued to expand its portfolio beyond beer, shifting into the flavoured alcohol category, with Desperados and
Strongbow both growing above 30% in volume and doing well in Nigeria and South Africa.
Strongbow, though, has been jettisoned as one of the conditions set by South Africa’s competition authorities.
Distell also continues to show spirited performances in the African markets that the Heineken South Africa venture will be robustly contesting. In the six months to December, its domestic revenue grew by 13.6% on volumes that were 9.7% higher driven by cider and its RTD brands. Even more impressive was Africa revenue growth of 21.5%.
Jeremy Sampson, MD of Brand Finance Africa, says Savanna would be the jewel in the crown for Heineken’s bid to latch onto changing drinking habits. “There will be huge potential in Africa with the cider brands being marketed alongside premium beer brands like Heineken, Windhoek and Amstel,” he tells the FM.
Sampson believes Savanna and its many varietals will appeal to female drinkers and a younger market. “In South Africa half the population is under the age of 24, and this is probably true for a good number of African markets. At this point Africa is still underbranded.”
Still, he doesn’t believe either group “would want to get into a full-blown price war”.
It’s a view shared by liquor industry doyen Michael Fridjhon, who says outright attrition at price points is unlikely.
“If anything, they’ll nip away at each other’s market share,” he says.
But while chances of a 1970s-style war are unlikely, because AB InBev is a vastly different beast to SABMiller, it would be naive to believe AB InBev will let Heineken South Africa nibble away at its lunch in Africa.
Rushton has no doubt AB InBev has advanced plans to counter the new-look company. “But the combination of beer and cider will make Heineken a formidable competitor in South Africa and Africa. Consumers will get more choice,” he says.
It’s an immense play. International research house Redburn said recently that Distell has transformed its portfolio to play in those blurred spaces where beer, spirits and wine intersect. “Breaking the hegemony of lager, cider became South Africa’s first flavour alternative to directly compete with beer, adding missing flavour to the monotonous repertoire of the lager drinker,” it says.
Which illustrates that there are exciting days ahead for Heineken and AB InBev and tipplers will be spoilt for choice. Of course, a misstep or two in these proceedings could result in a costly hangover for either of the two behemoths.