Diageo Targets Africa Growth With Spirits Ahead of Beer

By Moses Mozart Dzawu

Diageo Plc (DGE), the world’s largest distiller, is relying on spirits such as Johnnie Walker whisky and Smirnoff vodka to drive expansion in Africa as economic growth boosts incomes and demand climbs for premium drinks.
Diageo, based in London, is in the process of registering a distribution company to strengthen the business in Angola, said Ekwunife Okoli, managing director for Africa Regional Markets. It’s opened a Gilbeys gin factory in Mozambique and plans to begin bottling Smirnoff Ice in the southeast African country to exploit economic growth, he said.
“We’ve been able to reach out to our
consumer segment in these markets,” Okoli said in a Sept. 23 interview in Accra, Ghana’s capital. “The middle income and above consumers like quality brands and consume spirits.”
Africa’s alcoholic-drinks market is forecast to grow by 56 percent to $61.2 billion in 2018 from $39.3 billion last year, Bloomberg Intelligence analyst Kenneth Shea said in a July 7 note. The market in Nigeria, the continent’s most populous nation, will probably more than double over the same period. Growth will be driven by a large, young population and increasing urbanization that will demand branded consumer goods, Shea said.

Spirits Market

Sub-Saharan Africa’s gross domestic product is forecast to expand 5.5 percent next year from 4.9 percent in 2013, according to the International Monetary Fund. Drinks companies are targeting growth in the region as sales are sluggish in European and North American markets. About 20 percent of Diageo’s revenue came from Africa, Eastern Europe and Turkey in the year ending June 30, the company said.
Angola, Africa’s second-biggest oil producer, is the continent’s second-biggest spirits market after South Africa, Okoli said, declining to give details.
“Johnnie Walker is by far the biggest scotch brand in Angola,” Okoli said. “Today, the alcoholic market is mainly beer. I don’t believe it will continue to be like that in five years’ time.”
Diageo is using the infrastructure it has from beer to help develop the distribution of spirits in Cameroon, Ethiopia and Ghana, where it already makes its signature Guinness stout, Okoli said.
“With the same sales force for beer, we are able to supply our spirits brands,” he said. The company isn’t planning significant further investment in beer due to increased competition from companies such as SABMiller Plc and rising costs.

Beer Investment

“Beer requires a huge investment in capex and also we need to understand the market properly to see whether we can be competitive,” he said.
Guinness Nigeria Plc (GUINNESS), a unit of Diageo, said Sept. 8 that full-year profit after tax fell 19 percent as drinkers switched to cheaper brands to offset rising fuel costs. An October increase in beer prices in Africa’s biggest oil producer “was not the right thing to do in this environment,” Diageo Chief Executive Officer Ivan Menezes said in a Jan. 30 earnings call, acknowledging that the company made an error.
Guinness Nigeria’s shares have fallen 18 percent in Lagos trading this year, while the Ghanaian unit is down 50 percent in Accra. Diageo shares were 0.7 percent lower as of 12:27 p.m. in London, extending the decline for the year to 12 percent.
Coal and natural gas exploration in Mozambique is generating investment in infrastructure and putting more money in peoples’ pockets, Okoli said. The IMF forecasts GDP growth in the coastal country of 8.3 percent this year compared with 7.1 percent in 2013. Diageo’s Gilbeys factory started operations in June with a capacity to produce 300,000 cases per year, the company said in a Sept. 25 response to e-mailed questions.
“As the monies go down to the common man, people are going to be looking for recreation,” Okoli said. “And with recreation, they want to have a drink.”