Tuesday, 14 October 2014

A Tale of Two Breweries- The Limits of Sovereign Industrial Policy in a Globalized Market

(This story is from 2012/2013 and illustrates the, at times, predatory nature of industrial policy in Southern Africa)
 
It is with great sadness I found that Botswana has a structural deficit in the trade of beer. Year in, year out Botswana  imports much more beer than we export and the deficit is growing exponentially. In fact in 2011, according to CSO statistics, we imported Pula 124 million of beer up from a mere Pula 3.6 million in 2007. Exports on the other hand were a mere Pula 30 million, up from  Pula 0.5 million in 2007. Now the interesting question is why on earth Botswana imports that much beer? Is it because the local brewer Kalagadi Breweries Limited (KBL) which is a subsidiary of the global giant SAB-Miller  can’t keep up with demand for its chief brand  St Louis. Hardly! The reason is because its only real competitor ie Heineken Diageo which is in a strategic alliance with Namibian Breweries (NBL) has been making serious inroads into the local market. If you listen to KBL the only reason has been because of the way in which the alcohol levy was applied which gave the biggest import- Windhoek of which many Batswana are very fond. The alcohol levy used to be imposed on the import price of beer and on the retail price which gave NBL a massive price advantage over KBL. The other alternative explanation is that for years KBL has basically become a lazy monopoly in the market and could get away with one local brand St Louis* and really had to do nothing else until NBL and the alcohol levy shook the market.   

To thinking beer drinker ( i.e those before the third glass) the immediate response to this should be,  who on earth cares? Well it should matter but not to beer drinkers as long as we are allowed to choose where our beer comes from. But the trade statistics hide a genuinely fascinating story about business and government policy in SACU. The brewery game is dominated by two players in Southern Africa – SAB-Miller and Heineken Diageo which operates with NBL. Basically despite the variety of brands available on the SACU market to suit everyone from your day laborer to the CEO there are really only two commercial choices of breweries available and SAB-Miller remains by far the biggest player in the SACU market.  

But the really interesting beer story is not the Goliath of the industry ie SAB Miller but the David ie Namibian Breweries Limited (NBL). Unlike KBL, NBL is a local Namibian owned company which over many years has had considerable assistance from the Namibian government and has done  what almost no other brewery in Africa has managed to do,  which is to create a recognizable African brand across three continents. It now exports to over 20 countries. The Namibian government helped first by keeping SAB Miller from either buying NBL or establishing a brewery in Namibia in the mid-1990’s. The Namibian government then helped with a range of export promotion activities knowing full well the benefits to the country as a whole of having a globally recognized brand. But most breweries hate exports- they normally considered these junk volume sales because the profit margins are usually low due to  the transport costs of such a low value to weight items. This eats into the slim margins available in an industry that is so heavily taxed by government. But the real difference between KBL and NBL  was that the Namibian brewer had a tiny market of 2 million people in Namibia and it was either grow by export or die.

In Botswana KBL was never under such commercial pressure.  NBL, according to the company’s mangers derives some 60% of sales from exports  and its two biggest export markets are South Africa and Botswana. In 2010 Namibia exported Rand 1.3 billion in beer and it is one of the most important examples of the country's export diversification.
Why has NBL’s Windhoek brand been so successful? In part it has been what the beer marketing people call ‘premiumisation’. NBL took the German colonial origins of Namibia and turned it onto an advantage. The Rheinheitsgebot   which is the 16th century German beer making standard is used for making Windhoek which assures that only water, hops and barley are used  which assures purity.  This has been a major selling point for Windhoek at the premium end of the market. In Botswana, KBL has, twenty years too late, discovered  that it might be losing the market not just because of price and taxes and has recently introduced a new premium St Louis Export which has started winning awards.   
           The economics of trucking huge volumes of beer across the Namib and the Kalahari from Windhoek to Gauteng and Gaborone is really poor. Because beer is a low value to weight item you simply destroy your profit margins. It is one of the reasons that SAB Miller’s business model in Southern Africa is based on  breweries in each of the countries in which it operates and then those breweries will produce not only the local brand but also the whole stable of SAB Miller products. This model is not unique to SAB Miller and almost all breweries look for local firms to produce their products under license. Guinness, the world famous Irish black beer is produced under license in a score of countries with no access to Liffy water as the basic ingredient for all Guinness purists.

In 2008 NBL saw the enormous advantage of trying to produce its products in South Africa rather than reducing its margins and shipping beer to Gauteng. So when its partners Heineken Diageo decided to establish a Rand 7.7 billion brewery in Sedibeng in Gauteng in the run up to the World Cup, NBL decided to shift a part of its production to Gauteng. The decision over where to establish the brewery was not purely a commercial one. The government of South Africa, according to NBL as well as DTI reports, provided considerable tax concessions to set up in such a high unemployment area. Since 2008, if the Namibian trade statistics are to be believed, both the value and volume of beer exports from Namibia have been flat. NBL says the figures are inaccurate but refused to provide its own. The bigger bottles are now being produced in Sedibeng and for the moment the smaller bottles are still coming  across the Kalahari. But eventually the transport economics dictates that exports from Namibia should diminish greatly.

Since the move to Sedibeng in 2008 there has been a perceptible shift in policy towards competition to NBL in Namibia. In 2010 the government of Namibia authorized the building of a brewery in the country by SAB Miller which it had previously blocked in the 1990’s. The SAB Miller brewery has not yet started construction.

There are at least two lessons from the SACU beer saga. The first is that South African tax concessions only strengthen the natural commercial forces that drive business to areas of high economic density like Gauteng. The government of South Africa might wish to stop aiding the loss of diversification from one of its neighbors. For all the smaller SACU partners all this is part of century long process of Pretoria behaving in a commercially predatory manner and is nothing new. It should also be an object lesson to those in Gaborone designing the current Economic Diversification Drive that foresees the establishment of local firms first that produce for the local market and then is a second and later stage move into exports. The experience of KBL and the whole SABmiller business model simply means that this will never happen because more exports mean less profits for the group as a whole. There is no avoiding the lesson of Namibia that a lean and hungry business helped by government to export can do much better in terms of export diversification than any inward looking approach to diversification. NBL exports ZAR 1.3 billion from Namibia and KBL exports P 30 million  from Botswana – the  numbers speak volumes.
[*According to senior officials from KBL the local Botswana  bee,r St Louis is named after city in the USA, not the French patron saint. Why one asks, would anyone in Botswana name the national beer after a big but relatively uninteresting American city? The response given to me by those officials was that this was done because Batswana like big American cities. This seems curious and if anyone has a better and  more credible explanation it would be appreciated]

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