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April 08, 2009

Major brewer plans to use sorghum to produce cheaper African beer

by Kerry Capell

Beer sales in developed markets are losing fizz, so the world's second largest brewer, SABMiller, is looking to the relatively untapped African market to help drive future growth. But with an estimated 315 million Africans living on less than $1 a day—roughly the same cost as a bottle of beer—commercial brews such as SABMiller's Peroni and Miller Genuine Draft are beyond the reach of vast swathes of the population.

Low-income consumers have traditionally made home-brewed hooch from local ingredients that range from bananas and watermelons to root vegetables. Sometimes the ingredients aren't quite so healthy: In Kenya, for instance, there have been a number of fatalities after home brewers added methanol and battery acid to give their brews a kick. With no regulation of this so-called informal beer market, drinkers "can be taking their life in their hands," says Gerry van den Houten, supply chain and enterprise development director for SABMiller Africa.

Hoping to tap into this informal market, SABMiller is embarking on a new strategy to make beer more affordable. The largest brewer on the African continent, with operations in 14 countries, SABMiller already has around 45 indigenous African brands, ranging from the more affordable Chibuku Shake Shake in Malawi and Eagle in Uganda, Tanzania, and Zimbabwe to such premium brands as Nile Special and Mosi. Now the company plans to create even more affordable brews using locally sourced ingredients such as cassava, a root vegetable that yields a rich starch, in place of more expensive imported alternatives such as maize.

"It is an entirely logical move, given that a large segment of the population in Africa may not be able to afford commercially brewed beers as often as they'd like," says Kim Slater, director of consulting at beverage market research firm Canadean in Basingstoke, Britain.

SABMiller estimates that the home brew market is worth more than $3 billion in the African countries where it currently operates, amounting to a volume potentially four times greater than the brewer's current sales there. "There is an enormous informal alcohol market in Africa," says van den Houten. "We hope to access much of that market by producing a commercially brewed beer at 50% to 60% of the cost of standard lager by using locally sourced ingredients."

SABMiller, which was known as South African Breweries prior to its 2002 acquisition of Milwaukee-based Miller, now gets 35% of its overall profits from Africa, compared with just 4% for rival Diageo (DEO). According to Trevor Stirling, research analyst for European beverages at Sanford C. Bernstein (AB) in London, the four main international brewers currently control nearly 90% of the African market: SABMiller has a 43% share vs. 19% for Heineken (HEIN.AS), 16% for French brewer Castel Group (in which SABMiller owns a 20% stake), and 12% for Diageo. Stirling reckons that a move toward local sourcing is on each company's agenda.

SABMiller is just the latest consumer giant to target low-income consumers in emerging markets. With its inexpensive individual sachets of everything from shampoo to detergent, Anglo-Dutch consumer goods giant Unilever (UN) blazed the trail. Since then a host of other companies, ranging from Nestlé (NESR.MU) to Nokia (NOK) to Philips (PHG), have followed suit with products and services tailored to emerging-market consumers. Some of those innovations are now also starting to "trickle up" to more developed economies.

Accustomed to strong growth, beermakers traditionally had little need to stretch. In 2008, SABMiller reported sales of $21.4 billion on pretax profits of $3.3 billion, up 15% and 16%, respectively. But growth is harder to come by these days. According to the latest figures released by London-based market research firm Plato Logic, global beer sales grew by less than 2% in 2008, down from 5.7% in 2007. Volumes are expected to continue their decline this year.

That's one reason why SABMiller is turning more attention to emerging economies—including consumers at the so-called "base of the pyramid." By June the brewer hopes to launch a commercial trial in Angola of a new formulation of its N'Gola brand, using locally grown cassava instead of imported maize. The beer will retail for approximately 40% less than other mainstream lagers.

Although cassava is widely grown in Africa, it's produced today primarily by subsistence farmers. By developing a local supply chain, SABMiller hopes to help Africans move from subsistence to cash-crop farming. Within two to three years, van den Houten says, the company is aiming to develop an entirely new beer using 100% cassava or other locally grown ingredients such as palm derivatives.

To be sure, the use of locally sourced ingredients to make mainstream beers isn't entirely new. Both Diageo and SABMiller have made brews using the grain sorghum for several years. In 2002, SABMiller launched Eagle, a sorghum beer that's now the company's second-largest African brand. Using locally sourced ingredients also qualifies SAB for tax breaks, which in turn helps it sell Eagle for one-third less than lagers that use imported barley.

SAB's success with sorghum in Africa formed the template for a similar program launched in India in 2005 to grow barley. The company currently works with an estimated 6,000 small-scale Indian farmers who receive prices that average 5% higher than the market rate to produce an estimated 20% of the barley the brewer uses in India. SABMiller figures it will need roughly 55,000 farmers in its supply chain across India and Africa by 2011 to meet future production needs.

The company is also looking at growing barley in African countries such as Angola, Ethiopia, Mozambique, and Zambia. It's already working with local farmers in Tanzania using a "hub and spoke" model, where one larger commercial farm supplies around 40% of the barley and trains smaller growers in the area to supply the rest. "Traditionally many of these small-holder farmers have found it difficult to access financing," van den Houten says. While SABMiller will not provide cash directly, it will act as an intermediary with local banks, helping farmers get loans by guaranteeing to buy their output.

Not that the push into ultra-affordable beers lacks challenges. To bring down costs, SABMiller also must address the price of packaging—whether bottles, cans, or kegs—which van den Houten says can account for up to 60% of overall production cost. The company is looking at everything from using less labeling to trying out materials such as cardboard or collapsible PVC boxes.

Another big issue is distribution. In remote rural areas, draft beer barely exists today: The cost of owning and maintaining draft dispensers is out of reach for many local pubs. Beer is often served in bulk, with several people drinking from a shared container that can be anything from a bucket to a hollowed-out calabash, a kind of squash.

Solving such issues will be crucial if SABMiller is to convince lower-income Africans to switch from homemade hooch to commercially brewed beer. The company says it is closely examining the experience of other industries that have overcome such distribution and logistical challenges. In the meantime, the cassava project in Angola is a viable first step. "Our strategy is to have a portfolio that spans as much of the market as possible," van den Houten says.

Business Week

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