14 December 2012

Africa: A Taste for Scotch

Industry data point to slowing sales of Scotch whisky to emerging regions, but global drinks groups are bullish on Africa.

At the Cragganmore distillery in Speyside, Scotland, hundreds of casks of single malt whisky are being matured. In years to come, much of this Scotch will be exported to emerging markets, with Africa high on the list. The reason? Diageo, owner of the distillery and the world's biggest drinks company, makes 40 percent of its sales in emerging regions, and the group is pushing its Scotch brands on the continent.

The timing might seem ambitious. The most recent data point to static sales of Scotch industry-wide, driven largely by economic slowdowns in Asia and Latin America. Africa doesn't escape unscathed. The value of exports to South Africa, the world's eighth biggest Scotch market, fell 4.7 percent to $195.2m over the period January-September 2012, according to the Scotch Whisky Association. Sales hit $266.6m for the year 2011, down from $271.7m in 2010, pointing to the country's mounting economic woes.

But that has not deterred the world's largest distillers.

Diageo plans to invest $1bn in Scotch production over the next five years to meet growing global demand - much of it from developing markets.

The company's efforts in Africa are bearing fruit. Its sales of Scotch on the continent grew by 20 percent in the last financial year, led by its famous blended Scotch brand Johnnie Walker, which grew 40 percent over the period.

It is not the only group to sniff out the bigger opportunity, and faces competition from Pernod Ricard, the world's second-largest spirits maker. Like Diageo, emerging markets account for around 40 percent of the French group's sales, and both companies are looking to increase that rate to 50 percent by 2015 in a bid to offset slowing sales in developed regions.

In a bid to promote its spirits brands, Pernod Ricard has opened commercial units in Ghana, Nigeria, Angola and Kenya this year - expanding a foothold that had previously been limited to South Africa, Namibia, Gabon and Côte d'Ivoire. The group has said publicly that it could now target bolt-on, or smaller, acquisitions in the short-term while not ruling out a large deal in the medium-term. "Sub-Saharan Africa represents a new frontier for Pernod Ricard," the group's annual report states.

Pernod Ricard's presence in southern Africa is already substantial. Its famous Jameson Irish Whiskey leads South Africa's premium whisky category, holding a volume share of 69 percent in 2011, according to Euromonitor, the market research group. The group also sells an annual 200,000 cases of Scotch - including its Passport and Chivas Regal brands - in Angola, where it holds the dominant market share. Africa is included in its Asia-Rest of World unit, which accounts for 39 percent of group sales and 42 percent of profit from recurring operations.

Competition between the big two is likely to heat up. "Diageo dominates the African spirits space. They have the pan-African spread, and their beer operations are a perfect distribution platform from which to be able to push their spirits. But Pernod Ricard will be making a real push over the next couple of years to make it a core focus area for them," says Jeremy Cunnington, senior company analyst for alcoholic drinks at Euromonitor.

Beyond the southern borders

Despite big ambitions for the region, consumption levels are still low. While Africa pours back 4m cases of blended Scotch a year, Latin America consumes an equivalent 14m cases, to Western Europe's 33m cases, according to Euromonitor.

Diageo sees that as an opportunity, arguing that with developed markets facing continuing economic headwinds, consumption trends are shifting. "Europe used to be the big market for Scotch but that picture is changing overall. The future is going to come from markets like Africa, Latin America, and Asia," argues Benjamin Itty, Diageo's global consumer planning director.

South Africa's Scotch market dominates, accounting for around 70 percent of Africa's market both in terms of volume and value. With sub-Saharan Africa's biggest economy facing serious structural and economic woes, could falling export values be a cause for concern? Perhaps not.

The downturn in those values does not take into account the fact that volumes are actually rising - a trend which could be attributed to greater consumption of economy and standard, rather than premium brands. Scotch exports to South Africa for the period January-September 2012 hit 11.2m litres of pure alcohol; an increase of 10.2 percent over the same time last year, according to the Scotch Whisky Association. In fact, export volumes have seen consistent double digit growth since 2009.

Category-wide, consumption of whisky in South Africa is actually on the up. Value growth for whisky hit 10 percent in 2011, while consumption by litres increased 9 percent, Euromonitor says. That is compared to a 2 percent volume increase for South Africa's spirit bracket as a whole.

And for forward-looking distillers, the Scotch story is playing out beyond South Africa's borders. Export volumes to Africa as a whole rose to 4.3m cases for the first three quarters of 2012, an increase of 12 percent compared to the same period a year before. Export values for the continent hit $279.4m, up 5 percent year-on-year, the Scotch Whisky Association says.

Nigeria is among Diageo's top five emerging markets by sales across drinks categories. Other top markets for Scotch industry-wide include Morocco, Egypt, Kenya, Cameroon and Angola.

"South Africa will remain our priority market, however we are now putting more focus on Nigeria, Angola, Kenya and Ghana," says Craig Hutchison, finance director of Pernod Ricard Sub-Saharan Africa.

The returns across the continent are substantial. Diageo's African operating margins (around 25 percent, versus the group average of 29 percent) are likely to increase as the spirits business gains scale, Deutsche Bank points out in a July research note. That owes not a little to the Scotch market.

"Africa's Scotch whisky business is among the most profitable in the world for Diageo with similar pricing...and lower distribution costs," the bank notes. "With consumption patterns no different in Africa to those in Latin America or Asia, this should be [a] very highly rated profit stream."

Growing market

So why the taste for Scotch? The continent might have been considered a market for beer in the past, but whisky has a strong heritage as well. "Historically Africa has been a brown spirits market, particularly western, southern and central African regions, with whisky being the largest category," argues Pernod Ricard's Mr Hutchison.

The trade-up to whisky has been accelerated by rising incomes, young populations and high rates of urbanisation. "Scotch is sensitive to prosperity," says Diageo's Mr Itty. "If GDP per capita grows there's a correlation with Scotch consumption, because when people earn more money they want to trade up to something with that reputation."

The popularity of the spirit owes a lot to "that reputation". Much of Diageo's success in Africa's Scotch category, the company argues, is attributed to Johnnie Walker, whose aspirational 'Keep Walking' slogan resonates with emerging consumers.

The brand has fast become a signifier of social improvement in Africa, says Nick Blazquez, Diageo's head of Africa: "Johnnie Walker is really helping drive visibility of the category because its key brand characteristic - 'Inspires Personal Progress' - resonates with the aspiring African consumer of today."

Price points

But encouraging consumers to move from beer to whisky requires careful pricing. "It's about arm's reach pricing: price points have to be aspirational, but still affordable," Mr Itty says. "If you are selling at more than three or four times the price of beer in a bar it's going to be very difficult to get people to trade up."

Johnnie Walker Red Label, which falls into a standard pricing category, has been the chief driver of growth, he says, while economy brands such as White Horse are offering consumers a more accessible price-point. However, Africa is also a growing market for deluxe and super-deluxe categories - especially in resource rich countries - with some consumers paying up to $100,000 for a bottle.

Strategic marketing campaigns are encouraging consumers to trade up. When Diageo began pushing its Johnnie Walker brand in Africa in 2010 it recruited Ethiopian runner Haile Gebrselassie as one face for its 'Walk with Giants' advertising campaign. In a clever piece of television marketing, the two time Olympic champion touted the Scotch brand's optimistic 'Keep Walking' slogan through a wistful commercial based in his native Ethiopia. In his voiceover, the runner recalls "the challenge and the poverty of the past" and recognises "the dreams of Africa".

Diageo is also on a drive to educate customers and retail outlets about how best to serve Scotch, and is spending money on training bar staff across the continent. Over the last year, Diageo has opened Johnnie Walker Houses, elite bar-cum-whisky-embassies, in Shanghai and Beijing. Africa is next. There are plans to bring a spirits showroom Addis Ababa next year.

Pernod, meanwhile, has opened a Business and Brand Academy in Johannesburg in order to train teams working in its new African entities.

Two horse race?

While Diageo and Pernod are leading the international charge for Africa's Scotch space, other players are emerging. "Those two will be the big players in key markets like Nigeria and Angola, but don't rule out smaller companies looking for opportunities," Euromonitor's Mr Cunningham says.

Medium-sized groups such as La Martiniquaise, which owns the Label 5 brand, are also ready to increase their footprint - potentially in Francophone markets - he says: "You will get the more nimble proactive companies, such as William Grant, such as La Martiniquaise, going into markets when they see an opportunity. Those may not be markets where Diageo and Pernod are particularly focused, so they could be looking to take a large slice of the market."

In South Africa one reason for declining Scotch exports by value may be the growth of local drinks groups, including Distell, which is posting double digit volume growth for its blended whisky brand Three Ships. For the six months to June, the indigenous group announced an almost 10 percent increase in sales across its portfolio of wine, spirits and ready to drink products.

Euromonitor also notes that the growth of the country's whisky category at large is "driven by Brandhouse", the local joint venture between Diageo, Heineken International and Namibia Breweries.

The big two are prepared for the fight. "The competitive environment is increasing with all of the international players investing more in Africa. This is a good thing because it is helping grow the category," Diageo's Mr Blazquez says. "We have every intention of growing our beer brands ahead of the market, but we want spirits to grow faster."

Pernod's Mr Hutchison is similarly bullish. "Competitive intensity has increased. But with our whisky portfolio, from standard brands through to ultra-premium, we feel we are able to capture the majority of the future growth."

The challenges stretch beyond sensitivity to economic and geopolitical shocks, and include high taxation rates and affordability, but there are plenty of reasons to be positive. "We believe [the African spirits business] recently hit an inflection point in terms of scale in many markets, such as Nigeria," Deutsche Bank states in its note.

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