- March 1, 2012
- Posted by: admin
- Category: KWV Holdings
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