Mixed spirits in the African alcohol sector as restrictions continue

Craft beer market suffers

Prohibition has hit the emerging craft beer market, which recorded encouraging growth from the early 2010s. The emerging industry accounts for 10% of jobs in the entire beer market, but forms just 1% of total production. Seasonal in nature, sales rocket during long summer nights that usually bring in an influx of tourists.

Nick Smith migrated from New Orleans to launch Soul Barrel Brewing Co in the winelands of the Western Cape. Smith says Covid forced the company to build a new bottling plant ahead of schedule, in order to supply online retailers and supermarkets, modifying a business model that gained most of its revenue from on-site sales and brewery tours. Despite tight prohibition, Smith says that the company managed to grow in the 12 months to February.

“It’s been hectic and it’s been a battle… The whole craft industry is new and many startups are still defining what their true business model is. Covid has developed this kind of wartime mentality that we just have to get through it, keep adapting and focusing on the long-term goal of making South African beer internationally known.”

Prohibition has also hit the country’s barley farmers, who face reduced demand and difficult planting decisions, says Jose De Kock, a farmer and chairman of the Barley Industry Committee.

“In 2020 AB InBev South Africa stuck to their original mandate of 340,000 tonnes of barley in the Southern Cape and in the Western Cape in the Swartland area. For 2021, famers’ mandates have been cut over 20%, which is a huge decline.”

Farmers are forced to sell excess barley as animal feed, which can be 50% lower than the price of malting barley. Alternative crops could be produced – principally wheat and canola – but many farmers could be counting the cost for years to come if those markets are oversupplied.

Following drought and a poor harvest in 2019, when high nitrogen levels degraded stock, last year’s bumper harvest was the best on record says De Kock, which has boosted morale within the agriculture sector, for now.

New drinking habits 

While the short-term outlook is troubled, restrictions are driving new consumer habits and brand opportunities. For multinational drinks companies like Diageo, green shoots of recovery are being found in spirits and the non-alcoholic beer sectors, according to Renaissance Capital’s Adedayo Ayeni.

“We think that the market has growth opportunities in East Africa and Diageo itself is doubling down on the spirits segment in Nigeria,” he says.

“Gin is a rising category in Nigeria and East Africa, particularly among women, and comes in affordable prices and packaging – especially the mainstream brands. In markets where the restrictions to alcohol sales were implemented, non-alcoholic beverages are rising in popularity, especially given that consumers will consume what is available.”

Diageo’s non-alcoholic Malt Guinness line grew double digits in the last six months, and the firm will look to boost their spirits brands further as home consumption replaces beer drinking in bars.

Opportunity to invest

Whether spirits and non-alcoholic drinks will be enough to see the market through further Covid restrictions remains to be seen. Nevertheless, Diageo says the crisis offers an opportunity to invest, and says it will ramp up capital expenditure in 2021.

“The companies that pause investment through a crisis will pay a big price for it after the crisis,” says O’Keeffe.

Renaissance Capital’s Ayeni concurs: “Consumers will always have the need to socialise, therefore the importance of bars and other on-premise consumption outlets will not be blunted in the near term. Rather we believe that the Covid-19 driven weakness in the brewer asset prices has presented investors with investment opportunities, to pick up these stocks in growth markets at appreciable discounts.”

****