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Consolidation in the beer industry

Consolidation in the beer industry

It was a recent phenomenon that saw an overwhelming flow of foreign capital in Ethiopia’s beer industry. In matter of years, big names like Heineken and Diageo poured in money to beer. However, this dynamism seems to be continuing in recent years with the biggest names in the industry managing deals to swallow small and new breweries in the industry, writes Dawit Endeshaw.   

As the expression goes, eventually, “the bigger fish swallows the smaller fish”; and the current dynamics in the Ethiopian beer industry is better captured by this expression.

Just a few weeks ago, BGI Ethiopia through its parent company Castel Group disclosed its intention to takeover, Zebidar, the youngest brewery in Ethiopia, which entered the market two years ago.

This might be a good offer for Zebidar which came to the market in 2016 with a prime target of controlling the beer market in southern Ethiopia. Located 167 kilometers south of Addis Ababa in the Gurage Zone of the Southern Regional State, Zebidar has an installed capacity of producing 350,000 hectoliters of beer per annum. It was established with an initial investment of 1.3 billion birr.

Currently, Zebidar’s 60 percent share is held by Unibra, a Belgian company, and the remaining by Zhemar General Industries SC.  Zhemar has more than 2,000 shareholders. Zebidar’s Brewery rests on 150,000 square meters plot.

According to sources close to the industry, BGI has agreed to buy Unibra’s 60 percent stake in Zebidar, recently.

This deal with Zebidar was also accompanied by a similar acquisition deal between BGI and Raya, another new brewery in Ethiopia.

BGI Ethiopia has also agreed to buy 58 percent stake in Raya at a total cost of 2.5 billion birr taking a controlling share in Raya Brewery. Established almost five years ago, Raya is the second brewery company in northern Ethiopia, next to Dashen.

Raya, which was established in Maichew, Tigray Regional State, has the capacity to produce 700 hectoliters of beer, a year. Currently, its asset is estimated to reach 4.45 billion birr.

BGI already holds Raya’s 42 percent shares which it acquired at the time of establishment. Raya’s shareholders include Tsadkan Gebretensay (Gen.), former chief of staff of Ethiopian army and Dawit Gebregizabher, a businessman particularly identified with investment in the aviation and import sectors. All in all, there are more than 2,440 shareholders.

“We got a good offer from BGI,” Dawit told The Reporter. On the other hand, BGI will work on expanding the factory.

BGI also agreed to increase the production capacity of Raya to three million hectoliters, Dawit said.

As per the agreement between Raya and BGI, which apparently has been going on for the past couple of years, the shareholders will get seven folds of the initial share values when the deal is concluded.

This might be a strategic move by BGI which saw its shares in the brewery market declining in recent years in Ethiopia. BGI, which is a pioneer in the Ethiopian brewery industry, was established in 1922 by Mussie Hal, a Belgian national of Ethiopian descent.

The company began its operation at 20,000 square meters of land in Addis Ababa, Mexico area.

Currently, BGI produces beer brands which include Amber and Castle, alongside its flagship brand St. George with an estimated production capacity of three million hectoliters beer per year.

For years, BGI has been enjoying a dominant market position over the brewery market which could go as high as 70 percent at a certain time. However, this dominance has seen a decline in the past successive years.

This decline in dominance is largely attributed to the coming of multinationals in the industry. Companies such as Heineken and Diageo entered the Ethiopian market back in 2011 following the acquisition of old and tittering state-owned breweries in the country. In this respect, Heineken has paid over 163.4 million dollars, for the acquisition of Harar and Bedele; while Diageo decided to invest USD 225 million on Meta Brewery, another state-owned factory placed in the auction block under the privatization policy.

Since then, these two companies particularly, Heineken has invested a significant sum of money to improve its production capacity and quality; this brought Heineken in direct market contention with BGI. Currently, Heineken has a production capacity of 4 million hector liters, a year. It offers beer brands such as Heineken, Walia, Walia Radler, Harar, Bedele, Bedele Special, Buckler and Sofi Malt.

“These changes reflect the dynamic and competitive beer market in Ethiopia which we believe will strengthen and develop the overall brewery industry in the country,” Serawit Bezabeh, director of Corporate Affairs at Heniken Breweries SC said in an email response to The Reporter.

Heineken is now in its third phase of expansion which it is undertaking in its Kilinto factory site. This round of expansion is expected to bring its total production capacity to 5 million hector liters. With this, the company’s total investment in Ethiopia stands at 500 million euros, one of the biggest in the industry, according to a statement from Heineken.

Fortune, a business weekly newspaper, recently published a story that stated the National Bank of Ethiopia, upon an order from the Office of the Prime Minister, directed commercial banks to approve 40 million euros in letters of credit (LC) for Heineken’s expansion project.

According to estimations from Heineken, the beer market is growing at a rate beyond 10 percent annually, while experts say it could be well over 15 percent.

“The market will continue to grow in the coming years which could result in new entrants in the market or continuation of the ongoing consolidation like the one we are seeing with BGI, Raya and Zebida,” Heineken forecasts.

Not only Heineken, but Diageo as well is making similar moves these days. Diageo has also made investments geared towards market expansion in recent years. Just recently, the company has introduced Azmera and Guinness beers to the Ethiopian market.

“We are at the moment working on options on how to expand our capacity,” Baker Magunda, managing director of Diageo said in an exclusive interview with The Reporter a couple of months ago.

“We sell everything we produce and therefore we want to keep our commitment to Ethiopia,” he said.

Moreover, companies such as Dashen have also increased their capacity not to mention the coming of new players into the industry including Habesha, Raya as well as Zebidar over the past five years.

Currently, Ethiopia’s total beer consumption stands at 12 million hectoliters per year. In addition, per capital consumption is estimated to be around nine liters.

Industry experts argue that the recent aggressive move from BGI might be the result of similar competition and expansionist desires of other industry players: Heineken and Diageo jointly balancing the market share of BGI.

The decision from BGI is very wise and it is in line with the dynamics in the industry, Alazar Ahmed, an expert in brewery industry and a consultant for some of the aforementioned breweries, comments.

He argued that the market is still untapped and companies have to exploit that. For BGI, it is very expensive to serve distant markets like northern and southern parts of Ethiopia.

So instead of building new factories it is very wise to acquire already established brewers, he said. Again for local brewery companies, it was difficult for them to be competent with those big multinational companies because the later has more muscle.

He also forecasts that given the potential market of 100 million population new multinational companies might join the Ethiopian market in the coming years.

Other commentators in the market also saw the new acquisitions of small breweries by the larger ones as a concern for competitiveness of markets.

Since the enactment of the Trade Practices and Consumer Protection Proclamation in 2010, Ethiopia has witnessed the introduction of detailed rules and setting up of a government institution to oversee mergers and acquisitions. Since then, the Trade Competition and Consumer Protection proclamation of 2013 and other detailed directives have provided some yardsticks for and procedures to be followed for mergers in Ethiopia. 

According to Trade Practices and Consumer Protection Proclamation, the recent merger news in the highly competitive beverage, alcohol sector is one that will require the blessing and approval of the Trade Competition and Consumers Protection Authority as legal pre-requisite, according to a statement given by Aman Assefa & Associates Law Office to The Reporter’s enquiry.

The authority, in its consideration to approve or reject merger applications, uses the “significant adverse effect” on trade and competitiveness in the market, reads the statement.

Often times, the merged entity’s prospect in becoming a sole price setter for practical purposes and any possible effect of limiting or restricting price competitiveness in the "relevant market” will be a point of consideration in analyzing the effect on trade and competitiveness, said the statement.

Alazar, despite being optimistic about the growing market, shared this concern regarding the new mergers.

If we, for instance, mention a scenario where Heineken show interest to acquire BGI we will see a very dramatic shift in the market, he said.