Why competition for beer market is reaching saturation

An apple does not fall far from the tree. This saying comes to life when you meet Alexandra Chappatte, founder and chief executive of African Originals.

Her products come in an assortment of flavours, colourfully branded, just as animated as she details her journey in the Kenyan beverages market.

Notwithstanding, apples are a key ingredient in some of her products. African Originals is a beverage manufacturer based in Baba Dogo, Nairobi, a familiar industrial area for such businesses.

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As a young manufacturer of alcoholic and non-alcoholic drinks branded Kenyan Originals or KO, Ms Chappatte knows too well how tough the market is.

This is not only because she is facing a major competitor in the country, Kenya Breweries Ltd (KBL) which knows the business in and out, having started in 1922.

It is due to the ever-changing business environment, courtesy of what has become the infamous finance bills that have made the venture capital intensive.

Yet, the firm founded in November 2018, is inching closer to Sh1 billion in sales annually, just six years into operation.

While this may insinuate an elastic beverage market that favours newbies courtesy of a youthful generation, she says it is all about data.

And that data-informed their decision to steer clear of the beer market. “We don’t believe there is growth in the beer market in Kenya,” she says.

She adds that there are already enough players in the space and the market is saturated. The focus, she notes, is on ciders and spirits, where there is notable growth and the market is elastic.

The strategy then became a mix of products: one portion that can be sold in high volumes with lower margins and the other with lower volumes but higher margins.

Ciders provide high volumes with lower margins while spirits offer low volumes with high margins. “We have seen some customers switching from beer to cider and also to spirits. This happened during the Covid-19 pandemic,” says Ms Chappatte.

She notes that year-on-year sales for beer are declining in Kenya as the beverage takes a lion’s share of the market both in volume and value, at 80 per cent and 62 per cent respectively, leaving little prospect for growth.

According to data by the African Originals, between 2019 and 2023, beer sales shrunk by 12 per cent, while Ciders and spirits saw a 200 per cent and 53 per cent growth respectively.

KO’s growth has come courtesy of aggressive fundraising, the latest being Sh260 million ($2 million), which now sees the manufacturer backed by Mauritius-based brewer Phoenix Beverages Ltd.

This expansion will see it enter the Ugandan market this year even as the manufacturer boasts of markets in the United Kingdom and Europe.

“The reason there is one big player is because it is very expensive to enter this market. You need to set up manufacturing and distribution because they are not really going to pick your product. You have to do it (distribution) yourself and you cannot get definite markets straightway,” she noted.

“Every founder, if they want to be in this space, needs to see that (fundraising) as their absolute role to make sure they bring the money into the business and it doesn’t dry up.”

KBL, a subsidiary of EABL which is backed by Diageo, a British multinational beverage company with a footprint across 180 markets, is a major player in the alcohol beverage market in the country.

KBL is largely known for its beer brands such as Tusker. However, it has been redefining its market share with new products to match the novel generation who seem to enjoy experimenting with their palates.

Market data shows beer holds the largest share of alcoholic beverages. However, the data by the Alcoholic Beverage Association of Kenya (Abak), a lobbying body for alcohol manufacturing businesses, also shows spirits as a promising category for growth.

“Spirits have widespread appeal in Kenya and are available at a range of price points. Gin is popular among millennials with ready drink expanding their presence through the appeal of variety, affordability and suitability for at-home and out-of-home drinking occasions,” reads a 2023 report by Abak titled Building a strategy to combat illicit trade in Kenya.

Middle class

The report states that while wine consumption is growing, particularly among Kenya’s wealthier middle class, sales from beer being the largest category of alcoholic beverages, have been depressed by the slow recovery and reopening of on-trade outlets post-Covid-19 as well as a consumer switch to lower-priced, higher-alcohol spirits.

And while Ms Chappatte fears a shrinking market for beer, this is where East African Breweries Ltd (EABL) Group Corporate Relations Director and Abak Secretary Eric Kiniti sees an opportunity for growth.

EABL is the parent company behind KBL in Kenya.

“From our view, there is an opportunity to grow the beer market driven by the growing population and recruiting consumers from the illicit market which accounts for 59 per cent of the alcohol consumed in Kenya,” he told The Standard referencing the Abak report.

According to the report, the value of alcohol sales averages Sh248.1 billion. The illicit alcohol market averages Sh67 billion.

The major challenge with the sector, says Mr Kiniti, is the tax regime which is unfavourable to both new and legacy players.

He notes that the Kenyan alcohol beverage market has seen many new entrants coming into the alcohol market in the past 10 years. These include local and international players in both the beer and spirits space which demonstrates that the market is competitive and allows new players in the market.

“The main challenge has been the tax regime in Kenya which has been unpredictable and the rates are also very high in comparison to other countries in the region,” he added.

The alcohol beverage sector has always been a low-hanging fruit for the government when seeking new ways to raise money, which informs the jump in taxes in almost every finance bill.

As a young business, says Ruth Mungai, African Originals’ financial controller, they have not been spared either as she revealed that they are still haggling on whether to tweak alcohol percentages or volume of their products to navigate the latest changes.

In 2024, the government decided to levy excise duty based on alcohol levels (alcohol by volume) and not dependent on the type of drink.

Profit margin

Ms Mungai referenced a spirit product with alcohol by volume (abv) of 45 per cent which used to attract Sh364 on a bottle but now the amount has gone up by Sh160.

“That business needs to make a decision on whether to reduce the abv of their products so that they can save on expense or take up the cost. And taking the costs affect the profit margin,” she said.

She added that while they are still in the process of making those decisions, at African Originals, they are moving some of their products like gin and tonic from five per cent abv to eight per cent so that they can enjoy preferential tax rates.

“If you are a small brewer and you have been paying Sh5 million excise duty per month, that will go down by half. But if you are large, and you were doping products that have very high abv, your taxes will almost double,” she explained.