The spirit merchant and its 20 year operation in Africa

I guess we have been in Africa for quite a long time and we have learnt everything is a cycle, and that it’s worth staying confident through the cycle, investing through the curve.

As lovers of the iconic brands Diageo produces raised their glasses to the alcoholic beverages company’s 20 years of keeping their best drinks brewing and making social impact in Africa, analysts earnestly awaited its H1 2018 results. The company, which continues to innovate as it battles to hold a large chunk of Africa’s roughly $13 billion beer market, which has slowed in recent years as a result of a drop in commodities prices, is seeing growth in some of its major markets in Africa and The Nerve Africa was at the company’s Lagos offices to discuss the numbers and the lessons the global giant has learnt in Africa in its 20 years of existence.

In Nigeria, Guinness, a member of the Diageo Group grew H1’18 revenue by 19% year-on-year, with profit after tax strengthening to ₦2.1 billion ($5.8 billion) in H1’18. At the same period last year, the company reported a loss after tax of ₦4.7 billion. Now, debt burden is gradually fading and loans are down 250% y/y.

However, the numbers were not as good in East Africa, where Diageo holds more than 50 percent stake in East African Breweries Limited (EABL). The Nairobi-based company, which has subsidiaries in Uganda, Tanzania and South Sudan, shed 4 percent of last year’s gross profit and 3 percent of operating profit, despite a 28 percent sales growth in Tanzania.

Also in Ghana, where soaring utility prices and a weakening cedi affected a lot of businesses, Guinness Ghana lost GHS4.6 million for the period. But other fundamentals offer a beam of hope. The company reported GHS11.7 million worth of free cash flow, as against a negative free cash flow of nearly GHS30 million reported in the first half of 2017.

“I’d say, external factors that have made business tough, I’d point to East Africa, where the election uncertainty in the first half hurt our performance in Kenya. It did hurt all consumer businesses. I’m pleased to say that situation is stabilizing. I expect to do better there,” Ivan Menezes Diageo Chief Executive told Analysts in a conference call on January 25.

Generally, it has been 20 years of continuous learning for Diageo in Africa, but the company seems stronger than ever and seems ready to deliver great value in 2018, as commodities-based economies across the continent continue to recover.

“We might not fully return to the glorious days of a few years ago,” admits John O’Keeffe, President Diageo Africa as he met with The Nerve Africa team, but he is confident that there will be improvements.

“I guess we have been in Africa for quite a long time and we have learnt everything is a cycle, and that it’s worth staying confident through the cycle, investing through the curve, so that as you come up the cycle which I believe we are beginning to do in Nigeria, you would get dividends from that and so we have had good, a really good performance last year in countries like Nigeria; as you saw that in the results, notwithstanding the tough market and the circumstances, we found ourselves in,” O’Keeffe adds.

Rich History

Diageo’s love affair with Africa precedes 1997 when it was formed through a merger between Grand Metropolitan plc and Guinness plc. Johnnie Walker first found its way to Africa when it arrived in Kenya back in the 1890s. Guinness has been brewed locally in Nigeria since the 1960s. Diageo rides on this rich history and great understanding of the continent to continue to grow its business.

The Nigerian beer market is one of the fastest growing beer markets in the world. This growth is driven by strong population growth which has led to increase in consumption. According to O’Keeffe, insights like this “is the reason why we will continue to invest and stay through the very cycles that we witness right now because we know that the future is going to be bright in Africa”.

Diageo is in Africa for the long haul and the company shows this by putting structures in place to ensure it wins. One such is going local.

Photographs by Tim Bishop/Diageo PLC

Glocalisation for the win

The need to understand glocalisation has never been more important, as more and more global brands expand to regions where local companies on their own are also taking off. Diageo is blending its activities with local consumer trends and preferences, and it started early.

“We went local very young,” says O’Keeffe. This strategy has continued to work for Diageo, which has gone as far as producing palm wine, a widely-loved alcoholic beverage in Africa, which is gotten from the sap of Palm trees.

“What we have learnt as a global operator is to really mind the local insight and so I think in terms of our 20-year journey, we have our innovation playing a key role for us, particularly over the last few years. Innovation that comes from about 20-22% of our business last year improved about 20% and a lot of that was driven on local insiders, local intervention and tapping into local norms that exist in Africa,” the Diageo Africa president says.

“We all know Africa; people talk about Africa but there is a huge diversity that you need to really talk about. Even within a country like Nigeria, there is a huge diversity of consumers. So we have learnt not to generalise consumers and not to generalise too much about Africa. We have learnt the power of tailoring our portfolio; we have learnt the power of innovation against local insights.

“I think that for all businesses to be successful, depends on domestic value creation. “So it’s not about export of businesses but it is about, how can we succeed with our local consumer in our country and so we have been very conversant as always to try and put very deep roots into the community.”

O’Keeffe speaks proudly of Diageo’s exploits in Nigeria where the amount of raw materials sourced locally has gone up from about 40% 5 years ago to about 80% this year.

While he agrees that other international companies may source raw materials locally; he argues that it is different for Diageo, as it allows the company see the opportunity more holistically in Africa, “than perhaps others do”. The company’s expansion has been based on this.

The company has made a number of acquisitions, including one in Ethiopia in 2015. “It was about 15% share of the market. We are very happy that business is performing,” O’Keffe says.

In keeping with the lessons learnt over the past 20 years — stay investing, stay committed to the business – Diageo continues to invest across Africa.

“We just announced a new brewery that we are building in Kisimu in Kenya; 15billion shilling ($149 million) investment that is underway, and we are open for business in the next year or so,” O’Keeffe adds. In a similar vein, the first Scotch bottling plant was opened by Diageo in Cameroon last year.

One of the lessons Diageo has also learnt in Africa is that a large number of consumers in Africa cannot afford the most premium brands all the time. In response to this, Diageo has broadened its portfolio from the price participation point of view both in beer and also in spirits. “More recently we have re-examined our investments in what we call mainstream spirits, which would be like the local spirits which is a phenomenal success in Nigeria and in West Africa.”

Responsibility in Africa

“We have also learnt that to succeed, you really need to be part of the fabric; that is why we try to source as much as we can locally and be a bigger employer,” says O’Keeffe.

Africa needs jobs. Youth unemployment in Africa is estimated at 12 percent, but it could more, considering the true situation in countries like Nigeria and South Africa. Diageo sees the employment intensive nature of the brewing industry as an opportunity to address this major challenge facing Africa.

O’Keeffe says 15,000 small farmers are supplying sorghum for the new brewery Diageo is opening in Kenya. He also believes up to 10,000 jobs could be created through bars. “So we have 25,000 new jobs being created just between the farmers and the bars before we talk about distributors and trucks etc.”

But beyond this, the company also offers Africans the opportunity to build a career with the global brand. “Over 70% of African managers are Africans and we are very conscious that we want to continue to grow the African data base,” O’Keeffe says.

Luminosity / Steven Karl Metzer

“So I think the culture in Africa is about understanding it. It is about respecting it, it is about innovating against it, and I think most importantly, it is contributing to it rather than taking from it.”

Hence, Diageo takes social responsibility seriously in Africa. The company has been involved in water for more than a decade. “We brought fresh water to 10 million Africans across the continent. There are countries where we are bound to play a bigger role than just be a beer. We feel that it is our corporate duty to give back to the community and society as much as we can and yes we do have to pay taxes, we do have to employ across Africa.”

The last 20 years have been two golden decades for Diageo, but how it continues to deal with external shocks on the continent will determine how the story of the next decade will be.