Beer Monopoly





  International Reports







Posted March 09

Real men smarten up

Beer in South Africa | REAL MEN don’t eat Quiche, they don’t wear pyjama trousers in bed and they certainly don’t drink beer out of a glass. That’s what longneck bottles are there for. Ms Manners may have been offended by the sight of REAL MAN glugging his beer straight from the bottle, but since the two hardly ever move in the same circles, REAL MAN tended to get away with his less than posh nosh table manners. Not for much longer, apparently. South African Breweries is spending good money on TV commercials that have only one message: Eh dude, drink your Peroni out of a glass!

Johannesburg last week – I have always wanted to write that sentence. Because I can now claim to have survived a weekend of watching South African telly. I still get the frisson of excitement at the thought of television in South Africa. South Africa must have been one of the last countries on this planet to get television. That was in 1976. Hard to imagine, but South Africa’s fortysomethings grew up without the box. Friends have told me that as a (admittedly, white) adolescent in those days you were stuffed on a weekend if you did not have friends with a pool or a tennis court.

I don’t really know what kind of programmes I was expecting. Nigerian soaps with convoluted plots or heated political debates, perhaps. However, no one prepared me for the tedium tediosum of South African weekend TV. In retrospect, I cannot imagine what was worse: no telly – or REAL MEN’s telly.

Ok, I know a thing or two of macho telly. There is the Italian variety with endless chat shows, where elderly man with clothes too tight and too gaudy for their age make eyes at scantily-clad busty blondes, who dance or just look pretty.

Then there is the whacky Japanese version of late night game shows, where a contest might entail having to slide (grope?) across 30 young bikini babes covered in some sort of lubricant. Weird, isn’t it?

But nothing, really nothing, can beat the South African type of endless sports matches. On Friday they start out with rugby, on Saturday they move on to cricket and on Sunday they round it all off with nonstop football. That way, REAL MEN manage to while away the weekend with their coach potato friends, glued to the box, nibbling biltong and swilling copious amounts of Castle Lager.

Yeah, I know all the clichés why women don’t like watching sports programmes. Rugby is too complicated. Cricket is too dreary. And golf is played by people without a love-life. Fortunately, there is football. It is easy to understand, some players look cute and if they score, they take off their kit. As matches go, football flows nicely. Even better, it is played the world over.

That must be one of the reasons why brewers like to air their beer commercials during football matches. Actually, it was a good enough reason for me to suffer through a weekend of sports programmes. I did it for purely educational purposes. There was nothing edifying to it and after two days, I began to wonder why there are so few desperate housewives in South Africa who have taken to breeding Rottweilers? Wouldn’t it be nice if the puppies knew some tricks like salivating into hubby’s briefcase or chewing his bedroom slippers?

The answer to my useless musing is of course that many South African households now have cable TV and a second TV set.

Watching South Africa’s beer commercials was an altogether puzzling experience. Perhaps I am mistaken, but if the beer commercials are anything to go by, REAL MEN have become an endangered species. REAL MEN who sport a mullet, wear shades at night, drive cars real hard, never read a manual or ask for directions and hence have no clue why women always need more shoes – these men now seem to be given over to self-doubt and fear.

Or why would South African Breweries dish out funds on promoting its international Dreher and Peroni brands with commercials which are mind-boggingly boring? In the case of Dreher, you get to see a bottle that is emptied into a glass, in the case of Peroni they show you a glass that is filled with beer from a bottle. The message? Geddit? Both beers have to be drunk from a glass.

Obviously, Dreher in South Africa is not the cool metropolitan Dreher brand that you would know from Hungary. SAB brew it locally so it is marketed as a domestic premium brand – like Castle Lite and Hansa Marzen Gold. But what has possessed SAB to give Peroni, its über-cool, high-design brand, the Dreher-bottle-to-glass-makeover is beyond me. The Peroni commercial is naff and a serious let-down if you have seen the “La Dolce Vita” video that SABMiller had produced for the re-launch of Peroni some years ago and which you can still find on YouTube.


Real men wear pink

If you ask me, the funniest beer commercial at the moment happens to be the one for Windhoek Lager. It has the Afro-American actor Louis Gossett star as some chap’s conscience personified. Just as the young bloke is about to take a sip from a frilly pink cocktail which a lady across the bar has stood him, Mr Gossett asks him: “Are you leading la vida loca? Are we in Vegas? No. We don’t drink pink drinks.” Mr Gossett passes him a Windhoek lager with the tag line: Always keep it real.

If we accept that advertisements are created to appeal to the irrational aspects of men’s psyche by playing on their anxieties and their need to belong, then South Africa’s beer drinkers appear to worry deeply about turning into ridiculous cissies. Otherwise, why would beer ads tell them to “butch up” or refine their table manners?

Beer in South Africa is still very much a man’s beverage. Never mind that women are said to contribute 25 percent of the beer volume. Evidently, so ingrained is still the stereotype that men braai (i.e. barbeque) and women make salads that beer advertising targets only the all-important core black males, also known as “Regular Joes”, young adults (“Kwaito Kids”) and trendy white males (“the Sandton Set”).

Funnily, even marketers with South African Breweries (SAB), the ur-cell of SABMiller, have been unable or unwilling to turn this insight to their advantage. Unless, they said to themselves: “If women chose our beers without much ado, we can put all our marketing rands where the results are.” Into REAL MEN.

This is not to say that SAB have resisted change when it comes to advertising beers and creating brand identities. Far from it. It has been SAB’s forte to know when to abandon strategies and formulas which had outlived their usefulness and when to adjust to changing market realities.

For decades, SAB brewed a portfolio of mainstream beers such as Castle, Hansa, Carling Black Label and Castle Milk Stout. They may have all been mainstream beers – all 25 million hl of them – yet they were carefully targeted at different consumer groups. The same applied to Amstel, brewed under license since 1964, and Guinness, SAB’s two erstwhile premium brands, which were meant to appeal to a more discerning clientele.

South Africa’s beer market has known little internal competition. At SAB, they even joked: “We are not a monopoly. We are just a temporary sole supplier”. Meaning: “come in and compete against us if you think you stand a chance.“ Many international brewers must have weighed their options. In the end, they all dropped the idea because SAB are such a formidable opponent. SAB do not just brew beer. They also have a Coca-Cola license (PepsiCo withdrew from the market in 1997) and cover the wine, cider and ready-to-drink segments through a 30 percent stake in South Africa’s Distell Group.

Without any competition to speak of, the two-digit growth rates that SAB enjoyed during the 1980s could have turned the brewer into a complacent giant, content with improving their economies of scale. But the good times were not to last. Since the late 1990s, SAB’s brand portfolio has experienced a massive shake-up against a backdrop of stagnating beer sales. SAB’s mainstay brand, Castle Lager, which in 1998 represented over 50 percent of SAB’s sales, began its dramatic decline, as did the Lion brand. Today, Castle’s volumes are less than half of what they used to be and Lion, SAB’s oldest brand and victim of a failed re-branding, is no more.

Fortunately, SAB managed to raise the volumes of their Hansa and Carling Black Label brands at the same time, the latter through its association with black pride, so that the losses and gains eventually balanced out – and before the South African media could ask the pertinent question as to what had caused this reversal in sales.

Market research shows that the South African beer market has remained more or less flat for the past ten years. But that did not rule out internal shifts and swings. With South Africa’s economy booming many consumers have traded up. Hence, the premium segment has grown to the detriment of the mainstream brands: 25 percent between 1998 and 2007. The main beneficiaries were Windhoek lager, imported from Namibia, and Amstel.


Friend or foe

That must have been a really worrisome development for SAB, especially since in 2003 their Amstel licensor, Heineken, together with Diageo, bought Interbrew’s stake in Namibia Breweries, the producer of Windhoek Lager. With Heineken setting up shop in neighbouring Namibia, SAB’s dealings with Heineken turned awkward. Right under their very eyes, Heineken gradually morphed from partner to competitor whose long-term intentions could not have been to SAB’s liking.

SAB’s managers were not daft. They could see what Heineken was getting up to. The only way out was to acquire an international beer brand themselves and to bring it into South Africa. The first opportunity arose when they bought Miller Brewing in the United States in 2002. The following year Miller Genuine Draft (MGD) was launched.

Interestingly, SAB had acquired the Czech breweries Plzensky Prazdroj – maker of Pilsner Urquell – and Pivovar Radegast as early as 1999, yet the regional barons did not seem to think that Pilsner Urquell would resonate well with South African consumers. After all, what’s sexy about a central European beer brand? What can it mean to high-earning consumers who, with a beer glass in hand, want to show off to their peers? Why should these status-flashers be prepared to pay a 40 percent premium to a Castle beer if they cannot impress anyone with their knack to pronounce the “qu” in Urquell with bravado and confidence? Why indeed?

SAB’s worry-mongers and hand-wringers have been proven right. Pilsner Urquell was first brought into the country in 2004. Even today, its sales volume lags far behind MGD’s.

If some of SAB’s top brass thought that a central European brand like Pilsner Urquell was dowdy, what did they make of the Italian Peroni brand, which SABMiller bought in 2003? Did they think it frumpy? Heavens, no. In SAB’s cultural iconography, Italy was not associated with fast food pizza, spaghetti and bulging Chianti bottles. In the minds of SAB’s executives, Italy was style, design, classy cars and a temptress led astray in Rome’s Fontana di Trevi. “Guardi, una birra Peroni è cool.”

Admittedly, the Peroni brand concept may take some time to sink in with South Africa’s beer drinkers. But you couldn’t say the same about Grolsch. Buying Grolsch in 2007 was an act of pure genius. Grolsch is the next best thing you can have to a Heineken. It is a good beer, its name almost sounds Germanic (not bad for a beer’s pedigree) and it comes in an iconic swing-top bottle.

Through cunning, patience and perseverance, SAB, in only a few years, got themselves a nice portfolio of international beer brands, which they could play around with and see which ones would fly. Still, it must have been hair-tearingly frustrating for them that, despite all their money and effort spent on attracting consumers to their new beer offerings, they never succeeded in establishing all of them as true premium brands. So all the while they toiled and slaved, the sales of Amstel and Windhoek just continued to climb.

Don’t mention “Windhoek Lager” to any SAB executives. That will have them reach for their anti-acid pills. Out to spite SAB, Heineken and Diageo did not change Windhoek’s pro-Reinheitsgebot sales tactics. They would probably defend themselves by saying “never change a winning team”. Or some such platitude.

Originally, when the local white Namibians and Beck’s still called the shots at Namibia Breweries, it was just a petty-minded, knee-jerk reflex against SAB to sell Windhoek Lager as an all pure beer, implying that SAB brewed “chemical beers” (whatever that is). But under the new owners the “100 percent pure” claim began to sound truly bizarre – since neither Heineken nor Diageo are known as Reinheitsgebot stalwarts.


A blow to their system

SABMiller’s "big ego, big talent"-strategists would have known that matters between them and Heineken were slowly coming to a head. That’s why, contrary to their public statement, they cannot have been all that surprised when Heineken took them to the court of arbitration – and won – over some legal quibble to do with SABMiller buying the Colombian brewer Bavaria in 2005.

To the rest of the world, the news of the termination of the Amstel licence dropped like a bomb. In March 2007, SAB were forced to stop the production of Amstel following Heineken cancelling SAB's licence.

Whether SABMiller’s Colombian deal only served as a pretext for Heineken to get out of the licensing agreement with SAB or not – at the end of the day Heineken succeeded in extracting the Amstel brand from SAB’s embrace, thus making sure that they would now get all of the profits and not just some paltry licensing fee from the 2.3 million hl of Amstel SAB brewed and sold.

Without doubt, the loss of Amstel represented more than a financial loss to SAB. The annual sales of the Amstel brand constituted revenues of approximately USD 300 million and earnings (EBITA) of USD 80 million.

The cancellation of the licence meant above all that SAB finally had to learn “competition”. In 2007, Amstel accounted for 9 percent of the South African beer market. Without the Amstel volume, SAB’s market share dropped to 87 percent.

Many brewers the world over would have thought that sort of market share rather comfortable. Not so SAB. For one, Heineken is a competitor who also knows how to play rough. For another, the action was to shift to the premium segment (2008: 17% of total), where SAB suddenly found themselves stripped of their long-time top-seller.

At the time of break-up, visitors to SAB’s headquarters in Johannesburg could feel some apprehension wafting through the executive suites. Competition had suddenly become the new rule of the game. Competition! Just imagine! Competition can lead to price wars, costly promotions, packaging proliferation, higher marketing spends – the full nightmare scenario, which has the guys from finance scream in their sleep. South Africa is SABMiller’s single most profitable market. In 2008, the market contributed only 17 percent to the company’s global volume – including the less profitable soft drinks volumes – but 25 percent to EBIT. In other words, one dollar out of four SABMiller earn in South Africa.

For a while, luck was on SAB’s side. SAB were granted a respite. The cancellation of the licence did not mean that Heineken was capable of satisfying demand for Amstel immediately. The Windhoek brewery was already running at full capacity. Moreover, a multi-million hl expansion there did not make any economic sense if planning for the long-term left no alternative to a production base in South Africa herself.

Heineken must have had plans for a brewery in Johannesburg in a drawer for some time. All the same, Heineken’s and Diageo’s local subsidiary, Brandhouse Beverages, a Cape Town-based company, has had to import Amstel for more than two years. Only in late August this year will Heineken have its own 3 million hl brewery up and running at a cost of EUR 260 million – probably just in time for the 2010 football world cup.

Although Heineken has had to grapple with the disadvantage of having to bring in Amstel from as far away as Europe, the brewer has managed already to reclaim about a third of the Amstel volume last brewed by SAB. Even SAB, at a recent investor conference on South Africa (March 2009) had to admit that this had been no small achievement.


Bring in the troubleshooter

If you think that turbulence is your friend and that crisis presents a fantastic business opportunity, then you might dare swap seats with Norman Adami. Mr Adami is the sort of hands-on operator, who epitomises the undeterring can-do attitude. Remember: “when the going gets tough, the tough get going”? That must be his life’s motto. Nonetheless, Mr Adami is not to be envied. His is the task to lead SAB into the “era of competition” while improving their economic performance. That’s easier written than done.

Mr Adami is not a novice to the South African beer market. He ran SAB’s show there in the 1990s before he was sent to the U.S. to sort out Miller Brewing. But even Mr Adami, with all his operational skills and expertise, failed to turn around Miller Brewing. Despite his best efforts, Miller’s market share would not climb back above 20 percent.

Therefore, after his departure in the summer of 2007 (for very sad but noble personal reasons), SABMiller did the only logical thing: in October 2007, SABMiller and Molson Coors said they would combine their U.S. operations to create a business that would be the second-largest U.S. market player behind Anheuser-Busch.

Back home in South Africa, Tony van Kralingen in 2003 took over an operation that was in good shape. Helped by a strengthening rand, he nudged up profitability and launched all these new international brands. But SAB found it impossible to ignore the fact that these launches and rising input costs meant operating margins fells. At the South Africa investor conference in March 2009, SABMiller confessed that EBIT margins begun to slide in the financial year 2008.

Perhaps the re-appointment of Mr Adami as Managing Director and Chairman of SAB in October 2008 – after Mr van Kralingen had been whisked off to a global corporate position in London – helps shed light on how critical SABMiller’s bosses view the situation in South Africa. The business has “not over-performed in years” in the words of a former SABMiller executive, the competition is heating up, and the economy is heading for a nose-dive. GDP growth this year is estimated to drop to 1.3 percent from 3.2 percent in 2008. As if this were not enough, the country is gearing up to host the 2010 football world championship.

Mindful of the fact that analysts and investors are breathing down their necks, Mr Adami and his team will have the words of departed MD Mr van Kralingen ringing in their ears: “Because of SAB’s enormous dominance of the local beer and soft drink market, the company and the country are a bit joined at the hip. SAB’s success and the country’s success are highly correlated.”

The heavy promotional activity for the June 2010 FIFA World Cup notwithstanding, South Africans seem to be in two minds about it. Many South Africans are not that keen on football, being ardent cricket and rugby supporters; others say they cannot afford the tickets, which will be pricey for the average South African; some worry that the huge infrastructure schemes will not be ready in time, while others fret that numbers of visitors from abroad will not be anywhere near as high as expected because of the global economic crisis.


“I have a team”

Take it for granted that most South Africans have more serious problems to agonize over, including a general election on 22 April, than getting worked up over a series of football matches more than a year away.

However, there is a trifle matter to deal with, ahem, that this report has not yet touched upon and which is of great interest to South Africa’s brewers: namely what are Anheuser-Busch InBev planning to do as the “official beer” sponsor of the FIFA World Cup? The deal means soccer fans will be able to drink only Budweiser beer in and around the stadiums during the tournament.

In 2003, Anheuser-Busch had teamed up with a local importer to re-introduce their best-selling beer into South Africa’s upscale bars, trendy restaurants, five-star hotels and select liquor stores, after their former importer ceased trading in 2001. At that stage it was brewed in the UK and imported by Xtreme Brands, a distribution arm of Weitnauer Africa.

But no matter how hard I looked, I could not find the beer in the trendy restaurants that I visited during my stay.

A rumour that has been going round for some time suggests that Brandhouse could brew Budweiser if only around the World Cup. Heineken has brewed Budweiser in Europe and Latin America for Anheuser-Busch on a contract basis.

It's not a foregone conclusion. A-B InBev may prefer to ship in Budweiser, as PepsiCo did with their product during the 2003 Cricket World Cup.

When I approached A-B InBev’s press office for some clues as to what they are planning to do I received this statement from their spokesperson.

“Anheuser-Busch InBev is the ‘official beer’ sponsor of the 2010 FIFA World Cup in South Africa, and of the 2014 FIFA World Cup in Brazil. We are working hard to partner with FIFA, both globally and locally, to translate the passion for the Game among millions of adult beer drinkers into increased volume and brand equity, and into deeper consumer connections.

I am afraid we are not able to provide you with more information at this point in time.”

Now, go figure.

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