The Promota Magazine

Buying power: Africa’s emerging middle class

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SUB-Saharan Africa’s population is growing at a faster rate than any other region, passing 900 million in 2011. With North Africa, the total population now exceeds a billion people. In 2050, that could be two billion. They are also rapidly urbanising. In 2010, the United Nations’ Human Settlement Programme predicted that by 2030, more than half of all Africans will live in cities, up from the more than 400 million today. By some time in the 2040s, a billion individuals could be crammed into the continent’s metropolises.

On current trends, those individuals are likely to be wealthier and more acquisitive, fuelling a massive boom in fast moving consumer goods.

Research by the African Development Bank showed that in the past decade, Africa’s middle class had expanded to more than 300 million individuals. These individuals are richer and have higher expectations and aspirations than previous generations, creating a huge opportunity for companies and entrepreneurs who are able to overcome the logistical difficulties inherent in many of these markets to provide modern retail experiences and high quality brands.

Formal dining, one manifestation of the consumer story, is also taking off. Yum! Brands, owner of KFC and Pizza Hut, announced in February that it would look to add 130 new stores across the continent this year. Others, such as South African chains Steers and  Nandos are also plotting expansions. In Kenya, local favourite Nairobi Java House has taken an investment from Emerging Capital Partners to take its brand regional.

Even Walmart has taken notice, finally moving to complete its 2010 deal for Massmart, taking it into 14 African countries. Among the most visible beneficiaries of this demographic dividend have been drinks makers.

It is often reported that Nigerians drink more Guiness than the Irish, and while dismissed as an amusing piece of trivia by many, it is a fact that reveals the growing importance of African markets for brewers. The four major players – Diageo, Heineken, Castel and SAB Miller – have pushed into nearly every market on the continent. Their African units continue to generate considerable returns against a backdrop of moribund markets in Europe and the rest of the developed world, as population and economic growth drive the consumption of beer and spirits.

The size of the African opportunity has been laid out for international investors in the results reported by the major listed players. Consistently, these units have grown in size and profitability.

“We have a fairly simple hypothesis,” Mark Bowman, who heads SAB Miller’s African operations, told Gateway to Africa. “You have superior population growth in Africa of around 2.4 per cent compound; you’ve got GDP growth of 4.6 per cent and very low per capita consumption [of beer].”

Those consumers are already drinking alcohol, he explained, but it is bought in an informal, unregulated market of home brews. Even in the more established markets, beer is only around 20 per cent of the alcohol category, according to Bowman. Beer is aspirational, and as the per capita wealth of African countries increases, individuals transition into drinking beer. Figures from research company Plato puts African beer consumption at around 9-10 litres per capita – less than 20 per cent of the average in global developed markets.

“The work we’ve done suggests that alcohol consumption in Africa is not that much different to other parts of the world, but that by far the bulk of it is below-the-radar, more home brew and the like,” Bowman said. This means that the company can expect growth above that of the overall economies. “We have to see 6-8 per cent beer growth as a standard trajectory,” he said.

SAB has been expanding its brewery network in the past few years, building new facilities in Nigeria, Uganda, Angola and Zambia and doubling the capacity in its South Sudan operation. It expects to keep investing around $500 million annually over the next few years.

Such stellar growth being exhibited in African divisions is unlikely to have passed unnoticed by other major drinks players. The world’s largest brewer – Anheuser Busch InBev, for example, has only a limited presence on the continent. While there is still considerable slack for growth on the continent, the incumbents are well entrenched, having invested heavily in joint ventures and built controlling stakes in domestic operations in almost all of the major markets.

Heineken, Diageo, SAB Miller and Castel currently make up 80 per cent of the beer market, according to research by the rating agency Moody’s; while Diageo and Distell combined make up more than 70 per cent of the formal spirits market.

Driving the cost of beer down is one way that the established players can make the economics of the continent look less attractive to global competitors. Both SAB Miller and Diageo have experimented with brews using local ingredients in order to localise cost bases and drive down prices.

Doing business in Africa can be difficult, due in no small part to infrastructure constraints – particularly  transport and power. Most of the breweries are self-contained, generating their own power and operating their own water and effluent treatment plants. Brewing is capital intensive, and any breaks in operation can seriously dent profitability. Although there are improvements to infrastructure, it will be some time before that equation changes enough to allow manufacturers to rely on national utilities. Add to this the relatively poor connections between regional markets and building economies of scale looks difficult for anyone without local connections and knowledge. This is perhaps why the incumbents are able to remain bullish.

“There’s no doubt that the level of competitiveness is going up significantly, and because there’s less virgin territory available from a multinational perspective, it is much more likely that we’re going to start stomping on each other’s patches. That’s inevitable,” SAB Miller’s Bowman said.

“But I think you have to be rational about it. For someone who’s not currently operating in Africa, I think it’s quite difficult. You have to learn, it takes time. One has to pay one’s school fees by understanding the dynamics in the market, how to operate. I think there’s tremendous opportunities, so FMCG companies, and companies in general, would be churlish not to consider opportunities in Africa… Each country has its own dynamics, you can’t just turn up and expect to do well. You’ve got to find your way, and that takes time.”


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