Remgro’s Heineken headache

Remgro’s start to life as a Heineken Beverages shareholder has gotten off to a rocky start, with the Dutch brewing giant writing down the value of its local business and the Distell-merger not going as smoothly as planned.

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

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

On paper, the company produces some of the world’s best-known alcoholic beverages, from Heineken to Savannah and Nederburg wines. 

However, its brands, particularly its beers, have one major weakness in South Africa – they are all over-indexed towards the premium end of the market. 

With South African consumers feeling the financial pinch of a weak economy, elevated living costs, and high interest rates, prices became king. 

Remgro CEO Jannie Durand said this is one of the biggest challenges the newly formed company faces as it is unable to compete with South African Breweries (SAB) in terms of price. 

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. 

These pressures, from brand positioning to high inflation, resulted in Heineken’s sales volumes declining and its Dutch parent writing down the value of its South African business by R10 billion. 

The poor results from Heineken Beverages and the decline in the business’s value resulted in its contribution to Remgro’s earnings, which resulted in a R386 million loss in its latest interim results. 

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

However, Remgro and Heineken have one major edge over all competitors in South Africa that it is looking to leverage – its beyond beer category. 

Distell and Heineken’s merger has created a dominant player in this category, with Savannah and Hunters being market leaders. 

This enables the company to access significant future growth opportunities as beer consumption declines globally due to shifting consumer preferences. 

Heineken said that its cider portfolio, based on these two brands, has outperformed in South Africa, enhancing Savannah’s position as the market leader. 

While this is not yet enough to make up for declining beer volumes, it puts the company in a strong position for future growth. 

Remgro said Heineken Beverages’s recent performance is not “an accurate reflection of the long-term prospects of the business”. 

It said enhanced synergies following the merger of the businesses are on track to deliver positive results in the future. 

The investment holding company said the original investment thesis remains intact, and it will continue to build a multi-category portfolio of brands for all consumers. 

Heineken Beverages will also unlock efficiencies through scale, which will lower its cost base. 

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