Is Heineken squeezing out its local competitor?
Reports are popping up in Bahamian newspapers about a growing feud between the privately-owned Bahamian Brewery and Beverage Company (BBB), based in Freeport on Grand Bahama island, and its big rival Commonwealth Brewery, which is located in Nassau on New Providence island.
Heineken holds a 75 percent stake in Commonwealth Brewery, which the owner of BBB, a colourful local character by the name of Jimmy Sands, has tried to use to his advantage by giving their competitive wrangles a David-against-Goliath twist.
Tiny islands with small consumer bases make for “interesting” beer markets, especially in the Caribbean. The Bahamas is one of those markets. With a population of about 300,000, most of whom live in Nassau, a city of 250,000 people, the Bahamian economy is driven by tourism and financial services.
Lucky are those brewers that enjoy monopolies on their respective islands. But even monopolists may find their businesses hard going. Lack of scale, wobbly economies (read declining numbers of tourists) and parallel imports (sometimes a euphemism for plain smuggling) can cause executives sleepless nights. Guess what happens if a local competitor appears on the scene? More sleepless nights as those in charge desperately try to find a quick fix to their problems.
Commonwealth Brewery started production in the late 1980s as a joint venture between Heineken and the Associated Bahamas Distillers and Brewers. It has 70-plus labels, 380 members of staff, a major recycling operation, and brands such as Heineken, Kalik, Guinness, Eclipse, and Vitamalt.
All went well until Mr Sands’ brewery BBB went on stream in 2007 with a capacity of 40,000 hl beer per year. Its portfolio of brands includes Sands, Sands Light, Strong Back Stout, High Rock Lager, Bush Crack Beer and Triple B Malt. Although Mr Sands took the highly controversial decision at the time to base his brewery on the island of Grand Bahama, far away from the island of New Providence, where 80 percent of all beer consumers are based, his business took off eventually. Admittedly, BBB’s rise in sales and volume was helped by a generous tax break: under the current scheme, passed in the 2010-2011 budget, Commonwealth Brewery pays USD 5.0 per liquid gallon in taxes, while BBB pays USD 2.0 per liquid gallon - giving the latter a USD 3.0 advantage.
Mr Sands recently told the Tribune Business publication that maintaining the tax difference was crucial to his brewery’s survival, especially given that it incurred a USD 1.04 per case in transportation costs to get its products from Freeport to Nassau - costs Commonwealth Brewery did not have.
Today total beer consumption in the Bahamas is about 180,000 hl – and flat. Market observers say that Mr Sands’ BBB has a market share of 17 percent, while imports account for 8 percent, which gives Heineken’s Commonwealth Brewery a market share of 75 percent.
Even in a stagnating beer market you would have thought that this sort of split would allow both brewers to live happily ever after. Ah, but not so on the Bahamas. According to local media, things turned a shade more vicious when Commonwealth Brewery had an Initial Public Offering last year and Heineken reportedly repatriated the USD 60 million windfall profits back to The Netherlands. What is more, prior to the IPO, on 1 January 2011 a new dividend policy had become effective, under which 100 percent of Commonwealth Brewery’s net income is to be distributed as dividends to shareholders.
What are the implications of such a high pay-out? To all appearances, a fierce turf war as Commonwealth Brewery struggles to protect its market share from being eroded by a smaller competitor.
In July 2012, the local Punch newspaper wrote that Commonwealth Brewery in its past financial year ending December 201”showed absolutely no increase in production levels, despite introducing Kalik Lime. There was an uptick in revenues, but that [was] due solely to USD 4 million in price hikes to consumers. And the stagnant demand for its products, coupled with a USD 7 million increase in cost, resulted in the company ending the period with a 15 percent decrease in net income.”
The Punch reporter went on to issue the damning verdict that “with no major investment to move the company forward in a substantive way, Commonwealth Brewery is just treading water and acting as a ‘cash cow’ for Heineken, which is milking all profits out of the business. […] Companies that tread water for too long start to sink because competition and/or economic conditions overtake them. […] Commonwealth Brewery wants to bully the next fellow out of the game rather than change its own flawed business strategy.”
As we see it, the battle over market share between Commonwealth Brewery and BBB is played out in the domain of national psychology and in the market itself. Both Commonwealth Brewery and BBB claim to be true Bahamian companies. Both employ a local workforce (Commonwealth Brewery 380 versus BBB’s 65) and both have local owners. But media observers have already rubbed it in that Commonwealth Brewery is majority-owned by Heineken, with headquarters in The Netherlands, whereas BBB is 100 percent Bahamian. True, 25 percent of Commonwealth Brewery is owned by the Bahamian public after last year’s IPO. Yet it was the Bahamian administration that forced Heineken into that deal.
In recent months Mr Sands has reiterated his accusation to local media that Commonwealth Brewery is not playing fair. He claims the “giant” is using its marketing dollars to force distributors and event promoters into exclusive agreements to benefit Kalik and push Sands beer out of the market. “In one such agreement with a local merchant”, writes The Punch, “Commonwealth Brewery offered product discounts, staff uniforms, draught beer equipment, furniture, a paint job for the building and two ‘Kalik Parties’. The total package was valued at USD 27,000. In return, the merchant had to replace Sands signage with a Kalik sign, Kalik had to be the best priced beer available, and the store had to exclude Sands and Strong Back brands.”
As Mr Sands sees it, Commonwealth Brewery as a vertically-integrated company with 60 wholly-owned retail outlets has the ability to lock him out of a vast section of the market.
What worries him even more is Commonwealth Brewery’s product strategy, especially its attempt to push Eclipse, a cheap beer brand, further into the market. From what we hear, Eclipse is being sold for USD 18 per case (24 bottles of 0.33 l). On Mr Sands’ home territory, Grand Bahama, sales of Eclipse already stand at about 4,000 cases per month. Eclipse retails at half the price of a case of Kalik (USD 38.25 per case and Sands beer (USD 32.50 per case). Commonwealth Brewery does not offer any discount on its Eclipse beer, but promotes it with the slogan of “One Dollar – One Bottle”. It is estimated that between June and October this year Commonwealth Brewery spent USD 2.2 million on marketing its beers – a sum Mr Sands is unable to match.
Using its clout with retailers and its financial muscle, Mr Sands fears that Commonwealth Brewery is trying to slow him down and finally eek him out of business.
Commonwealth Brewery may well succeed in this. But in the meantime Commonwealth Brewery will suffer too. To our knowledge, no brewer has done well on pushing cheap beers. So why not keep the Bahamas as a beer duopoly in which prices and profits are healthy?
