National Sorghum Breweries is looking to list on the stock exchange. Reg Rumney spoke to chief executive Professor Mohale Mahanyele
BLACK-OWNED and black-run National Sorghum Breweries, which recently announced it is headed for the stock exchange, is no Jack the Giant Killer.
So says NSB chairman and chief executive Mohale Mahanyele, despite competing head on with giant conglomerate South African Breweries in both sorghum and lager beer and indirectly with SAB in cooldrinks.
Mahanyele lays his cards on the table. He would rather have SAB as a partner and its CE Meyer Kahn as a mentor, although he continues to talk to giant overseas brewing companies like Anheuser Busch about some kind of co- operation.
Indeed, Czech Republic brewer Pivovar Ostravar will take a 25 percent stake in NSB’s Vivo Africa Breweries, producers of Vivo lager.
The carbonated soft drinks division Africa Beverage Corporation, is a joint venture with Cott Corporation of Canada, which also supplies the cola syrup for Makro’s American Cola and other cola house brands.
Overseas companies, he says, are scared of SAB’s muscle, which has sent many would-be competitors like Anton Rupert packing in the past.
To put the competitive threat of NSB into perspective, even at full volume of its Vivo brewery of 700 000 litres a year, NSB’s share of the beer market is negligible. Perhaps when NSB achieves 10 percent of the present clear beer market of 2,2-billion litres in the next three to five years, it will be seen as a threat to SAB. But by then, Mahanyele says, SAB will have leapt ahead to greater volumes.
While SAB need lose no sleep, NSB will not spur a price war.
NSB’s Vivo is priced the same as SAB’s Castle lager, says Mahanyele, while the cooldrinks are around 30 percent cheaper than Pepsi and Coke.
On the other hand, Mahanyele admits it would politically dangerous for SAB to crush the fledgling black company, and if NSB has a political edge, well and good.
NSB’s reason for listing is to raise R200-million for expansion. A second brewery, Vivo 2, is planned, and NSB will raise more money for that, possibly attracting more foreign investment.
Having finally launched its lager beer after many delays, NSB is now going to spend money on marketing.
The initial marketing spend from July to December this year will be R10-million, with more to come in the new year, though Mahanyele does make the point that this does not include the below-the-line promotions all-important for the NSB’s township market. The sophisticated consumers likely to be reached by marketing make up only 20 percent of NSB’s sales, he considers.
“We must never make the mistake of fighting SAB below the line. It’s like fighting Mike Tyson. The best decision is not to get into the ring at all.”
Marketing to the community of traditional consumers, NSB also relies on the community to distribute its products, using, among others, the shebeens represented by SA Taverners’ Association and hawkers. Over 60 percent of its distribution is done this way.
Mahanyele has just taken the bold step of ditching NSB’s sales force. Township women, he says, are better sales people and cost less. They only need a bigger slice of the profit.
Most of NSB’s 10 000 shareholders are first-time shareholders — and most are women, not surprising since 70 percent of sorghum beer retailers are black women.
NSB from inception has had a social investment programme. Mahanyele says one cent out of every can of beer or cooldrink sold goes to education, and NSB is sponsoring a student in the field of education in every university or technikon in the country.
The company was formed four years ago when the South African government-owned sorghum beer breweries were privatised by selling shares exclusively to blacks.
Companies and pension funds were asked to invest on behalf their black employees in an empowerment exercise.
“We have about four major shareholders, but not as institutions. No one person can hold more than 10 percent of the shares.”
The shares are tightly held.
“We have paid at least a 20 percent dividend since the company’s inception. Those who paid R1 a share have already got back 54 percent of the original investment.”
Mahanyele puts the present value of NSB’s share at R5 to R10.
A div was paid even this year, made difficult because of the R17-million loss made by Jabula Foods — a loss which will be recovered by the outright sale of Jabula, leaving the company to concentrate on supplying it clear beer, Vivo, a wide range of sorghum beer products, and Nation’s Pride carbonated cooldrinks.
NSB lost the prisons account, but was not told why it had lost the tender, though Mahanyele has his suspicions.
Loss on the lager beer side, Vivo Fine Lager, are minimal, and have been incurred in development.
Despite major capital investment needed to get the Vivo Africa Breweries up and running, gearing has improved from 82 percent to 67 percent.
The Jabula debacle, which will mean the retrenchment of more than 300 people, says Mahanyele, cut deeply into the operating profit of R32,7-million, down 4,6 percent from the previous year. On turnover up by 2 percent at R543,5- million, bottom-line profit fell 53,2 percent to R12- million.
Political violence also played its part: NSB lost two- thirds of its Natal market, an area of high sorghum beer consumption, this year.
When NSB started, financial analysts predicted it had no future because it was thought the sorghum beer industry was moribund as increasingly sophisticated and urbanised blacks switched to “clear” beer like the lagers sold by SAB.
But sorghum had never been properly commercially managed, and had never been advertised or marketed.
Indeed, Mohanyele points out, as a revenue-generator for the bantustans and township authorities it become a despised business.
Mahanyele says the previous government’s decision to privatise sorghum beer brewing was inspired not by benevolence but a desire to rid itself of a nuisance.
Around three quarters of sorghum beer produced is brewed at home, making for enormous opportunities for expansion of NSB’s brewed products. Taking the home-brew into account, the sorghum beer market is three times the size of the lager market.
The exclusivity arrangement, giving NSB sole right to sell sorghum beer in the Republic could never be policed and so wasn’t worth much, he says.
The result was that NSB competed with SA Breweries subsidiary Traditional Beer Industries, which was supposed to operate in the homelands. Now TBI has set up a brewery in Soweto.
The exposure to competition was actually helpful, says Mahanyele, who estimates TBI has about 20 percent of the brewed sorghum beer market.
The advent of democracy has opened up opportunities in Africa, for instance in importing sorghum from, and exporting value-added products to other African countries, using South African technology and know-how.
Already, production of Vivo has been constrained by a shortage of cans, as demand exceeds supply of Vivo exports to Zimabwe and Mozambique.
There is a possibility breweries will be set up in Zimbabwe, Mozambique and Namibia, he adds.
Mahanyele stresses that NSB is the single biggest manufacturing group which involves blacks in day-to-day management at all levels.
Even when using outsiders an attempt is made to keep to the racial or empowerment theme on which the company was based. The annual report is printed by a black company with photographs entirely supplied by a black reporter.
Referring to recent empowerment moves, he says that however commendable it is to get blacks involved in insurance companies managed by whites NSB is the only company where blacks work at the coal-face of management.
“The time must come when blacks must begin to burn their fingers.”
This is the only way to grow, without being shielded from commercial realities, he says.
“We made mistakes. How else would we have learnt.”
Among those mistakes were the improprieties which led to allegations of corruption aired for the first time in the black magazine Tribute.
Describing a lack of proper corporate governance, standards and accountability as “unforgivable”, Mahanyele admits he was wrong.
“I regret some of the silly mistakes like trying to remunerate some of our executives by giving them payment in kind. It may be a common practice, though not openly admitted. We were caught out on it.”
Mahanyele says NSB is not immune from the kind of affirmative action poaching of job-hopping black staff that characterises the corporate world now. NSB has resisted joining in, however, preferring to promote from within to replace those leaving.
“Since we started we have not hired one black to replace a black.”