The beer market is at a turning point. Its value has grown significantly to reach USD620 million during a time when consumption grew by 16Pct annually. Recently, sustained success and the changing demographics of brewery ownership have led to acquisitions and big transactions involving billions of birr in investments. BGI’s recent announcement of a record ETB4.5 billion deal to takeover Raya, the fastest growing brand in the northern parts of the country is just the latest indicator of intensified acquisition activity in the brewery industry. EBR’s Samson Berhane talked to executives, experts, officials and industry insiders, in order to shed some light on the matter.
The brewery industry in Ethiopia is now undergoing dramatic changes, from rethinking marketing strategy and resource management in the retail trenches, and the innovation and expansion of products and services, to the simplification, and improvement of operations. But recently, in a bid to not only maintain, but to increase market share, mega brewer BGI is actively engaging in the acquisition of small brewers’ shares by investing billions of birr, signalling the dawn of an age of acquisition in the industry.
The occasional big announcement that one brewery is being acquired by another, has become increasingly common. One such move was made public after BGI Ethiopia, the oldest beer company in the country, succeeded in acquiring Raya Brewery. It paid ETB7,425 for each share with ETB1,000 par value. During a general assembly held November 30, 2017 in Mekelle, BGI disclosed its intention to Raya’s shareholders, who had not received a cent from their stake since the establishment of the company. “I was always insecure about my investment before the unanticipated moves of BGI,” says Asmelash Gebremedhin, who bought ETB15,000 worth of shares six years ago from Raya and accepted the offer from BGI to sell his stake for around ETB111,000.
Established eight years ago by its 58 founding shareholders, Raya commenced operations in 2014. They were later joined by over 250 other shareholders, including influential investors such as Dawit G. Egziabher, who controlled 22Pct of the company’s paid up capital of over ETB500 million.
Renowned personalities like Selome Tadesse, former general manager of the then Ethiopian Radio & Television Enterprise and Zafu Eyessuswork, a veteran in the financial sector were among the founding shareholders. BGI also bought a 30Pct share in 2011.
Despite shareholder expectations, Raya was unsuccessful in breaking even in its three years of operation. But alongside the failures, there were success stories.
Raya, with a major focus on the northern part of the country, was able to triple its annual income to ETB500 million in June 30, 2016, while the losses of the company surged by ETB 32 million in 2014/15 to ETB 104 million in 2015/16. Furthermore, it doubled its production capacity to 600,000 hectolitres. Such achievements inspired BGI to acquire Raya’s shares in order to increase its own market share. To fully acquire Raya, it agreed to pay ETB4.45 billion for the 25Pct owned by Dawit and 28Pct stake held by the remaining shareholders.
A move like this is not only rare, it is one of the biggest in the nation’s history of acquisition. “For us to grow, acquiring other companies means lower costs, as compared to building a new plant. It will also give us a bigger customer base in a shorter period of time in areas where we encounter a gap in supply,” Esayas Hadera, marketing manager of BGI, tells EBR.
The brewery and beverage production wing of Castel Group, BGI was the first private and foreign player to join the beer industry in Ethiopia. Towards the end of 1997, the company was established as BGI Ethiopia following the partial liberalization of the economy in 1991. It erected the first privately owned brewery after acquiring 47 hectares of land in Komobolicha. It began its foray into Ethiopian beer with its Bati and Castel brands. The move, at the time, was expected to give BGI leverage to control the market in the northern parts of the country.
A year later, it bought the iconic St. George Brewery for USD10 million, and invested over one billion birr in the renovation, modernization, and expansion of the plant. By 2011, St. George had inaugurated its third and largest brewery in Hawassa. This, along with recent expansion projects, raised the company’s production capacity to almost 3.6 million hectolitres a year. It also helped BGI hold an estimated 28Pct of the market.
In 2011, BGI was threatened by the arrival of Heineken, a company known for investing large amounts of money in the industry. As a result, BGI bought 30Pct of Raya’s brewery in 2011 and later increased its stake to 47Pct, with the goal of conquering the northern market. A year ago, after handing over the title of largest brewer in Ethiopia to Heineken, which holds an estimated 30Pct of the market, and has a capacity of four million hectolitres, BGI decided to acquire Raya.
Castel Group, a parent company of BGI Ethiopia, is also attempting to take over full ownership of Zebidar Brewery, the youngest player in the industry. The major shareholder of the latter, Cipari SA, the parent company of Unbira, has already reached a consensus to transfer its stake to Castel. Unbira, one of the founders of SKOL Beer (the fifth highest selling beer in the world), has exclusive rights to the SKOL brands in Africa, where it is sold in 11 countries. It owns 60Pct of the Zebidar brewery and the remaining equity, is held by its local partner, Jemar Hulugeb Industry. Although the amount of the buyout has yet to be announced by BGI and Unibra, industry insiders predict it will be no less than the offer made for Raya’s shares.
The acquisition will allow BGI to own Zebidar’s plant; which has an annual production capacity of 350,000 hectolitres. “The transaction, however, is subject to the approval of the Trade Competition and Consumers Protection Authority (TCCPA),” Gavin Brown said in his response to EBR’s enquiries. He declined to comment further on the issue, citing the early stages of the agreement between the two companies.
Contrary to Raya and Zebidar, another newcomer in the industry, Habesha Brewery does not seem impressed by the recent acquisitions. One of the fastest growing beer companies in Ethiopia, Habesha has become a highly recognized brand in the Ethiopian beer market. The company, which had around 10Pct market share last year, has an annual capacity of 750,000 hectolitres in its Debre Berhan plant (130 kilometres from Addis Ababa).
“Habesha Breweries, despite the incorrect rumours that are circulating, is not up for sale,” Ameriti Lemma, communications manager of the company told EBR in an email. “Rather, it is growing and planning to reach and connect with every Ethiopian; strengthening the vision with which it has started.”
Recent actions show the beer industry has entered a brave new era, but it is not one that all industry players are fond of. Some insiders fear this may be an ominous trend, as it might pave the way to monopoly. Others argue that the move just implies the conclusion of privatization and the dawn of a new era of mergers and acquisitions.
A consultant and marketing expert in the brewery industry with over a decade of experience, believes the recent acquisitions will bring competence to the industry. “BGI, through the recent acquisitions, will be able to build its market presence while reducing competitors’ strongholds, and achieving market synergies,” he argues. “It will also help revive the industry, as new strategies and ideas will be born from acquisitions of companies.”
Tewolde Asfaw, Chief Executive Officer of Raya Brewery, agrees. “It helps small companies like us gain competencies and resources we don’t currently hold,” says Tewolde. “Most importantly, the acquisition will benefit us by helping us avoid one of our biggest headaches—liquidity.”
Unlike in Ethiopia, acquisitions are more common in the global brewery industry. Over the past five years, the appetite for mega-mergers in the industry has surprised everyone. The aggressive merger and acquisition policy of big brewers have dramatically changed the competitive environment in the global brewing industry.
The world’s top brewers, including Heineken and BGI, have been increasingly willing to enter into multibillion-dollar deals. This was spurred on by the explosive growth of the craft beer industry, which upset the status quo. Their popularity pushed global industry players to buy out key brands. Acquiring renowned craft beer brands was perceived as advantageous because it reduces costs incurred for research and development, according to CB insight, a New York-based research outfit. Over the past five years, the world’s six largest brewers have made 55 acquisitions. AB InBev, the largest brewer in the world is in the lead with 43 acquisitions, followed by Heineken, which has made seven deals over the past five years, according to the same source.
The trend in Africa is no different. Dominated by multinational players such as SAB Miller, Heineken, and Castel Group (mainly through acquisitions), the beer market in Africa is projected to grow quicker than in any other region over the next three years, according to a study done two years ago by Canadean, a company known for conducting detailed industry and consumer research. The consumption of beer is forecasted to grow by five percent annually over the same period of time.
Ethiopia, along with Kenya and Zambia, is one of the fastest growing beer markets in Africa, as Canadeans findings show. A look at the Ethiopian alcoholic beverage industry shows that even though it is comprised of wineries, distillers, and breweries, breweries accounted for 90Pctof its revenue. Moreover, breweries in Ethiopia employ an estimated 10,000 people.
In Ethiopia, the annual production of beer hit seven million hectolitres, while the number of breweries stood at seven. Presently, Heineken, BGI Ethiopia and Dashen Breweries are the biggest players in the industry in terms of volume and revenue. The later entrants undertook expansion projects to keep up with the major actors in the industry. Habesha is making efforts to double its capacity to 1.5 million hectolitres at an estimated cost of USD43.3 million, whereas Raya is working to increase its production by 25Pct to 750,000 hectolitres. This will make BGI the largest brewer in the nation by raising its capacity to 4.3 million hectolitres. Even more, if it succeeds in fully acquiring Zebidar, it will reach as high 4.6 million hectolitres. “In doing so, we will able to have all strategic spots in a bid to control the Ethiopian market,” says Esayas, who is also involved in the negotiation process of the recent acquisitions. “As the market in towns is growing faster than in the capital, the acquisitions will give us a competitive edge.”
BGI’s latest moves coincide with the massive expansion projects of its closest competitor, Heineken, which is currently undertaking its third phase expansion project in a plant located in Qilinto. Upon completion, the project will enable Heineken to produce five million hectolitres of beer and push its total investment in Ethiopia to 600 million dollars.
Gerrit van Loo, managing director of Heineken Ethiopia, has also affirmed that the brewery will continue expanding its investment, but not through consolidation. “We will not acquire any beer company,” he told The Reporter English, a weekly newspaper. “It is much cheaper to build or invest in our own factories instead of acquiring.”
On the one hand, industry insiders perceive the expansions of both BGI and Heineken due to their high cash liquidity. Others argue that it is due to challenges faced during repatriation of hard currency. The recent negotiations between Heineken and the government, where the latter was pushed to approve close to 50 million dollars despite the recurrent foreign currency crunch, is a reflection of the severity of the problem. “Such challenges might push multinational companies to expand as the value of their cash is depreciating unless they reinvest it,” says a consultant in the brewery industry EBR spoke to.
But this does not hold water for Aklilu Kefyalew, director of Beverage Directorate at the Food, Beverage and Pharmaceutical Industry Development Institute. “I have not heard any problem in relation to repatriation,” explains Aklilu, whose institution was established with the aim of providing assistance and formulating strategies, policies, and actions for the development of the beverage sector, including the brewery industry, which has an annual turnover of USD620 million from an estimated annual production capacity of 11 million hectolitres.
Despite the challenges, however, the Institute is eyeing big prospects from the market, which has yet to see new players in the field, including Kegna Beverages and another brewery built by owners of Kangaroo Plastic and its sister companies in Modjo. “The recent acquisitions and expansion projects, along with the new entrants, will result in the creation of more jobs and help the government collect more taxes,” Aklilu stresses. “It will also help raise our export revenue from the brewery industry.”
6th Year . March 16 – April 15 2018 . No.59