E-Malt.com News article: Africa: Drinks giants in head-to-head scramble for market share in Africa

In just eight weeks Diageo, the world’s largest drinks group by sales, set up and launched a beer made of cassava, a local tuber crop, in Ghana last year, Financial Times reported on November 1.

Ruut Extra was Diageo’s first cassava beer – the British company is more accustomed to brewing Guinness stout and distilling Johnnie Walker whisky – and the project involved securing a tax break for cassava sourcing from 7,000 local farmers.

“Is that eight weeks or eight months?” queried a sceptical analyst at Diageo’s investor conference in London last month.

“Under normal circumstances you’d go: ‘It’s not possible’,” acknowledged Ekwunife Okoli, Diageo’s managing director for regional markets in Africa. “But we had SABMiller as our competitor . . . We had to act in an extraordinary way . . . And I assure you, absolutely, eight weeks from idea to delivery.”

Diageo’s rapid delivery of Ruut Extra is a sign of a head-to-head scramble for market share in Africa, which western drinks companies view as the world’s most exciting emerging market because of its fast-growing economies, rising purchasing power and expanding populations.
Africa, in short, is the new Asia for consumer goods companies.

Mark Bowman, managing director of Africa at SABMiller, the brewer whose century-old roots in southern Africa give it the biggest share of the continent’s beer market, said: “In the last two years, there has been a significant increase in competition, both in marketing spend and competition for assets, such as breweries.”

SABMiller has doubled its capital investment in the continent from $200 mln a year three years ago to $400 mln since. About one-third of its annual $1.6 bln capex spend is to be allocated to Africa, even though the continent produces only 12 per cent of earnings.

Castel, with which SABMiller has a cross-shareholding, and Heineken, are the region’s two other big beer players, followed by Diageo, which has splashed out more than £1 bln in capex and acquisitions over the past five years.

“Africa is currently one of the most highly prized regions for the global brewers,” said Mr Bowman.

The 48 countries of sub-Saharan Africa may be highly disparate but what excites consumer goods companies is the expected doubling of the continent’s population to 2 bln by 2050, accompanied by a trend towards urbanisation – people in cities are more likely to drink branded alcohol than those in the countryside.

The International Monetary Fund expects eight of the 10 fastest-growing countries in the next five years to be in Africa, after a decade in which the continent supplied six of the top 10.

“By 2035, Nigeria will be as big as the UK economy,” said Andy Fennell, Diageo’s chief operating officer for Africa.

If the average Nigerian, who currently drinks 11 litres of beer a year, were by 2035 to drink as much beer as the British do now – 72 litres a year – it would be a champagne moment for the drinks companies.

For the time being, however, Nigerian beer sales have failed to recover as hoped after the removal of fuel subsidies 18 months ago that has reduced disposable incomes.

Amsterdam-based Heineken, which last week issued a profits warning, said quarterly sales volumes had dropped in Nigeria and cited “challenging economic conditions” in South Africa.

Diageo also raised fears of weaker quarterly trading in Nigeria and Ghana last month.

Phil Carroll, analyst at Shore Capital, said: “The shine has come off China but African markets have their issues too.”

The continent has a history of conflict and governance issues, extremes of poverty and wealth and poor infrastructure.

Unreliable water and electricity supply make the cost of building a brewery in Africa 30-40 per cent more expensive than one built in Europe, says SABMiller’s Mr Bowman.

Longer term, however, the growth statistics are too beguiling to ignore. The number of households earning more than $5,000 will increase from 85 mln in 2011 to 128 mln in 2020, according to projections from McKinsey, the management consultancy.

Pernod Ricard, the spirits group that is second to Diageo in global sales, sees this rising middle class as presenting “a major growth opportunity” for spirits.

“We want to do the same in Africa as we have done in Asia,” said Pierre Pringuet, chief executive of the French company, which derives 55 per cent of its emerging markets sales from Asia.

Spirits is still a tiny market, especially compared to beer, in most African countries – partly because of cultural differences but also because of cost. Most incomes stretch only to homegrown local brews, some illicit.

“In terms of relative affordability, a beer in sub-Saharan Africa costs an average of three working hours against five minutes in the US or eight minutes in eastern Europe,” according to analysts at BPI Capital Africa.

The international drinks companies hope to change habits by bringing low income drinkers into the formal market, first through a range of cheaper packaged beers made with local raw materials.

SABMiller produces a variety of opaque beers from sorghum, maize and cassava that sell for half the price of its Castle Lite beer. Its hope is that they will graduate to its more expensive beers when they can afford it.

Diageo plans a similar strategy for higher-margin spirits, which account for more than three-quarters of its global sales – but just 35 per cent in Africa.

The company’s blueprint for Ghana includes “a more affordable range of mainstream spirits brands which we will use to begin to transform consumers from beer into spirits”, said Mr Okoli.

Where cassava is concerned, Diageo has learnt fast – SABMiller made the first commercial beer out of cassava in Mozambique 18 months ago. “We feel a bit put out that Diageo copied us so quickly,” said Mr Bowman.

With so much at stake in Africa for all the drinks companies, it is just one example of a “fierce competitive dynamic”, as Mr Bowman describes it, for market share in the continent.


01 November, 2013