Johannesburg - SABMiller is facing the first major challenge to its beer monopoly in South Africa, following the dramatic news that Heineken has terminated with immediate effect its 40-year-old contract with SAB for the manufacture and distribution of Amstel.
Tom de Man, the regional president of the African and the Middle East units of Heineken, told Business Report that Heineken hoped to have its own brewery up and running in the country in two years.
Until then, Brandhouse Beverage, a Cape Town-based firm, would import from Heineken's European breweries a little less than the 2,3 million hectolitres of Amstel that were sold each year by SAB.
Amstel accounts for 9 percent of the local beer market. This, combined with the 2 percent that the Heineken brand has, gives the Heineken group a combined 11 percent share of the market.
It will be the first time that a competitor with a significant share of the local beer market has challenged SAB's position.
De Man said that there was a compelling business case for terminating the contract with SAB: "Our profit contribution from Amstel will increase significantly compared with how we fare now."
He said Heineken had initiated an arbitration process, in terms of the contract, last year, after the conclusion of SABMiller's $7,8-billion (about R57.4 billion) acquisition of Bavaria in Colombia.
That transaction resulted in the controlling shareholders of Bavaria acquiring a 15 percent stake in SABMiller.
Heineken argued, successfully, that this resulted in a material change in ownership of SABMiller, which could reasonably be considered to be harmful to the interests of the Heineken Group.
Bloomberg reported that SABMiller had said the reason given by Heineken for terminating the contract was that profit from the South African division was used to fund SABMiller's global expansion.
SABMiller found out about Heineken's decision on Monday, from someone who had read the announcement on the Heineken website.
The move will result in SAB losing control of the most popular premium beer brand in the country. It accounts for about 70 percent of SAB's premium beer offering, which at annual growth of 22.5 percent is the fastest growing market segment.
SAB's sales volume increase last year was 1 percent. Analysts say this points to a decline in the volumes of sales of SAB's core products, which account for 85 percent of total sales.
The contrast with the sales performance of SAB's core products makes the move by Heineken more threatening. In its last financial year, Amstel generated revenue of $300-million in South Africa and before tax profit of $80-million.
Tony van Kralingen, SAB's chief executive, said the group would use international premium brands such as Pilsner Urquell or Peroni to replace Amstel.
Julian Wentzel, the head of research at First South Securities, said Amstel had been SAB's growth engine and that management would need to work out very quickly how to replace it. The 11 percent of the beer market represented critical mass for Heineken "and a comfortable base from which to build a platform". Local competition authorities were far more robust than when SAB's position had been challenged previously.
Chris Pitcher, an analyst at UBS in London, said Heineken's move was "the first major step to challenge SABMiller's dominant position in its local market.
SABMiller loses a very successful brand with the growing black middle class."
Pitcher had a "reduce" recommendation on SABMiller stock.
"Heineken's ability to supply the South African market in the short term will be hamstrung by its lack of local production facilities," said Matthew Webb, an analyst at JPMorgan Cazenove.
South Africa is one of Amstel's biggest markets, accounting for 19 percent of the 12,2 million hectolitres the brand sold last year internationally, according to figures from Heineken.