USA Corospondent - April 2017

Quarterly Publication - April 2017

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Gregory Longe

Gregory Longe

Greg co-manages the Africa Frontiers Strategy and has 11 years' investment experience across Frontier markets. He joined the Global Frontiers investment unit in 2013 as an investment analyst.

After a tough week – or even a particularly good one – indulging in a guilty pleasure brings enjoyment to millions across the globe. In a high-end bar in London, it may be an e-cigarette paired with a top-shelf whiskey or craft gin (served with Fever-Tree tonic water, of course). In a shebeen in Lusaka, it might be a scud of Chibuku. In Colombo, a beedi and a cup of toddy. The location and refreshments may differ, but the ritual remains the same – and businesses built around meeting these needs have become some of the largest and most successful in the world. It is no surprise then that shareholders in these global giants have been handsomely rewarded.

Our Global Frontiers strategies look to invest in the emerging markets of tomorrow. These are countries characterised by tremendous opportunity and strong economic growth, but also by low levels of economic development. Infrastructure is often poor, banking penetration low and formal retail limited. Out of necessity, and often ingenuity, the informal sector in these markets is usually sizeable. As a result, many larger companies find themselves competing with both formal and informal players. This can be tough, given the questionable tax compliance practices, patchy health and safety records, and low cost bases associated with the informal sector. Despite these challenges, however, companies that can find the right value proposition have seen customers happily pay for the benefit of a safe, consistent product.

Competition from the informal sector is particularly fierce for the large alcohol and tobacco companies. But it is also this competition that gives rise to some of the most exciting opportunities.


SABMiller (SAB), now part of Anheuser-Busch InBev, has a long history on the African continent. With roots stretching back to 1895, it has spent over 100 years competing with traditional or opaque beers in Southern Africa. Opaque beer is typically fermented in small quantities from sorghum or maize. It has been drunk for thousands of years in villages across the continent, and is brewed based on recipes passed down through generations. Drinking opaque beer at social occasions is part of the cultural fabric of rural villages and urban capitals across sub-Saharan Africa.

With the introduction of Chibuku, SAB’s opaque beer, the brewer has been able to formalise the mass brewing of traditional beer, tapping into the informal home brew opportunity in 10 countries to date. It has profited from offering an affordable, safe and consistent alternative to small-scale backyard brewers. By formalising the informal sector, it has also brought these profits into the tax net, which benefits the governments in these countries. In Zimbabwe, one of the first markets to sell Chibuku, opaque beer sales amount to triple the volume of lager beer sales and account for double the profits.

Chibuku broadened SAB’s product offering and allowed it to move beyond the clear beer or lager market. Formalising the informal beer market also helped SAB capture a larger share of the total alcohol market. A secondary impact is that Chibuku makes the business more stable and less cyclical. Periods of increased consumer spending see beer drinkers trade up from opaque beer to lager beer, while recessions see down-trading from lager to opaque beer. SAB is able to capture the full range of consumption in both economic environments.

In addition to Zimbabwe, this exciting story is currently playing out in SA, Botswana, Ghana, Malawi, Mozambique, Tanzania, Zambia, Lesotho and Swaziland. The opaque beer opportunity is also part of our investment case for holding the brewers in some of these countries.


A more nascent opportunity lies in beedies. Beedies are small, hand-rolled cigarettes made of tobacco flakes wrapped in leaves and tied with colourful string. Beedies are prevalent in India and much of Southeast Asia, and are a very low-cost alternative to cigarettes. However, the industry is synonymous with child labour and beedi smoking is considered to be significantly more harmful than cigarettes. While no global cigarette company has found a way to compete with the beedi industry yet, we believe that the formalisation opportunity in Sri Lanka is particularly interesting.

Ceylon Tobacco Company (CTC), a British American Tobacco subsidiary, has a monopoly in Sri Lanka’s formal cigarette market. However, this does not tell the full story, as beedies account for 45% of the total tobacco market. For CTC, the opportunity to produce a beedi-type product will see its addressable market almost double. Machine-rolled beedies will be safer than informal beedies, and cheaper than cigarettes. Entering this market would therefore allow CTC to grow volumes, while customers would be able to consume a less harmful product. As is the case with Chibuku in Africa, the Sri Lankan government also stands to benefit, as any profits from beedi sales would be taxable (which is unlikely to be the case today). Furthermore, applying global health and safety practices to the beedi industry should be positive for lawmakers and should help keep more children in schools.

CTC is currently pursuing the beedi opportunity. If successful, we have no doubt that the technology will be rolled out into other markets. Bangladesh, where beedies account for 40% of the tobacco market, is another prime candidate for formalisation. Even in an industry such as tobacco where volumes are declining, the company that is able to formalise the informal sector can see a return to growth.

As we scour the world’s frontier markets looking for investment opportunities, we often come across companies innovatively meeting their customers’ needs. As these economies move from frontier to emerging market status, we will no doubt see more examples of this. The governments in these countries stand to benefit. Consumers stand to benefit. And hopefully, as shareholders, we will benefit as well. Now surely that is something to toast to.

As long-term investors, environmental, social and governance (ESG) considerations are fully integrated into our investment process and form part of the mosaic for any investment case, in understanding the longterm sustainability of companies and their business worth. When valuing a business, we take ESG factors into account predominantly by adjusting the discount rate applied to the assessment of its normalised earnings. We therefore implicitly build the risks relating to ESG considerations into the ratings of the businesses we analyse. Where we can, we explicitly allow for ESG costs in the modelling of a company’s earnings.


Social objectives vary significantly between investors, and ESG issues are often intrinsically fraught with ambiguity. We do not exclude investments in companies that perform poorly on ESG screens, but we do require greater risk-adjusted upside before investing. In practice, a business with an ambiguous ESG profile will be required to deliver higher returns to justify its inclusion in the portfolio.