Size does matter as AB InBev increases beer volumes in SA and Africa
Brussels/London/Johannesburg — Sitting outside the ramshackle Vimba Tavern in Alexandra, Patrick Mashego swigs from a one-litre bottle of Carling Black Label, SA’s most popular beer.
Rolled out by Anheuser-Busch InBev (AB InBev) across the country this year, the larger bottles are part of a plan by the world’s biggest brewer to lure price-conscious South Africans to its mid-market beers and away from bargain rivals or home brews.
AB InBev’s move marks a departure from its typical playbook of increasing margins and profits principally through higher prices and rigorous cost control, tactics honed through its close association with private equity firm 3G Capital.
It is also the clearest sign yet of how AB InBev aims to conquer the rest of Africa after getting a major foothold on the continent by buying its biggest global rival SABMiller in 2016.
On a continent where the average person drinks 10 litres of beer a year — compared with 75 litres in the US and 66 litres in Brazil — establishing its premium brands and selling high volumes of mid-tier beers will be key, as will breaking into countries dominated by other brewers. "Clearly there’s room for making our products more present. That’s definitely a big part of our efforts here," said Ricardo Tadeu, AB InBev’s Africa zone president. "In comparison to where we have been, these markets are still being developed."
AB InBev is trying to protect and expand its mid-tier brands with the help of discounting and promotions as they will be its workhorses during the time it takes its premium international lagers Budweiser, Stella Artois and Corona to gain market share.
But because AB InBev already has a range of premium beers for the high end of the South African market, it is also freer than SABMiller to push brands such as Carling and Castle deeper into the mainstream market.
At the Vimba Tavern, Mashego, who spends most of his day scouting for recyclable rubbish to make a living, seems sold on AB InBev’s strategy. At R19 for a one-litre bottle, Mashego is paying about 20% more than for 750ml bottles but gets a third more beer. "This is all I drink now," said Mashego, sitting next to a friend also swigging beer from a one-litre bottle.
‘It’s a steal’
SABMiller’s African presence was considered the main prize in AB InBev’s $107bn acquisition of the world’s second biggest brewer — given the potential for growth on the continent as beer sales in other regions stagnate. Bernstein analysts estimate the African beer market was worth $10.8bn of net revenue in 2016, or 7% of the global total, and they see it as the world’s most attractive region for long-term volume and profit growth.
Because AB InBev already has a range of premium beers for the high end of the South African market, it is also freer than SABMiller to push brands such as Carling and Castle deeper into the mainstream market.
When AB InBev bought SABMiller, it cited forecasts that beer sales in Africa would grow by nearly three times the global rate between 2014 and 2025. About a fifth of the industry’s revenue in Africa, and a quarter of the profits, come from SA.
As part of its new strategy, AB InBev is reinforcing its volume play with more frequent discounting for Carling and another local favourite, Castle, retailers say. At the Zio liquor store in Sasolburg, shoppers pushed trolleys laden with Castle on promotion last month for Freedom Day celebrations to mark SA’s first post-apartheid elections in April 1994.
"It’s a steal," said one shopper in the mining town as he picked up an 18-pack next to a sign saying: "Buy 12 and get 6 extra free." Even though AB InBev controls more than three quarters of the South African market, according to Euromonitor International, liquor store owners say promotions have become more common than under SABMiller. "We used to get them once every quarter, now it’s more like one a month," said one of five Johannesburg liquor store owners to tell Reuters they had seen a jump since AB InBev took over.
Promotions were most intense towards the end of 2017, another liquor store owner said. "There were deals almost on a weekly basis ... crazy stuff," said the trader in Vanderbijlpark near Sasolburg, adding that AB InBev appeared to be in "full-on war" with its closest rival Heineken in the run-up to Christmas.
The Dutch beer maker, which controls 7% of SA’s beer market, has been gaining market share since last year, mainly through its Heineken lager which is a favourite among the country’s elite. But it has been driving into the mainstream sector too with Soweto Gold, which it launched late last year, as well a greater push for its more established Tafel brand. It is also rolling out different bottle sizes.
"Both AB InBev and Heineken are pursuing an ambitious growth agenda. With that comes quite intensive promotional activity," said Heineken’s SA chief Ruud Van den Eijnden. "What you see is increasingly brewers use specific packs to do promotions."
Jumbo bottles and multi-packs
UBS analyst Nik Oliver said AB InBev generally puts more emphasis on value than SABMiller did. This means it is more likely to initiate price rises across its beer range that can absorb promotions or discounts on specific products.
"Of course, we discount and promote when it makes sense," said AB InBev’s Tadeu, a Brazilian who has been with the company since 1995. "But the truth of the matter is we never undermine net revenue per hectolitre growth." While AB InBev does not publish the scale of its price rises, revenue per hectolitre of beer sold after duties rose 5% in SA last year, in line with inflation.
In the three months to March 30, revenue per hectolitre rose at a "high single-digit" rate from a year earlier, AB InBev said. The company as a whole targets revenue per hectolitre growth above inflation and cost rises below inflation.
Oliver from UBS said the bigger bottles were also a good way to drive sales in the near term with new drinkers who would probably help push up margins further in the long run. "It gets [price sensitive consumers] into a brand, and then the view is that those people, over time, will probably also buy the smaller size, so work up that price ladder over time."
For Tadeu, the plan AB InBev has adopted in SA — varied bottle sizes and packs coupled with regular discounting, as well as the promotion of its premium beers — can serve as a blueprint for the rest of the continent. "One thing we noticed is that in Africa, in many of our markets, we still depended too much on one pack."
After introducing one-litre bottles in SA, Tadeu said other African markets should expect to see new variations. "It’s very good to have different packs, because you then always have something attractive for consumers in terms of promotions."