Eugene Shepherd admits he’s no beer expert, but he’ll tell you the bottle of Eagle Lager he treats himself to every week is a step up from the murky home-brews that had been his preferred tipple. He now saves his pocket money all week so on Saturdays he has the 1.20 cedi (61¢) for an Eagle, a beer brewed from locally grown cassava that SABMiller (SAB:LN) introduced in Ghana in March. “Eagle is my first experience with beers,” the 20-year-old student says as he settles into a plastic chair at a roadside bar in Sogakope, a dusty town of 88,000 stretched along the highway 150 kilometers (90 miles) from the Ghanaian capital of Accra. “I really like this drink.”
For SABMiller, Shepherd’s newfound thirst for the clear, bottled beer proves the success of a strategic shift in Africa. To produce Eagle Lager, the world’s second-largest brewer has replaced most of the barley malt in the brewing process with inexpensive, indigenous cassava. The producer of Miller Lite, Peroni, and Pilsner Urquell is counting on cassava and other local crops such as sorghum to fuel its expansion in Africa, where it estimates home-brews or cheap spirits account for some three-quarters of alcohol consumed.
Brewers in recent years have emphasized high-end brands to boost margins by getting drinkers to spend more on each beer they consume. While Eagle Lager is far from a premium product, it’s still more than twice the price of popular home-brews.
Emerging markets are key for brewers. The three biggest—Anheuser-Busch InBev (BUD), SABMiller, and Heineken (4H5:GR)—are based in western Europe, where austerity and a prolonged economic slump have cut consumption. London-based SABMiller, which traces its roots to South Africa, gets more of its sales outside Europe and North America than the others, and more than two-thirds of its profit is generated in emerging markets. It launched its first cassava-based beer, Impala, in Mozambique in November 2011. Impala now accounts for more than 5 percent of its Mozambique unit’s production.
“There is a lot of opportunity in Africa, but you want to be the first one in the market and entrench yourself as the dominant player,” says De Wet Schutte, an analyst with Avior Research in Cape Town. “SABMiller has been largely successful in doing that.”
Cassava, a tuber grown widely across Africa, is a staple food in many countries. While barley doesn’t do well in the tropical climate, cassava is so easy to grow that Ghana and Mozambique have a surplus. The crop hadn’t been used in beer because it starts to degrade within 24 hours of harvesting. But SABMiller uses a portable machine that does initial processing of the roots in the field, allowing them to be stored for weeks.
Ghana, where the economy is set to grow 7.7 percent this year, charges an excise tax of 47.5 percent for beers that have less than 30 percent local content. For brews with more domestic ingredients—such as cassava in Eagle Lager—the excise tax drops to 10 percent. SABMiller says that helps make the profit margin on Eagle Lager about the same as those on its other brews. “These lower-price beers make sense,” says Wynand Van Zyl, a Macquarie Group analyst in Johannesburg. “It’s very important for international brewers to demonstrate commitment to the local economy.”
SABMiller, which sells 46 local brands across Africa, expects to spend about $300 million to $500 million a year on the continent outside of South Africa, building breweries and bottling facilities, says Mark Bowman, managing director at SABMiller Africa. In Uganda and Zimbabwe, the company already produces Eagle Lager using sorghum in place of some barley malt. The new beers have a more bitter taste than brews made from barley malt, and Bowman acknowledges that it’s “not supposed to be quite as nice as mainstream beers.” The difference will be a turnoff for some drinkers accustomed to smoother, more expensive quaffs.
Still, the newer localized brews helped SABMiller achieve a 9 percent increase in beer production in Africa, excluding South Africa, for the quarter ended in March. And sales of low-cost, locally sourced drinks could grow to “double or triple the size of the premium beer market as people move” from home-brewed concoctions, Bowman says. “These beers are a clear way to reach a market that wants to drink beer but can’t afford to.”