SAB tells its side of distribution story
“THE competition law is not there to penalise size, it’s there to penalise inappropriate and unlawful conduct,” said Norman Adami, chairman of SA Breweries (SAB), this week in a case in which South Africa’s most successful global company stands accused of anti-competitive behaviour.
The outcome will be critical for SAB, which accounts for over 3% of national GDP of between R50-billion and R60-billion, and provides 350 000 jobs.
If it loses the case at the Competition Tribunal, it might have to change the way it distributes beer to rural areas, and add R1.5-billion to its costs.
The case revolves around SAB’s appointment of an elite group of 14 distributors in the 1980s, which distribute about 10% of the brewer’s beer and other products to rural areas in South Africa.
SAB’s long-term deals give these 14 distributors the right to distribute liquor in an “exclusive territory”.
SAB sets a maximum price at which these distributors may sell and imposes strict standards, such as requiring them to deliver to all licensed outlets in their territory.
In return, the distributors are paid a fee, which works out to an effective 7% discount on what they deliver.
But the Competition Commission is arguing before the tribunal that all retailers and redistributors that buy more than 16 pallets of beer (1 000
There’s no law that says you can’t be big and successful
cases) should be given the same 7% discount by SA Breweries, although these other companies do not perform the same functions or have the same obligations.
The commission says the fee SAB pays is “‘price discrimination” against smaller independent retailers and distributors.
SAB rejects this, saying that giving such a discount to everyone would cost the company R1.5-billion. That would lead to a drop in service levels, fundamentally undermine its business model, and ultimately lead to an increase in the price of beer.
There is another option: SAB could eliminate these distributor deals and create “depots” — which is how it operates in the rest of the country — from which retailers could buy their products.
Why is SAB fighting the case so hard if in effect it could flick the switch and create depots?
“The business model would continue if appointed distributors were eliminated but what we would lose is the empowerment opportunity and employment in rural areas. It would result in the unnecessary destruction of value to largely black-owned appointed distributors,” said Adami.
He said the 14 distributors employed 720 people. Eight of them were black owned.
“We could have saved ourselves a lot in legal fees. We’re saying there are 14 appointed distributors who risk losing their entire business, which they have developed over decades. As a corporate citizen we believe we haven’t done anything wrong, and we feel we’ve got a moral obligation to these people,” he said.
But SAB also relies on its distributors to bring back returnable bottles too, which are recycled and used on average eight times a year, helping to keep a lid on SAB’s costs.
SAB pays R220-million a year to keep the distributorship model going.
Adami argued that measures like this had helped SAB halve the real price of its beer over the past 40 years, after inflation.
“We can’t think of a cleverer way to do it or we would have done it. Why not? It’s in our selfinterest.”
He argued that the commission’s proposal could see large, white-owned redistributors benefiting, as they’d be able to qualify for the discount because they buy beer in bulk, whereas smaller black-owned firms wouldn’t be able to meet the qualification levels. The large companies could either force out smaller rivals, or buy their businesses — ultimately leading to less competition among distributors.
Some critics see government bodies, like the Competition Commission, as “anti-big business”, but Adami said government policy is pro-competition and pro-business.
“Because one is successful maybe there is a feeling we’re doing something wrong. But what about the fact that maybe SAB is doing something right? … There’s no law that says you can’t be big and successful.”
The complaint against SAB was first brought in 2004 by the Big Daddy’s Group, run by Nico Pitsiladi, which used to deliver substantial quantities of SAB product, largely in the Eastern Cape. What hurt Big Daddy’s is that SAB can now deliver directly to more retailers who order at least 10 cases as more became licensed, said Adami.
He was scathing about Big Daddy’s, saying it was ironic it adopted the stance of the undersiege small business fighting a Goliath when it bought about R250-million from SAB last year. Big Daddy’s is made up of wholesale and retail outlets near townships. It comprises 38 outlets and many brands and supplies some of the estimated 200 000 illegal shebeens.