Africa: Global brewers competing for African profits

It’s a somewhat distant memory now, but in the early 2000s the company once known as SA Breweries (SAB) came off second best to global drinks group Diageo in a fight for control of the Kenyan beer market, in what was dubbed the "beer wars", The Financial Mail reported on February 7.

SAB had set up shop in Kenya in 1998. When Diageo took a 53% interest in the country’s largest brewery, East African Breweries Ltd (EABL), the conflict turned ruthless.

The arrival of Diageo, which owns high-profile brands like Johnnie Walker and Tanqueray, gave EABL the resources to go head-to-head with SAB’s dominant beer maker.

For once, SAB had to agree to a compromise and in 2002 it and Diageo swapped their holdings in their respective Kenyan and Tanzanian operations. Diageo, headed by Ivan Menezes, ended up dominating Kenya — where it sells 90% of all liquor — and SAB had the lion’s share in Tanzania.

This war marked the beginning of a rapid expansion by global liquor brands across the continent. Diageo’s move into Africa has been particularly lucrative.

For SA investors who will have to use their offshore allowance to buy Diageo, the share represents an interesting diversification into a group with huge potential still to unlock.

For the six months to end-December, the UK-based group increased net sales in East Africa by 13%, while the increase for the continent as a whole was 6% to £821 mln.

"Across Africa, beer net sales were up 5% with strong growth in Serengeti Lite in Tanzania and Senator Keg in Kenya," the company said in its results. "Guinness and Malta Guinness grew 5% and 10% respectively across all key markets. Spirits delivered double-digit net sales growth, largely driven by Smirnoff 1818 and Tanqueray in SA and Chrome Vodka in Kenya."

EABL, still listed on the Nairobi Stock Exchange, has become one of Diageo’s star performers. It increased volume and sales 13% and commissioned construction of a new brewery.

Though EABL produced strong results, Cavan Osborne, manager of the Old Mutual African Frontiers Fund, points out that it was the first set of good results for the group in five to six years.

Osborne says his fund has long since sold the holding it once had in EABL. It might consider investing in the brewery again but would have to take into account the possibility of a sudden currency shift and the state of the Kenyan economy, which is starting to show signs of a strong recovery.

Another player is making its presence felt on the continent — Remgro-controlled Distell, which is based in Paarl.

Distell said in its results for the year to end-June 2018 that revenue in African markets, outside SA, rose 19.5% to R3.41 bln, while volumes were up 7%.

This was largely due to the acquisition of KWA Holdings East Africa Ltd (KHEAL), Kenya’s largest wine and spirits manufacturer and distributor, in April 2017.

"KHEAL is performing beyond expectations, led by the impressive performances of [its] local brands Kibao and Hunter’s Choice," the group said.

At about the same time, Distell also took control of Best Global Brands, a liquor distributor that operates in Angola, Kenya, Nigeria and Kenya.

Distell’s performance was also boosted by the growing appetite for SA wines in East Africa.

"In Kenya, growth in the wine category was attributed to double-digit revenues led by JC Le Roux and Nederburg, with spirits led by Kibao, Viceroy and Hunter’s Choice."

Distell’s overall revenue was up 10.4% to R24.23 bln and operating profit was up a modest 1.8% to R2.4 bln.

Avior Research analyst Janine van Wyk set an outperform rating on the JSE-listed stock, with a price target of R150, Bloomberg data shows.

It is currently trading at R139 a share.

Though Africa has proved to be a lucrative market for brewers, it has not been problem-free, particularly in Nigeria and Angola.

Osborne points out that beer prices have been flat in Nigeria and that the Abuja government has increased taxes on liquor to boost its coffers.

Diageo has felt the pain in Nigeria with net sales declining 4% despite double-digit growth in spirits.

Distell has a similar story to tell. "Oil-rich African economies such as Angola and Nigeria have yet to benefit from higher oil prices."

Even so, it said they remained "key pockets of opportunity" for the group.

Looking at the scale of Nigeria, which has a population of 190-million people, it is easy to see why global liquor brands are keen to be there — despite the rather harrowing trading conditions.

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