Opportunity In Zambia Beer Despite Tax Hike

The Zambian beer industry has enjoyed several years of fast-paced growth, and we expect this to continue despite an increase in tax on 'clear beer' effective from January 1. The market leader is Zambian Breweries, a subsidiary of SABMiller. Zambian Breweries has posted consistently strong volume growth over the past five years, though this may dip slightly in 2014 when the new tax takes effect. Zambian Breweries produces the country's most popular beer, Castle, and volume sales of this brand account for just under 60% of the group's total.

Worryingly for Zambian Breweries, however, is that its next two largest brands, Mosi and Castle Lite, are subject to the newly enforced tax laws. The tax specifically targets what is defined as a 'clear beer': beer which is distilled multiple times and therefore more transparent in colour than regular lager. Together, Zambian Breweries' clear beers of Mosi and Castle Lite account for 36.4% of the company's total volume sales.

Solid Double-Digit Gains
Zambian Breweries - Company Revenue (ZMKmn)

Starting from January 1, the Zambian government is enforcing an excise duty of 60% on clear beer, up from 40% previously. This 20% hike now means that alcohol prices in Zambia are among the highest in the Southern Africa region. Zambian Breweries has passed almost the entire cost of the new tax onto the consumer, with retail prices rising by 16%. Such a move will significantly reduce volume sales of the company's clear beer, which grew at 12% in 2013.

Such a move by the government is a thorn in the side of beer producers within the country, though we believe significant opportunities remain, highlighted by the high level of investment seen. In 2013, Zambian Breweries opened up a new brewery in Ndola at a cost of ZMK500mn (US$90mn), as well as a new plant in Kitwe. The Ndola brewery has increased the company's manufacturing output by 1mn hectolitres (hl). Another 1mn hl plant, in Lusaka, is under construction. Zambian Breweries has attributed its aggressive investment strategy to the country's impressive GDP growth. Over the last five years, real GDP growth in Zambia has averaged more than 6.6%, with private expenditure rising at an even greater rate. Indeed, our Sub-Saharan Africa (SSA) team believes such impressive growth is likely to continue, forecasting real GDP growth to average 7% between 2014 and 2018, which would make Zambia the 11th fastest growing country in SSA.

Close Correlation
Zambia - SABMiller's Beer Volume Growth & Real GDP Growth (% y-o-y)

Zambia still remains one of the brightest growth markets for beer consumption in SSA. In 2010, the government reduced excise on clear beer from 60% to 40%; Zambian Breweries, and by extension SABMiller, will be hoping for a similar turnaround a few years down the line.

The structure of Zambia's beer industry is similar to that of many other SSA countries. Four global brewers dominant the continent: Heineken, Diageo, SABMiller and Castel. Through their subsidiaries, one or more of these companies has influence in almost every SSA country. As a result of this structure, the formal African beer market can be seen to operate on two levels: cheap, local beer that has long been provided by domestic breweries, and expensive, premium beer (global brewers' flagship brands). However, the informal SSA beer market makes up the overwhelming majority of total sales, with some estimates finding that around 75% of the total drinks market is made up of cheap home brews or illicit spirits.

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Related sectors of this article: Food & Drink
Geography: Zambia

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