After South Africa’s Competition Commission has recommend the acquisition, South African Breweries (SAB) is a step closer to acquiring the Smirnoff ready-to-drink (RTD) range of products from global drinks giant Diageo.
SAB is planning to manufacture, market, distribute and sell all RTDs related to the Smirnoff brand including Smirnoff Storm, Guarana, Spin, Pine Twist and Berry Twist. Rights for the original Smirnoff Vodka are, however, not part of the deal. SAB will also have the right to market under a licensing agreement Guinness Stout which will continue to be imported from Ireland.
According to the Competition Commission the merging parties are required to make firm commitments on the localisation and production of the Guinness beer brand in South Africa, including providing the expected timelines of the localisation of the Guinness brand in South Africa.
SAB already produces Brutal Fruit and Redds which are flavoured alcohol brands (FABs), and similar to RTDs like the Smirnoff range. “The FABs market is a highly concentrated market in South Africa with Distell being the outright dominant player and the proposed merger will likely create further concentration in this market. The merger substantially alters the structure of the FABs market as it is essentially a combination of the second (SAB) and third (Diageo) largest players in the FABs market,” the commission said in a statement.
Despite the “closeness of competition” the commission said last week it will recommend to the country's Competition Tribunal to approve the deal because "such increase in volume will benefit the consumers as the Smirnoff RTDs will be widely available and this will present better consumer choices." The statement said “that the proposed transaction is unlikely to distort competition and have any notable effect on the prices of Diageo and SAB’s FABs [flavoured alcoholic beverages] post-merger as the parties will still be constrained by other brands.”
Currently Smirnoff RTD’s account for about 10% of the market in South Africa but are likely to grow under the new agreement.
The sale of the RTD portfolio and the distribution agreement for Guinness follows a consistent path of Diageo to focus on its premium spirits portfolio in South Africa and elsewhere.
The first step was in 2015, when Diageo and Heineken dissolved their joint ventures in South Africa and Namibia. At that time, Diageo sold its 42.25% stake in DHN Drinks and its 25% stake in the Sedibeng brewery in Gauteng, South Africa to its former partners Namibia Breweries and Heineken. Diageo reasoned it had become market leader in spirits in South Africa with a 40 percent share and felt it had the necessary scale to go it alone. For this purpose the global leader in drinks established Diageo South Africa as a national distribution company in the same year.
The next step followed in December last year, when Diageo entered into an agreement for the sale of United National Breweries (UNB), its sorghum beer business in South Africa, to Delta Corporation (inside.beer, 20.12.2018).
By giving away all products which are not directly related to its core business, Diageo is now better able to focus on the high margin business with premium spirits. As announced today, Diageo saw operating profit rose 10% to GBP 4 billion (USD 4.97 bn) for the twelve months to the end of June, with organic sales up 6.1% to GBP 12.9 billion (USD 16bn). Fortified by consumer thirst for Gordon’s and Tanqueray gin and Game of Thrones Scotch Whisky Diageo chief executive Ivan Menezes said that ”Diageo has delivered another year of strong performance. Organic volume and net sales growth was broad based across regions and categories, with new product innovation being a strong contributor.”