March 8/Middle East and Africa Food and Drinks Insights -- Dutch brewer Heineken and the U.K.'s Diageo have agreed to form two joint ventures in the South African drinks market. Under the first agreements, Heineken and Diageo will build a brewery in the Gauteng province close to Johannesburg, with two possible sites already under consideration. This new facility, which will be called Supplyco, will have an initial capacity of 3 million hl, and will be 75% owned by Heineken and 25% by Diageo, producing Amstel, Guinness and Windhoek beers as well as other "ready to drink" products. In the second investment, Heineken and Diageo will also partner with Namibia Breweries to combine their beer, cider and ready-to-drink businesses in South Africa and replace their old cost-sharing venture. Through these investments, Heineken and Diageo are positioning themselves to take on market leader SABMiller, giving the Anglo-South African a run for its money.

According to the terms of the second agreement, which will be called DHN Drinks, Heineken and Diageo will each own 42.25% of the JV, while Namibia Breweries will own the remaining 15.5%. According to a statement by both companies, Heineken's total net investment in these new ventures will be 260 million euros ($401 million), while Diageo will invest 100 million pounds ($202 million) in the first two years. One of the challenges facing both of these projects will be the chronic power-shortages that have been plaguing South Africa. However, the opportunity to challenge SABMiller's dominance in the local market is clearly not something Heineken is willing to let pass by.

Following a lengthy battle, Heineken won back its rights to brew and distribute Amstel Lager in South Africa in March 2007 when the International Court of Arbitration of the International Chamber of Commerce ruled in its favor. SABMiller had said that the loss of the Amstel contract would cost it $80 million a year in profits, as the beer represented 9% of its beer volumes in South Africa. Following this ruling, Amstel announced that it was looking to establish a brewery in South Africa as soon as possible, while sourcing Amstel beer from its breweries in Europe until this could be built.

SABMiller used to control around 98% of the South African beer market, with this figure now having dropped to around 93-94%. While SABMiller has penetrated emerging markets such as China, the firm has retained a strong domestic focus to secure its highly dominant market position. However, it is clear that domestic competition, particularly in the beer sector, is set to increase significantly and could perhaps lead SABMiller to focus more heavily on other emerging markets.

From the March 17, 2008, Prepared Foods e-Flash