Strategic investments pay off for Kenya’s largest brewer

East African Breweries Limited (EABL) is reaping the rewards of its decision to invest in key assets, as its managing director and CEO explains to Tom Collins.

For almost 100 years, drinking a beer in the East African region has routinely meant picking up a cold Tusker lager – the flagship product of Nairobi-based East African Breweries Limited (EABL).

The beer was named in honour of George Hurst, the co-founder of EABL’s predecessor company, Kenya Breweries Ltd (KBL), who was killed by an elephant soon after the establishment of the firm in 1922.

In 1935, KBL acquired Tanganyika Breweries and the companies merged to become EABL the following year. At the turn of this century, Diageo, the world’s largest beverage company, acquired a majority stake in the firm.

Since then it has introduced a suite of local products to the market as well as leveraging UK-based Diageo’s global brands such as Johnnie Walker and Guinness. 

As the second biggest company in the market after telecommunications firm Safaricom, EABL contributes approximately 1% of Kenya’s GDP and its products have retained a reputation as some of Kenya’s favourite brands.

Growth in key products such as Senator Keg, a lower end lager, pushed EABL’s net earnings up by 33% in the half-year to end-December 2018.

Andrew Cowan, group CEO, who joined in 2016 after leading Diageo’s UK office for five years, says that somewhat risky investments in key assets during a period of weak economic growth are beginning to pay off and have contributed to the gains.

“The critical thing we did when the business was soft in 2018, was to bite the bullet on some investment decisions we wanted to make,” he says.

“So when many capex-intense businesses across Kenya and even East Africa were tightening the belt on investment, we stuck with two of our big strategic investments.

“We invested $10m in a spirits expansion factory down here in Nairobi and then the poster child of our big $150m investment is our Kisumu brewery.

“While that felt difficult at the time, because the state of the business didn’t warrant the investment, when the economy bounced we really benefited.”

When complete, the Kisumu brewery, which is already producing Senator Keg beer, will create jobs for more than 100,000 people across the supply chain, says the company.

The investment in low-end, low-margin beer, together with investment in high-end, high-margin spirits, reflects EABL’s will to dominate its home markets and to stay relevant to a wide range of consumers.

More than just profit

Cowan believes that EABL’s positioning as a “household name” gives the company a responsibility to work towards more than just profit but to provide safe and cheap alternatives to illicit alcohol which currently dominates East African markets.

In 2018, a report by the International Alliance for Responsible Drinking found that up to 60% of alcohol in Kenya is illicit and dangerous, more than double previous estimates by the World Health Organisation.

“The way we’ve built out our portfolio is to have every type of drink available to every type of consumer whatever their spending power,” Cowan says.

“We accept that this means we will have a wide variety of margin mixes; we will go after lower margin businesses not because it’s necessarily the textbook Harvard Business School margin expansion solution but because we have a 97-year-old duty to provide our customers with those types of products and we work closely with the government on that.” 

EABL pumps some $500m into the Kenyan treasury each year – around 5% of the annual budget – so the government certainly takes a keen interest in its homegrown brewer and the partnership is used to mould the beverages market to one of safety and profitability.

The Kenyan government has reduced excise duties on Senator Keg, which allows the low margin beer to remain commercially viable and to compete with dangerous home brews.

Tax hikes

Yet the policy framework doesn’t always fit so snugly with commercial objectives. Kenya’s latest budget contained tax hikes on gambling and alcohol, including a 15% increase on spirits, which increases the price for consumers. The government is working to plug its budget deficit, and the hike is the second in two years, which frustrates Cowan.

“Raise taxes; but raise them in a way which understands the elasticity of our categories,” he says. “The sweet spot is every other year. The only other company which is contributing more to the treasury is Safaricom so don’t kill the goose who is laying the golden egg.”

The increase on spirits will likely dampen growth in one of EABL’s fastest growing segments: high-end spirits.

According to EABL in-house research, brandy has dominated the region as the brown spirit of choice. Yet the brewer believes Scotch whisky – in particular Diageo’s global Johnnie Walker brand – is a much more sophisticated beverage and under Cowan’s guidance the company has invested heavily on advertising to ensure that high-end liquor appeals to the region’s growing middle class.

“To the millennials who are looking at the world through their phone Johnnie Walker is way more aspirational than any other brown spirit in East Africa,” says Cowan.

“We’ve really laid down some heavy advertising and promotion on Johnnie Walker and the half-year results have been really strong at 37% growth in Kenya.”

Shaping the market

With some of the least developed commercial beer markets in the world, the habit of drinking brand-related alcoholic beverages in East Africa is still relatively new.

This grants any brewer the power to not only serve the market but to shape it, too. 

Cowan describes this process as being “provocative” and highlights a number of EABL’s key provocations which have steered taste buds away from basic lager towards ale and even cider.

“This market was either amber or black and nothing in between and actually this means you have loads of white space to play with. Tusker Ale has been our second provocation of Kenyan consumers – the first was Kenyan cider,” he says, pointing out that cider didn’t previously exist in the market but now occupies a substantial niche.

This open space is also expected to grab the attention of East Africa’s younger consumers, who are rapidly outweighing their older peers in terms of the nation’s average age.

One million new drinkers come online each year across the region according to Cowan, and EABL is positioning its innovative products to influence a segment that has yet to form its drinking habits.

The diverse offering is also intended to preempt and protect against the inevitable arrival of the microbreweries that have shaken up European and North American markets in recent years.

The so-called “beer revolution” – the push towards smaller brewers who treat their beer more like wine with a wide range of tastes and colours – is already being felt in Kenya. Kenya’s large expat population has seen a number of new brews introduced into the market including Bateleur and 254, with a range of ales now on sale across the capital.

Capturing ‘share of wallet’

Cowan believes the competition, or “conversation”, as he calls it, is useful for keeping EABL products at the forefront of innovation. The real threat, he contends, is the consumers’ wallet – the choice behind where to spend any disposable income.

“Coca-Cola referred to it as share of throat, we refer to it as share of wallet,” he says. “Consumers in Kenya have discretionary money to spend. It’s about where they spend that money. Rather than rival companies, our two biggest competitors are mobile phone data and gambling.”

The narrative of Kenya’s growing middle class, which has done so much to attract a broad range of companies from insurance brokers to fintech startups, works to inform EABL’s strategy as the brewer aims to capitalise on the market’s liquidity.

The region’s consistently high growth rates, estimated at around 6% by the African Development Bank in its economic outlook for 2019, help to make EABL one of Diageo’s most successful subsidiaries.

Cowan believes that Africa has “the highest potential beer market in the world” and applauds his local region for creating the right environment for business to flourish.

“The economy will grow at 6% while childbirth is at 3%,” he says. “When you have the economy growing twice as fast as the population it is very encouraging. Then you also have mass urbanisation. This points to a very positive outlook and what individual nations need is a government like the Kenyan government with a progressive attitude towards seizing that opportunity. While they are doing that we hope they will have a beer at the same time.”