SABMiller's Plan for Cheaper African Beer

(page 2 of 2)

SABMiller is just the latest consumer giant to target low-income consumers in emerging markets. With its inexpensive individual sachets of everything from shampoo to detergent, Anglo-Dutch consumer goods giant Unilever (UN) blazed the trail. Since then a host of other companies, ranging from Nestlé (NESR.MU) to Nokia (NOK) to Philips (PHG), have followed suit with products and services tailored to emerging-market consumers. Some of those innovations are now also starting to "trickle up" to more developed economies.

Global Beer Sales Are Going Flat

Accustomed to strong growth, beermakers traditionally had little need to pursue the same approach. In 2008, SABMiller reported sales of $21.4 billion on pretax profits of $3.3 billion, up 15% and 16%, respectively. But growth is harder to come by these days. According to the latest figures released by London-based market research firm Plato Logic, global beer sales grew by less than 2% in 2008, down from 5.7% in 2007. Volume growth is expected to continue its decline this year.

That's one reason why SABMiller is turning more attention to emerging economies—including consumers at the so-called "base of the pyramid." By June the brewer hopes to launch a commercial trial in Angola of a new formulation of its N'Gola brand, using locally grown cassava instead of imported maize. The beer will retail for approximately 40% less than other mainstream lagers.

Although cassava is widely grown in Africa, it's produced today primarily by subsistence farmers. By developing a local supply chain, SABMiller hopes to help Africans move into cash-crop farming. Within two to three years, van den Houten says, the company is aiming to develop an entirely new beer using 100% cassava or other locally grown ingredients such as palm derivatives.

To be sure, the use of locally sourced ingredients to make mainstream beers isn't entirely new. Both Diageo and SABMiller have made brews using the grain sorghum for several years. In 2002, SABMiller launched Eagle, a sorghum beer that's now the company's second-largest African brand. Using local ingredients also qualifies SAB for tax breaks, which in turn helps it sell Eagle for one-third less than lagers made from imported barley.

"Hub and Spoke" Barley Production

SAB's success with sorghum in Africa formed the template for a similar program launched in India in 2005 to grow barley. The company currently works with an estimated 6,000 small-scale Indian farmers who receive prices that average 5% higher than the market rate to produce an estimated 20% of the barley the brewer uses in India. SABMiller figures it will need roughly 55,000 farmers in its supply chain across India and Africa by 2011 to meet future production needs.

The company also is looking at growing barley in African countries such as Angola, Ethiopia, Mozambique, and Zambia. It's already working with local farmers in Tanzania using a "hub and spoke" model, where one larger commercial farm supplies around 40% of the barley and trains smaller growers in the surrounding area to supply the rest. "Traditionally many of these small-holder farmers have found it difficult to access financing," van den Houten says. While SABMiller won't provide cash directly, it will act as an intermediary with local banks, helping farmers get loans by guaranteeing to buy their output.

Not that the push into ultra-affordable beers lacks challenges. To bring down costs, SABMiller also must address the price of packaging—whether bottles, cans, or kegs—which van den Houten says can account for up to 60% of overall production cost. The company is looking at everything from using less labeling to trying out materials such as cardboard or collapsible plastic containers.

Another big issue is distribution. In remote rural areas, draft beer barely exists today: The cost of owning and maintaining draft dispensers is out of reach for many local pubs. Instead, beer is often served in bulk, with several people drinking from a shared container that can be anything from a bucket to a hollowed-out calabash, a kind of squash.

Solving such issues will be crucial if SABMiller is to convince lower-income Africans to switch from homemade hooch to commercial beer. The company says it is closely examining the experience of other industries that have overcome such distribution and logistical challenges. In the meantime, the cassava project in Angola is a viable first step. "Our strategy is to have a portfolio that spans as much of the market as possible," van den Houten says.

Capell is a senior writer in BusinessWeek's London bureau .