Tapping Africa’s Beer Market

Tapping Africa’s Beer Market

Leading breweries are racing to capitalize on Africa’s massive potential consumer market, but risks remain for both investors and host countries

Across Europe and North America, leading breweries must contend with the harsh reality of operating in saturated markets and against the rising clout of craft breweries. Accordingly, breweries are racing to establish themselves in Africa’s lucrative yet risky market.

Rising consumer demographics

Africa’s potential beer market is attractive by virtue of its demographic features. According to U.N. statistics, Africa will to account for one-fifth of the global population by 2025. More importantly, the continent boasts the largest working age population in the world. In Tanzania, 45% of the entire country is between the ages of 15 to 45, and this figure is expected to increase within the next decade.

In addition, countries in sub-Saharan Africa are experiencing the fastest rates of urbanization and highest GDP growth in the world. To put this into perspective, New York City added roughly 4 million residents in the past century yet Dar es Salaam is projected to add over five times that number within the same time-span. In summary, Africa is primed for the largest increase in legal age drinkers and a $400 billion growth in its consumer market.

Practical and political challenges remain

Despite the enticing potential for growth, there are still substantial risks and challenges. Outside of major urban centers, distribution can be a costly endeavor as large-scale grocery stores are not prevalent. Instead, most consumers favor neighborhood kiosks or independently owned convenience stores.

As a consumer good, beer has yet to catch on in popularity and the vast majority of Africans prefer fortified wines and home brewed liquor. This difference in preferences is demonstrated by the fact that the global average per capita beer consumption rate is 44 liters per year; whereas the average rate for Africans is barely nine liters per year.

Lack of infrastructure is a critical bottleneck for investment across Africa and the threat of violence persists across several countries. Nigeria and Kenya are Africa’s largest beer markets after South Africa. Yet, both countries have struggled to contain the threat of militant Islamist groups like Boko Haram and Al Shabaab.

Finally, the specter of expropriation looms large over the industry. Beer sales provide a stable source of revenue; brewing does not require highly specialized knowledge, and all of the components for production are locally sourced. If a brewing facility were to be seized, it would not take much effort on the part of a local government to have it back up and running.

Good deal for all parties

For now, host governments appear keen to work with major breweries. Diageo and SABMiller are expanding operations by negotiating favorable tax concessions on their products. Until last June, the Kenyan government granted Diageo a remarkable 100% tax exemption on its Senator Keg brand pale lager.

In exchange for lowered tax burdens, foreign breweries assert that they provide opportunities for local farmers due to the need for local sourcing. To appeal to African consumer profiles, breweries produce beers derived from regional ingredients such as cassava and sorghum. Another selling point is the fact that beer presents a better alternative to unregulated bootleg liquor, which causes hundreds of deaths annually.

For host governments, successful FDI in the beer industry entails a steady source of tax revenue and the potential to open doors to investment into other sectors. Over the past four years, Heineken and Diageo have acquired state breweries and provided infrastructure in support of new ones across Ethiopia. Likewise, U.S investment firms have enhanced their portfolios with investments in local breweries.

Despite the uncertain and competitive landscape, so far brewery ventures have paid dividends. SABMiller’s Eagle is the world’s first sorghum lager and one of the best selling beers in East Africa. In some regions, demand for Diageo’s beers is outstripping supply less than a year after their introduction into the market.

Future discontent raises political risk profiles

While the beer market is chugging along, increased domestic criticism and economic downturn could spell the end of the party. Earlier this year, SABMiller slashed its growth forecast in Nigeria from 8% to 3% in light of falling oil prices and the subsequent effect on the Nigerian economy. The much discussed rate hike by the U.S. Federal Reserve could also wreak havoc on developing countries as FDI dries up and the pressure of servicing dollar-denominated debt increases.

Moreover, local governments have begun to voice concerns over externalities arising from the growing beer markets. One point of contention is that the local sourcing of beer ingredients is threatening regional food security. In Uganda, smallholder farmers have benefited greatly from their contracts with multinational, brewing companies like SABMiller.

As farmers focus exclusively on crops for beer production, which provide higher returns and guaranteed sales, they have done so at the expense of producing other staples foods like corn and potatoes. As a result, this development has left lower income groups in Uganda exposed as the overall food supply decreases while staple foods prices have risen.

Local groups and NGOs are becoming increasingly vocal in criticizing these trends. Specifically, such groups claims that in exchange for short-term revenue, African governments are squandering their economic future by tacitly exposing the most productive members of society to alcohol addiction. In a potential sign of things to come, Ghanian lawmakers convened last May to pass a 100% excise tax increase on beer and tobacco, in the name of curbing alcoholism.

For now, the African beer market remains a highly attractive prospect, albeit one with considerable political and economically driven risks. Whatever the future entails however, investors will have a reason to drink one way or another.

About Author

Sam Doo

Samuel is an IR professional interested in the crossroads of geopolitics and investigative research. He was previously a graduate associate at OPIC, a U.S. developmental finance institution that provides political risk insurance and financing options for emerging market investments. He also previously worked for INTERPOL. He holds a MA from George Washington University and a BA from the University of Michigan.