Let’s start by looking at economic growth in the region. Since 2000, GDP in Ethiopia has increased more than five-fold to be recorded at $47.5 billion in 2013. Unlike other high-growth African countries such as Nigeria, much of Ethiopia’s growth has come from agriculture and services rather than from the abundance of resources such as oil, which could guarantee political stability in the country going forward. Furthermore, the government has invested greatly in developing infrastructure to promote manufacturing, to ensure the country continues on the road of development. According to the IMF, Ethiopia will experience robust economic growth over the next two years at 8-8.5%, higher than the Sub-Saharan Africa average of 6%. We could expect this to translate into the development of affluent groups with high disposable incomes, to stir demand for discretionary products such as alcohol.
An immediate by-product of economic growth and industrialization in a predominantly agrarian economy has been increasing urbanization. Ethiopia is supposed to be a leader in urbanization, growing at an average annual rate of 3.57% between 2010 and 2015. According to the United Nations, Ethiopia’s urban population is likely to triple between 2010 and 2040. A larger urban population could further boost sales for Diageo, as people develop more refined tastes and preferences with more exposure. According to Euromonitor International, the alcoholic beverages industry saw the best of the development in Ethiopia, growing at a CAGR of 30% between 2009 and 2013.
Ethiopia also has an innate demographic advantage, which could prove very lucrative. At present, the population in Ethiopia stands at 96.63 million, which has been projected to grow at 2.6% by the World Bank. Of the 96.63 million, approximately 95% of the population are currently below 54 years of age, with almost 44% in the 0-14 age group. Going forward, the South African Development Bank suggests an addition of more than 10 million individuals to the 21+ pool over the next 10 years, which could propel sales for Diageo. Furthermore, with higher economic growth setting in, those in the working age population can be expected to earn higher incomes to bolster premium alcohol consumption. Assuming an increase in the number of individuals between the ages of 15 and 65, from 50% of the population presently to 66% by 2021, we expect alcohol consumption in the region to more than double to reach 18.29 million equivalent units (i.e. standard nine-litre cases). We have assumed a 20% market share for Diageo, keeping in mind the high penetration of the informal sector and the higher prices of Diageo’s brands. Further, we have discounted for poverty in the region, which presently stands at 30%, since affordability is bound to be a serious issue among these groups. This gives us an estimated 3.66 million equivalent unit sales for Diageo in the region by 2021, more than twice its current estimates. Note that our analysis is solely based on the impact of the demographic advantage Ethiopia is poised to have, which along with economic advantages could boost sales even more. For instance, as Ethiopia progresses further, we can expect a reduction in poverty rates and an increase in market penetration for the company to further pull up these figures.
All in all, Ethiopia holds tremendous potential for the future and Diageo can be seen taking relevant steps to leverage this. These include the inauguration of expansion work on Meta Abo Brewery in the capital of Addis Ababa worth $119 million. The factory is equipped with three production lanes with a capacity of 40,000, 33,000, and 36,000 bottles per hour in each lane, respectively. The recent addition of the third lane will allow a three-fold annual production increase to 1.7 million hectoliters for the company. Furthermore, they have been working closely with 6,000 farmers in the region with respect to barley supply. This will not only ensure stable supply for the company, but also help increase purchasing power for farmers to feedback into sales for the company. At a time when dynamics are changing in important markets such as the U.S. and China, Africa in general, and Ethiopia in particular, may just prove to be a bright spot for the company.
Trefis has a $119 price estimate for Diageo, which is slightly above the current market price.