The Beer Frontier: Investors Look To Africa Breweries For Returns

The Beer Frontier: Investors Look To Africa Breweries For Returns

US fund managers are circling beer companies in Africa as they search for better long-terms returns on investment, and say the continent’s high youthful population with an average age of about 20 years will drive  the world’s alcohol business in the future.

According to a Reuters report, fund managers are abandoning infrastructure investments for better return in the beer market, where youthful drinkers — at prime age for beer-drinking — are making it profitable to invest in local breweries.

Babatunde Ojo, a portfolio manager at Harding Loevner overlooking a $600 million frontier markets fund, told Reuters importing beer into a country like Tanzania “would cost four or five times more … than to make it domestically.”

According to a Wall Street Journal report, international spirit companies coming into Africa are targeting even the poorest consumers in urban and rural areas with liquors made locally and sold at dirty-cheap prices.

Africa urbanization
image: The Economist

The continent has the fastest growing population in the world and is expected to cross the four billion people mark by the close of the 21st century.

With increased urbanization cities like Lagos and Dar-es-Salaam that are expected to witness a jump in people living there are becoming huge targets for beer companies looking for market and fund managers are investment in such firms.

Data collected by Lipper shows that Ojo’s fund recently bought 730,000 shares of Tanzania Breweries and 900,000 shares of East African Breweries, while The Templeton Frontier Market fund added $3.6 million of East African breweries shares and $11.8 milion of the Nigerian Breweries.

Legal drinking age

Tanzania and Nigeria are expected to see the largest increase in the legal drinking age population in Africa by 2018.

While Africa’s drinking-age population is growing, other continents such as Western Europe and North America have been witnessing a decline of between 5 percent and 10 percent since the break of the century, Rabobank Research shows.

“If you invest in Africa, it will be a rocky ride between the possibility of economic and political instability, but if you look at the long-term potential, the rewards you can reap are very interesting and worthwhile,” Francois Sonneville, director in Food and Agribusiness Research at Dutch-based bank Rabobank International, told Reuters.

For London-based Diageo, Africa has emerged as a rare hotspot for the beer business and the company is digging in with expansion plans that has seen it make significant acquisitions over the last year.

The alcohol and beverage firm said Africa was the only market that showed growth in the last fiscal year when it saw a 0.8 percent fall in operating profit.

Diageo’s rival SABMiller is also working to dominate the African market by hinging on $1 beer strategy. Fortune reported earlier this year.

SABMiller outlined a new strategy that focuses on keeping a lid on beer prices and developing local lagers to help the world’s second largest brewer tackle an increasingly important but complex African beer market.

“Consumers in Africa drink the same amount of alcohol as consumers everywhere else,” said Mark Bowman, managing director of SABMiller Africa at a presentation in New York City in March.