The Middle East and Africa, the Large Hole in A-B InBev’s Portfolio

Despite A-B InBev’s strong global position as the world’s leading brewer, with a 19% share of global beer volumes thanks to a broad geographical spread, the company has a major gap in its regional portfolio. In the Middle East and Africa, the company commands only a negligible share of volume sales.

This is not a negligible gap, however, with the region expected to enjoy the strongest volume growth of any region in the world over 2010-2015 with a CAGR of 6% (4.8 million litres), the third biggest expected actual regional increase according to Euromonitor International. This will be more than matched by a 7% CAGR in value terms as consumers trade up.

The Middle East and Africa is a difficult region for A-B InBev to break into as it is highly consolidated at both regional and country level. The top four companies in the region, SABMiller, Heineken, Castel and Diageo, together accounted for over 70% of the region’s volumes in 2010. At a local level, many markets are dominated by a single company accounting for at least 95% of volumes. There are a few markets which are more competitive, such as South Africa, Nigeria, Angola and Tanzania, but this is relative.

Of the four leading companies, SABMiller and Heineken are global rivals to A-B InBev, while Castel’s beer operation, BGI, is 20% owned by SABMiller. This leaves fourth-placed Diageo as the only viable option.

Beer a significant part of Diageo

Diageo’s beer operations accounted for a substantial share (22%) of the company’s £9.8 billion revenues in fiscal 2010 (£2.2 billion), of which around £890 million came from Africa, according to a recent company presentation.

Diageo’s beer operations would appear to be an anomaly both for the company and in the global beer market. Its operations are in effect those of a strong regional player, yet it also has one of the few global beer brands, Guinness, which dominates the stout category.

In volume terms, the Middle East and Africa accounted for 60% of Diageo’s 1.9 billion litre global total in 2010. This share is only likely to grow due to the long-term decline of its other key region, Western Europe, as well as the strong performance of its African operations. Diageo’s operations in Africa are primarily focused on East Africa, particularly Kenya, although it also has a growing presence in West Africa, particularly in Nigeria.

In recent years the company has greatly increased its investment and focus on beer in Africa as a whole as it attempts to rebalance its geographical portfolio so that its revenues from emerging markets increase from 32% in fiscal 2010 to 50% by 2015. This has included acquiring in 2010 Tanzania’s second biggest brewer, Serengeti Breweries, in 2011 spending US$368 million on enhancing its Nigerian brewing capacity and US$225 million in the September to acquire the Meta Abo brewery in Ethiopia, having failed to acquire the Bedele brewery earlier in the year, losing out to Heineken.

In addition to offering strong emerging market volume and revenue growth potential, its operations also offer a great potential route to market for its spirits and RTD brands in the region. Volumes of these categories are relatively small due to low disposable incomes and unfavourable taxation, but with growing wealth in the region this could change and allow spirits to grow. Having sold up its Indian operations and pulled back from China following the Asian financial crisis at the turn of the century, it is unlikely to make the same mistake twice.

All these factors make it very unlikely that Diageo would want to sell its beer operations in the near future, but what would make it change its mind?

Little reason to sell

The most likely reason would be a need for funds to drive the company’s spirits expansion in emerging markets as its spirits operations are currently over-reliant on mature markets. Thanks to its beer operations in Africa, in alcohol by volume terms Diageo is relatively well exposed to emerging market regions, with 37% of its volumes accounted for by emerging markets. If one, however, includes just spirits, only 29% of its volumes were in emerging markets in 2010. This will rise slightly with its acquisition of Mey Içki of Turkey and the probable purchase of Grupo Cuervo to 33%, but the company will still need greater exposure to and investment in emerging markets, particularly in the booming Asia Pacific region.

Diageo is particularly weak in that region, especially compared to its rival Pernod Ricard, which has established strong routes to market in both India and China. Since 2006, Diageo has made great efforts to boost its presence in these markets, with more success in China (eg the Sichuan Quanxing acquisition) than in India (its failed joint venture with Radico Khaitan), but still needs to do a lot more work in both, which will require substantial investment in terms of both developing its own portfolio as well as through acquisition.

In terms of acquisitions, the key aims would be to acquire the rest of its stake in Moët Hennessy to enhance its position in China through the Hennessy cognac brand and in India acquire a local spirits producer to give it a distribution base for its international portfolio. The acquisition of the remaining stake in Moët Hennessy would cost in excess of US$10 billion alone, although at the moment LVMH seems to have no desire or need to sell.

If, in the unlikely event, these opportunities become available in the near term, that financial outlay, combined with the funds it has already spent or is expected to spend in the next year or 18 months on Grupo Cuervo and possibly part of Beam, would be a stretch, particularly if it suffered falling revenues and profits in mature markets.

Even if that happens, such a divestment by Diageo with its current investment in the beer category seems very unlikely in the short to medium term. Indeed, it would require a major shift in strategy away from beer.

If Diageo was in need of funds, it would more likely try to spin off its beer operations in a joint venture rather than an outright sale. Diageo would still want to have the distribution platform its beer operations offer in Africa. This means, that for the foreseeable future, A-B InBev will continue to have an ever wider gap in its geographical portfolio.