By Peter Evans
NAIROBI, Kenya--For 20 years, Leonard Odhiambo has run a
thriving business off a dirt path in Kibera, the biggest slum in
sub-Saharan Africa. He brews changa'a, a potent spirit made from
molasses and mashed grain. A half-liter bottle sells for just over
a dollar.
Changa'a is illegal, but the police aren't his biggest threat
these days. Diageo PLC, the world's largest spirits company, is
selling inexpensive liquor barely a hundred yards from his door.
The cheapest, a whiskey called Jebel Gold, costs about 10 cents for
a 30-milliliter "tot"--about two-thirds of a shot.
Mr. Odhiambo says he is losing customers to the nearby liquor
shack, which also offers non-Diageo branded products such as
Napoleon Gold Brandy and King Horse Vodka. "They sell cheaper than
they used to," he says.
International spirits companies are expanding across Africa,
targeting even the poorest consumers with liquor made locally and
sold at dirt-cheap prices. In major cities and, increasingly, in
rural areas as well, the world's biggest liquor makers are
launching low-price versions of big-name brands, forming
partnerships with independent distillers and creating their own
versions of local spirits.
Africa has emerged as a rare bright spot for London-based
Diageo, which said Thursday that operating profit for the fiscal
year ended June 30 fell 0.8% on weaker sales in North America, the
Asia-Pacific region, Latin America and the Caribbean. In Africa,
discounting the effect of acquisitions and currency fluctuations,
sales rose 6%. Earlier this week, Diageo moved to wield more
control over its growing business in South Africa, terminating a
joint venture with Heineken NV.
The global spirits industry sees Africa as the final frontier--a
potentially huge market that is largely untapped. Only 2% of the
industry's profits came from Africa and the Middle East in 2013,
according to Sanford C. Bernstein & Co. Between 2013 and 2017,
the continent's liquor market is projected to grow by 45%, to $2.39
billion, Diageo has told investors.
There are wealthy consumers in Africa who can afford expensive
Western liquor. But cheaper local brands dominate the rest of the
legal market. Global giants such as Diageo and Pernod Ricard SA of
France now realize that to compete effectively in Africa, they need
to move down-market.
"All the real action is when you go below 200 Kenyan shillings,"
around $2, says John Williams, marketing director at Kenya
Breweries Ltd., a Diageo subsidiary.
Slum sales
To compete head-on with changa'a merchants like Mr. Odhiambo,
Diageo is selling low-price products out of shacks in some of
Kenya's poorest slums. Jebel Gold is its cheapest brand, but others
don't cost much more. A tot of Liberty, a whiskey, sells for around
20 cents, while Kenya Cane, a white rum, goes for around 35 cents.
Diageo says most sales of those brands have been to drinkers moving
out of the illicit market.
Competitor Pernod Ricard offers its Passport Scotch whisky for
$4 per half-liter bottle in many African countries. The brand has
had the most success in Angola, where it sometimes was used in
place of currency during the country's decadeslong civil war,
according to Laurent Pillet, Pernod's top Africa executive.
Beer companies also see opportunity in the market for
high-alcohol-content products. SABMiller PLC, the world's No. 2
brewer by sales, last year started selling in Tanzania a blended
three-year-old Scotch whisky called Fyfe's. SABMiller already holds
a nearly 30% stake in South Africa-based Distell Group Ltd., the
No. 2 distiller in Africa by sales.
Diageo has invested more than $1 billion in Africa over the past
five years. It controls about 25% of legal-spirits sales on the
continent, according to research firm Euromonitor International,
almost double the market share of Distell. Pernod Ricard is third
with 6%, while other big names, such as Brown-Forman Corp., Bacardi
Ltd. and Rémy Cointreau SA, have less than 2% each.
For Diageo, much of the rest of the world isn't looking as
promising. Sales growth has abated in the U.S., Western Europe and
China. A global bourbon boom has largely passed the company by.
Revenue from North America, Diageo's biggest market, declined 1% in
the year ended in June, excluding the effect of currency movements.
Last month, Diageo said Chief Financial Officer Deirdre Mahlan
would take over as president of its North America unit , replacing
Larry Schwartz, who announced his retirement earlier in June.
The company also is contending with a U.S. Securities and
Exchange Commission inquiry into whether it has been shipping
excess inventory to U.S. distributors in an effort to boost its
results, The Wall Street Journal reported last week. Diageo said it
is "working to respond fully to the SEC's requests for information
in this matter."
Diageo's competitors also are staking claims in Africa, and
Kenya has become a battleground for the world's two biggest spirits
companies. Diageo has operated for nearly a century in the country,
which has one of sub-Saharan Africa's largest economies, but now
faces pressure from Pernod Ricard, which opened a Nairobi office in
2012. Massive billboards for Pernod's Jameson Irish Whiskey and
Diageo's Johnnie Walker Scotch dot the city's skyline, while
salesmen compete to get their brands into the hundreds of new bars
and stores that open each year.
The battle for Nairobi is likely to be replicated across Africa
in the next decade. "Africa is Asia in 15 years," says Alexandre
Ricard, Pernod Ricard's chief executive. "That's how important it
can become for us."
Diageo hit some bumps on its initial foray into the low end of
the market. Three years ago, the company launched Jebel, a
predecessor to Jebel Gold. It was packaged in plastic pouches to
save on costs. When a smaller competitor introduced a rival brand
in glass bottles, which are perceived as safer and more hygienic,
Jebel's sales collapsed. Jebel Gold is now sold out of a keg so
customers can see the liquid being poured, alleviating concerns it
has been tampered with.
Diageo thought it could apply global marketing techniques to its
African spirits brands. "We've been guilty in the past of coming at
it from a Diageo perspective of premiumization and total focus on
the brand," says Nick Cook, Diageo's commercial director in Ghana.
"It's actually more about keeping a brand locally relevant and
keeping the costs down. That's something we're not used to."
Now, branded mugs and tablecloths are provided to bars in poor
areas. In Ghana and Nigeria, herbs--regarded as essential for good
health--have been added to products.
In Kenya, liquor makers market to the lowest rungs of the
economic ladder by advertising on radio stations known as slum
radio, which play to settlements across the country on constantly
changing frequencies.
Radio is the "medium of choice" for many of Diageo's lower-price
brands in Kenya, said the company's Mr. Williams. The distiller has
reached customers who have never before consumed legal alcohol by
using what it calls vernacular radio-stations broadcast in one of
Kenya's 67 different dialects, often to a single tribe or town. "We
can use dialect or slang to reach tribes or areas we'd never have
got to before," Mr. Williams said.
The company is using motorbikes instead of trucks to transport
its liquor to remote Kenyan communities.
In East Africa, one of Diageo's top five global markets, the
company's liquor sales doubled in the last two years. In the last
six months of 2014, sales of what Diageo calls emerging
spirits--products sold for between $1 and $2.50--increased 28% in
East Africa. During that same period, sales of beer priced at the
same level fell 12%.
Health campaigners say the rapid expansion of spirits brands is
compounding an existing problem. Although nearly half of African
men abstain from drinking alcohol, those who drink have the highest
prevalence of "heavy episodic drinking" of any region in the world,
according to a report by the World Health Organization.
"In our society, drinking is a big problem," said William
Ntakuka, program officer for SCAD, a Kenya-based nonprofit
organization that campaigns against alcohol and drug abuse. "It's
bad, and it's getting worse."
Diageo, Pernod Ricard and other international spirits companies
operating in Africa all run responsible-drinking programs and say
their products should be consumed in moderation.
Billboard ads
In many African countries, laws about marketing alcohol aren't
as strict as they are in much of the developed world. Many African
governments, for example, allow billboard advertising of alcohol
brands directly outside schools.
In the U.S., Diageo and other alcohol companies are prohibited
from placing ads within 500 feet of schools. In Africa, some
countries allow ads to be placed anywhere. Diageo says it abides by
local laws and works with governments to improve advertising
standards.
The growth of the African market has taken international liquor
companies--many of them with emerging-markets experience in Asia
and Latin America--by surprise.
Pernod Ricard in 2011 wanted to begin selling in Angola but had
no local expertise. It moved an executive from Poland to Angola and
start the business from a hotel room in Luanda, the country's
capital.
In Uganda, Diageo needed to increase capacity quickly. Without
waiting for approval from headquarters, executives ordered a
$40,000 production line from a local supplier. It was delivered and
operational within weeks.
In 2013, Diageo opened a mobile distillery in Accra, Ghana, that
it calls "the cube." Made from five 8-by-40-foot shipping
containers, the cube produces 1,500 plastic bottles of liquor an
hour. Setting up a new distillery with full production capacity
would have cost around $45 million. Building the cube cost about $3
million. It operates 24 hours a day, six days a week.
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If one area of Africa becomes saturated with a particular
brand--or if consumers don't take a liking to a new product--the
distillery can be packed up and moved to a new location. Diageo
currently operates mobile distilleries in Ghana, Nigeria and
Mozambique, and has plans to expand throughout Africa.
In Ghana, the main product made in the cube is Orijin Bitters.
It was created to satisfy local tastes. Ads for it around the city
read "Herbs, Fruit, Alcohol." A 750 milliliter bottle sells for
just over $2.
"We could run three cubes and still not have enough," says Eric
Botchwey, the distillery's production manager.
In Ghana, as in many African countries, liquor companies are
trying to take market share away from beer brewers, which have long
had a solid foothold on the continent. Around 10% of the beer
industry's global profits come from Africa and the Middle East,
compared with 2% for the spirits industry, according to
Bernstein.
In Nairobi, Pernod Ricard is introducing its Jameson brand to
beer drinkers by working with local bars to brew beer in casks used
to make Jameson whiskey. Italy's Gruppo Campari SpA suggests
drinkers in Nigeria mix Campari, a bright red liqueur, with beer to
create a cocktail known as a "Churchill."
Diageo is one of Africa's biggest brewers through its ownership
of Guinness and numerous local breweries, so the company in many
markets is competing against itself. In several countries, Diageo
sells miniature bottles of Johnnie Walker Red Label Scotch whisky
with a free mixer for the same price as premium lager.
There are signs that tastes are shifting. Total African liquor
sales by volume increased 8.6% in 2014, according to research firm
IWSR. Spirits have "suddenly started becoming something
aspirational," says Vignesh Ramachandran, head of marketing at
Nakumatt Holdings Ltd., Kenya's biggest supermarket chain.
As competition intensifies, Diageo is intent on defending its
market share in Africa. "International players come and go," says
Charles Ireland, chief executive of Diageo's East Africa Breweries
Ltd. "But it's our turf, and we fight hard to protect it."
Saabira Chaudhuri contributed to this article.
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