Focus - Nigeria offers growth out of stability

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Stable government and an expanding economy have greatly improved the growth prospects for soft drinks producers in Nigeria. Moreover, writes Richard Corbett, strategic analyst at market analysts Canadean, there is significant potential for increasing per capita consumption of soft drinks.

The Federal Republic of Nigeria is the most populated African nation and home to around 140m people; its economy has been expanding rapidly for a number of years and the warm climate is compatible with cool drink consumption. But with soft drink per capita consumption of just under 35 litres there is considerable untapped potential.

The demand is there but even the more pioneering of soft drinks entrepreneurs have been deterred by the long history of political instability, corruption and poor macro-economic management.

Soft drinks make up the bulk of commercial beverages in Nigeria and now account for around 6 in every 10 litres of beverages traded, up from 5.5 litres ten years ago. With alcoholic drinks edging forward to around 15% and hot drinks static on 3%, most of these gains have come from the milk sector. What will be of great interest to soft drink manufacturers are the extraordinary levels of growth achieved in the last decade; soft drink volumes have increased by a stunning 150% in ten years.

As is often the case in the developing world, packaged water has been a key driver behind the spectacular growth. The market can be split between products in pouches and products in PET bottles; it is the pouches that make up more than 90% of the volumes. There is little value added to the pouches and they serve a basic thirst quenching role; there are hundreds and maybe even thousands of companies producing these low-cost pouches, with branding underdeveloped and labelling sometimes nonexistent.

The PET segment is where the branding is more visible and this segment is growing, fuelled by the investment of a number of players, not least Coca-Cola and its leading table water brand Eva. The Nestlé Pure Life brand was introduced into Nigeria in 2005, while other companies involved in local PET-packaged water include Swan, Ragolis and Cascade (KRS Investment Ltd). The market is almost exclusively still, with the sparkling segment limited to imports sold in hotels and bars.

Nigerian soft drinks are dominated by waters and by carbonated soft drinks which between them make up 96% of all volumes. Waters overtook carbonates back in 2003 but carbonates maintain an important chunk of the market (one in three drinks sold is a carbonate). Growth may be less dramatic in the category, but in ten years demand has still jumped by a third. There is no doubt though that water growth has suppressed opportunities in the carbonated category, as has the progress of locally produced juice, nectars and still drinks.

Some investment is helping to facilitate future carbonates expansion. Market leader Coca-Cola has three bottling partners in Nigeria. The Nigerian Bottling Company (NBC), owned by CCHBC, is its main partner and has the sole franchise to bottle Coca-Cola products in Nigeria. It has national coverage through 16 bottling facilities around the country, including an ultra-modern plant in Abuja which opened in 2007, along with 82 distribution warehouses and 200,000 distribution outlets. 2007 also saw the introduction of a new dedicated canning line for Coca-Cola products. Previously, Coca-Cola cans were imported from South Africa.

The 7-Up Bottling Company is the second largest carbonates company in the non-malta carbonates segment responsible for flagship brands like Pepsi-Cola, 7-Up, the Mirinda range of fruit flavoured carbonates and Mountain Dew citrus drink. In recent years both Coca-Cola and PepsiCo have come under strong competition from local players, such as the La Casera range, produced by Classic Beverages Nigeria Ltd.

Malt drinks are important in Nigeria and make up more than a fifth of carbonates sales. Nigerian Breweries (Heineken) and Guinness Nigeria Ltd (Diageo) are the key players for malt drinks with their respective Heineken and Guinness malta brands, but there are other smaller players in the market.

Local juices and nectars were boosted by a ban on imported finished juice products introduced in 2004. The ban was designed to encourage manufacturers to utilise local citrus fruit in juice production and to reduce the impact of having to buy imported fruit juice concentrate.

In reality, the ban has only been a partial success because there is still an absence of large-scale citrus farms in Nigeria, with manufacturers still having to import concentrated juice for the production of drinks. Local production has stepped up but although growth is strong in percentage terms, sales represent less than 2% of overall soft drinks volumes. The muted demand is perhaps not surprising considering the abundance of fresh fruit available on the street but there are also some image problems for locally produced juice, nectar and still drink products. Consumers often perceive locally produced offerings to be of limited quality.

The import ban may have provided a lift for the juice, nectar and still drink markets but it had a negative effect on the squash segment as local operators concentrated on producing juice, nectar and still drinks. The squash market was quite reliant on imports like Prince's Jucee brand from the UK and inevitably suffered as a result.

Only GSK benefited due to their local production of Ribena. Local squash/cordials production did recover in 2007 and demand rose again with 2008 projections pointing to another rise. Squashes were inconvenienced by the ban but initially fruit powders were outlawed altogether for being an import. The ban was eventually lifted after a few months but the damage had been done and the category is now recovering.

While there is some interest in iced tea and sports drinks, it is the energy drinks category which has started to attract a following. Locally produced Lucozade Original and Lucozade Boost largely drive the energy drinks category but other powdered still and carbonated products are present as well. Improved distribution and growth from Lucozade, Red Bull and Power Horse are all helping the category to expand at an exciting rate.

For all of these categories to develop further, there will need to be further support and investment. There is little doubt that Nigeria is a land of opportunity for soft drinks pioneers of the future but today many are still discouraged by the reputation of the past. Today Nigeria has a civilian government and the country is trying to put behind it the perception that it is politically and economically unstable and corrupt.

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