No small beer empire

More acquisitions to come When the newly London-listed SA Breweries (SAB) bought three breweries in the Czech Republic in 1999, it had to manage the integration of three independently run, formerly competing brewers.

In Project Golden Thread, as the integration was code-named, it imposed the “SAB way” under the guidance of SAB stalwart and now SA CE Tony van Kralingen.

Despite 20% of the workforce having been retrenched, the Czech business grew profits from US$20m to $120m in three years.

“We set about introducing SAB methods, such as segmenting the market and rationalising the brands,” Van Kralingen says.

“But I think one of the main reasons for our success was our ability to deal with the many sensitive issues and cultures in a foreign country — which we had become accomplished at doing back home in SA.”

The Czech Republic is just one of 60 countries on six continents in which SABMiller now operates. However, SAB's experience there is typical of its approach to acquisitions. And, with a few exceptions, it has delivered time and again.

If its $1,2bn purchase of Grolsch is included (an unconditional offer has been backed by Grolsch's board), SABMiller is the world's largest brewer in terms of volumes, according to researcher Plato Logic.

Though some calculate volumes differently and still put SABMiller in second place, what it has accomplished in a short time is nothing less than SA's greatest internationalisation success story.

Though the rest of the world had hardly heard of SAB before its listing in London in 1999, it was an iconic company in SA, with a 98% share of the lager market and an almost generic brand, Castle Lager.

It has transported this model: aimed for a dominant market position, bought up competitors and invested in brands. It now boasts a portfolio of more than 200 brands.

The strategy, which transformed SAB into a global player, was conceived by five South Africans: CE Graham Mackay, FD Malcolm Wyman, chairman Meyer Kahn, Andre Parker (until recently head of Africa and Asia) and Norman Adami (who has retired from his position as president and CE of the Americas).

The architects of the strategy are Mackay and Wyman. “He's the best strategic chess player in corporate business I know,” says Macquarie First South research head Julian Wentzel of Mackay. “He had a vision and a map well ahead of everyone else.”

Wyman, on the other hand, is the corporate finance brains behind the strategy, and introduced a mergers & acquisitions (M&A) methodology which has determined the process and formula for each of its 30 large deals. “As well as being able to look at the macro-environment, he has an unbelievable eye for detail,” Wentzel says.

When SAB's head office was still located in Jan Smuts Avenue, Johannesburg, a global strategy had often been discussed around boardroom tables. However, in the days of apartheid, SAB was unable to invest globally.

Like most big SA corporates, it was stuck at home and forced to invest in other unrelated businesses as diversified as hotels, retail and manufacturing.

“As a conglomerate, we had real depth of management in our beer business. A lot of strategy is making a virtue out of necessity,” says Mackay.

“We didn't really know how things would pan out; at that time global brewing businesses didn't exist.”

Mackay says he identifies patterns and looks for what will happen next. “One of the advantages I have is the ability to see things from a global perspective,” he says. “I travel to many different markets and see what is happening in many different areas of the world.”

In the 1950s, SABMiller had a few brewing interests in other African countries, but most of these were nationalised when postcolonial governments came to power.

By the late 1980s, the company had made some small investments in offshore markets, like elsewhere in Africa and North America, but these were always done quietly, and couldn't be disclosed.

“We always felt we could compete internationally, but were constrained in investing outside our borders because of the rest of the world's attitude towards SA,” says Wyman.

Then apartheid began to unravel, at the same time as communism. With the symbolic dismantling of the Berlin Wall in 1989, SAB saw opportunities emerging in Eastern and Central Europe.

“We recognised the growth potential in those emerging markets and identified the less established players which operated there. Emerging markets played to our strengths,” Wyman says.

“Post-communist Central European countries were looking for skills and breweries were being privatised. We were a very small African brewer and knew that we had to get into these countries ahead of the large multinationals to have a competitive advantage.”

But, as Mackay says, a strategy is only as good as its execution. To get that right, it built the best M&A team it could and implemented stringent and ruthless acquisition criteria.

“We've been told that our M&A teams are the best in their class,” Wyman says. “We use the old adage: act in haste and repent at leisure, and we assess the value of our acquisitions carefully.”

The other part of SAB's strategy is its ability to choose from a wide selection of experienced management to deploy to its operations around the world.

Many of these managers are South African. “One of our greatest success factors was the ability to transfer skills from SA,” Wyman says. “We found that South Africans' ability to deal with different cultures back at home enabled them to work well with local cultures in difficult regions.”

Much of the company's success in human resources comes because of a carefully constructed human resources programme. SA human resources head Steve Bluen has said its programme allowed the export of 42% of its high-calibre executives over the past 10 years.

One of the most unusual and effective methods used is the “people balance sheet” which analyses “human capital” available in the company at any time on a global basis.

If a position becomes vacant anywhere in the world, a glance at the balance sheet can immediately show where suitable candidates may be found to fill the position. This is achieved through a structured process that includes career and leadership development.

“We've always concentrated on people; it's part of our DNA,” Mackay says. “Even in the years of isolation, we used to travel around the world and benchmark ourselves against other businesses. Our management systems and processes have allowed us to acquire the right people.”

Though no two markets have been the same, there is a formula. Romania MD Dieter Shulze previously managed Poland, where market share increased from 18% to 40% over the past 10 years.

He says his first task when posted to a new country is to identify the localised brands and “turn them into attractive propositions”. Phase two, he says, is to develop the regional brands into national ones.

“We also introduce SAB's technical processes to improve the quality of the beer. It's not really a one-size-fits-all solution, as each country has its own nuances. But the concept is the same.”

The general rule of thumb is that SABMiller tries to become No 1 or No 2 brewer in each country in which it operates.

“To be successful, we have to build a relevant scale,” Shulze says. Size is usually achieved by acquiring the strongest brands and building a brand portfolio. “Building a portfolio of brands is ongoing and means understanding the customer through a psychographic model and by segmenting consumers.”

SABMiller's first acquisition in Eastern Europe was a small one, made in 1993. It bought Hungary's largest brewer, now called Dreher, for a mere $50m. However, it was the beginning of its quest to become a global brewer.

At that time, it also saw what was happening in China and started talking to China Resources, a privatisation arm of the Chinese government. The discussions led to it gaining joint control, with China Resources, of China Resources Snow Breweries, which is now the largest brewer in China and brews China's biggest-selling beer, Snow.

In 1995 SAB made one of its most important European acquisitions. It bought a controlling stake in Poland's Lech Brewery for $30 million.

Following a number of acquisitions and substantial organic growth, Poland is now the single-biggest contributor to Europe's operating profits, which were $936 million in 2007. “Because we were restricted in exporting capital from SA at the time, we had to buy small and grow it very quickly,” Wyman says.

By 1998, SAB was well-positioned in both Eastern Europe and Africa, and China was on a growth path.

“We knew there were more opportunities coming, but they would be far bigger than we had become used to,” Wyman says. “We also realised that we couldn't raise sufficient finance on the JSE, and decided to list in London to access the larger international capital markets.”

So, in 1999, SAB moved its primary listing to London, when it raised £300 million and became an FTSE 100 stock.

The London listing, and access to far larger amounts of capital, helped push SAB into the big league. Its global profile was raised and it was able to make far larger acquisitions on the world stage.

In the year in which it listed, it acquired a controlling interest in Plzensky Prazdoj, brewer of Pilsner Urquell, in the Czech Republic for almost $800 million.

Then, in 2002, came another transformative deal. It moved into what was the world's largest market, the US, by acquiring Miller Brewing for $5 billion, and the group's name was changed to SABMiller. That made it the second-largest brewer in the world in terms of volumes.

Three years later, it consolidated its position in Latin America, where it had already bought a few small brewers, by paying $8 billion to buy a majority interest in Bavaria, South America's second-largest brewer.

“The South American deal was probably one of the best we have done,” Wyman says. “It has the capacity to add huge value to the group.”

SABMiller Latin America MD Barry Smith, also a South African, says there are many similarities between SA and South America, including crime and political liberation. “But beer consumption is quite low and the beer category is underdeveloped. It is considered the poor man's drink.”

Smith says SABMiller has set out to improve the appeal of beer, differentiating and enhancing the brands, as beer is seen as somewhat generic, and introducing premium brands to the South American markets.

But the Miller acquisition was a shift from SABMiller's strategy of identifying opportunities in emerging markets. It marked the change from a large emerging market brewer to a global brewer.

“We started with small markets and a small wallet. We now see ourselves as a global brewer, with an emerging market bias, but we will also be looking at developed markets,” Wyman says.

However, despite the good idea, Miller has proved to be more difficult than expected. Early signs of an improvement in its performance were immediately dampened by a price war instigated by Anheuser-Busch.

But the proposed joint venture with Molson Coors — a large US brewer — announced last year, is expected to solve many of its problems.

The two businesses in the US will be effectively merged. Greater volumes allow lower costs and the complementary geographic locations and brands mean a greater presence across the US for the new company.

“The deal with Molson Coors will make Miller a far better business,” Wyman says. “It needed the critical mass which the joint venture will provide.”

Two other important acquisitions in developed markets were the purchase of Italy's Peroni and the recently finalised purchase of Dutch-based Grolsch. “We found the brands attractive,” Wyman says, “as they fit well with our international premium-brand portfolio.”

The ownership of a portfolio of well-known global brands — now Peroni, Pilsner Urquell, Grolsch and Miller Genuine Draft — is part of the next phase of SABMiller's unique strategy: to develop an international brand portfolio and sell some or all of these brands in all of the markets in which it operates, alongside the local mainstream and economy brands. “We will also promote locally made, premium brands on a regional basis,” Mackay says.

The strategy is somewhat different from the single-brand strategy of most of its competitors such as Anheuser-Busch and Heineken. “We found that different countries want different brands and taste profiles,” says Wyman.

SABMiller decided to focus on premium brands mostly because of growing global wealth and the aspirational identity attached to premium beers. “There is a global trend to move from mainstream to premium,” Wyman says.

The attraction of the strategy for SABMiller is the higher prices, wider margins and faster growth that premium brands offer.

But already, in the US for example, premium brands have around 15% of the total beer market. In SA the category has reached over 12% of market share, and is growing strongly.

In developing markets, the growth is set to be significant mostly because it is coming off such a low base. All this is set to increase the less than 5% of total sales that premium brands make up of SABMiller's total beer portfolio.

Mackay sees another trend developing with “the fragmentation of brands at the top end. There's a search for more authentic brands as opposed to the blockbuster international premium ones,” he says.

“In the US and UK, for example, there's a move towards small, unique and highly differentiated beers as well as to unknown foreign beers and ales. We're upping our innovation and looking at other types of beers and other brands.”

Though the focus on premium brands and the further enhancement of mainstream and economy brands is designed for organic growth, the brewer is not about to stop making further acquisitions.

It has recently closed a deal in Poland, where it acquired a small brewer, Browar Belgia, to add to its portfolio; it acquired the Australian premium brewer Bluetongue, and it continues to make acquisitions in the large growth markets of China and India.

“We have taken a medium to long-term perspective in Asia,” says SABMiller Asia MD Ari Mervis. “In China, market share has risen to around 18%, but margins are very thin. But China is a volume player. Brands are becoming more established and we are beginning to introduce premium brands.”

The group has made investments in India and Vietnam, with its Australian businesses also falling into the Asian region. India and Vietnam are still small beer markets, though India's population and low beer consumption means there is only one way to go.

“There are only 11mhl brewed in the entire Indian market,” Mervis says. It is less than half that brewed in SA. “We could easily grow 100% in a short period by enhancing beer's appeal.”

SABMiller's recent Australian purchase of Bluetongue grows its interest there from a small distribution joint venture with Coca-Cola. The Australian market boasts margins of around 38%. “We'll introduce more premium offerings into Australia and we're looking at building a brewery there,” Mervis says.

Wyman sees SABMiller as “a global consolidator” and expects another big acquisition between now and 2012.

“We see ourselves as a contender for any attractive major deal which may arise,” he says, though he won't say what this may be. He adds that SABMiller's ambition is not necessarily to be the No 1 brewer in the world, but rather to be the world's best global brewer.

There are various choices. Should speculation be true that the handful of global beer giants (see graph on page 33) could start merging with each other, SABMiller will be in position to make a bid for one of them.

Already there are strong rumours that Anheuser-Busch and Belgium-based InBev are talking about a merger, a deal which would certainly knock SABMiller back into No 2 position.

Two of the larger players that will have to look for partners if they are to compete effectively, include Carlsberg (in fifth position in terms of volumes according to Plato Logic) and Heineken (in third spot).

“But there are still a number of smaller players which could be bought in various parts of the world,” says Barnard Jacobs Mellet beverages analyst Grant Swanepoel.

Without further acquisitions, SABMiller has a good geographical balance in terms of profits, except for Asia, which is still small but is set to become a greater contributor.

“There's no doubt, as Asia grows, it will become a more significant profit contributor,” Wyman says. “It's nice to have a good geographic balance but we don't really have a target for the spread of our business. As long as the businesses are good.”

“SA will struggle for the next few years, particularly with Brandhouse becoming a more formidable competitor,” Swanepoel says.

Performance from the rest of Africa “could be significantly boosted” should SABMiller be able to buy Castel, a French-based family-owned brewer mostly in Francophone Africa, in which SABMiller already has a 20% stake and a right of first refusal should it come up for sale.

The downside for nearly all SABMiller's operations is the margin pressure caused by higher input costs, something that may force the brewer to push up prices.

Though SABMiller's move from a small SA brewer to one of the world's top ones has shown some exceptional strategic manoeuvring and brave decisions, not everything has always gone the group's way.

One setback was when Anheuser-Busch acquired Hong Kong-listed Harbin Brewery from under its nose. SABMiller had already bought a 29,4% stake in the brewer in 2003 and had made a bid for the remaining shares. In a rather bloody fight, Anheuser-Bush made a far higher offer.

SABMiller said it wouldn't overpay and, just over a year after buying Harbin, sold its shares to Anheuser-Busch, making a tidy profit of around $100m. The consensus, even though it appeared SABMiller had lost a battle with an archrival, was that it did the right thing.

Another such occasion was in 1998, when SABMiller spent around $100m on trying to establish a foothold in the Russian market. The timing couldn't have been worse — two months later it was hit with a 75% currency devaluation and the Russian economic crisis.

“We had to decide whether to pull out completely or to weather the crisis,” Wyman says. “We decided that Russia remained an interesting market, and stayed.” The market has recovered and is now a profitable contributor.

But those examples are the exception. SABMiller stands out predominantly for getting it right so often. That is something of which no other large SA corporate can boast.

Source: Financial Mail

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