British drink giant, Diageo, to accelerate growth in Africa

(News of Africa) – British drinks giant Diageo (DGE.L) expects its annual growth in Africa to accelerate beyond the current 15 percent, helped by its zero-duty Senator keg beer in Kenya and a strong rise in Johnnie Walker and Smirnoff spirit sales.

Africa is Diageo’s biggest emerging market region and vies with Latin America to be its fastest-growing, as economic growth accelerates in much of the continent and with its population of one billion set to double by 2050.

“We are seeing more people with more money to spend, and with these drivers of growth in place we expect overall growth to accelerate,” Diageo’s Africa President Nick Blazquez told Reuters in an interview on Thursday.

The continent provides 14 percent of Diageo’s group sales and the region has seen annual sales rise 15 percent over the last five years. He is optimistic for more growth, with 7 of the world’s 10 fastest-growing economies in Africa.

“Africa provides us with a great growth opportunity while western Europe and North America are more difficult. We would expect spirits to grow faster than beer,” he added.

The growth will help the group expand the proportion of its sales it makes in emerging markets – Chief Executive Paul Walsh set a target to get half its sales from these fast-growing markets by 2015 from around 38 percent currently.

Some 80 percent of Diageo’s Africa business comes from Nigeria, South Africa and East Africa, and Blazquez is keen to enter new markets such as Angola, Mozambique and the Democratic Republic of Congo with sales of spirits set to grow faster than beer sales.

Spirits growth has outpaced that of beer, helped by the introduction of small bottles of spirits aimed at cash-constrained consumers which has helped Diageo grab a 40 percent share of the international spirits market in Africa.

However, beer was the foundation of Diageo’s business in Africa. Its Guinness beer first arrived on the continent with a shipment to Sierra Leone in 1827, while it built its first brewery outside Britain and Ireland in Nigeria in 1963.

Around 70 percent of its Africa business is in beer, with Guinness the number two in Africa to SABMiller’s (SAB.L) Carling Black Label in terms of sales value. It is expanding, with Guinness brewed in South Africa since November last year.

CHEAPER BEER

Beer growth is being led by Senator keg which was introduced in Kenya six years ago by Diageo’s 50 percent controlled East African Breweries (EABL) (EABL.NR) at a fifth of the price of its mainstream beer Tusker, and has rapidly grown to account for over 40 percent of the Kenyan beer market.

With the Kenyan market, where EABL has a 97 percent market share, bedeviled by cheap illicit beer which has caused illness and in many cases death, the Kenyan government agreed to waive excise duty in return for a cheap and safe product which uses local barley and sorghum.

Diageo was able to cut the price due to the zero duty, the use of cheaper local grains and by selling the beer from large kegs rather than more expensive bottles.

Although low-priced Senator keg is overall dilutive to profit margins, Diageo helps to offset this as more affluent consumers move up to more expensive products like Tusker and Guinness, and also spirits such as Johnnie Walker.

Blazquet is looking for further growth after spending over one billion pounds in the last five years, on acquisitions and building capacity including Diageo’s purchase of Ethiopian brewer Meta Abo, and Heineken (HEIN.AS) and Diageo opening a new brewery in South Africa near Johannesburg in 2010.

In addition, Diageo’s EABL bought a 51 percent stake in Tanzania’s Serengeti Breweries, and bought back a 20 percent stake in Kenya Breweries in an unwinding of an agreement between Diageo and SABMiller in East Africa.

But opportunities for expansion in beer are limited with four players controlling over 80 percent of the African market led by SABMiller, privately-owned Castel, which has links and cross shareholdings with SABMiller, Heineken and Diageo.

Diageo shares were 0.3 percent higher at 1,521 pence by 0130 p.m. in a lower London stock market.

 

Source: Reuters

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