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Al-Ahram Weekly 22 - 28 April 1999 Issue No. 426 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 22 - 28 April 1999 Issue No. 426
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Profile Special Travel Sports People Time Out Chronicles Cartoons Letters ABC sits on 'cash cow'
by Niveen WahishIn 1997, its centenary year, the Al-Ahram Beverages Company (ABC) was sold. Some may think this is not the ideal way to celebrate 100 years of existence, but, on the contrary, the sale has put the company on the road to recovering its former glory.
Although it has only been a little over two years since ABC's ownership moved from government hands into the private sector, the company has often been dubbed a privatisation success story.
It has introduced new products and expanded its plants. The price of its shares has doubled and its sales have risen from LE149.2 million in 1997 to LE186.3 million in 1998. And its market capitalisation has soared from $89 million to over $250 million. Moreover, it is one of only six Egyptian companies which have Global Depository Receipts (GDRs) trading on the London Stock Exchange, and it recently issued GDRs in the euro as well, making it the first company in the region to do so.
The company has been in the spotlight since the Egyptian government decided it wanted to sell it. The company was a state monopoly which controlled 90 per cent of the alcoholic beer market in Egypt and whoever bought it would be inheriting the monopoly. However, ABC's value was difficult to assess because of its various real estate holdings which inflated its price. This derailed an offer for the company from its former owner before nationalisation, the Dutch company Heineken. To avoid a stalemate, the government sold 10 per cent of the company's shares to its employees and 15 per cent to institutional and individual investors in a public offering.
However, according to a public official who prefers to remain anonymous, the public offering was a failure. Many potential investors in the country turned away from the offering because of the religious prohibition against alcoholic beverages. On the other hand, the low turnout at the offering convinced the Egyptian government that the best way to divest this company was to sell to a strategic investor.
The US-Egyptian Luxor Group offered to buy the company without its real estate, and the Egyptian government agreed. Seventy-five per cent of ABC, or 3.37 million shares, was sold to the Luxor Group for LE231 million. The new owners are still operating ABC's three plants in Giza, Alexandria and Sharqiya province, but by the year 2002 they must close all of them except Sharqiya and give the land on which the other two stand back to the government. The new company knew it needed to invest a lot to turn ABC's performance around. So the Luxor Group pledged to inject over LE200 million to revamp ABC, and build a new brewery in Al-Obour city just east of Cairo to replace the Giza and Alexandria plants.
Apparently, the company was worth every penny put into it. Ahmed El-Zayyat, chairman of the company, was quoted as saying he inherited a company "that was by any standards a gold mine -- a monopoly with a 95 per cent share of the market, 100 years old and very well known, a cash cow."
Not satisfied with just having ABC, the Luxor Group recently made two additional acquisitions. It bought one of its would-be competitors, the Nile Brewery (NB), under construction in Badr City on the Cairo-Suez Road. And it acquired Egypt's sole state-owned wine-maker, Gianaclis Beverage Company, enabling it to dominate the wine market as well. The acquisitions will put the company at a great advantage for years to come, especially since both its new Al-Obour plant and the NB enjoy a 10-year tax holiday, an incentive that is no longer granted to drinks-manufacturers.
With its purchase of the NB, it appears as though the company is making things very difficult for the competition even before it sets out, especially since ABC already has a 90 per cent share of the alcoholic beer market and 95 per cent of the non-alcoholic beer market.
Not only is ABC the country's only beer manufacturer for now, it is not challenged by imported beer either. The latter is subject to a 300 per cent customs tariff. Thus, while ABC markets its local beer at an average of LE3.50 a bottle, imported beer sells at LE21-24.
Therefore, ABC can be categorised as having a monopoly position. However, some critics say that one company should not be allowed to monopolise the market. They attribute this state of affairs to the fact that to date the government has failed to issue an anti-trust law to hedge against the formation of monopolies. Yet, the official who refused to disclose his name believes that the government has knowingly let this happen, especially since the cabinet approved ABC's purchase of Gianaclis. In his opinion, the alcoholics market is not a strategic industry so the government does not really care whether it is monopolised or not as long as the new owners do not lay off any workers and invest in upgrading the company with expertise and new technology.
Keefer, meanwhile, denied that his company wants to monopolise the market. He admitted that "in the alcoholic and non-alcoholic beer market, which is ABC's main business, we do not have any meaningful competition." Nonetheless, he said, "We welcome anyone who wants to compete. That will make us more efficient." He added that a monopoly usually does not last more than 10 years unless it is artificially protected, for example, by a government.
With over 90 per cent of the market secured, ABC apparently feels safe cooperating with its only rival, the El-Gouna Beverage Company (GBC), established by Orascom Projects and Touristic Developments, which began production this month. El-Gouna, located in the Red Sea resort of the same name, has an initial production capacity of 60,000 to 90,000 hectolitres annually, expandable to 140,000 hectolitres. It is producing two premium beers one of which is made under license from Lowenbrau of Germany. "This is the first international beer brand to be manufactured under license in Egypt," said Rhamy Abdel-Hamid, marketing manager of GBC. While acknowledging that ABC has a near monopoly on the Egyptian market, he said GBC hopes to carve out a niche for its products. In addition to the brewery, El-Gouna Beverages has also completed construction of a winery.
ABC has forged a strategic alliance with Orascom's new company. Both sides will invest in joint marketing and creating an awareness of the 'beer culture'. According to Keefer, the two companies will do this by spending on "advertisements and promotion to get people drinking other alcoholic beverages to focus on drinking beer. The aim is to get back consumers who were alienated in the past, as well as attract people who now drink other alcoholic beverages to drink beer."
Keefer believes that the market for both alcoholic and non-alcoholic beverages has great potential. He said that last year his company produced 355,000 hectolitres (one hectolitre equals 100 litres) of alcoholic beer and 205,000 hectolitres of the non-alcoholic beverage. The latter figure doubled last year compared to 1997. "We see ourselves growing very rapidly in that market," he said, adding that the company managers before privatisation had never picked up on the demand for the non-alcoholic beer. "It is the first thing we spotted." He noted that there is also a good market for non-alcoholic beer in neighboring countries, which represent a good potential export business.
As for alcoholic beer, per capita consumption right now is less than 2/3 of one litre per person. In 1986 it was almost double that figure. And 50 years ago, per capita consumption was triple that figure.
Keefer attributes the drop in demand for beer products to the fact that the quality of the products deteriorated while prices were increasing dramatically. "The public sector was not really interested in expanding the market," he said.
Moreover, "if we look regionally at Turkey, Lebanon, Iraq, Algeria, Morocco, and Tunisia, they all have significant beer consumption at least 10 times as much as Egypt. There are still many people in Egypt who are capable of buying more beer."
Not satisfied with being Egypt's sole beer-maker, the Luxor Group is now moving into wine production with the purchase of Gianaclis, which boasts 95 per cent of Egypt's highly protected wine market worth $32.1 million annually. Keefer said that investment in the new company will initially be limited. "Most of the assets are very salvageable right now. It is similar to ABC where you have a great old company with lots of heritage and brains, but quality has deteriorated."
Keefer said that 10 years ago, 70 per cent of Gianaclis' customers were Egyptian and now they are less than 10 per cent. He said that the company's initial strategy is to win back the lost clientele. They will do that by bringing in foreign technical experts, improving quality dramatically, then introducing new products such as non-alcoholic and French-style wines.
Meanwhile, ABC will be making a total investment of about LE55 million in the NB. "We are going to expand the existing capacity," he said, adding that it will mainly be used for the production of non-alcoholic beer. "It is closer to Cairo and Upper Egypt than the Sharqiya plant where non-alcoholic beer is currently being manufactured."
"The Nile Brewery is a good deal," Keefer said. "We are buying capacity for about $54 per hectolitre, which is a very good price. Most brewers in the world, when they buy capacity, usually spend about $100 per hectolitre." The NB may accommodate the production of 600,000 hectolitres of non-alcoholic beer or 300,000 hectolitres of alcoholic beer.
