BATANAI MATSIKA
Research across Sub Saharan Africa (SSA) shows that alcohol consumption mostly consists of home-brews given that commercial alcoholic beverages are unaffordable. It is also estimated that the volumes of home-brewed alcohol in SSA are about four times the size of the clear beer (lager) market.
Home-brews are mostly made from fermented fruits, vegetables or grains and are sold at cUSD50c/l or less.
While home-brews are much cheaper than commercial beer, consumption is considered unhealthy. That said, commercial beverages are still considered a luxury for the African consumer.
Estimates show that a beer costs 3 hours of work on average in SSA compared to 5 minutes of work in the United States of America (USA) or 8 minutes in Eastern Europe.
This is partly due to differences in employment and salary levels across the different regions. This observation implies that there is indeed a massive opportunity for SSA brewers to tap into the home brew market in Africa through affordable beer such as sorghum or opaque beer.
Morgan & Co Research notes that SSA brewers have had to develop several strategies to find cheaper ways to produce affordable beer at good margins. This has entailed (i) local sourcing initiatives and (ii) substitution of barley with endemic crops such as sorghum or cassava.
Due to the large reliance on imported raw materials (particularly barley) and packaging, brewers have engaged significant efforts in developing local sourcing for grains and packaging.
Barley, which is the key ingredient in beer brewing, is not a traditional crop in most SSA countries (except Ethiopia) as it grows best in temperate climates. Some areas in East and Southern Africa offer conditions where barley can grow at acceptable yields.
The absence of industrial farming in the region has been a key hindrance to the development of local farming.
Brewers have invested in supporting and training a large population of small-scale farmers to grow barley. Kenya, Tanzania, Zambia, Zimbabwe and Uganda now grow large barley crops, mostly through
out grower programmes.
Endemic crops such as sorghum or cassava are much cheaper to grow than barley.
They require less water, monitoring and training of out growers. Brewers have developed beer using endemic crops and the first launched was Eagle Lager, introduced in Uganda by SABMiller (now AB InBev) in 2004.
This beer has grown very fast in the whole southern and eastern African region.
Furthermore, SABMiller started brewing lager with cassava starch in 2011.
It then launched a cassava-based ager in Mozambique branded “Impala”.
Growing cassava is even less expensive than sorghum and hundreds of millions of farmers in SSA can grow cassava.
However, cassava has limited industrial applications as its supply chain is very complicated.
The crop deteriorates very fast after harvest and has a high water content (it is a tuber not grain) and is therefore unsuitable for long distance transport. It cannot be stored after harvest and is expensive to transport from the field to brewery.
Cervejas de Mocambique (ABInBev Mozambican subsidiary) and an NGO have developed an on-site processing unit that can transport the starch to the brewery and save costs.
Impala also received a tax duty cut and could be sold c20% – 30% cheaper than mainstream lager.
Delta’s sorghum business has seen phenomenal volumes-growth during economic downturns.
Further, the “Chibuku” brand has remained a market leader in that category particularly in rural areas where the main economic activities are small scale mining and subsistence farming Delta has taken this business a step further through the acquisition of Natbrew in Zambia and United National Breweries in South Africa.
The South African operations have taken off and there is huge potential in the niche opaque beer market.
The reopening of the economy post-Covid-19 lockdowns will be a relief for Delta as supply and distribution channels return to normalcy.
Morgan & Co Research is cognisant of Delta’s risks such as the depreciation of the Zambian Kwacha (ZMW) and South African Rand (ZAR) as well as inadequate foreign currency on the auction system but maintain that potential capital gains will outweigh downside risks. We also view Delta as a potentially interesting dividend play.
Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@ morganzim.com / batanai@ piggybankadvisor.com
