Focus - SABMiller and Africa
SABMiller is playing the long game in Africa
This morning, SABMiller hosted a divisional seminar looking at its plans for Africa. Olly Wehring was in the audience, and reports on the brewer's aims for the potentially lucrative - but notoriously challenging - region.
It is fair to say that the African brewing landscape is dominated by SABMiller, and not just thanks to its presence in its country of origin, South Africa. Dating back to 1910, when the company first invested in Zimbabwe, SABMiller claims today to have an unrivalled footprint in the continent, driven by “significant investment” over the past 20 years.
In lager, Africa – excluding South Africa - accounts for 13% of group volumes for SABMiller, 12% of sales and 13% of EBITA. Add to this the fact that the company is also the leading bottler for Coca-Cola Co in the region, and one can gauge clearly the importance of Africa to the brewer.
In its latest divisional seminar, held in London earlier today (10 October), SABMiller was quick to voice its optimism for the long-term future of Africa. Alongside rapid GDP and beer consumption growth for the region's markets, other indicators include foreign direct investment, infrastructure and agricultural development, and the growth in industry and tourism. In such heady climes - economically as well as meteorologically - SABMiller has made hay: lager volumes have grown unabated over the past 20 years (forecast to hit around 17m hectolitres in fiscal 2012), as have sales and EBITA – a 15% three-year CAGR, no less.
Of the markets, Tanzania and Angola were flagged as performing especially well; both are forecast to raise their EBITA contributions to US$100m+ between fiscal 2011 and 2013. Other star performers in the region include Mozambique, Zambia, Zimbabwe and Botswana, all set to deliver about $50m EBITA in the same period.
As to how SABMiller expects to deliver on its African promises, the emphasis is more on the proximity of facilities than on scale. With infrastructure inefficiencies and logistical barriers, the countries of Africa are best served by many smaller-sized breweries than by one or two large sites. This results in improved control of consumer pricing, a reduction of 'stock-outs', and lower distribution costs. Indeed, in fiscal 2012, SABMiller delivered distribution savings of around $1.5m.
Also, SABMiller intends to ease its capacity constraints by continuing to invest. The construction of new breweries in Uganda and Zambia, for example, both of which are running at full capacity, along with upgrades in South Sudan, Zimbabwe and Ghana, may hit the bottom line in the short term, but should deliver healthy benefits in the medium- to long-term.
Then, there is SABMiller's three-pronged strategy of halving the price of beer, of doubling the price of beer and of going farming.
By producing beer brands at a low price point, the company is targetting the so-called “informal alcohol” segment; a polite way of saying home brew and illicit spirit distillation. This sector is – to put it mildly – vibrant in Africa: the brewer estimates that informal alcohol is a $3.7bn value opportunity. By producing beer from locally-sourced raw materials, such as sorghum and cassava, the brewer can set low price points to hopefully attract these 'informals'. Transactional packs can also help reduce the price of beer.
The 'doubling the price of beer' concept targets the burgeoning middle class. An estimated 90m middle class households in Africa today represent a leap of 31m in the last ten years, according to SABMiller. With that goes all the usual aspirational attitudes that the brewer will hope to capitalise on, with 20% of its portfolio in the region sold at a premium index of 110% versus mainstream beer.
Finally, SABMiller is keen to encourage the continent to 'go farming'. As highlighted earlier, by sourcing raw materials locally, the brewer can avoid the expense of importing commodities. In Mozambique, for example, it is aiming to expand barley production from 250 tonnes to 10,000 tonnes, while doubling barley output in Tanzania and Uganda. This domestic procurement should deliver savings of around $60m by fiscal 2015 for SABMiller.
Like all brewers, SABMiller is playing the long game in Africa. Investment will remain the key word for the region for a few more years to come. Short term, SABMiller will spend between $300m and $500m per year on its operations there. This may not appeal to the investment community: Indeed, since this morning's seminar, one analyst has already warned that he “expects (SABMiller's) shares to continue to under-perform in the near term”, due in part to “some pressure in Africa this year”.
With its long history in the region, however, and its knowledge of the risks to expectations, SABMiller believes that its medium-term future in Africa is bright.
To view a webcast of SABMiller's presentation on Africa, click here.
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