BMI View: We maintain an optimistic outlook for the country's food and drink industry over our forecast period. With expectations for strong economic growth, a favourable demographic profile and a gradually emerging middle class, Zambia remains one of the most attractive investment destinations in the region. That said, short-term challenges remain, including continued pressures on an already ailing Zambian kwacha and the prospect of industrial unrest within the public sector workforce. With t he World Bank expecting little improvement in the global commodities market through much of 2015, this will also continue to weigh on the Zambian economy.
Total food consumption growth (local currency) in 2015: 9.6%; compound annual growth rate (CAGR), 2014 to 2019: 10.0%
Mass grocery retail (MGR) sales growth (local currency) in 2015: 13.6%; CAGR to 2019: 13.4%
Despite low copper prices, we anticipate real GDP growth of 6.0% in Zambia in 2015, from an estimated 6.0% in 2014. Private and government consumption will remain the key drivers of growth, with resilient domestic demand helping to offset weaknesses in the export sector. Growth will also be supported by a stable inflationary environment.
Although President Edgar Lungu was elected only in January, Zambia is set to return to the polls once more in 2016, as the presidential term cycle was interrupted by the death of President Michael Sata in office. Given the fact that Lungu won narrowly in January, the poor economic performance of the country at present and policy uncertainty, we believe that he will struggle to be re-elected next year ( see 'Lower Mining Tax Will Fuel Public Discontent', April 24). As a result, we do not expect that recurrent spending will be targeted, as the government will be looking to hang onto votes - a goal that would be undermined if cuts were made to social spending and public sector wages. Rather, we think that capital investment will be targeted instead. Although cuts to government investment will result in a lower budget deficit and less need to ramp up borrowing in order to fund them, it will also mean that future growth is jeopardised.
Demographics will remain favourable for the expansion of the food, drink and MGR sectors. Zambia has an estimated population of 14.1mn and this is projected to increase to 16.6mn over the forecast period. This will result in a significant increase in the youth population, which is vital for the industry.
Key Industry Developments
Opportunity In Zambia Beer Looks Strong To 2019: The Zambian beer industry has enjoyed several years of fast-paced growth. We expect this to continue, despite an increase in tax on 'clear beer' from 40% to 60%, which came into effect at the start of 2014 (meaning that alcohol prices in Zambia are among the highest in the Southern Africa region). The market leader is Zambian Breweries, a subsidiary of SABMiller, which has posted consistently strong volume growth over the past few years. Zambian Breweries produces the country's most popular beer, Castle, which accounts for just under 60% of the group's total volume sales.
The structure of Zambia's beer industry is similar to that of many other Sub-Saharan African (SSA) countries. Four global brewers are dominant across the continent: Heineken, Diageo, SABMiller and Castel. Through subsidiaries, one or more of these companies has influence in almost every SSA country. As a result of this structure, the formal African beer market can be seen to operate on two levels: cheap, local beer that has long been provided by domestic breweries and expensive, premium beer (the global brewers' flagship brands). However, the informal beer market makes up the overwhelming majority of total sales in SSA, with some estimates suggesting that around 75% of the total drinks market is made up of cheap home brews or illicit spirits.
Zambian Breweries is very well positioned within the wider industry structure given its overwhelming command of the market on a market share basis. The strength of its margins means it is able to absorb the bulk of the excise price hike so there is no major impact on total volumes. Going forward, rising incomes will help it recapture its high margins with further volume growth, so the outlook still remains strong.
Zambia Sugar Announces New Investment Project: Illovo Sugar Group's subsidiary Zambia Sugar announced in February 2015 that it was investing ZMW522mn in a new refinery at its Nakambala sugar plant in Mazabuka. The new refinery is scheduled for completion in April 2016 and will more than double the plant's annual refined sugar capacity to around 100,000 tonnes. Zambia Sugar is Africa's largest sugar producer and in the reporting period ending March 2014 processed 1.29mn tonnes of sugarcane at the Nakambala plant, generating revenue of ZMW332mn. For the six months to 30 September 2014, the company reported that revenue had increased by 5% to ZMW966mn and that profit from operations had increased by 3% to ZMW149mn, on the back of a solid performance in both agricultural and manufacturing operations.
Meat Company Zambeef To Benefit From Rising Incomes: Zambia's Zambeef is one of the country's largest companies, with vertically integrated operations spanning production, processing and retail. Strong top-line growth in Zambia over the past few years (the company's H115 results recorded a 6.9% increase in revenue year-on-year at ZMW844.1mn and gross profit in the same period up 25.3% to ZMW323.5mn) has made the company more ambitious and it is pushing forward with plans to pursue growth in West Africa. Through this strategy, Zambeef is boldly attempting to gain the advantage of being a first-mover. The safe option would be to expand in Southern Africa, where economies are more integrated and where the company knows the market better. Indeed, retail channels are generally a lot more organised in Zambia, Zimbabwe and Botswana than in Nigeria, for example. However, Nigeria's 150mn-plus population and vast potential means it is an opportunity that is too good to ignore for an established regional player. We also highlight that Shoprite is expected to pursue growth in Nigeria at some point. This is crucial, in our view, as Zambeef might be able to use a similar model of operating outlets within Nigerian Shoprite stores as it has done in Zambia.
Key Risks to Outlook
The most salient risks to Zambia's economy stem from global economic developments that directly impact the price of copper, Zambia's chief export, as well as the appetite for frontier market investment. If struggles in Europe, China and other major markets are more or less pronounced than we currently anticipate, then our forecasts would be rendered either too optimistic or too negative.