May 16 (Bloomberg) -- Eugene Shepherd admits he’s no beer expert, but he’ll tell you the bottle of Eagle he treats himself to every week is a step up from the murky homebrews that had been his preferred tipple.
“Eagle is my first experience with beers,” the 20-year-old student said as he settled into a plastic chair at a roadside bar in Sogakope, a dusty town of 88,000 stretched along the highway 150 kilometers (90 miles) east of the Ghanaian capital of Accra. “I really like this drink.”
Shepherd now saves his pocket money all week so on Saturdays he has the 1.20 cedi ($0.61) he needs for a bottle of Eagle, a beer brewed from locally grown cassava that SABMiller Plc introduced in Ghana in March.
For SABMiller, Shepherd’s taste for the clear, bottled beer proves the success of a strategic shift for Africa. To make Eagle, the world’s second-largest brewer has replaced most of the barley malt in the brewing process with indigenous cassava.
The producer of Miller Lite, Peroni and Pilsner Urquell is counting on cassava and other local crops such as sorghum to expand in Africa, where it estimates homebrews or cheap spirits account for some three-quarters of all alcohol consumed.
Brewers in recent years have increasingly emphasized high-end brands to boost margins by getting drinkers to spend more on each beer they consume. While Eagle is far from a premium product, it represents a similar strategy because for the likes of Shepherd the beer is an indulgence that costs more than twice what homebrews do.
Emerging markets are key for brewers. The three biggest are based in western Europe where austerity and a prolonged economic slump have cut into consumption. SABMiller, which traces its roots to South Africa, gets more of its sales outside of Europe and North America than the others, which has helped keep its estimated price-earnings ratio at the highest of its peer group.
Shares of London-based SABMiller have rallied about 60 percent since November 2011, when it launched its first cassava-based beer, Impala, in Mozambique. Impala now accounts for more than 5 percent of Cerveceria de Mocambique’s volume.
Generating more than two-thirds of its profit from emerging markets, SABMiller’s Johannesburg listed shares trade at 23.4 times estimated earnings. Heineken NV trades at 18.8 times estimated earnings, with Anheuser-Busch InBev NV at 20 times.
“There is a lot of opportunity in Africa, but you want to be the first one in the market and entrench yourself as the dominant player,” said De Wet Schutte, an analyst with Avior Research Pty Ltd. in Cape Town. “SABMiller has been largely successful in doing that.”
Ghana, where the economy is set to grow 7.7 percent this year, charges an excise tax of 47.5 percent for beers that have less than 30 percent local content. For brews with more domestic ingredients -- provided by the cassava in Eagle -- the excise tax drops to 10 percent. SABMiller says the profit margin on Eagle is about the same as its other beers.
“These lower-priced beers make sense,” said Wynand Van Zyl, a Macquarie Group Svc analyst in Johannesburg, who rates SABMiller outperform. “It’s very important for international brewers to demonstrate commitment to the local economy.”
Cassava, a tuber grown widely across Africa, is a staple food in many countries. While barley doesn’t do well in the tropical climate, cassava is so easy to grow that Ghana and Mozambique have a surplus.
The crop hadn’t previously been used in beer because it starts to degrade within 24 hours of harvesting. SABMiller uses a portable machine that does initial processing of the roots, allowing them to be stored for weeks.
SABMiller, which sells 46 local brands across Africa, will spend about $300 million to $500 million a year on the continent outside of South Africa, building more breweries and bottling facilities, according to regional managing director Mark Bowman. In Uganda and Zimbabwe, the company already produces Eagle beer made from sorghum.
“These beers are a clear way to reach a market that wants to drink beer but can’t afford to,” Bowman said in an interview at the company’s African headquarters in Johannesburg.
That helped SABMiller achieve a 9 percent increase in sales volume in Africa, excluding South Africa, for the quarter ended in March, the company said last month.
Eagle has a more bitter taste than brews made from barley malt, and Bowman acknowledges that it’s “not supposed to be quite as nice as mainstream beers.” The difference will be a turnoff for some drinkers accustomed to smoother brews.
“I think the taste must be improved,” said Vincent Avornyo, a 25-year-old veterinarian’s assistant drinking an Eagle at another bar in Sogakope. “It’s somewhat tasteless and doesn’t foam like the normal beers.”
Despite such criticisms, sales of low-cost, locally sourced brews could grow to “double or triple the size of the premium beer market as people move” from home-brewed concoctions, Bowman said.
That’s good news for Efam Spot, the bar where Shepherd savors his weekly brew. Eagle is “doing very well,” according to Akos Ahiabu, a 23-year-old waiter there. “It’s quite cheap,” Ahiabu said, “so many people can afford it.”
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