Remgro’s Heineken headache

Heineken Beverages’ cider business is showing strong growth and outperforming the South African market. It provides optimism for Remgro that its turnaround plan is bearing fruit. 

However, its beer volumes remain under pressure in South Africa, as its brands remain over-indexed towards the premium end of the market. 

As South African consumers have come under increasing financial pressure, many are turning to cheaper alternatives provided by South African Breweries and other companies. 

Heineken Beverages was formed from the merger of Heineken South Africa, Remgro-owned Distell, and Namibia Breweries. 

The new business began operating in April 2023 and was immediately met with headwinds, including high inflation, a high cost of capital, and declining demand for its products. 

Its performance was so poor that Heineken wrote down the value of the local business by R10 billion earlier this year. 

The main driver of value in the business is the potential to leverage Heineken’s scale to grow beyond the beer category. 

The merger of Heineken and Distell created a dominant player, with its cider brands Savanna and Hunters being market leaders in South Africa. 

Heineken viewed this segment of the business, in particular, as very attractive as it enables the Dutch giant to capitalise on future growth opportunities as beer consumption declines globally. 

In its latest investor conference call, Heineken said its brands in this category continue to outperform their competitors. 

CEO Dolf van den Brink said the company is seeing strong momentum in sales of its Savanna brand and, encouragingly, its Bernini products. 

The company also said it would increase investment in brands with the greatest long-term potential growth opportunities – singling out its South African brands, among others. 

“In the second half, Heineken will materially step up investment in its brands focused on the greatest opportunities for long-term sustainable growth. Notable increases will be in Mexico, Brazil, Vietnam, India, and South Africa,” it said.

However, Van den Brink said the Dutch giant has significant work to do in the beer segment of its South African business. 

He did not outline this significant work, but the company’s recent results reveal that its core beer brands have come under increasing pressure. 

The South African business has not been exempt from this, with its Heineken and Amstel beer brands experiencing declining sales. 

In response to questions, Remgro, which owns 18.8% of Heineken Beverages, pointed to the company’s latest investor presentation to outline how the business will be reinvigorated. 

Remgro CEO Jannie Durand explained that the major challenge the company is facing is its inability to compete in terms of price. 

This is because its brands, particularly Heineken and Heineken Silver, are over-indexed towards the premium end of the market. 

And so, while this enables the business to have strong margins compared to its peers, it also means it cannot compete on price when consumers are searching for value. 

While Heineken Beverages’ core beer brands have come under increasing pressure, SAB has had a record few years in terms of production and sales. 

AB InBev purchased SABMiller in 2016, uniting the world’s two largest brewers to form the largest beer company.

This allowed the company to take the fight to Heineken in the premium space through AB InBev’s global brands, which include Stella Artois and Corona. 

Meanwhile, its local brands, such as Carling Black Label and Castle, have cemented their position in the market. 

In its latest results, Remgro reported a R386 million loss from its stake in the local business. 

It said the company was also forced to increase spending on promotional activity to compete in a more challenging competitive environment than expected. 

As part of its plan to boost the sales of its core beer brands, Heineken Beverages has launched a new 650ml returnable bottle and will aim to unlock cost efficiencies through scale. 

These green shoots have already been seen by Remgro’s management, which said a recovery in revenue has become evident.