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October 2001 Issue
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REPORTS - ABC looks to score thirsty Gulf

in the vast, gleaming supermarkets of saudi arabia, there’s a section that wouldn’t be out of place in a supermarket in the west. underneath a sign labeled “beer,” there are cases and cases of malt-beverage brands from all over the world.

of course, this is all non-alcoholic beer, but it happens to be hugely popular in the islamic kingdom. industry analysts put the per capita consumption of malted beverages in saudi arabia at three liters per capita annually, more than twice that in nearby egypt.

non-alcoholic beer has traditionally come from western countries, with the biggest brands in saudi arabia being moussy, produced by carlsberg, and barbican by bass. now, however, egyptian beer producer al ahram beverages company (abc), though a midget in the global beer scene, aims to become a serious player in this key market.

on august 21, abc signed an agreement with the saudi dairy & food stuff company (sadafco) to distribute its flavored and unflavored malt beverages fayrouz and birell, which will give these brands a presence in half the outlets in saudi arabia, kuwait, bahrain and qatar. “in one fell swoop, we’ve cut a swath through the marketplace in four countries,” said steven keefer, head of market development at abc.

this is apparently only the beginning of abc’s plans for regional expansion, and there are hopes that the company’s non-alcoholic malt beverages will soon be distributed all over the middle east. “we have a beverage niche that fits well into the regional mentality,” keefer added.

for now, the deal makes only a small difference in abc’s bottom line. according to analysts, the deal will only comprise 4 percent of revenue in the first year and 8 percent by the second year, but it does provide an important source of hard currency for the company. since it has to import its hops and malt, the company is affected by fluctuations in the value of the egyptian pound.

more importantly, abc ultimately has a limited market in egypt. because of low per capita income as well as local drinking habits, exporting will be the only way for the company to fully utilize its brewing capacity. the market for alcoholic beer in egypt, especially, is not expected to grow very much.

“when you think about it, abc doesn’t have much more room to grow,” said malak wahby, an analyst for hc securities. “it’s already satisfying cairo and alex, which are the main consumers of alcoholic beer. it’s still opening up a couple of governorates, but i think the demand is going to fade out. you won’t see a boom in alcoholic beer.”

a recent hc study estimates that the egyptian alcoholic beer market will reach saturation by 2004.

still, non-alcoholic malt beverages have been showing strong growth in the past few years. last year, abc sold over 500,000 hectoliters of non-alcoholic beer, 22 percent more than in 1999 (and more, incidentally, than the amount of alcoholic beer sold). fayrouz alone showed a 31.1 percent increase.

while non-alcoholic beer is currently only 29.2 percent of the company’s revenue, it is expected by hc to grow to 35.8 percent by 2005.

“we found a huge amount of demand, so we relaunched, repackaged and repositioned both products,” explained keefer about the decision to reissue fayrouz, which was first developed in 1985, and revamp birell. according to keefer, people drink birell because they have the “entertainment expectation of drinking a beer.” fayrouz, meanwhile, is mainly for the younger, hipper crowd, but still appeals to all ages. in other words, as can be seen from the supermarkets in saudi arabia, it’s for people who want to drink beer but can’t.

non-alcoholic beer’s status as primarily an “entertainment” drink, however, still limits the market somewhat, as birell and fayrouz may not have the same thirst-quenching associations as other products on the market. “people aren’t going to drink three of them a day like they drink coke or water,” said curtis ferguson, the representative for coca-cola in the region. “they’re going to drink one in a social setting. so at a certain point – along with pricing – the market is somewhat limited.”

while egyptians don’t drink much beer – 0.6 liters a year per capita compared to 12.5 liters in turkey – they don’t drink all that much non-alcoholic beer either. according to some estimates, egypt’s annual consumption of malted beverages is only 1.5 liters per capita.

part of the reason is pricing – egyptians have low incomes and beverages are heavily taxed. “the average egyptian can only afford one soft drink a week, and that’s what he’s consuming right now,” ferguson said. “so there’s still a lot of upside potential if you could ever get the pricing right. but the thing that holds back fayrouz – or coke or pepsi or whatever carbonated soft drink – is the fact that the government has us down as a luxury item. there’s a 50-percent tax on soft drinks.”

pricing has also been cited as a reason for a drop in abc’s net income. while revenues increased during the first six months of 2001 compared to the same period last year, net earnings decreased by 10 percent, from £e 44.5 million to £e 39.7 million. although the prices of beer and wine both increased during this period, abc attributes the 18-percent drop in wine sales to a decrease in tourism. but the drop has also been linked to the cost of financing a loan the company took out to acquire gouna beverages – giving abc an alcoholic-products monopoly – and a new tax on distribution operations.

so even if the margins will be low, the sadafco deal is widely seen as a necessary step for abc to move beyond the large, but ultimately limited market of egypt. “the deal might open new opportunities for abc if its brands start to be present in those four markets,” said wahba at hc. “if people really start to develop a taste for abc’s non-alcoholic beverages, this might give the company a head start to approach the other arab countries.”

according to keefer, this is precisely the direction abc will be going. there is a huge, untapped regional market of 350 million muslims, he noted, including large muslim countries like pakistan. aside from the low-risk approach of making deals with established distributors, abc may consider buying up state-owned breweries in other countries. more deals are expected to be announced next year.

while much smaller than other global brewers, abc has an advantage over other non-alcoholic beer producers because of its position in the middle east and its understanding of the prevalent culture and religion, keefer said. “we’re coming from the mindset of the egyptian arab muslim consumer, and we have a certain understanding that western brewers don’t have.”

the future of egypt’s hundred-year-old brewer may lie mainly in the gulf countries, which thanks to greater heat and more money have higher consumption patterns. the two biggest cities in saudi arabia consume more soft drinks than all of egypt combined.

expanding into the gulf is “definitely what abc has to do to survive,” ferguson said. “the secret to the beverage industry is to use your capacity. if you use your capacity and push that out, then you make money. but if you’re paying the bank 15 percent interest in [egyptian] pounds and you’re not using that capacity, then you’re dead.”

abc has a non-alcoholic brewing capacity of 1.2 million hectoliters. in 2000, the company sold 517,613 hectoliters of birell and fayrouz.

paul schemm

                            


 


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