Another round of consolidation is  expected in the liquor industry. Marc  Hasenfuss investigates the implications.

The South African liquor sector, stirred  in recent years by a series of corporate  actions, now looks ready to be shaken  quite vigorously.

Beer giant SABMiller — despite its  focus on emerging markets offshore —  remains the “big bottle” in SA. But the  mix of the local liquor  industry has undergone a  subtle change, driven by  internal and external forces.

Internally, corporate  action has led to influential  new forces emerging — most notably  empowerment giant Hosken Consolidated Investments (now the anchor  shareholder in KWV Holdings) and  investment powerhouse PSG (which  owns a valuable strategic stake in JSE- listed Distell).

In the past 18 months  investment conglomerate  Remgro (whose prime  mover, Johann Rupert,  owns significant swathes  of winelands property,  among other things) —  has also increased its grip on Distell as  the biggest shareholder .

These three investment giants will undoubtedly do most of the shaking in the  next few years.

International liquor icons Diageo and  Pernod Ricard have made their presence  felt , and will probably continue to make  inroads as part of a broader African  expansion. Diageo has already blown  some froth off SABMiller. Its joint venture, through the feisty brandhouse, has  resulted in Amstel, Heineken and Windhoek challenging hard for a share of the  premium beer market.

Smaller international players like Halewood (which markets the popular Red  Square brand) have cornered niches,  specifically with its ready-to-drink   cider/alcopop brands in fast-growing  emerging markets. Other players of significance would include wine and spirits  group DGB (Bellingham, Culemborg,  Douglas Green, Nordic Ice, Red Heart  and Teacher’s ) and spirits specialist Edward Snell & Co (Jack Daniel’s, Campari,  Grant’s and Russian Bear).

Most observers can clink their glasses  in agreement that the local liquor industry, though made up of no more  than a handful of genuine  contenders, is likely to undergo intense consolidation in the next five  years.

Simply put,  smaller liquor enterprises (and this  is not even including the multitude of small  wine enterprises  struggling to gain  traction locally and  abroad) need to  “bulk up” to thrive.

SABMiller serves as an   example of a company making the most of its stout balance  sheet and formidable local presence to  build an imposing operational base internationally via acquisitions, mergers  and joint ventures.

Though it’s doubtful any other local  liquor sector contenders can hope to  aspire to these heights , smaller players  will have to reinforce local positions as  well as extend their offshore reaches.

Distell was born from a late-1990s  merger of Distiller’s Corp and Stellenbosch Farmers’ Winery, a fruitful exercise  in terms of realising cost efficiencies in  production, distribution, marketing and  brand building.

Tellingly, the success of brandhouse  was based on a co-operative structure  consolidating the interests (and local  strengths) of three top-rate operators.  Brandhouse Beverages was formed in  mid-2004 as a joint venture between  Diageo, Heineken International and  Namibia Breweries . The Cape-based  company now ranks as a leading premium drinks company. Its portfolio includes Johnnie Walker, J&B, Smirnoff,  Bell’s, Baileys, Jose Cuervo, Tanqueray,  Captain Morgan, Amstel, Heineken,  Windhoek and Guinness.

Brandhouse strategy director Peter  Hart says: “In SA there were always  category-leading companies. But we  brought together brands across the various categories in a complementary way.  It was unique to SA.”

The brandhouse structure may inspire  similar exercises to broaden brand portfolios, with diversity being strength in a  fickle liquor market where individual  brands inevitably lose their  flavour.

Brand expert  Jeremy Sampson,  chairman of  Interbrand  Sampson, believes more  consolidation  is imminent.  “Y ou need  critical mass  in the liquor  game. Diageo  and Pernod Ricard are already  in SA, and there  are rumours of an Indian predator targeting  the market. It’s probably a  matter of time before the Chinese, who  are already active in the liquor industry  in France, are here as well.”

Consolidation is probably not the optimum outcome for a market already  dominated by relatively few players. But  the realities of competition — especially  the entrance of large international liquor  companies into Africa — will possibly  trump concerns around broadening ownership in the liquor industry.

The impact of the international players  is clearly seen in the marked changes in  market share of the roughly R70bn/ year  sector .

An SA liquor industry study, commissioned by the department of trade &   industry in 2005, showed SABMiller had  a 56,4% share of the market. Distell, a  diversified liquor group distributing a  wide range of wine, brandy, cider and  liqueur brands, was a distant second with  17,6% . At that point Diageo-aligned  brandhouse held just 7,2%.

Five years later, a study commissioned  for SABMiller by Econex and Quantec  Research revealed SABMiller’s share of  the total SA liquor market had fallen to  under 45%. It seems Distell, probably  thanks to its huge successes in the cider  and ready-to-drink categories, snaffled  some market share from SABMiller.

But the biggest move was the huge  gain by brandhouse — to more than 18%,  presumably thanks mainly to its endeavours on the beer front with Windhoek, Heineken and Amstel (the last  formerly licensed to SABMiller).

Pernod Ricard, another influential international player, had garnered over 2%  in market share with premium brands  including Absolut Vodka, Chivas Regal  and Jameson.

Sampson says it’s clear just how much  muscle a company like brandhouse has  behind it.

Edward Snell & Co and DGB held  shares of 2,6% and 1,6% respectively  with the balance of 11,5% (roughly R8bn  worth of business) accorded to “ other”.

The “ other” is an interesting segment.  It includes a significant player in KWV,  which only in recent years was allowed to  locally market its export wine brands,  including Roodeberg and Cathedral Cellar . The “other” would also include the  many co-operatives in the wine farming  sector as well as  independent wine  farming initiatives (which PSG chairman and wine farm owner  Jannie Mouton says require  “an ego and deep pockets to  survive”).

Opportune Investments  CEO Chris Logan believes  local players need to be  proactive in the face of increased international competition. “Competition from  global giants is bound to  intensify over the next few  years. Smaller local players  are going to battle to compete against larger  international companies.

“We need a local champion  — like SABMiller in the beer  market — that has an ability  to hold a profitable chunk of  local business but can compete internationally on a large  scale.”

In retrospect one fears that  PSG’s 2010 endeavours (via  Zeder Investments) in steering KWV towards Pioneer  Foods — specifically its subsidiary Ceres Beverage Company — might have been a  great opportunity to get the consolidation ball rolling in the liquor sector.

Granted, shareholders — other than  PSG/Zeder and Thys du Toit’s Rootstock  — were none too happy to give away  their KWV shares to Pioneer for  1200c/share (ironically, around 40%  higher than today’s price).

But having KWV trading off the Ceres  distribution platform, and using efficient  marketing channels, might have been a  game-changer. Pioneer’s Hooch ready-to- drink brand could have offered  KWV valuable non grape- based diversion, while  KWV’s spare production  capacity could have been  useful for the fast-growing soft drink/fruit juice  offerings from Ceres.

It was probably these attractions that  prompted Halewood International, a  niche player in the local liquor sector, to  enter the fray with a cheeky tilt at KWV  when it was clear the Ceres takeover offer  was going to be rebuffed.

Since PSG/Zeder’s sale of its KWV  stake to HCI, it seems most parties in the  liquor industry have opted for a tactical  retreat.

But things are still bubbling away, and  it’s only a matter of time before someone  pops the consolidation cork once  again.

Source: Financial Mail – Marc Hasenfuss