North Africa Drinks Industry Report
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MIDDLE EAST - NORTH AFRICA DRINKS INDUSTRY REPORT Thursday, 01 December 2005 00:00 International News Services sources: BY MARK ROWE AND PAUL COCHRANE INTRODUCTION JUST as chocolate sells well in cold countries, so do soft drinks flourish in hot countries, which would suggest that North Africa and the Levant presents an inviting face to the international drinks market. And, broadly speaking, this is the case. Most international brands, such as Coca Cola, consider Tunisia, Egypt, and Morocco among their top 10 fastest growing drinks markets in Africa, with these countries enjoying high growth rates of sales in the past few years, frequently of more than 40%. The region has seen a small rise in affluence in some countries, which creates opportunities for companies to sell greater volumes of premium brands. Meanwhile, prices of soft drinks are low and tend to be within the remit of all social categories. At an international level, the European Union (EU) is busy striking free trade deals with its African and Levant neighbours on the Mediterranean coast, and the EU's drinks industry is taking note. High tariffs on imported food and drinks have protected local companies but these are being reduced by 25% each year and will have evaporated by 2012. The main areas for growth are in mineral water and fruit juices. "Safe" water is popular in Egypt, for example, which has one of the highest kidney failure rates in the world, mainly because of the lack of a reliable source of clean drinkable water. The North Africa region tends to be dominated by local players but is a growing market for the international brands. Nestle Waters saw 2.5% of its global sales in the region in 2004, worth around Euro 130 million. Nestlé Waters, which, with a 9.8% market share, is the market leader for bottled water in the Africa/Middle East region, with its Baraka and Nestlé Pure Life brands, earlier this year announced a major deal to take over BGFZ, Algeria's major producer of bottled water and carbonated drinks, and swiftly moved to complete the take over. Yet many challenges remain, as a spokeswoman for Nestle Waters pointed out. "The main challenges are the growth potential of the bottled water market," she said. "This depends on the dynamism of the economic environment and the distribution network that needs to be better structured." Per capita incomes, though higher than in much of the rest of Africa are still extremely low compared to western standards. In addition, international companies - speaking on background terms to just-drinks.com - are only too aware that they must take into consideration the political climate: many international firms privately acknowledge that in each country there remains a wariness of Western influence. Yet a long-term boycott related to the war in Iraq failed to materialise. "The boycott didn't happen," said Said Benbihi, North Africa research analyst for Euromonitor. "There were attempts by local players such as Mecca Cola and Arab Cola to seize the opportunity but they only succeeded temporarily. People found these brands just weren't as good as the established brands. The big brands such as Coca-Cola are well established and have sophisticated distribution systems." The issue of investment risk is never far away. While most countries in the region are politically stable, they can scarcely be said to have whole-heartedly embraced democracy. In Libya, Col Muammar Gadaffi appears to have come in from the cold, but a track record of eccentric behaviour means that drinks companies will remain cautious in Libya for some time yet. Algeria has suffered from an appallingly cruel internal war for more than a decade, though here at least some degree of peace has recently been secured. Nevertheless, the broader canvas for the region looks rosy. "The region has really great potential," said Mr Benbihi. "These countries are generally non-alcoholic so the main market is for soft drinks and the market is far from saturated." Egypt With a population in excess of 70 million (the fastest-growing and the largest in the Arab world), the Egyptians represent one of the most important soft drink markets in the Middle East. According to Euromonitor, soft drinks saw a 48.1% growth between 1997 and 2004, with carbonates, the largest sector, growing by 35.2% and bottled water by 88.3%. Recent years, however, have seen a major slowdown in the Egyptian economy in real terms, which has negatively affected sales of soft drinks. Carbonates, fruit juice and concentrates have reported volume growth well below historical averages since 2003. This was mainly attributed to the general decline in disposable incomes among the Egyptian middle-income groups, the main consumers of soft drinks. External factors, such as currency fluctuations and devaluations, have led to a rise in unit prices for imported items such as fruit pulp, packaging materials, machinery and even advertising. The major players in the country include Al Ahram, the leading producer of beverages - alcoholic and nonalcoholic - with a market share in excess of 90% in both segments. By November 2005 Al Ahram had seen a five-fold increase in volumes, and a 10-fold increase in capitalisation in its business since privatisation in 1997. The company recently built a new distillery - the first in Egypt - to address unsatisfied demand caused by high import tariffs on alcohol. According to Euromonitor, in 2003, the year for which figures are most recently available, carbonates seemed to be recovering slightly with positive growth in sales, at 3.7%, compared with nearly 1% in 2002. Bottled water is perceived to have plenty of potential in Egypt. Most Egyptians believe tap water is contaminated and very unhealthy, (and as we have said, local health statistics back this up). Bottled water sales maintained positive volume growth in 2003, with sales reaching 370.5 million litres, making it the second largest sector by volume in the Egyptian soft drinks market. Innovation is key to sales. Nestlé Waters in particular has set up special sales organisations for distribution to unique types of sales outlets. Street vending is a classic example of adapting to the demands of local consumers - Nestlé Waters sells its Baraka to consumers in the street via mobile tricycles. In the fruit juice sector, virtually all 100% juice is made of pulp, which is usually imported, though the local fruit juice industry has fought its corner. Sporty fruit juice, operated by Blue Stone Trading, a Cairo-based family business that started out in 1990, has proved popular with the younger generation and school children. Reflecting growing tastes, the company is shortly introducing a new range of flavours, including pina colada and cranberry juice. However, the company imports all ingredients from the United States and the United Kingdom. "The performance of soft drinks in Egypt is greatly dependent on the performance of the economy as a whole, and what this means for disposable incomes," said Mr Benbihi. "If the Egyptian economy recovers, then some of the vast potential in the market will be realised, as the climate and attitudes towards alcoholic drinks favour growth of soft drinks in the longer term." Morocco Sales of soft drinks recovered in 2004 sales from a dip to historical levels with off-trade value and volume growth rates of 8% and 10% respectively, according to Euromonitor. The drinks market growth can be explained by the increase in sales of Pepsi-Cola, the establishment of new cola brands and the significant marketing efforts made by companies to stimulate sales. Another important factor influencing growth was the price reduction strategy applied by Coca-Cola in 2004, with one litre plastic Coca-Cola bottles now Dh1 - Moroccan Dirham (10 US cents) cheaper. Sales of soft drinks rose by 80.8% between 1997 and 2004, according to Euromonitor, mostly propelled by a surge in bottled water by 97.7%, from 404.8 million litres to 800 million litres. In terms of volume, bottled water is now the largest sector in the country with off-trade sales reaching 725 million litres. Carbonated bottled water remains less popular than still bottled water as consumption is generally seasonal. Unlike most countries in the region, Morocco has several well-established local brands, established more than 20 years ago, particularly in the bottled water market. "Morocco has a lot of mountains with sources of pure water," said Mr Benbihi. "Prices are low and competition between the brands is strong." The largest player remains Sidi Eli, which has 65% of the bottled water market. The multinationals tend to trail in with around 4% of market share. Superficially, the fruit and vegetable drinks market looks buoyant, with growth of 25.7% between 1997 and 2004 but the detail is less encouraging: this sector is the smallest in the market and sales last year only reached 55.6 million litres. The market, which was led by local company and sole concentrate producer Frumat SA, has struggled to recover from a plague of locusts that affected the southern citrus growing areas in 2004. Frumat has since gone bankrupt. As a result, Morocco became a net importer of juice and concentrate and is likely to remain so in the medium term future. According to the US Department of Agriculture (USDA) Foreign Agricultural Service: "There are just three single strength juice manufacturing plants in Morocco that are hardly able to meet the local demand for consumer oriented single strength juice. Given the prices of the fresh citrus in the local market, the local citrus processors will continue to face strong competition from imported juices." Lifestyle changes are also affecting the sales of drinks in the country.