International brewer toasting the latest acquisition of South African craft beer maker

Jason Bell

One of the world’s largest brewing houses, Heineken, has taken a step towards a larger share of the South African beer market with the acquisition of the local black owned craft brewer, Soweto Gold, in October 2017. This development comes just months after Heineken bought out the Stellenbosch-based brewery, Stellenbrau. The mergers mean that the brands can now be marketed to a global customer base. While this may be good for the respective owners of the acquired firms, the transactions reflect the challenges faced by Soweto Gold and other small brewers in accessing routes to market on their own.

Soweto Gold has stated that the merger presented an opportunity to benefit in terms of marketing, distribution and sales. This is consistent with challenges identified in previous CCRED research on barriers to entry in the beer industry, which included interviews with Soweto Gold as a black industrialist with capabilities in beer brewing that experienced difficulty in accessing the mass market due to challenges in obtaining finance and competing with the dominant firm, SABMiller. The study found, amongst other things, that there were significant barriers to entry in the industry including SABMiller’s control and influence over access to bar space, fridges, and branding at popular mass market outlets such as taverns and bars, and its control and influence over distributors through various incentive contracts which include terms restricting the ability of distributors to service rival producers.

Little has changed at the manufacturing level in the industry with the largest mass producer, SABMiller, still holding a virtual monopoly because of its ability to exploit economies of scale in production, distribution, and advertising. These advantages have allowed it to effectively control access to the mass beer market. As beer is a differentiated product, craft brands can compete with established brewers in terms of consumer tastes, although there are important differences in terms of the ability to achieve scale and market products. Smaller brands may look to compete directly with SABMiller in terms of accessing space on the counter in bars, for example, but SABMiller has the capacity and scale to offer attractive incentives to bar owners to secure the most visible space. Rivals find it difficult to compete in this regard as they have to incur similar costs to ensure that their products are positioned at the customer’s eye level. Soweto Gold was forced to target middle-class consumers in the craft market due to difficulties in building brand awareness, achieving scale including in distribution, requirements to invest in bottling, as well as strategic behaviour by SABMiller. As noted above, part of the rationale for the merger with Heineken relates to enhancing capacity in distribution and marketing.

The acquisition of Soweto Gold is testament to the barriers facing entrants in terms of establishing independent, black owned companies to compete with incumbent firms not only in beer but other consumer goods markets as well. This case shows that despite the fact that Soweto Gold has clearly developed a good product, brand and company established by a black industrialist, barriers to entry and expansion are high such that there may have been no other option to grow the company but to merge with a large multinational company in order to achieve the brand awareness and economies of scale to expand its share in the market.