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Africa: Beer’s final frontier

Global brewers are salivating over the growth prospects.

This article was first published in the latest issue of the Moneyweb Investor. Click here to read the magazine in full, at no cost to your pocket.

Carlos Brito, CEO of AB InBev, the world’s largest beer company, said at the recent release of the company’s full-year results that the tie up with SABMiller in 2016 had “exceeded expectations”.

The acquisition of the South African brewer helped the group grow its revenue 5.1% to $45.5 billion during the year to end-December 2017.

With the acquisition virtually bedded down, synergies extracted and respectable earnings for the year, AB InBev is now focused externally with plans to capitalise on the promise of SABMiller – growth in Africa. 

With the rebound in commodity prices in 2016 and 2017 the outlook for African beer markets is bright. 

And against a backdrop of muted beer growth globally, the relatively under-developed beer market on the continent has global brewers salivating.

While AB InBev is the dominant player on the continent (thanks to SABMiller’s multi-decade investments there), the likes of Heineken and Diageo have been ratcheting up their competitive activity in the region.

 Arguably, this wave started with Heineken’s decision in 2007 to repatriate the Amstel brand in South Africa and build its own brewery. This was followed by SAB’s entry into Nigeria in 2012, and more recently with Heineken’s greenfield entry into the Ivory Coast and Mozambique. This is according to research from investment firm Sanford C Bernstein.

At this point, Africa is still a modest Africa contributor to AB InBev’s group profits. In the last year, Africa accounted for about 7% of group

equity-adjusted EBIT. “We are very positive about Africa,” says Ricardo Tadeu, AB InBev Africa president. 

“In markets like Tanzania, Ghana, Nigeria, Mozambique, where consumption is lower per capita, we experienced mid-teen growth. South Africa is a more developed market and the rate of growth is not as fast.”

To maintain this type of growth, AB InBev is investing heavily in developing the right portfolio of products for each market, and in enhancing production capacity and distribution. 

The brewer already sells everything it produces in Nigeria, for instance, and is planning a greenfields expansion project there. It has also expanded its operations in Zambia and Ghana.

 

 

“Having a local understanding of each market and each brand and how it connects to the consumer is very important. We are fortunate that SAB Miller has a well-developed sense of the markets it operated in. Affordability is key. Because GDP per capita is lower than average we must provide excellent products at the right price. If you can do that, and get it to consumers, you should do well,” says Tadeu. 

Heineken earns a similar proportion of its earnings from Africa – about 8%. This is down from a healthy 18% in 2014, prior to the slump in Nigerian profitability. 

Nigeria and South Africa are Heinekens biggest businesses in Africa, but it also has important businesses in Ethiopia, Egypt, Rwanda and Burundi, which fall outside the “Big 8” African beer markets, according to Bernstein.

Africa is smaller for Diageo, which earns 2-3% (also suppressed by the Nigerian slump) from its African beer operations, according to Bernstein. But it is no less strategic, with Africa historically a key driver of Diageo’s beer business and Guinness in particular. This business will provide the platform from which to build a strong spirit business.

“This is the most attractive of the beer regions globally in terms of long term volume and profit growth,” says Stirling.

One shouldn’t forget Castel, the family-owned wine, beer and soft drinks business that has been developing its Africa beer business since the 1980s. 

It’s worth noting that AB InBev owns 20% of Castel and has pre-emptive rights over Castel’s beer assets. 

“We believe that, if the business did ever come up for sale, Heineken (and potentially others) would also be extremely interested in acquiring the business and the price tag (for 80% of Castel plus Castel’s 38% stake in ABI Africa) could well be in the order of $30 billion,” says Trevor Stirling, MD, European Beverages at Bernstein.

At this stage the African beer market accounts for 7% of global beer volumes, $10.8 billion of net revenue and $2.2 billion of EBIT in 2016.

It comes down to Africa’s promised demographic dividend. “Volumes are likely to be driven by the healthy combination of a large (and rapidly growing) population, low current per capita consumption and strong GDP growth,” he says.

With less than 10 litres of beer consumed per person, Africa is still very far from the roughly 70 litres consumed per person in the US and Western Europe, or even the 45 to 50 litres observed in Latin America or Eastern Europe. 

“We think there is little doubt that Africa will be one of the engines of growth for the beer category in the decades to come.”

Making the region more attractive is the relative stranglehold that the four major brewers hold over Africa. Collectively AB InBev (following its acquisition of SABMiller), Castel (private, but 20% owned by AB InBev), Heineken and Diageo (and their respective subsidiaries) generated about 93% of the region’s net revenue, and about 98% of the profits.

For AB InBev in particular, Africa is far more profitable than emerging Asia (which is mainly China and India), due to the oligopolistic market structures across most of the countries, says Bernstein.

While the big brewers dominate, the market remains hotly competitive says Tadeu. “I was previously in Mexico, where AB InBev has a 68% market share. I can assure you, it was very competitive. Competition is good because it creates excitement in an industry and drives growth. If you look around the world, the industries that face competition are the healthiest industries.”

Tadeu is not willing to voice the targets for growth across Africa. “I know what I want, I’m just not sure I want to express it.

“Africa is fundamental to our growth. We are still developing our markets, and want to do so in a sustainable way. But Africa will make a contribution, of that I have no doubt.”

 

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