Growing with Ethiopia

‘We Call Our Strategy ‘Growing with Ethiopia”

Ever since coming to Ethiopia, Heineken has been prone to making splashes in the beer market. First, they purchased two national breweries: Bedele and Harar. In 2015, they launched their Walia brand with great success, shaking up the competition through a strategic pricing strategy that helped them increase market share. Now, the company has launched its signature Heineken brand in the local market, which is produced in their state-of-the-art brewery in Kilinto, which cost more than EUR200 million to build and expand.
At the helm of Heineken’s Ethiopia office is Gerrit van Loo, a man with nearly three decades of experience with the company. After studying law and economics in the Netherlands, he enlisted in the Dutch navy before starting his first job as a management trainee at Heineken’s headquarters in Amsterdam. Since then, he’s worked throughout Europe and Africa in marketing and sales before becoming a manager.
Van Loo says Africa is brimming with potential – and Ethiopia is no exception. Since arriving in 2015, he’s accomplished quite a bit – the Klinto expansion, launching the flagship Heineken brand, and helping develop Ethiopia’s agriculture value chain. EBR’s Tinbete Ermyas spoke with van Loo to learn more about their work in Ethiopia, including their environmental protection efforts, developing local talent, and the unique challenges he’s faced working in the local context. The following is an excerpt.

Heineken has been in Africa for about 100 years but only came to Ethiopia five years ago. One would think this would have happened sooner, given the large population, fast economic growth, and low per capita alcohol consumption. Why did it take the company so long to arrive?
All the breweries were in the hands of the government. [They first] privatised St. George. Then, in 2011 they decided to privatise the three remaining breweries – Bedele, Harar and Meta. When they opened up, we were one of the companies to bid for the three breweries – and we got the bid for Bedele. Then we bought Bedele and Harar from the Ethiopian Privatisation Agency. We then presented our plans on what we wanted to do with the breweries.

It seems like the company was ready. How long had Heineken been eyeing Ethiopia?
A long time. We had a little bit of importation of Heineken in the past. [However], as a foreign investor it was not possible to have a business in Ethiopia where you sell finished products. You have to produce them yourself and that was not possible in those days, so there were very limited sales of Heineken in the country.
So we had Ethiopia on our radar for a long time, but it was only after the government privatised that we were able to actually step in.

And you stepped in with a bang. Between purchasing the Bedele and Harar breweries and building a factory in Klinto, the company has invested around half a billion dollars. How has the return on investment been so far?
We’re very much in an investment phase at the moment – and if everything works out we will probably continue to be in an investment phase because Ethiopia is a huge country and there are a lot of people. There are all kinds of underlying factors that will make the beer market grow, [like] economic growth, a relatively stable country, urbanisation, a growing middle class.

When we started there was a serious undersupply of beer. But already in the last four years the per capita consumption has doubled, but it is still at a very low level compared to many other countries. So a lot of brewers see that [and are investing].

Now it is growing from a supply-driven market to a demand-driven business…and we are expanding capacity at the moment. So we will serve the nation by selling a lot more beer [because] the beer market will grow and is growing.

Speaking of serving the nation, during the media tour of your new factory you said that you wanted to help transform the barley sector in Ethiopia. Can you elaborate on that?
We started a public-private partnership with the Dutch government and the Agricultural Transformation Agency in Ethiopia to establish a barley business, a local barley value chain. That is very important because the good thing about Ethiopia is you can grow barley. Some African countries cannot grow barley and [instead] use rice or sorghum.

But still, the barley value chain was not developed in Ethiopia for a very simple reason: Local farmers could earn more money by growing other crops than malt barley.

So the breakthrough is, together with universities, we have developed seeds that are especially equipped for growing barley in the environment of Ethiopia, between 1,800 and 2,200 metres. The good news about those seeds is that they tripled yield per hectare. All of a sudden, growing malt barley in Arsi and Bale was more attractive for farmers than growing other crops. So if we go to the barley fields now, farmers are very happy with what happened because [they can] double or triple [their] income.

Of course, it is a rotation crop; you cannot grow barley every year and you have to rotate it with other crops. But the barley value chain has been quite transformational.

Supporting value chains is something the company has been vocal about. Heineken aims to supply at least 60Pct of its raw materials for its African breweries from within the continent by 2020. How is that plan going?
There are a couple of limiting factors at the moment. The first is the malt price is still more expensive than importation. A couple of things have to be done [to solve this]. One is the raw barley price. Compared to the international price, it is very expensive in Ethiopia. Secondly, the malting fee in Ethiopia is almost four times more expensive than in Europe. So we’re in a situation where local malt is 20Pct to 25Pct more expensive than importation. Ethiopia is the only country where local sourcing is more expensive than importation.

We are currently [sourcing] 33Pct [of raw materials locally], and we believe that can grow, but that will depend on whether we have enough malteries in this country. The barley must go to malteries before we use it in the breweries. Currently there are two malt factories – one in Asella and one in Gondar – [but] more malteries will have to come to Ethiopia. Then we can also produce more barley and over time we won’t have to import either raw barley or malt.

So, with the new seeds, tripling the yields, more farmers are growing barley, and now the Asella [maltery] doesn’t have to import barley. But more has to happen.

In general, we call our strategy ‘growing with Ethiopia’. [This] means, on one side, raw materials for the brew house…and we are actively talking with malteries to come to this country and invest.

Secondly, Heineken global has a lot of contacts with international glass factories and we’re encouraging them to come to Ethiopia because, over the time, we should not import bottles. If we get our glass and barley from Ethiopia, we will make a huge step in our agenda of growing with Ethiopia.

A lot of the challenges you mention deal with post-production – barley pricing in the market and malting. But it was also a little rough for the agricultural sector because of the drought. How has it been on the farming side?
The drought didn’t impact the areas where we grew malt barley. In general, yes, the country is seriously affected by the drought. But not so much in Arsi and Bale, where we grew barley last year.

Let’s talk about your product. You recently launched your flagship Heineken brand here in the local market at over ETB20 per bottle. Why such a high price – is this because it is more costly to produce or for market segmentation?
It’s both. It takes additional requirements to produce Heineken locally. It has to do with raw materials – with yeast, import and process time, reputation, quality checks – so it is a more expensive product to produce.

But it is also marketing strategy because Heineken is a global brand. You want to have a marketing portfolio of offerings at different price levels for different consumers in the market. It is not all about selling all the same lagers with the same price. You talk about different products, like Sofi Malt, the international premium segment, or regional strongholds like Bedele and Harar.

It is very much like playing a portfolio game of brands. Therefore it is about building a brand portfolio for the different needs of consumers in the market place.

This isn’t the first time you’ve employed a pricing strategy. Over a year ago Heineken introduced Walia at around ETB10 in an attempt to increase market share.
To get into a country you need a penetration strategy, so we had a lower price for Walia when we introduced it. If you invested over USD100 million in the Kilinto Brewery, you want to fill that place. A brewery needs to be filled within a couple of years. The big surprise with Walia is the brewery was filled within three months. That was unprecedented in the Heineken world and the growth of Walia was a huge surprise and a tremendous success in the world of Heineken because we were able to double the business in a year.

We grew seriously. We also got a global commercial award for best introduction of 2015, which was nice. And [the launch] was recognised as a huge international success.

The timing was perfect, the product was perfect, the label was perfect, and I think it shows that the country was waiting for more competition in the beer business because it was undersupplied and the market was dry.

You speak so proudly of Walia and the recognition it received. That reminds me of an article I read about another point of pride for Heineken: a craft brewer in America called Lagunitas that the company acquired in 2015. Heineken helped develop their capacity and began exporting its product. Lagunitas’ CEO said this helped “open doors that had previously been shut and bring…U.S. craft beer…to communities all over the world”. Is there a similar plan to develop and export your local brands?
In most cases, beer does not travel. Most beers produced are primarily consumed locally. There is not a lot of exportation, with the exception of the Heineken brand. I think 99Pct of the beers are consumed locally.

We are exporting a little bit of Walia, Harar and Bedele. If Ethiopians in Washington or other places want [these brands], we can serve them.

But to build an international brand out of an Ethiopian beer, I think that is difficult. We are not a low-cost producer; it is expensive to produce in Ethiopia. If you go to other African countries, producing beer is cheap, that is not the case [here]. First, we have a state of-the-art brewery, but we have to bring that to Ethiopia, which is not easy or cheap. Secondly, running it [is challenging]. We talked about importing glass, local barley is expensive, malt importation from Europe and paying import duties is challenging and not going to make it cheap.

Wages are lower [here] than in Europe. However, terms of productivity, the amount of hectolitres one can produce here is significantly lower than in places like Europe, where you’re talking about a much higher level of automation.
Also, taking the product from here to the rest of the world is complicated. [Heineken is] privileged [to have] a big export brewery, which is close to the Port of Rotterdam. There are a lot of containers coming to Rotterdam, so the tariffs for leaving are relatively cheap because those containers are coming anyway and they need to go back.

Therefore, exporting from that country is cheaper as compared to being here in a landlocked country, where it takes a couple of days to get to the port, so that makes [exportation] difficult from an economic perspective.

I want to talk a bit about sustainability. Beer production requires lot of water, which is scarce. Heineken says Ethiopia is a ‘priority area for water resource consideration’. What does that strategy look like on the ground?
Heineken has recognised 23 locations in which we operate in water-scarce areas. Two of those locations are in Ethiopia: Bedele and Harar. In those water-scarce areas, our aim is to become a water-neutral brewery.

This means we are [taking actions] over time that will compensate for the water that we use. When we bought Bedele and Harar, they used 10 litres of water to produce one litre of beer. That was not okay. Therefore, the first thing to do was apply internal systems to reduce the water usage. Currently we use around 5 litres in those breweries.

Secondly, we built a high-level wastewater treatment plant. The water has to get out of the treatment plant and it has to get quality certification, [so that it’s safe for use downstream].

In Harar, we have a public-private partnership with a Dutch water company and the Harari region, in which we are able to compensate, over the time, the water we use. We have been engaging with [the United Nations Industrial Development Organisation] to invest with the local authority in Bedele and [implement] better water management.

Your website says your sustainability efforts extend from ‘barley to the bar’. This includes the farmers who supply your raw materials. Do you engage them in your sustainability efforts?
Yes, but not on the water management. [For them it’s about] bringing the right pesticides and fertilisers to increase the yield. We also engage with them through the Heineken Africa Foundation, which has big funds. Every year we fight to get funding for some of [our] local projects.

We have some five projects related to Harar and Bedele. We built a new hospital wing in Bedele. We are also working to refurbish a medical centre in Kilinto. Next year, we will acquire additional ambulances for Bedele and Arsi, to support the farmers. We are trying to help the community we operate in. We want to be a good neighbour in the places we operate. [So helping] the society has been part of our sustainability agenda.

While Heineken has been here for five years, you’ve only been here for just over one year. What do you see as your biggest accomplishments since arriving?
First, getting Kilinto up and running. It is always a hustle to build a brewery.
Launching Heineken was another challenge, as was building a culture for the [local] company. It is a young company and there were a lot of young people. Building the culture, the process and systems; [understanding] the abilities of people; [and developing the] functional and leadership capabilities required a lot of effort.

Many graduates come directly from university and have to learn what it means to be in a company: What does it mean to work together? What does it mean to be a leader? What does it mean to have a quality conversation?
So a lot has been done in training and developing [our human resources]. We came out of a rough phase by bringing Bedele and Harar to Heineken’s standards. At the same time we were building another brewery. You can imagine that has been quite a journey, but the job is exciting.

A lot of recent graduates fill the rank and file positions of the company. However foreigners hold the top management positions. Is your company planning to shift the balance by grooming young Ethiopians to eventually occupy those positions?
In our management there are four foreigners and four locals. So it is 50-50. So let’s not say that [the company is] run by foreigners. In total, there are also nine expats in a company of one thousand people. So 1Pct of the people are foreigners, the rest are Ethiopians.

Of course, we are listed in the stock exchange in Amsterdam, and shareholders are all over the world, so [Heineken] is an international brand. But we consider ourselves as an Ethiopian company.

If we talk about the leadership team in Ethiopia, we’re talking about 60 people, of which seven or eight are expats. And we will do more and more on developing the people…especially…African expat managers. Our manager in Rwanda is from Congo Brazzaville. Our manager in Sierra Leon is from [the Democratic Republic of Congo].

We have a management internship programme – there are 35 new trainees for this year. Will we develop people? Yes. Will it be quickly? I don’t know. The very good thing about Ethiopia is the people are very eager and willing to learn. That makes it rewarding to work because they are very eager to move [up] in their lives.

That’s what I like about Ethiopia – this ‘can do’ mentality. They are eager to change tomorrow. [This is] similar to what we saw in Asia 20 years ago. That makes it rewarding to work here.

You have alluded to being General Manager in other countries. Now that you’ve been here over a year, how does Ethiopia differ from other places where you’ve worked?
Ethiopia is completely different. For example, the security issues that occurred [over the] last year are never on your radar in other countries.

When we came to the country, we felt there was a big red carpet. But by the time you’ve invested a lot of money, the carpet is changing a little bit. My plea to government here is that they should not only attract foreign investors; you also have to sustain [those] who have already invested.

For example, there are some tax issues and regulations that still need a little clarity. What corporations like is predictability. And we do not like bills from five years ago. We have a bill that’s from when the government owned the Harar Brewery from five years ago. That is not helpful and the government has to recognise that there is competition between countries [to attract investors].

So there is some work to be done. In Europe you can do a lot of things with very concentrated trade, a lot of interactions with the big supermarket chains or the big pub chains. Here we do not have powerful supermarket or pubs chains. It is a totally a different thing. I think 60Pct of what I do on daily basis is different from what I used to do [in Europe].

As you mentioned, one of the things you’re not used to is political unrest. Have your operations stalled because of the protests?
We did miss some sales the week after Irreechaa because we were prudent with driving our trucks around the area, so we did actually stall some trucks. But a week later, the political situation calmed down and we’ve not been affected.

Most investors we interview mention similar issues you’ve brought up –regulatory or logistical challenges in the private sector. Has there been a silver lining?
Absolutely. There are a huge opportunities in Africa and Ethiopia – a growing population, urbanisation, growing middle class. We get two million people in the legal drinking age every year in Ethiopia.

In Europe everybody gets old. And if you get old, you drink less. But here, you have a young population that comes into the legal drinking age and in terms of opportunities, this is way, way better than Europe.

Now that you’ve brought up demographics, I want to talk a little about the legal drinking age. There are those who want to raise the local minimum legal drinking age to 21. What are your thoughts?
We adhere to what a country decides. If the country accepts the age as 21 or 18 we adhere to that. [However], we have our own opinion: Somebody at the age of 18 is able to take responsibilities with moderate drinking. The thing is not about the age; it is about moderate drinking.

The dark side in our business is too much drinking, underage drinking, and [drunk] driving. We have to fight those things. Beer is a healthy product, if you drink moderately. We have a campaign here in Ethiopia – ‘Belik, Bagbab, Behalafinet’ – that is actively promoting the moderate consumption of beer. The message is drinking in moderation at the right time, at the right place, for the right reasons.

Because in this business there are dark sides and we have to fight [them]. If that’s costing volume, that’s costing volume. We are here to serve a product that can bring people together to have fun. We work on the fun side of life and we should stay on that side. EBR

5th Year • December 16 2016 – January 15 2017 • No. 46


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