This article first appeared in The Economist on 31 May 2014.
A long-established African firm went global, only to find the fastest-growing market was on its doorstep.
May 31st 2014 | KITWE AND ONITSHA | From the print edition of the Economist
On a Friday evening in Onitsha, as the beer market is closing, a man carefully straps six cases of Hero lager and two cases of Pepsi to the pannier of his moped. Another rolls away his purchases by wheelbarrow. Coaches parked nearby will soon be filled with day-trippers and their cases of booze. Each day a vast quantity of beer is sold from this closely packed warren of stores. It is part of a sprawl of specialist markets in the city, a commercial hub on the Niger river, which draws in traders from across southern Nigeria.
It was the bustle of Onitsha that persuaded SABMiller, the world’s second-largest beer company, to set up a brewery here. The market takes a slice of SAB’s local production and sells it on to small traders who are otherwise hard to reach. The company had been late in coming to Nigeria. First it acquired a rundown brewery in Port Harcourt in 2009 and then another in Ilesha before it built a brand-new plant in Onitsha in 2012. Already, its capacity is being increased, to slake locals’ ever-growing thirst.
Nigeria is Africa’s largest economy and its largest beer market after the country where SAB (South African Breweries) was founded in 1895. The firm moved its main stockmarket listing to London in 1999 and a few years later it acquired Miller, a big American brewer, in a deal that gave the renamed SABMiller global scale and reach. It now operates in 75 countries, but in recent years it has found that its fastest-growing and most promising market is the continent of its birth (see chart below)
SAB has operations in 15 African countries and a stake in 21 others through its alliance (bolstered by cross-shareholdings) with Castel, a French drinks firm. Its beer has been brewed in Zimbabwe for more than a century and it has had operations in Angola and Botswana since the 1970s. But its presence on the continent was only really felt in the mid-1990s when it snapped up newly privatised breweries in Mozambique, Ghana, Uganda, Zambia and Tanzania. This was not a grand strategic gamble on African growth: the continent’s economies were then in a funk. “At this stage it was about fixing the companies,” says Mark Bowman, boss of SAB’s Africa division. With repairs and sounder management, the thinking went, they ought to turn a decent profit.
In fact the investments turned out to be shrewder than anyone could have expected. Within a few years Africa’s economies began to expand quickly, in part because of Chinese demand for the continent’s abundant raw materials. GDP grew at an average annual rate of over 5% in the decade after 1997. Rising incomes meant more consumers could afford to switch from home brews to factory-made beer. SAB found it could not keep up with the burgeoning demand. It ditched its make-do-and-mend business model and began to invest in building modern breweries.
SAB also began looking for fresh territories to conquer. This was a riskier gambit than buying rundown breweries on the cheap. In Africa one company tends to dominate in each national market: in the nine largest markets a single firm accounts for three-quarters of beer sales on average, according to a report by Rey Wium and Anthea Alexander of Renaissance Capital, an investment bank. Scale is needed to defray the distribution costs: a brewer has to be able to deliver a low-value but bulky product twice a week to remote taverns. Most deliver soft drinks too (SAB is the leading bottler of Coca-Cola in Africa). There are high fixed costs to building a new brewery in Africa. Water treatment and power add to the price tag. An entrant has to sell a lot of beer just to break even.
SAB first looked at setting up in francophone West Africa but opted instead for an alliance with Castel, which was established there. In 1998 SAB entered Kenya, building a brand-new brewery, only to retreat a few years later after it had been out-muscled by East African Breweries, a local outfit in which Diageo, a big British drinks company, has a majority share. It invested in South Sudan even before its formal independence from Sudan in 2011. The goal was to establish its brand there before anyone else could enter. At first things went well. But the government soon split into factions. Lager sales fell by a quarter last year, amid political violence.
Nigeria, in contrast, is one of SAB’s fastest-growing ventures. Stung by its experience in Kenya, the firm had initially been wary of entering a market where it faced not one but two big incumbents—Guinness, owned by Diageo, and Nigerian Breweries, owned by Heineken, a Dutch giant which also has ambitions to refresh all parts of Africa. This time it was careful to avoid a head-on clash with its rivals. It kept out of Lagos, the country’s commercial capital. (Costs are also higher there.) “We are a regional player,” insists Simon Harvey, head of SAB’s Nigerian businesses. It treats its three breweries there as separate entities. Each has its own brands.
A new beer was developed just for Onitsha. Nigerians like larger-than-life names: the country’s leading brand is called Star; SAB named its beer Hero. Its label features the rising sun, an icon of the local Igbo people. SAB uses such symbolism in other African markets to give its beers a local identity. “People badge themselves with beer,” says Alan Clark, the company’s overall boss. “It has an emotional content.” The firm’s brand in Zambia is Mosi, the local name for Victoria Falls; the label depicts the frothing waterfall. In Tanzania its best-selling beer is Kilimanjaro. Each ale has a distinct taste. Hero is brewed with fewer hops than a European lager. This gives it a less bitter, more refreshing taste that is suitable for a hot climate. It also makes the beer more “sessionable”: people can drink more of it.
A push to make factory-made beer more affordable is an important part of SAB’s strategy on the continent. An average consumer works for 2-6 hours to earn enough to buy half a litre, compared with 17 minutes in America (see chart 2). Hero is priced competitively. A 650ml bottle costs 150 naira ($1), around 25% cheaper than a bottle of Star. But the bulk of the African market is further down the income scale. Two-thirds or more of all the alcohol consumed in Africa is supplied not by big breweries or distillers but by home-brewers and bootleggers. Their output varies from the merely drinkable to the toxic: a dud batch of home-brewed spirit recently claimed around 100 lives in Kenya. The market is nevertheless vast and SAB worked on a way to tap it, in a modest corner of its empire at Kitwe, in Zambia’s copper belt.
Zambia is the home of chibuku beer. It was developed in the 1950s by Max Heinrich, a German, who had the idea of making the indigenous home-brew on a commercial scale. His business passed through many hands before SAB acquired it in 1999.
The brewing process at Kitwe has not changed much in half a century. Maize is ground and mixed by hand with cold water in a giant tub. The mix is then sucked into two pressure-cooker towers that look like spaceships from a 1950s sci-fi movie. The steam quickly turns starch into sugar. The mix is strained and cooled. Yeast is added to turn the sugar to alcohol. Within a few hours the brew is poured into one-litre cartons. It continues to ferment in them, and must be sold and drunk within a few days, before it goes sour. The beer has the consistency and colour of a watery porridge. The SAB brand is called Shake Shake because the carton has to be shaken before each sip to disperse the sediment.
SAB had until recently seen chibuku as a sunset business because of the competition from informal brewers who pay no tax. But Shake Shake is now sold in 11 countries and is the main weapon in the firm’s battle to capture the bottom end of the market. A litre sells for half the price of the main local brands, such as Hero or Mosi. Faster sales of chibuku have helped to cushion the blow of a big fall in lager sales in Zimbabwe, where money is tight. SAB has developed an upscale version at Kitwe called Chibuku Super, which comes in a plastic bottle and has a shelf life of several weeks. The firm also offers economy-brand lagers made from cassava or sorghum that attract a lower rate of duty from governments that want to support local farmers. SAB’s premium lagers, such as Peroni and Castle Lite, complete the range.
What might other consumer firms looking to Africa learn from SAB? It is not an easy place to do business and the results are not uniform. Lager sales are booming in Nigeria and Ghana but shrinking in Zimbabwe and South Sudan. And there are few reliable sources of business information: firms have to learn as they go along.
South African businessfolk have a phrase for it: paying your school fees. The first year in a new African market almost never goes to plan, says Mr Bowman. “You’ve got to persist through the school-fees stage and not lose your nerve,” he says. It takes a while to work out how to get lorry licences for each state in Nigeria; how to deliver beer to remote taverns in Uganda; or how to transport imported malt from Mombasa, a port in Kenya, to Juba in South Sudan. Local managers are trusted to do what best fits local conditions, says Mr Bowman. There is no recipe for success but persistence clearly matters. “The model is that we stick it out.”