Company Trend Analysis - Heineken Goes Local To Target Weak Consumer - MAR 2018


BMI View: Heineken is expanding its presence in the SSA region through its latest investment in building a brewery in Mozambique that will be operational in 2019. Mozambique scores poorly in our Risk/Reward Index for the potential of the beer industry, with a weak consumer profile unable to spend strongly on a per capita basis. However, its strong logistics development is attractive for Heineken as it looks to source ingredients locally to target this relatively low income consumer.

Heineken, one of the world's largest brewers has invested USD100mn for the construction of its first brewery in Mozambique. Located in the Maputo province, it will have a capacity of 800,000 hectoliters and will begin production in the first half of 2019. Heineken, which brews Amstel and Sagres, started off in the country with a sales and marketing office through which it imported its beers into the country.

The deepening investment into Africa follows the company's strong performance in the Africa, Middle East and Eastern Europe region, driving Heineken to expand its presence through a new brewery in Mozambique. According to the Q317 results (ending September 2017), Heineken witnessed organic growth of 8.8% y-o-y in Africa, Middle East and Eastern Europe, behind only Asia Pacific. Heineken's Africa, Middle East and Eastern Europe division accounts for 15% of total revenues for the company.

Heineken Performs Strongly In Africa
Consolidated Beer Volume Sales In Q317, %y-o-y
Source: Heinken Company Filings, BMI

Heineken already has divisions in Nigeria, Ethiopia and the Democratic Republic of Congo (DRC). In April 2017, the company opened a new brewery in the Ivory Coast with an investment of USD178mn. As such, Heineken's investment in Mozambique is a continuation of its investment in the region for beer to produced and sold domestically.

Mozambique ranks poorly in our Alcoholic Drinks Risk and Reward Index for Sub-Saharan Africa, placing 14 th out of 15 countries (see ' SSA Alcoholic Drinks: Fast-Growing Markets Undermined By High Risks, October 18, 2017), with low rewards and high risks for companies operating in the country. Although Mozambique is forecast to see growth rates of beer consumption of an average 4.6% per annum, other countries where Heineken is also operating in such as Nigeria boast a much stronger growth rate of 7.1% per annum over 2017 and 2021. Total beer consumption will reach 308mn litres in 2021 in Mozambique, up from 258mn litres in 2017 but again, this represents a smaller market size than other SSA markets. Furthermore, Mozambique has the smallest middle-class (disposable income of USD10,000-25,000) in the region with just 33,300 households falling in this segment in 2021, compared to 2.16mn households in Nigeria. This is a smaller target population for Heineken in Mozambique compared to other countries.

Comparatively Tepid Beer Outlook For Mozambique
Beer, litres mn, %y-o-y
e/f= BMI estimate/ forecast. Source: BMI Research/WHO

As such, Heineken's decision to invest in Mozambique goes hand-in-hand with the company's aim to source 60% of its raw materials in Africa by 2020. By sourcing its raw materials from the country it is operating in, Heineken's products become much cheaper and can cater to the large low-income population in the country. The low-income segment forms the majority of the households in Mozambique with almost 98% of households having a disposable income of less than USD5,000. Heineken can also avoid paying the high taxes to import beers from overseas to meet the demand for domestic consumption. By using ingredients indigenous to the local population, it can target a mass market with familiar tastes, with cheaper final products.

While we hold a fairly cautious view on the potential of the beer industry, Mozambique scores higher than its regional peers in our Operational Risk Index for logistics and trade and investment risk, making it a stable choice for setting up a brewery in. Mozambique's score of 37.8 and 41.9 for logistics risk and trade and investment risk respectively (100= Lowest Risk; 0= highest risk) is ahead of countries like Ethiopia which has a score of 35.5 and 31.2 respectively. This makes Mozambique more attractive from an operational risk standpoint compared to more attractive consumer markets like Ethiopia.

Mozambique More Attractive From A Logistics and Trade and Investment Standpoint
Logistics Risk Trade and Investment Risk
Source: BMI Logistics Risk Index and Trade and Investment Index. 100= Lowest Risk; 0= highest risk.
SSA Average 32.5 35.6
Mozambique 37.8 41.9
Tanzania 33.2 37.5
Uganda 30.5 41.5
Ethiopia 35.5 31.2
Angola 28.0 28.1