The Distribution footprint in South Africa

The distribution footprint refers to the number and location of distribution centres where manufactured product is warehoused and from where distribution to the trade takes place.  The trade refers to wholesalers and retailers that are appropriately registered or licensed to trade in liquor.

The number and location of distribution centres is a function of demand and economics.  Demand relates to the service levels, i.e., order-frequency, order sizes, need for a delivery service and sales volume.  As demand increases so does the need to establish more distribution points.  This is however balanced by the economics of distribution.  An increase in service levels must naturally be balanced against the increased cost.  SAB continuoulsy re-evaluates this balance in an attempt to ensure an optimal distribution footprint.  Specialists in the field of distribution economics collect a multitude of economic data and employ sophisticated computer software to map out an optimal footprint.

Growth in sales volumes over the past two years has placed a strain on the capacity of many of our distribution centres and, going forward, increased retail licensing may very well contribute to an increasing need for further distribution points.

SAB Ltd currently distributes its range of products through a network of 53 distribution centres, comprising SAB depot's, contracted distributors and franchised distribution centres (HoneyBEE DC's).

	Total
SAB Depot's	39
SAB owned Contracted Distributors	2
SAB Franchised Distribution Centres - HoneyBEE	2
Contracted Distribtors	10
Total	53

The Case for Independent Distributors in South Africa

Up until the early to mid 1980's SAB distributed its product solely via its own established network of depots.  SAB depots were predominantly situated in the metropolitan and larger urban areas.  In its endeavours to increase availability of its brands throughout South Africa and achieving economies of scale that would result in reduced cost of distribution SAB saw a need to widen its distribution footprint to include more remote rural areas.  Whilst SAB posessed years of corporate intellect and experience in distribution the benefits of an owner-managed distribution operation lead SAB to a deliberate programme of establishing independent contracted distributors.  The combination of SAB's scale, purchasing muscle, brand power and distribution knowledge coupled with the entrepreneurship, greater flexibility and more intimate local relationship building capability of the owner-managed operation strengthened the distribution footprint leading to greater product availability and thereby an increased offering to customers and consumers at lower prices.

There are currently twelve independent contracted distributors in South Africa, two of which are SAB-owned.  Five of these are black owned.

A number of factors, key of which were uncertainty with regard to liquor legislation and a period of volume decline, prompted SAB to slow down the rate of further establishments since the mid 1990's.  As a consequence no further depots or contracted distributors were established between 1996 and 2003.

Franchised Distribution Centres

The turn of the millenium co-incided with a turn in SAB's sales volume fortunes, progress with new liquor legislation, growth in the number of licensed liquor retailers and an increasing focus on the socio-economic imperative of broad-based black economic empowerment (BEE).

SAB's research suggested that South Africa had been lagging far behind international benchmarks in terms of licensed outlet density, the latter probably stemming from the previous regime's policies that made it either difficult or impossible for black people to obtain liquor licenses.  SAB foresaw a normalisation of the liquor trade whereby former unlicensed shebeens and taverns would become licensed and would demand a delivery service from SAB.

Old-style distribution agreements and brand-franchising had over the years evolved to new forms and styles of franchising.  "Business-format" franchising, also referred to as "carbon-copy" franchising entails the licensing / franchising of an entire business format, i.e. the entire way of conducting a particular business as opposed to merely authorising the use of the franchisor's brand for example.  Business-format franchising therefore offers a means to open up a business opportunity to BEE candidates whilst at the same time providing a success-recipe.

"Tandem Franchising" © a concept and mechanism developed by Eric John Parker of Franchising Plus involves the implementation of a mentoring and financing programme for new franchisees from previously disadvantaged backgrounds in South Africa.

The stage was set for a new chapter in SAB's distribution footprint:

·          New distribution centres to meet the demand for improved distribution

·          Sustainable black economic empowerment through Business-format franchising and

·          Broad-based BEE through Tandem Franchising© allowing for greater accessibility

SAB decided to place any new distribution centres on a Business-format franchising platform.  A new franchise, called HoneyBEE Distribution Centres, was formed and two pilots, Madadeni Beer Distributor in northern Kwazulu Natal and Westonaria Beer Distributor on the western borders of Gauteng were launched in 2004 and 2005 respectively.  These distribution centres would perform the same warehousing and distribution function as performed by SAB depot's and contracted distributors but with the following important differences:

·          The HoneyBEE distribution centres would be franchised to employ SAB's entire business model including information systems tecnology, warehousing and distribution best practices, accounting and human resource practices, value propositions to customers, and other business practices.

·          The HoneyBEE distribution centres would bear branding closely associated with SAB.

·          The HoneyBEE distribution centres would be co-owned by the black empowered franchisee principal and SAB.  SAB's shareholding would over time as the business grows, be diluted to a nominal shareholding of between 5% and 10% through a series of share buy-backs

·          SAB would via preference shares and long-term loans provide the balance of funding not covered by the equity contributions of the franchisee principal and SAB.  These would be redeemed and repaid by the business over time as the business grows.

SAB's commitment to the success of these independent businesses is underpinned by its continued shareholding and financial exposure.