Africa’s untapped beer market

AB InBev’s takeover of SABMiller is all about breaking into the African market. But where there is opportunity, there is also risk

 
 
Author: Rita Lobo
January 13, 2016

In Europe and North America the ‘end of week beer’ is a long and respected tradition. Workers from across sectors and industries head to bars and pubs to celebrate yet another long week of toil and the arrival of the weekend. And across the Western world, the variety of tipples on offer for those thirsty, honourable workers is largely the same, from the workmen’s social club to the high-end bars: Beer. Ice cold Budweisers, Stella Artois and Carlsbergs rule the roosts and are recognised brands worldwide.

Some of the most popular beers in the world have struggled to attract consumers in Africa, where small local brews have been the popular choice for many years

But if one such worker were to step into a watering-hole in Lagos or Harare, they would not be greeted with the familiar red labels of their beloved Bud, but by Star Lager, Nigeria’s brew of choice, or Zambezi, Zimbabwe’s favourite beer. Some of the most popular beers in the world have struggled to attract consumers in Africa, where small local brews have been the popular choice for many years.

In fact, many drinkers across African regions often bypass conventional bottled or keg beers altogether, and opt for home-brews instead. In Uganda, people meet at local drinking clubs to enjoy a shared malwa, a fermented drink consumed through long straws from a clay pot on the club floor. There are similar clubs across regions in the continent.

Fig. 1
The home-brewing trend has been enduring in Africa, as traditional malts and barleys used for making beer are expensive to import, and locals have relied on home-grown crops like cassava to produce their fermented beverages.

But bootleg brews are not always tasty, and are often dangerous. According to The Daily Mail, 75 people were killed by bathtub beer served at a funeral in Chitima, Western Mozambique in January last year.

The fact of the matter is that beer is still relatively expensive in many parts of Africa. According to research by Goeuro, a bottle of beer in South Africa costs about $3.20 in a bar (see Fig. 1). That may sound like a bargain compared to the $4.13 paid by a Liverpudlian in a local pub, but the average receptionist or office worker in South Africa makes just over $4,800 a year, while a similarly employed office administrator in North West Britain brings home $23,500 per annum.

Suddenly that cold brew on a Friday evening is looking a lot more like an expensive luxury to the South African drinker. Additionally, wages there are much higher on average than those in Sub-Saharan Africa: in Uganda, an imported bottle of beer in a bar would set you back $1.44, but as many as 82 percent of Ugandans earn less than a dollar a day.

Brewing behemoth
However, it is not entirely accurate to say Africa has experienced a complete beer draught. SABMiller is the second largest brewing company in the world and still a major player in the international beverage market (see Fig. 2). It was once simply South African Breweries until it started looking abroad for opportunities, took over the Miller Brewing Company, listed itself on the London Stock Exchange and started expanding in Europe. It now operates in 75 different countries worldwide.

SABMiller has been brewing beer in South Africa since 1895. It has ties to other African countries that go nearly as far back; it has had breweries in Zimbabwe for over a century, and in Angola and Botswana for at least 50 years. In the mid-1990s, it got onto something of a roll in its African expansion by acquiring several newly privatised national breweries in Zambia, Tanzania, Mozambique and Uganda.

Mark Bowman, Head of SABMiller’s Africa division, insisted this rapid expansion into the continent was somewhat unplanned; he told The Economist that “at this stage it was about fixing the companies”. The breweries were going for cheap, and SAB brought know-how and sounder management with the unambitious intent of simply making these companies turn a profit.

In the decade after SABMiller’s rapid African expansion, between 1997 and 2007, GDP in Africa grew an average of five percent, fuelled by Chinese demand for the continent’s abundant minerals. Sub-Saharan African countries are experiencing the fastest rates of urbanisation and highest GDP growth in the world. Additionally, the continent is experiencing a rapid demographic shift; according to the UN, one-fifth of the world’s population will be African in 10 years.

But more importantly, Africa has the world’s largest working age population. In Tanzania for instance, over 45 percent of the entire country is aged between 15 and 45, and that figure is increasing by the year. Basically, the majority of drinkers coming of legal age within the next decade will be found in Africa. So Africa’s middle class is growing, and they will be thirsty.

Fig. 2

Today SABMiller is present directly in 15 African countries, and in a total of 21 through partnerships with local and international brands such as French drinks company Castel. Up to 27 percent of SAB’s volume is marketed in Africa, and it accounts for around a third of its profit.

Suddenly, saving those national breweries in the 1990s looks like a rather shrewd long-term investment for SAB. And the company’s enviable position in Africa (see Fig. 3) is looking particularly appetising for Anheuser-Busch InBev: SABMiller’s erstwhile competitor, now its soon-to-be parent company.

AB InBev is on the cusp of finalising its takeover of SABMiller. In November, the two companies agreed the terms of the takeover, after months of negotiations. AB InBev has formally offered $104bn for SABMiller and, if approved by the various regulators involved, the deal will spawn a brewing behemoth that will produce over one in four of the world’s beers and command half the industry’s profits.

The overall takeover is slightly unusual in that it involves a $12bn spin-off deal, in which Molson Coors – makers of Coors Light – buys out SABMiller’s US stake to form MillerCoors, a US joint venture. AB InBev already brews Budweiser, America’s most popular beer, so it would be unlikely regulatory approval would be given for a takeover of SAB (makers of Miller, another popular brew in the US), because of competition and anti-trust laws. But if SABMiller sells off its US interests to Molson Coors before the AB InBev takeover, there is no issue.

By relinquishing a smaller, but still profitable brand – Millers – AB InBev is opening itself up to a world of ‘megabrew’. And of course, SAB’s wide reach in Africa, and the potential for growth in that market, is at the crux of this merger.

Going flat
The average Kenyan might drink 13.5 litres (see Fig. 4) of beer a year – just a fraction of the average of 55 litres the average European drinks – but the market in Africa is expected to grow five percent between 2013 and 2017, according to research by Canadean. Conversely, people in Europe are drinking 8.5 percent less beer than they did before the recession and production has dropped by six percent in the region, according to the Brewers of Europe.

And it’s not just in Europe. In the 1980s and early 1990s, beer was the US’ undisputed alcoholic beverage of choice by quite some distance. But in just over two decades, the consumption of beer per capita has dropped by 20 percent, despite population growth, according to a poll by Gallup. In particular, young and non-white drinkers are turning away from beer at alarming rates. That means the fastest growing demographic segments in the country are the ones rejecting beer the strongest.

Fig. 3There is another threat looming large on the North American and European beer horizons: the rise of the microbrewery. In the last five years the number of European breweries has skyrocketed by 73 percent. According to Demetrio Carceller, President of the Brewers of Europe, almost 100 percent of these new operations are microbreweries: small, independently owned outfits making specialty beers. There is a similar trend in favour of emerging craft beers among US drinkers.

SABMiller and AB InBev have tried to hop on the micro/craft bandwagon by buying up small breweries: SAB snapped up Greenwich favourite Meantime earlier this year, and AB InBev took over Golden Road Brewing, the top craft brewer in Los Angeles. But these acquisitions will not solve the problem AB InBev and SABMiller face in Europe and North America.

InBev’s net profits plummeted by 32 percent in the three months to June. From the same period in 2014; revenues dropped by nine percent in the same period. And its problems are global. “One third of AB InBev’s business is in the US and that’s in structural decline, one-third of its business is in Brazil and that’s in cyclical decline – and then 10 percent is in Mexico which is growing”, Andrew Holland, a beer industry analyst at Societe Generale, told the BBC.

“Everything else is either in Europe or Russia, which is ex-growth, or China which is the only ‘go go’ bit of the business – but China only represents five percent of profits.”

And then there is SABMiller’s phenomenal penetration of the African market, and the positive economic and demographic changes sweeping the continent. “Africa has seen inflation fall, foreign debt shrink and GDP rise in the last few years.

Moreover, population growth – once feared as a major contributor to poverty – is now perceived as an asset, with the working-age population set to outgrow that of China and India”, said Kevin Baker, Account Director at Canadean.

Risky market
But Africa, excluding South Africa, is a risky market. SABMiller, Heineken, Castel and Diageo account for around 90 percent of the bottled and keg beer market. But home-brewing is a significant cultural staple. SABMiller and global health organisations estimate the consumption of illegally made alcohol far outstrips the legal market in Africa.

Bottled beer is still not the drink of choice in many parts of the continent, and new brands exploit that mercilessly; if drinkers don’t favour beer, then they certainly don’t favour any particular brand of beer over another. In 2013, Les Brasseries Ivoriennes, an independent brewery, debuted in the Ivory Coast market where Solibra – a Carlsberg sister brand – had dominated for decades.

With sales dropping in traditional markets in the West, it’s no wonder brewers are falling over themselves trying to peddle bottles to the locals

The challenger wrestled 12 percent of the market within its first year in circulation. Additionally, the African market is not homogenous by any means, and emerging local brands tend to do extremely well in local markets; SABMiller has been clever in its penetration and has exploited this fact. Instead of pushing in Miller by hook or by crook, it has invested in localised brands. Key to its strategy in the continent, however, is to be able to respond to local needs with local brands.

It has been referred to as ‘localisation’ and it’s the flexibility to adapt their products to a specific locale and market. There might not be any Miller in Nigeria, Ghana or Mozambique, but there is Hero, Club Lager and Impala, respectively, all SABMiller brews. These local brands reflect national identities and are designed to appeal to regional tastes. According to Fortune, these localised efforts have helped SABMiller increase its share of the beer market by 20 percent since 2010.

SABMiller has also made a concerted effort to keep a lid on the prices of beer, and any bottle shouldn’t cost more than $1 in any part of the continent. It might sound cheap, but that $1 is double to price of many local drinks, and much more than the home-brews would set a drinker back.

But it is a clever strategy as the slightly higher price is appealing to the rising middle classes, who see it as a status symbol to drink these bottles. In pricing the beers slightly higher than the prevalent drink, the brewer is relying on the young, cool middle-class drinkers to set the cultural trends, as they have done around the world since time immemorial. It’s the oldest marketing trick in the book, and it works.

Over the medium-term, SABMiller predicts volume of sales in Africa will rise around five percent. The company is relying on a strategy of few price increases, and focusing on increasing its volume. It’s a cunning plan designed to exploit the improving economies in Africa; that is, as Africans make more money, and SAB beer prices remain stable, they are bound to win more customers.

It is not without its risks though, as the company will have to keep its margins lower in the medium-term. But for SAB, and for AB InBev who are literally buying this strategy, the goal is to win the trust and loyalty of a new market before it can maximise profits.

Fig. 4The merger with AB InBev, though agreed to in principal, still has some regulatory hoops to jump and will not be finalised before the middle of the year. So SABMiller’s long-term prospects in the region are immensely appealing to its buyers, who have always struggled to break into the region, and are now watching their prospects in the Americas and Europe slide.

But of course, investing in Africa is hugely risky as well. Not only do many Africans across regions favour the home-brewed drinks and cheap fortified wines, but the spread of Islam in the north of the continent also means those markets are restricted. According to Goeuro, beer consumption in Egypt stands at just four yearly litres per capita, and is likely similarly low across North Africa where populations are predominantly Muslim. These consumption figures are unlikely to rise.

Additionally, there are structural and practical challenges ahead for any brewer trying to assert itself in Africa. Infrastructure is a big issue, both in the public and in the private spheres. SABMiller is starting to address its own production shortfalls by investing $100m in a brewery expansion project in Ghana that is projected to double its brewing capacity in the region, and similar investments have been made in Nigeria, Zambia and a few other countries.

However, solving the public infrastructure problems is much trickier. Outside major urban centres up and down the continent, large-scale supermarkets essentially disappear, leaving consumers to rely on neighbourhood joints and independently owned convenience stores for their liquor. That makes distribution a challenge in itself, without even factoring in the poor roads and transport facilities.

There is also the very real threat of violence. Kenya and Nigeria, both among the top markets for brewers, have struggled to contain the threat of militant groups such as Boko Haram and Al Shabab; groups that are by nature religiously opposed to the consumption of alcohol, as well as physically threatening to drinkers and suppliers.

Finally, the microbrewery threat is not constrained to the Northern Hemisphere. In fact, one of the reasons craft breweries are so successful in the first place is that beer is increasingly popular, reasonably cheap to make and does not require specialised knowledge, so any brewery producing decent cheap beer should expect competition to pop up in no time. There is also the risk of expropriation as governments look for steady revenue sources – renationalising a working brewery would not be a bad way to achieve that goal.

Barrels of potential
SABMiller has borne all of these risks, and AB InBev is keen to bear them if it means unleashing all the untapped potential in Africa. And of course they are not alone. Heineken, another large brewer making it in the continent, has made its own expansion plans clear.

It has announced a joint venture to produce and market beer in Ivory Coast. Roland Pirmez, Heineken’s President for Africa, Middle East and the Eastern Europe region has declared the country a “very promising and dynamic new market”, and put his money where his mouth is by investing $172m in a brewery. So while AB InBev is looking to break into Africa by taking over SABMiller, Heineken is happy to play the long game in the region, and follow in SABMiller’s footsteps by investing in localisation.

“Africa is, I would say, one of the last frontiers, as well as India, for our industry and we have 25 years of growth [there] to go. Despite some wobbles from time to time in some countries, because you cannot put Africa in one basket, there is growth coming on”, Heineken CEO Jean-François van Boxmeer told CNBC.

For international beer companies as a whole, the African continent really is the final frontier. With sales dropping in traditional markets in the West, it’s no wonder that brewers are falling over themselves trying to peddle a large amount of bottles to the locals. The trouble is, it is yet to be determined whether or not Africans are interested in the product. But for AB InBev, as for SABMiller before it, it looks to be a risk worth taking.