Brewing a better beer for Africa by Megan Barnett @FortuneMagazine June 24, 2011, 1:57 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons By Carolyn Whelan, contributor FORTUNE — A guy walks into a bar and orders a pint of beer. But this isn’t a pub in London or a sports bar in Milwaukee — it’s a watering hole in Uganda. And the beer, from the same company that brews Miller, is made from sorghum, a grain common to Africa . For centuries, Africa’s slum dwellers have scored cheap buzzes by fermenting local crops like banana, pineapple and palm into home brews, some of which is so toxic it sends drinkers to the hospital. Now SABMiller wants bootleggers to buy the company’s own beer instead. By building high-tech microbreweries and micro supply chains sourcing local ingredients like sorghum – a hearty grain normally used for syrup and cattle feed – from farmers in Uganda, Tanzania and Zambia who may buy their beer later, the world’s second-biggest brewer hopes to crack a virgin market. Sourcing local ingredients cuts supply chain price volatility, and logistics, inventory and import duty costs – and the result is a product priced 20% less than barley beer. The company pegs the Africa home brew market at triple that of traditional beer. Outside South Africa, Africans consume just 7 liters of beer a year per capita (excluding home brews), versus 77 liters in the U.S., so enormous opportunity looms. SABMiller subsidiary Nile Breweries first concocted the sorghum beer recipe in 2002 (it also scored lower sorghum beer taxes), making it an early mover in the sub-pyramid space. Today 35% of all Ugandan beer by volume is Nile’s Eagle brand sorghum beer, which is also sold in Tanzania, Zambia, Zimbabwe and Swaziland. But other brewers are quickly following suit. Since 2008, Heineken and Diageo DEO have done the same in Ghana, Sierra Leone and Cameroon, albeit not replacing pricier barley with sorghum at a 100% rate. As prices for imported staples such as barley soar and key markets like South Africa stagnate, these companies are finding opportunity with home grown brews in other parts of the continent. “With barley prices so high, it helps brewers’ margins,” explains Tim Drinkall, manager of Morgan Stanley’s Frontier Emerging Markets fund. “Whenever a company can cut costs and keep up quality, it’s a positive.” Economic boost Micro supply chains also help local economies. Nile Breweries generated about $92 million in value-added for the Ugandan economy and supported roughly 44,000 Ugandans through agricultural, manufacturing, retailing or distribution jobs in 2007, according to a French business school INSEAD study. (Some 9,000 farmers sell the brewer sorghum.) The company is also Uganda’s fourth-largest taxpayer, capturing value previously lost to the black market. Farming sorghum in Uganda “We want subsistence farmers more involved in the value chain,” says Andy Wales, head of Sustainable Development at SABMiller. “Our affordability model is attractive because it focuses on local crops and creates additional income for farmers and a new profit pool for us without cannibalizing our core product.” Historically, SABMiller has imported 80% of its raw materials in Africa; today that’s 66%. SABMiller’s micro supply chain moves are a sharp departure from its decades-long attempt to flood emerging markets with premium beers, with much of their inputs like barley and bottles sourced abroad. But its efforts to penetrate untapped markets echo those by Coke KO and Danone to do the same in the African mango juice and dairy markets — Coke by incubating a mango farming culture in Uganda instead of using Indian or European puree imports, and Danone by sourcing milk for dairy products from Senegalese farmers rather buying it abroad. Still, not all market watchers are convinced. “This won’t move the needle,” quips Don Elefson, a fund manager for the Harding Loevner Frontier Emerging Markets Fund, noting an enduring dominance by local players due to distribution woes that leave multinationals on the sidelines. “Africa is still mom and pop.” Africa is a challenging market, and one that has long eluded foreign retailers. Its medieval road infrastructure and 15 landlocked countries make delivering machinery, inputs and ingredients across oft-dicey borders costly or impossible – 40% of food in emerging economies spoils before reaching market or store shelves on average. But with a young and urbanizing population and seven of the world’s ten fastest-growing economies by 2015, many multinationals are eyeing Africa. Roughly 200 million Africans – or more than Brazil’s entire population — will enter the consumer goods market by 2016. Undaunted, SABMiller plans to brew cassava-based beer in Mozambique and the Southern Sudan within a year (it’s even invented a new processor to preserve cassava en route to the brewery), and to boost local barley sourcing to 50% from 10% of the total by the end of this year by seeding a Tanzanian barley growing industry. Some $3 million could be saved annually by substituting cassava for other ingredients, according to SABMiller. This would help the company meet its long-term goal of halving today’s price of mainstream beer in Africa. “A select number of multinationals are getting very serious about working together on Africa’s agricultural development,” says SABMiller’s Wales. If those efforts bear fruit, along with joint ones by the company and behemoths Unilever UL , Standard Bank, Yara and others for better crop yields, roads and cold storage through an agricultural corridor project in Tanzania, Africa may yet morph into a local, if not global, breadbasket.