Diageo Targets Africa Growth With Spirits as Well as Beer

Diageo Plc, the world’s largest distiller, is relying on spirits such as Johnnie Walker whisky and Smirnoff vodka to help 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 plant in Mozambique that is currently producing Gilbeys Gin and plans to produce other spirits in the southeast African country to exploit economic growth, he said.

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 ended 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.

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.

Beer Investment

“Despite the group having beer operations across much of the world, management only regard their beer business in Africa as a strategic asset,” Jonathan Fyfe, an analyst at London-based Mirabaud Securities, said today in e-mailed comments. “The strategy is used to gain the necessary scale to sell their international premium brands.”

Guinness Nigeria Plc, 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 15 percent in Lagos trading this year, while the Ghanaian unit is down 50 percent in Accra. Diageo shares were 0.3 percent lower at the close 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 people’s 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.

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