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Johnnie Walker, Jameson in spirited scramble for Africa market

Saturday November 17 2012
diageo

Diageo’s iconic Scotch whisky brand is poised to become the next big success story for the company’s Africa operations

At the Speyside Cooperage in rural northern Scotland, six coopers hammer away in the workshop, each crafting at least one whisky cask every half hour. The musical ringing of metal on metal echoes around the shop.

Several miles away at the Cragganmore Distillery, home to the famous single malt, Laura Vernon, the plant manager paces across the factory floor and on to the huge old workshop where thousands of whisky casks are stacked against the walls. The casks hold whiskies that may be consumed in Africa in the year 2030, upon maturity, at least if a dream of Diageo, which owns Cragganmore Distillery and nearly two-dozen others in Scotland, comes to pass.

Diageo, which owns East Africa’s biggest brewer East African Breweries Ltd (EABL) has embarked on a drive to push Scotch whisky sales in Africa, historically a weak spirits market.

In their latest research note, analysts at Deutsche Bank said Diageo’s iconic Scotch whisky brand Johnnie Walker is poised to become the next big success story for the company’s Africa operations.

Diageo recently sought the services of Ethiopian athletics legend Haile Gebrselassie and Cameroonian saxophone maestro Manu Dibango as brand ambassadors in local advertising campaigns for Johnnie Walker, a drink positioned for mature, upwardly-mobile men (Its slogan is “Keep Walking”).

(Read: Diageo banks on Johnnie Walker to drive revenues on the continent)

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For Diageo, the strategy is to grow its African spirits business beyond South Africa — its largest African spirits market for scotch (42 per cent of SA sales) and vodka (37 per cent).

But Diageo’s push into Africa is facing strong competition from other global spirits leaders like Pernod Ricard.

Pernod is the world’s second largest spirits company behind Diageo and the maker of whiskies like Jameson and Chivas Regal. The firm has established businesses in Nigeria, Ghana, Kenya, Angola and Morocco in the past six months.

Growing consumption

The two spirits giants are hoping to cash in on the growing middle-class in Africa to reduce their reliance on traditional markets like Europe and the US.

“We have barely scratched the surface of Africa’s Scotch whisky business,” said Benjamin Itty, the consumer planning director at Johnnie Walker during a media meeting in Aberdeen Scotland.

“Consumption growth is closely linked to gross domestic product growth, and enables consumers to trade up easily,” Mr Itty said.

Diageo and Pernod are the largest global players, with 3-4 per cent share each. According to analysts at Merrill Lynch, the wealth management division of Bank of America, the two companies are focusing on growing overall spirits consumption in emerging markets such as India, Africa and the Middle East — where per capita consumption remains low — and trading consumers up in China and Russia where international brands command less than 2 per cent share.

In June, Laurent Lacassagne, the chairman and CEO at Europe’s branch of Pernod Ricard, said the firm was expanding its direct presence in Africa by rolling out strategic spirits brands and seeking affiliates on the continent to help push up volumes.

According to the company’s financial results, Diageo’s net sales for spirits in East Africa went up by 50 per cent in the half year ending December 2011, driven by a surge in the uptake of premium spirits including Johnnie Walker.

However, beer is still the company’s leading product in Africa, making up 67 per cent of Diageo’s African division sales. Merrill Lynch says Johnnie Walker is the largest whisky brand, with retail sales of $5.2 billion in 2011, followed by Jack Daniels (made by Brown Forman) at $2.4 billion, and Chivas Regal at $1.8 billion.

In 2011, Johnnie Walker grew 40 per cent in Africa, and in South Africa by almost 34 per cent. About 18 million cases of Johnnie Walker were sold globally last year, making it the number one premium spirit by value.

Emerging markets

Deutsche Bank analysts said Africa’s Scotch whisky business is “among the most profitable in the world for Diageo,” even with similar pricing in other global markets. Diageo executives said the firm will spend at least $628 million over the next few years to boost the number of its distilleries and expand its warehouse capacity to keep up withrising demand, especially in emerging markets.

Many markets that are considered “emerging” from an economic point of view have levels of per capita spirits consumption that are mature — in many cases higher than the developed world. However, most of the alcohol consumed in these markets tends to be lower-priced local products, with key international categories such as scotch, cognac and rum remaining underdeveloped in these markets.

Deutsche Bank says with Scotch whisky usually associated with status — signifying economic prosperity and high social standing — the firms are hoping to cash in on a growing number of Africans whose disposable income is rising with economic development.

The African Development Bank (AfDB) estimates the size of Africa’s middle class — those spending between $2 and $20 a day — at about 313 million people, or 34.3 per cent of the continent’s population, a spike from 111 million two decades ago. In East Africa, the figure is about 29.3 million, representing an average of 22.6 per cent of the population; 44.9 per cent in Kenya, 18.7 per cent in Uganda, 12.1 per cent in Tanzania, 7.7 per cent in Rwanda, and 5.3 per cent in Burundi.

Kenya is likely to be an attractive market in the new Diageo drive, with the country leading its East Africa neighbours in terms of alcohol consumption patterns.

(Read: Diageo rolls out barley, sorghum projects in East Africa)

According to WHO’s Global Status Report on Alcohol and Health, Kenya consumes by far the largest proportion of spirits in the region — 27 per cent of its total alcohol consumption — compared with an average of just 2 per cent in the other four East African countries.

Analysts say operating margins for Diageo in Kenya could go as high as 30 per cent given its premium pricing and the company’s position in both beer and spirits. Through its listed subsidiary EABL, Diageo owns about 90 per cent share of the formal Kenyan beer market and more than 50 per cent of the local spirits market.

Projections by Merrill Lynch show that emerging markets represent 48 per cent and 40 per cent respectively of Diageo and Pernod’s sales. In the latest research note on European spirits business, the firm estimates that if current trends continue, the sales will increase to 55 per cent and 50 per cent in the next three years for Diageo and Pernod respectively.

In the Africa and Middle East spirits business, South Africa is the largest market by volume (130 million litres) while the UAE is largest by retail value. Morocco is the only market in the region to experience a decline in volumes over the past 10 years, Merrill Lynch said.

Away from the spirits business, in Africa global giants like SABMiller, Diageo and Heineken are ploughing millions of dollars into marketing as they compete for the continent’s rapidly expanding drinks industry.

The writer recently toured several distilleries in Scotland

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