Heineken NV is opening a third brewery in Ethiopia in 2014 in an effort to expand in African markets. This is expected to be the world’s fastest-growing region in beer volume sales, in percentage terms, in the 2013-2018 period. The Middle East and Africa (MEA) is forecasted to grow, according to Euromonitor International, by a 5% CAGR in total volume sales. The significance of this logistical move derives from the company’s strategy to dominate the continent’s second-most populous market.
Africa’s population size, untapped low-income consumer expenditure, growing incomes and rate of urbanisation are all playing a part in its global significance. It is no surprise that global companies like Heineken are looking to get a stronger foothold in this continent, but they have to contend with incumbent brewers, especially SABMiller Plc.
Demography and Economy in Favour of Africa
As the urban population is expected to grow at 3% CAGR over 2013-2018 in the MEA, and the population is expected to grow by a CAGR of 2%, Heineken is looking towards a growing consumer base. But let’s not forget that growth of a beer consumer base will also depend on the degree of social mobility, and growing accessibility of low-income consumers to beer markets via affordability.
Source: Euromonitor International from national statistics/UN
Although there is a positive outlook based on key demographic and economic indicators in the MEA region, the bulk of volume sales are likely to be derived from low-income consumers. By using a mixture of cost-cutting initiatives, as in packaging, distribution, marketing, and local sourcing, the company will increase the affordability threshold. In the Heineken example, as people migrate to cities and are expected to have more disposable income, they will aspire to buy clear beers that are considered premium quality. Heineken’s 720ml Primus beer, in the Democratic Republic of Congo and Rwanda, has a relatively high price, so the company developed a 500ml bottle as an answer to aspirational demand.
Heineken’s strategy in African markets is comparable to other key competitors, aiming to source the bulk of their raw materials, and labour, locally. With a significant variety of alternative fermentable starches available, like cassava, sorghum and teff in Ethiopia, and with government subsidies of such local grains, this could also become a key cost-cutting opportunity.
Beating the Biggest Brewer in the Continent: SABMiller
In beer, Africa is considered to be the battleground between three key global brewers; Heineken NV, SABMiller Plc and Diageo Plc. Heineken wants to dilute some of SABMiller’s dominance in the continent by limiting its expansionary strategy toward newly developing African markets, especially where the former company is not a competitive threat. According to Euromonitor International data, the disparity between Heineken and SABMiller is highlighted in their MEA volume sales share of 38% for the latter and 18% for the former.
Source: Euromonitor International
However, Heineken has much work to do to compete against SABMiller in beer in Africa, let alone the soft drinks market, where both companies hold distribution licenses for Coca-Cola. This aspect of both brewers’ operations goes hand-in-hand with the distributive breadth of their beer brands. Heineken, like SABMiller, will have to get its products to hard-to-reach areas. And this must be done without impeding too much on margins or raising prices beyond an affordability threshold. Heineken’s involvement in Africa is not that recent, and the company’s drive to establish Heineken beer as a global brand is the impetus for establishing a presence in emerging markets.
According to Siep Hiemstra, President of Africa and Middle East Heineken, the company’s primary focus in Africa will be to grow organically, but that puts a question in analysts’ minds. Will organic growth alone be enough for entry or growth where SABMiller is incumbent or aims to enter?
Heineken should be looking to further capitalise on Africa’s growth prospects through acquisitions or joint-ventures, in parallel with organic growth. Small scale acquisition, although limited in choice, is a likely option for Heineken to initiate market entry and add to its regional organic growth. The reasoning here is that Heineken is far from catching up with SABMiller, but it must limit the latter’s expansion in the continent. This is especially the case when SABMiller is so risk-inclined that it is willing to enter a market before being recognised as an independent nation state, eg South Sudan. Subsequently, acquisition and inorganic growth will be as important to Heineken’s strategy in Africa as organic growth.