A beer war brews?
Older investors who recall the Rembrandt Group’s tilt at the local beer market in the 1970s will probably feel a chill at some of the observations made by Remgro executives at the release of the interim results.
Rembrandt the predecessor to Remgro was knocked out of the South African beer war of the mid- to late-1970s by the then dominant player, SA Breweries (now part of international brewing giant AB InBev).
It does seem increased competition in the local beer market might signal that a beer war is under way. That’s great for drinkers, but not so great for beer-making margins.
Last year Remgro swapped its major stake in Distell, which earned the bulk of its keep from ciders, affordable wines and spirits, for an 18.8% stake in Heineken Beverages South Africa (Heineken Beverages).
With a wider array of products, brands and markets, Heineken Beverages looked like a more formidable competitor to market leader AB InBev. But the initial trading period has been brutal, with Heineken Beverages notching up a sizeable loss. Remgro’s share of the losses was R208m, prompting the value of its investment to be written down by more than R5bn.
It was a litany of woes for Heineken Beverages, with supply chain challenges (mainly malt and glass) and load-shedding coming on top of lower industry growth. Even more worrying was the admission of increased competitor activity, and a shift from premium brands to mainstream brands
not great for Heineken, which was “over-indexed” in the premium segment.
And that’s not all. Heineken Beverages implemented price increases ahead of the industry, which affected margins and volumes.
According to Remgro CFO Neville Williams, beer was imported during the trading period and then sold at thin or no margins in a bid to maintain market share.
He said that considering these challenges, the six-month trading performance by Heineken Beverages was not deemed to be an accurate reflection of the longterm prospects of the business. “We expect that meaningful insights from the results will be forthcoming only after a longer trading period.”
That said, investors won’t have missed that AB InBev appears to be enjoying frothy trading in
South Africa. In recently released year-end results, the brewer reported that “record high volumes delivered double-digit top[-line] and high single-digit bottom-line growth”. The group said the portfolio gained share in both beer and total alcohol.
Remgro, though, is not making any slurred pronouncements about the Heineken Beverages investment.
Asked about a potential revaluation of the Heineken Beverages stake at end-June this year, Williams said the group is not ready to pre-empt any such decision. “The current value provides a reasonable assessment of the value of our Heineken Beverages stake. But we expect a recovery will happen over time as it delivers on its business thesis.”
There are some glimmers of hope. Remgro CEO Jannie Durand indicated that there was a recovery in the fourth quarter of 2023. “We are still trading behind in the market, but a recovery was led by brand Heineken with the launch of Heineken Silver and an improvement in Windhoek and Amstel,” he said.
He added that the old Distell brands Savanna and Bernini also saw a strong close in 2023.
One important development is that Heineken Beverages is moving into returnable bottles which Durand believes has vast growth potential. “The first deliveries took place on February 22, and the early results are promising. Vast capital is required, but it will improve margins We firmly believe the [Heineken Beverages] transaction was, and remains, a very good capital allocation decision. It provides a very strong platform for sustainable and profitable future growth.”