Diageo severs ties with Heineken to go solo in South Africa

It is common wisdom that “two’s company and three’s a crowd”, meaning that with three parties and different agendas the complexity of the problems increases. This could have been one of the reasons why the world’s number one drinks company said on 28 July 2015 that it is dissolving a joint venture with Namibia Breweries (NamBrew) and Heineken in South Africa and neighbouring Namibia three years earlier than planned so Diageo can now go it alone in those countries.

Analysts say that the profit sharing agreement struck by the three partners would have been to the detriment of Diageo as, in recent years, spirits products have grown faster than beer.

The joint venture began in 2004 and was renewed in 2008 for a ten-year term as the companies sought to counter the dominance of SABMiller, which controls more than 90 percent of the South African beer market.

However, the joint venture failed to take significant market share away from SABMiller in beer.

Diageo will receive about GBP 128 million (USD 199 million) from a series of transactions with Heineken and Namibia Breweries. The maker of Smirnoff Ice and Baileys will buy out Heineken’s stake in Brandhouse, a sales and marketing entity. At the same time it will dispose of its 25 percent stake in the Sedibeng brewery to NamBrew and sell its 15 percent stake in Nambrew to Heineken.

Diageo will continue to make ready-to-drink products out of its wholly-owned facility in Durban, while Heineken will brew Guinness for bottled distribution under a license. Diageo plans to continue importing canned Guinness.

South Africa is Diageo’s fifth-largest spirits market by units sold, and its share of the market has increased from 26 percent to 40 percent over the past nine years, the company said.

Earlier this year Diageo took full control of the South African traditional sorghum beer company United National Breweries from a company controlled by the Indian businessman Vijay Mallya. For the 50 percent it did not own yet, Diageo was willing to pay up to USD 36 million.

SABMiller’s share of premium beers in South Africa

(volume share %)