Wednesday, December 13, 2006



EABL- Future Strategy
Why Diageo should sell out

Let me point out that the current management in
EABL is doing a good job. This article is not meant to disparage or attack anyone. It merely offers a longer-term view (mine) of EABL's future. I am looking at the future 6 years away. EABL is doing quite well at present and the medium term outlook (3 years) is satisfactory. But I’m not so sure of the long term future

I think that the best thing to happen to
EABL would be if DIAGEO Plc sold its stake to another Brewing company.

Why?
Diageo's ownership of
EABL stops it from growing into new markets and strategic direction.

EABL has already grown as far as it can go in the East African market. As per the
latest annual report more than 60% of the Group's profit is derived from Kenya. So it’s still Kenya Breweries/UDV Kenya where the profits are concerned.

The only other ways to grow are to:
(1)-Branch into new products like soft drinks.
By the way SABMiler Plc (South African Breweries’ parent company) is one of the largest bottlers of Coca-Cola in southern Africa. It acquired Amalgamated Beverages Industries- a soft drink bottler in the past two years.
The beer market is saturated. Have you noticed how EABL keeps launching and killing brands?
Pilsner Ice came and went so did Pilsner Ice light. Now we have Whitecap Light.

(2)-Move into new markets by acquisition and expansion.
This involves setting up new subsidiaries and acquiring new companies

How Diageo affects EABL's strategic direction
DIAGEO Subsidiaries
EABL cannot expand in Africa because Diageo already has subsidiaries all over Africa to cater for those markets. For instance, in West Africa Diageo have Guinness Ghana Breweries Ltd and a joint venture to market its brands in South Africa. So Diageo has covered east, central and South Africa. Where else can EABL go?
For Diageo Africa is well covered on a group basis (with its subsidiaries), but for EABL it's boxed into East Africa.

Currently, EABL is moving Tusker into export markets but competition in the European, Asian and American markets is tough and the gains will take a while to be seen.

Diageo's strategic focus
Diageo considers itself a spirits company that happens to sell beer i.e. out of its Global Priority brands only one isn't a spirit-Guiness.
EABL considers itself a beer company that sells spirits and other beverages

Hence, Diageo may not be enthusiastic about EABL's moves into other related sectors like carbonated non-alcoholic beverages.

What if we keep the status quo?
EABL will continue earning ‘nice’ dividends and a 7-10% annual growth but nothing spectacular.(assuming they maintain their market share)

Competition will keep intensifying in the region for EABL's market. For example, Keroche and others are targeting the lower end of the market.
Carlsberg, Windhoek, Stella Artois target the upper end.

This may affect EABL's earnings.

The proposal
If EABL were bought by a pure beer company e.g.
Carlsberg. Then they can chart moves for the group's growth in the continent and beyond. For instance, Carlsberg isn't as strong in Africa like Diageo or SABMiller Plc. It would use EABL to grow in the region.

Bottom line
Unless, EABL can come up with a new long-term (7 years plus) strategy the future will be challenging. New brands in the existing market only cannibalize existing ones. At the same time competitors are slowly chipping at its market share.

17 comments:

Gathunuku said...

Great thoughts for EABL. Unfortunately the current arrangement serves Diageo quite well so I am not sure they are about to take note of your suggestions. With the West African brewers hardly having local brands worth a mention and SAB dominating the south, EABL becomes a much coveted prize. Strong local brands and complete domination of the east makes it the billion dollar company it is.
I'm not informed of the specifics in West Africa but am almost certain Diageo have not (cannot) achieve what they have in East Africa

Ryan Shen-Hoover said...

Thanks for the interesting analysis, Pesa Tu.

coldtusker said...

Agree with Gathunuku.

Why should Diageo sell?

It does NOT benefit Diageo to have Carlsberg/EABL as a competitor when EABL expands into Central, South & West Africa.

If I were Diageo:
- Install an excellent management team that grows my downmarket sales while maintaining the grip on the other sectors
- Increase hard liquor sales
- Cut costs to the bone
- Vertically integrate
- Create a cash cow
- Pay high dividends

Why, oh, why would I sell to a competitor who can leverage EABL's strength to attack me in my other markets?

If possible, I use EABL as a launching pad into smaller North Africa & Mid-East markets. In addition, further consolidate my position in S.Africa vs SABMiller.

Unless Carlsberg buys out the ENTIRE African portfolio which leaves EABL in the same position!

Bankelele said...

- Diageo leaving is not the long term answer, but Diageo will also not provide long term growth solutions
- I'd say they need to invest in new products, (not just killing and relaunching brands) Marlboro owned a beer company and beer companies can also cross invest- Tobacco is a non no, but I'd like EABL to tackle premium coffee for export.
- They should also get proper distributorships for North America, Central Africa. Their brand is known but distribution and marketing is spotry. Other foreign beers have found healthy foreign niche markets such as Red Stripe
- Beer growth is limited in Kenya esp. in rural areas where incomes are not able to afford beer which is expenve compared to the many more lethal alternatives.

pesa tu said...

i hope the blog pointed out the main problem i see with EABL/Diageo link.i.e. Diageo gets more out of it than EABL.

@Gathunuku: Yes, EABL has done well but where will future growth i.e 10 years from now come from?
Of course Diageo wont leave.But if i had a choice it would be better to sever the link.

@Coldtusker:I was not talking about what will happen but what should happen(i would like to see happening) for the good of EABL.Because as long as EABL is part of Diageo Plc. we shouldn't expect spectacular growth.

As things stand it's all good for Diageo.
Meaning that if u want to take a long term stake in the African beer industry then you would rather buy Diageo Plc or SABMiller Plc's shares NOT EABL shares

Don't forget South African Breweries(SABMiller Plc) owns 20% of KBL(Kenya Breweries Limited) while EABL owns 20% of Tanzania Breweries Ltd(TBL).The deal was crafted in London by Diageo Plc and SABMiller Plc. the EABL board was just called to rubberstamp it.

pesa tu said...

@Bankelele:Agree with you, that they need new products.
I would prefer FMCG(Fast Moving Consumer Goods) like soft drinks since the distribution/marketing and supply chains are similar to the beer industry.

I prefer Carlsberg since it's in the same line of business and could be hungry for African growth.SABMiller and Diageo already have subsidiaries all over the continent and would just use EABL as a placeholder for their brands in the East African region.

pesa tu said...

@Ryan Shen-Hoover: thanks for stopping by

coldtusker said...

Diageo will & should stay put... WHY?

About 10 years ago, Kenyans were asked to buy EABL Rights but Kenyans SNUBBED the offer.

Since EABL desperately needed the cash, Diageo stepped in, with CMA's approval, & bought the unallocated Rights AFTER Kenyans rejected the Rights.

EABL desperately needed the cash to:
1)fight Castle
2)expand
3)upgrade their production
4)downsize thus redundacy payments

In fact, may Kenyans started drinking Castle instead of (excellent) Tusker. I remained loyal to Tusker.

EABL even tried a scrip dividend i.e. get EABL shares instead of cash dividends. Most Kenyan shareholders refused the scrip option as well, they took the cash!
Diageo took up the scrip dividend.

So Diageo takes a financial risk in "moi's" Kenya while Kenyans did not. Now that going is good, we want them out?

Same story with EAPCement. Bamburi stepped in at the last moment by buying the Rights. If not for Bamburi the Rights was a major failure.

EAPCC does well & now (ignorant) Kenyans attack Bamburi! Where were these "patriotic" Kenyans when EAPCC needed them?

Mumias - When times were not so good for Mumias 3 years ago, many farmers sold their shares!

Many Kenyans (retail investors) are dissing Mumias' OFS thus leaving the door open for foreigners & institutions.

3 years from now when Mumias will be booming, these idiots will complain about "foreign" interests & "Institutions".

EABL (then KBL) was a Kenyan controlled company & brand but Diageo saw the opportunity.

Let's not get xenophobic. The Tanzanians & Ugandans "protected" Air Tanzania & Uganda Airlines (by going to SAA) from KQ but both closed up shop.

We sold 26% of KQ to KLM. Now KQ is the dominant airline in E&C Africa.

Even if EABL sold out to Carlsberg, Diageo will not give up its markets to EABL/Carlsberg.

EABL tried soft drinks (they owned part of Nairobi Bottlers) but their core business is ALCOHOL.

If you can't invest your cash then pay it out. Don't get into weird ventures far from your core business.

If EABL bought Coke Plants in Kenya, then Muslims might abandon Coke simply coz of its ownership!

Stick to your core business & only expand if you have the ability & financial muscle.

That's why BOC is buying Carbacid coz both in the gas business, BOC has the cash & expertise to grow the CO2 business.

I would be worried if BOC bought Crown Berger!

Riba Capital said...

Good Analysis.
EABL si strong but locally, and for sure it needs to think global.

What if Diageo but off the remaining shares and acquired EABL's brands which it can then market in countries where it already holds strong positions.
This way they get to diversify their product range and also establish a strong hold in Africa.

I read somewhere that Castle reqistered the Tusker Brand in SouthAfrica and thus EABL cant launch their flagship brand there.
Anyone with facts on this??

pesa tu said...

@Coldtusker: I didnt mean a sale was imminent.I was merely stating that Diageo is not the best partner for EABL.
Just like the Merril Lynch analysis that Bank of America should buy Barclays Plc

I know how Diageo took over EABL/KBL, the rights were offered at Sh.4 above market price.
In our ignorance as kenyans we forgot to buy direct from the market.We also rejected the scrip dividends.

But dont u see the limits of EABL's growth?

pesa tu said...

@Riba:Yes,Diageo can do that but EABL's brands are not considered global priority brands by Diageo.
The other thing is that marketing these brands will cost a bomb and returns take a while to accrue.

Tusker SA-Don't know about registration in SA but given that SAB owns 20% of KBL.They can craft a marketing arrangement.Similar to what Heineken has with EABL.

coldtusker said...

Pesa - Originally the Rights was priced lower than the Market but by the time the Rights Issue came to the market, the price on the NSE dropped further!

Kenyans were "afraid" that Castle would beat out EABL (KBL at the time) thus the bearishness.

Regardless of EABL's prospects with Diageo at the helm... Diageo (IMHO) will not sell EABL any time soon.

BUT never say never!

I think EABL should attack those niche markets in the liberal Muslim African & Mid-east countries like Egypt, UAE, Sudan, etc...

pesa tu said...

@Coldtusker:Diageo cant allow EABL to move to those markets.Some of the like UAE are serviced by Diageo's Duty free Division...tough luck for EABL

coldtusker said...

Pesa - Not for products that EABL licenses esp the hard liquor e.g. Smirnoff but YES for beer e.g. Tusker & White Cap which is a EABL product.

Note that even if EABL can't market certain products directly, there are other options e.g. contract manufacturing but KPA & RVR need to provide the means for EABL to export in a time efficient manner.

BAT uses Nairobi as contract manufacturing base for Middle East markets. Thus they make a "spread" but this means more jobs for Kenyans.

Mathu said...

Good analysis on the subject and the comments are interesting. Strategic direction for EABL comes from Diageo and there is no way EABL will contemplate attacking other Diageo markets not unless they can offer a better return to the overall group and has the blessings from Diageo. That said, some foreign brands are considered national entities in their home turfs just the same way kenyans would view Tusker and thus potential for expansion of EABL brands is limited. This would explain why Tusker is not suceeding as much in the Americas and Europe. I agree with the view that Diageo is gaining more from this relationship..but isn't that a result of a good investment decision. Furthermore, EABL would not have been here without the synergies from Diageo and thus to me a Diageo exit might be disastrous for EABL. Therefore, Diageo will continue to devote as much to EABL as long as it remains their key subsidiary in africa... win-win u would say!

pesa tu said...

@CT:Tusker isnt a global priority brand for Diageo.Check out www.diageo.com So Diageo wont bother to push it outside East africa.

Contract manufacturing can only work for high value items i.e. A kg of cigarettes has more than 5 times the value of a kg of beer.So if u manf beer here for lets say the UAE mkt. the freight costs alone may wipe out ur profits.So beer must be close to its consumer markets.

pesa tu said...

@Mathu: Thanks,Yes we EABL has benefited from the Diageo partnership.Diageo also did nothing wrong in taking it over.It was proper and legitimate.

The aim of the post was to move NSE investors into thinking beyond kenya and NSE only.
If u really want to grow your portfolio or diversify into the alcoholic beverage markets or bet on it growing big in Africa u cant buy EABL.
You either buy Diageo or SABMiller Plc. on the LSE.