The just-drinks interview - Part one: Diageo

The just-drinks interview - Part one: Diageo

Late last month, Diageo and Heineken officially opened a new brewery in South Africa. Among those attending the opening ceremony were Nick Blazquez, head of Diageo Africa, and Tom de Man, president of Africa and Middle East for Heineken. In a just-drinks African special this month, we have two interviews – the first of which sees Michelle Russell sit down with Blazquez.

As 165,000 bottles an hour chink across the production line at Diageo and Heinken’s Sedibeng brewery, a new battle for brewing supremacy has begun in a country currently dominated by SABMiller.

Around 200 people were present for the opening ceremony of the ZAR3.5bn (US$473m) brewery, which Nick Blazquez believes will offer the people of South Africa something different, while also picking market share off its main rival.

“Our total beverage alcohol approach (TBA) has been one of the key sources of our growth in South Africa," says Blazquez. "Over the last five years, our share of TBA has moved from 11% to 17% in value share terms. Obviously we’re pleased with that, and that growth has come from spirits, beer and RTD’s.

“My expectation is that we will continue to grow market share and the driving force behind that is having great quality premium brands. The consumers like them and the trade likes working with us.”

Blazquez remains polite with regard to the brewery’s direct competition with SABMiller. “[The trade] like working with SAB,” he concedes. “SAB is a great company, they’ve got great brands and have done very well in the marketplace and I think they’re good for building the category.”

Nonetheless, he adds: “I think that our brands offer something different, they’re working and we’re gaining. So touch wood, let’s hope this continues.”

But while Diageo has a long history and heritage in South Africa with its Gilbeys gin, Smirnoff vodka and Johnnie Walker Scotch whisky brands, it has a long way to go if it wants to catch SABMiller’s 90% share of the country’s beer market.

Maybe SAB’s 3% fall in beer sales by volume in South Africa for the six months to the end of September is a weakness the new brewery will target, particularly with operations starting up just months before the FIFA World Cup kicks off in the country. A coincidence no doubt?

“We finished it three months sooner than we thought, and have actually just signed off our secondary expansion stage, so we’re going to expand it to about 3m hectolitres now. And it’s fantastic that it’s been finished in time for the World Cup so I’d like to say it was all a wonderful plan but actually we were building it as fast as we could.”

Diageo owns a 25% stake in the brewery it has built with beer giant – and holder of the remaining 75% - Heineken, a partnership Blazquez is particularly pleased with.

“We have common values, a common goal and this is the best partnership I’ve worked in,” he says. “I had run businesses in Asia before I worked in Africa, I worked in lots of partnerships there and without question, this one we have here is the best.”

The brewery the two powerhouses have built is based near Johannesburg and sits in 83 hectares. The facility will be responsible for brewing Amstel, Heineken and Namibian Breweries' Windhoek brand as well as Smirnoff Spin, Smirnoff Storm and Strongbow Cider. Builders are already breaking ground on phase two of the brewery’s expansion to raise capacity by a third, to 4m hectolitres, by September, so there certainly appears to be a growing thirst in the South African market for premium beers.

Nick Blazquez, managing director, Diageo Africa

“Notwithstanding the current economic challenge in South Africa, linked to the global financial crisis … there’s much talk about the emerging black middle class in South Africa as economic development is occurring,” Blazquez says. “More people are coming into the consumer segment. We have seen significant growth in the premium segment with Johnny Walker Black Label and, likewise, in the beer market in South Africa we have seen a significant move into more premium beers.”

But with most African’s living on less than US$1 a day, how does the Diageo and Heineken partnership plan to reach those consumers?

“If you take Kenya, about half of the alcohol consumed was in the illicit sector and there are people that are living on $1 a day. The problem with that sector is that it is unregulated,” Blazquez says. “Certainly, some of the alcohol that people buy has been tampered with, so the amount of death and illness caused by that sector is significant. So, in combination with the Kenyan authorities, we developed a product where they waived all their duty.”

Blazquez said Diageo’s Senator Keg beer has provided a “suitably priced, healthy product” Kenyans could afford, from which the Government also receives tax from Diageo for employing farmers to grow its barley.

“It’s been massively successful. Last year we sold about 1.6m hectolitres of a product that didn’t exist about three or four years ago. It has captured a significant segment of the Kenyan marketplace and we are being encouraged to roll it out to other parts of Kenya because they see it as a way of bringing healthy alcohol, as it were, to have less of an impact on society, so it’s going very well,” Bazequez said.

However, for South Africa, Blazquez believes the premium segment is the right one for the partnership to pursue.

“In South Africa, the premium segment is growing and we’re growing market share,” he says. “That’s where we want to participate at this time. Whereas in Kenya we saw the opportunity and needed to go to that lower price point segment, in South Africa we’ve got lots of runway left to win that top end segment.”

That may well include the brewing of Guinness at the Sedinbeng brewery, which Blazquez says will happen “in due course”.

“It is in our plans to do so,” he says. “Guinness is perhaps the most broadly available beer brand in Africa and it has better geographic coverage than any brand. If we continue growing the way we are, it might become the number one brand by value in Africa. It isn’t at the moment, I believe, but it’s not far off.”

Looking beyond South Africa, Diageo again made the headlines in Africa earlier this year, when it settled a long-running dispute with SABMiller over the two groups' brewing subsidiaries in Tanzania.

With the injunction now lifted, Diageo's East African Breweries Ltd (EABL) will go ahead with its plan to ditch its 20% stake in SABMiller-controlled Tanzania Breweries and invest in rival brewer Serengeti Breweries, which Blazquez said is set to complete in the next few months.

He is also keen to point out that Tanzania is a “growing” and “attractive” marketplace.

“We figured that putting together the Tusker brand, the Serengeti brand, the Guinness brand and our spirits brands … bringing that total beverage alcohol portfolio together would be a winning combination in Tanzania.”

Considering how happy Blazquez appears with the new partnership, then, is the joint attack path one that Diageo will look to tread going forward? “I think that partnerships, especially in emerging economies, are very valuable,” he says. “We recently announced an agreement with Unicer, a Portuguese brewery, to brew and distribute Guinness in Angola.

“As and when there are other partnerships that make themselves available, then we will look at doing those. There’s nothing immediately in the pipeline that we can announce, but I think partnerships can be, as you’ve seen in South Africa, fantastic. Equally, in some places it’s better to do it yourself. It depends on the market circumstances relative to your competitive position and market access.”

The opening of the Sedibeng brewery is clearly a direct assault by Diageo and Heineken on SABMiller's home turf. And, with talk of a third expansion phase of the facility, amid whispers, even, of a second brewery, this would appear to be just the beginning of what promises to be a lively tussle.