Kenya: Diageo relying on “backward integration” in Kenya

It is 4pm in a country pub on the outskirts of Kisumu, a port on Lake Victoria. The establishment, set in fields off the main road, is built of crude brick with a tin roof. Inside the spacious yellow interior, which is round like a traditional hut, bottles of beer and spirits are ranged on shelves in a serving area protected by steel bars. At this hour there are just two men sat on barstools. A third, seated apart at a table, is slowly sipping a half-pint of dark beer through a straw, the Financial Times reported on October 31.

The beer in question is Senator Keg, a draught brew developed by Diageo, a UK-based drinks multinational, as a cheap alternative to bottled beer and what John O’Keeffe, the president of Diageo Africa, calls “a ladder” to the company’s costlier brands, including Tusker and Guinness.

Senator Keg comes in two varieties, a lager priced at Ks35 for a half-pint — roughly 35 US cents — and the less expensive darker version, which costs about a quarter of a bottled beer.

Distributed in 50-litre metal barrels and produced from locally grown white sorghum, it is manufactured in a $140m state of the art brewery built by Diageo in Kisumu.

“We went to the government and said, make us tax-exempt and we’ll produce local beer with all-local content,” said Mr O’Keeffe, of Diageo’s proposal before Senator’s launch in 2004.

That “backward integration” — as Diageo calls it — serves several purposes. It reduces reliance on imported wheat and barley, helps cement community relations through job creation and produces a beer cheap enough to compete with the local brews that Diageo characterises as “illicit” and possibly dangerous.

Diageo says that the plant, which opened last year, will eventually create 40,000 associated farming jobs and 5,000 other positions for people running bars such as the country pub outside Kisumu.

Joseph Ambuso Opilo, a retired property manager who sports a wide-brimmed cowboy hat, is both the owner of the pub and a sorghum grower. He shifts about 50 litres of Senator Keg a day and says he is part of what Diageo calls a “circular supply chain” that has enabled it to source more than 80 per cent of its agricultural materials locally, twice the rate of six years ago.

For Diageo, which owns slightly more than half of East African Breweries (EAB) — a holding company that in turn owns Kenya Breweries — Kenya is its biggest market on a continent where beer sales are growing faster than anywhere else. Africa accounts for 13 per cent of Diageo’s global turnover and half its beer sales.

As one of Kenya’s biggest investors, and the second-biggest taxpayer after telecoms company Safaricom, the pressure is on EAB to prove itself a force for good. Beer companies have been criticised for selling alcohol in countries where, say critics, people’s precious disposable income would be better spent on, say, sending children to school.

In his book Heineken in Africa: A Multinational Unleashed — aimed mainly at Diageo’s Dutch rival but partly applicable to other drinks companies — journalist Olivier van Beemen accuses the brewer of exaggerating its economic benefits and of cosying up to host governments for sweetheart tax deals.

When East African Brewers announced it was building a factory in Kisumu, expectations were certainly high. “We felt maybe some good luck would come our way and we could reap the benefits,” explains William Owino, chairman of a local self-help group. “We thanked the almighty.” It was left to Eliud Kiptoo, Diageo’s regional agribusiness manager, to explain that jobs in the automated brewery — the most advanced of Diageo’s 12 African plants — would be few, and limited mainly to those with qualifications. If local people were to benefit, he told them, they would have to grow the sorghum from which the beer is made.

Most farmers in the region, who mainly grow maize, have small plots and cannot compete with cheaper imports from Uganda, Tanzania, Brazil and Ukraine, Mr Kiptoo says. Low productivity and small plots at least means lots of farmers. “In South Africa, we have maybe 25 farmers supplying 30,000 tonnes,” he says. “Here I am looking at 17,000 farmers to supply 10,000 tonnes.”

Farmers have discovered that, as well as selling white sorghum at a fixed price of Ks37 a kilo to Diageo, they can eat it and use it for animal feed.

It has not all been easy going. Yields were lower than hoped for in the first growing season. The co-operative of which Mr Owino is part combined fallow land to create a single field of 21 acres. With little access to bank loans, it is pressing Diageo for finance so that it can expand and mechanise.

Perhaps the biggest concern is the tax. After sales of cheaper keg beer soared, Kenya’s government in 2013 raised excise duty to 50 per cent. Sales collapsed. Both Diageo and its farmers in Kisumu fear a repeat.

“Having engaged farmers like these,” says Mr Kiptoo, “it’s a nightmare we don’t want to contemplate.”

31 October, 2019