Beer Monopoly





  International Reports







Posted June 2009

1989 and all that

SABMiller twenty years on │We seem to know what we mean when we remember “1989”: images of jubilant crowds standing on top of the Berlin Wall are vivid in our minds. But when we reflect on the seismic changes that came with it – the collapse of the Soviet Union, the end of the Cold War, the rise of American hegemony – 1989 feels like ancient history.

Still, the ruptures of 1989 heralded in an era of accelerated globalisation. As China, Russia, India, the nations of eastern Europe and Latin America began to deregulate and liberalise their economies, many brewing companies pursued a feisty acquisitions policy to establish beachheads. But only a brewer from South Africa knew that it would take more than clever deal-making for a company to grow sustainably: a belief in people, a brand-led culture and a long-term vision. Twenty years after they embarked on their international expansion scheme, SABMiller rank as the world’s only truly global brewer.

Two decades ago, when South Africa was still run by an apartheid regime, when international sanctions were in place and foreign investments for South African companies out of the question, South African Breweries’ (SAB) executives understood that events in the former communist block countries would change the rules of the game in the brewing industry forever.

While peaceful protesters were chipping away at the Berlin Wall with hammers and pickaxes, SAB’s top brass were already planning for “the day after” – the end of apartheid. Although apartheid would only be done away with in 1994 with South Africa’s first free elections, it was at the end of the 1980s that SAB saw a window of opportunity opening up in the rest of Africa, in China as well as in central and eastern Europe.

In 1989, when Graham Mackay, then Managing Director of SAB and today CEO of SABMiller, put a team together to outline an international beer strategy, the brewer was still a highly diversified conglomerate both protected and restricted by the high walls that apartheid had erected around the country. For SAB, having grown volumes and earnings at about 18 percent annually throughout the 1980s and enjoying a market share of 98 percent, the need to diversify had been strong.

Hence SAB had acquired stakes in hotels, in a Coke bottler, a wine company, a supermarket chain, in furniture factories, shoe factories, and fashion stores among others. At some stage one out of five SAB employees worked in these companies.

Yet, despite these business sidelines, SAB always knew that their future as a company was with beer. Consequently, they began to benchmark themselves against the world’s major brewing companies to become an extremely efficient and low-cost beer producer. “Even in the depths of apartheid, when the country was isolated,” Graham Mackay said in an interview with BusinessWeek last year, “we still would travel the world comparing our operating practices with those we found overseas, and studying how the Americans ran their wholesaling system, how the Germans ran their quality. There was benchmarking all the time.”

In those apartheid days, SAB maintained their competitive edge through low-cost production and the recruitment and retention of highly skilled, ambitious people. It helped that SAB was a powerful economic force in South Africa – the third largest conglomerate behind De Beers and Anglo American – and that they enjoyed the reputation of a liberal company, thanks in part to their English (rather than Africaans) origins and corporate culture.

The plan which was developed by SAB at the end of the 1980s concluded that the brewer’s international expansion into emerging markets was to be financed by selling off all non-beverage South African investments with the exception of Southern Sun, the hotel chain. The disposals began in 1992 and were completed in 1998.   


“If I can make it there, I’ll make it anywhere”

Looking back, SAB’s international expansion was as much geographical as it was structural. First they ventured into emerging markets, where general circumstances may have been adversarial yet beer consumption was growing, then they took on mature western markets where beer consumption was stagnating if not in decline but societies were stable. Only in a final step did they begin to buy beer brands which they could turn into global brands. If that reads like an ideal case of globalisation - from basic market conquest to the high art of international brand building – well, it probably was. And, even more remarkably, it had been planned that way right from the start by Mr Mackay and his team of trusted South African managers.     

With a little seeding money and no beer brand of any international potential to speak of in their portfolio SAB began their shopping tour in 1992. Eastern Europe was quickly identified as an attractive market, yet SAB did not risk entering Russia immediately without having explored the beer business elsewhere in eastern Europe first. Poland seemed promising, yet at that time the Polish government was adamant that Polish citizens should benefit from the privatisation of the brewing sector. Next SAB looked at Hungary where they were the 13th international company to evaluate their options. The Dreher brewery in Budapest, which they focused on, was overstaffed with about 3,000 employees, broken, run down. Moreover, SAB would have been the third brewer (after Austria’s BBAG and Interbrew) to enter a market where beer consumption had been in decline for some time.

If they had approached the deal with business school rules in mind, they would have shied away from Dreher. But in the end a decision had to be taken and it was Mayer Kahn, SAB’s Chairman, who swayed SAB’s board by saying: “We have to start somewhere. We have to start learning”. That did it.

SAB’s turnaround of the Dreher brewery, which took three years and ten South African expats, underlines SAB’s emphasis on production and people. Above all it underlines SAB’s willingness to learn and to forge partnerships. SAB looked at local brands and developed these. And they relied on the people in each brewery to run it. Their human resources’ policy in those early post-communist days may seem harsh, but it proved effective. As Mr Mackay told delegates at the EBC conference in Budapest in 2001: “Fire all people who are over forty, watch carefully those between thirty and forty. But those between twenty and thirty: train, train, train.” 

1993 and 1994 saw SAB’s entry into Uganda, Angola, Mozambique, Tanzania and Zambia. When it came to expanding into Africa, SAB took the “opportunistic” approach – for lack of a better term. SAB looked at countries, where breweries were being privatised, such as Mozambique and Tanzania, or where the African National Congress had been in exile (Angola and Zambia) and South Africa enjoyed a positive reputation.

African governments at the time were reluctant to privatise their breweries. After all, given the lack of industrialisation across the continent, beverage companies are Africa’s major employers and major taxpayers. Relinquishing that control did not come easy to governments that had got used to having their hands in the tills of state-owned businesses.

But SAB proved to be particularly adept at reaching a consensus with governments and partners – so much so that Mr Mackay once said (reportedly): “If there was more of Africa we would be investing in it.”   

SAB did not attempt to crack Pierre Castel’s monopolies in western and northern Africa. The reason? At SAB they don’t mind monopolies themselves. Or rather, at SAB they believe that markets in Africa are too small to afford two or more players. When SAB did try to enter a monopoly market, as they did in Kenya against Diageo/Guinness-controlled East African Breweries, the brewer received some low blows and was forced to beat a hasty retreat. Yet, the attack on Kenya proved to Guinness and Mr Castel that it was better to come to some sort of understanding with SAB than to risk further attacks on their monopolies.

In 2001, after biding their time, SAB formed a strategic alliance with Castel whereby SAB exchanged a 38 percent interest in their African division (excluding South Africa) for a 20 percent stake in Castel's beer business. The two partners also agreed to seek investments in new African markets via 50-50 joint ventures. What is more, should Mr Castel, in view of his advancing years,  eventually decide to sell his group to SAB, SAB will control beer production in most African markets.

That was Africa ticked off.

Around the same time SAB expanded northwards in Africa, SAB targeted the Asian market, initially setting its sights on China. As Mr Mackay knew very well: you had to be in the much-hyped BRIC (Brazil, Russia, India, China) markets for future profit growth in order to have any clout with investors.

After negotiations with China Resources, SAB acquired joint control of Snow Breweries in 1994. Fifteen years on, Snow beer is China’s and the world’s biggest-selling beer brand. In 2008 the Snow range sold 61 million hl beer, ahead of the Bud Light range with 55.6 million hl. Besides, SAB’s joint venture (59 breweries) happens to be the major brewer in China.

Another BRIC country, India, SAB entered in 2000, taking a majority stake in Narang Breweries. Control of two more Indian brewers was purchased the following year. Through further purchases and joint ventures, SAB is India’s number two brewer today.

However, much touted though they may be, India and China are investments that will pay off in the very long-term only. SAB knew that more immediate profits were to be reaped in eastern Europe and in Russia. That’s why, in the mid-to-late 1990s, SAB did everything to set up shop in Poland (1995), Romania (1996), Slovakia (1997) and Russia (1998).

If SAB thought that Hungary had been a challenge, they did not know what lay in store for them in Russia. The Kaluga brewery they acquired was a real beauty. It had no equipment, no people, no brands, no distribution. Nevertheless, it was the 1998 Russian financial crisis (also known as the Rouble crisis) that persuaded SAB to invest in a local plant. SAB’s executives believed that the imported-beer segment would almost certainly dry out and only breweries with efficient domestic capacities would stay afloat.

SAB were proven right. In record time they built the brewery which after two years broke even. The business did really well between 2001 and 2007 - before the current economic crisis hit - and reached a market share of 6 percent by selling premium beer brands only.


White, male, brewer

1993 until 1998 marked the years of rapid international growth. SAB used their funds and their people wisely, knowing full well that timing was critical. A former SAB executive remembers: “We were better than the competition in emerging markets. And we had the people”. 

The fact that in those years SAB had so many skilled and dedicated people at their disposal has baffled many observers. At some stage there were more than 100 South African expats working for SAB in Africa alone. But let’s not forget that 1994 to 1998 were the years when Affirmative Action programmes back in South Africa forced SAB to promote black employees over white employees. As a result, SAB could take their pick from a pool of well-educated white males whose résumés said: “have suitcase, will travel”.

The business model that SAB introduced in each country sounds simple enough. Whatever they call it in corporate speak, it comes down to a localised organisation with each country headed by a “country baron”. As SAB did not have a powerful global brand they did not need a global structure to drive the business. Their synergies did not come out of production, but out of best practices, the transfer of people and the speed to implement.

The year 1999 was a pivotal year in SAB's history for a host of reasons. Seeking access to capital markets better endowed that those at home, the company in early 1999 shifted the headquarters to London and moved the primary stock exchange listing from Johannesburg to London. As part of their London listing, SAB raised several hundreds of million of pounds to fund further international expansion.

Raising funds for international growth was certainly one important reason for moving the primary listing to London. The other was to widen SAB’s shareholder base and reduce their dependency on South African shareholders (as well as the likelihood of shareholder opposition), who controlled 80 percent of the brewer’s share before 1999. By 2007 that figure was down to 18 percent. 

The most important transaction that year, however, was the acquisition of Pilsner Urquell and Radegast, two brewers in the Czech Republic, for USD 321 million with a combined market share of 44 percent.

Clearly, SAB felt that it was time they learnt handling an international beer brand. Mr Mackay believed then that the Pilsner Urquell brand had potential. Others, within SAB, thought that Czech beer was yesterday’s news and Pilsner Urquell an old-fashioned brand. Still, it was a brand SAB could play around with and use it as an entry in the mature markets of western Europe – markets SAB had no experience in. 


Learning competition

The first western European market SAB entered in order to “learn competition” – or what they call “learning in the market place” - was Italy. They must have thought their competitors real wimps or sissies for not being able to raise Italy’s per capita consumption figures (for years under 30 litres) to more “normal” European levels. Alas, no matter what they did at Peroni, which they bought in 2003 for USD 279 million, consumption would not go up. At any rate, they got the beer brand Peroni Nastro Azzurro out of the deal. Fortunately, this brand has proven to be sexy and popular with younger consumers in many markets around the world.

The year previously SAB had bought into another mature market by taking on the struggling Miller Brewing Company in 2002. Many explanations have been given for the bold move. Obviously, investors had SAB down in their books as an emerging markets brewer, whose discounted stock market evaluation reflected on this. Former SAB executives say that SAB needed a first world income stream (or boost their hard currency earning capacity, if you like) which only Miller Brewing could provide, to raise the value of SAB’s stock.

However, no one can rule out that SAB took refuge in Miller in order to escape a potentially lethal embrace by Interbrew. The botched or fictitious takeover scheme of SAB by Interbrew was widely reported in 2001.

Whatever the case, CEO Mackay with great ingenuity not only saved SAB from a hostile takeover, he also brokered a deal which allowed SAB the acquisition of Miller, the number two beer maker in the world's most profitable beer market. The deal effectively consisted of a stock swap with Miller's owner, Philip Morris Companies that was valued at USD 3.5 billion. SAB also took on USD 2 billion in Miller debt. Philip Morris (later renamed Altria Group) became the biggest SABMiller shareholder with a 36 percent economic interest and 25 percent of the voting rights (the total at which it was capped).

Although SAB have never liked big shareholders – remember how they diluted their South African shareholders’ stake by moving the listing to London and issuing more shares – Mr Mackay and his managers were pragmatic enough when it came to offering Philip Morris a stake. In plain English: without Philip Morris staying on board SAB could not have financed the deal. It was as simple as that.

Upon completion of the acquisition, SAB changed the name to SABMiller and became the world's number two brewer behind only Anheuser-Busch.

Latin America’s beer markets must have been on SABMiller’s radar screen for some time, yet it was only in 2001 that SABMiller gained access to El Salvador and Honduras. SABMiller’s major Latin American deal to date is the USD 8 billion-takeover of the Colombian brewery Grupo Bavaria in 2005. People familiar with the matter say that Mr Mackay succeeded in clinching the deal and woo the Santo Domingo family away from hitching up with Heineken because he agreed to give the family a 15 percent stake in SABMiller in exchange for 72 percent of Grupo Bavaria's stock. Heineken, according to the rumour mill, did not like the idea of a Santo Domingo on their board. Mr Mackay, ever the realist, decided to let the Santo Domingos in. Otherwise he would have had no deal.


If you can’t beat them …

Further up north in the U.S., the going had got too tough even for Mr Adami, SABMiller’s best operator on the ground, who had been brought in from South Africa to turn Miller around. When he had to acknowledge defeat, SABMiller did the only logical thing: team up with the number three in the market. In 2007 SABMiller and Molson Coors said they would combine their U.S. operations in a joint venture to create a business that will have annual sales of USD 6.6 billion and a 30 percent market share behind Anheuser-Busch.

The rationale behind SABMiller’s latest major acquisition – Grolsch in 2008 – is SABMiller in a nutshell. They came to the conclusion that Pilsner Urquell was not the global brand that lived up to all their requirements. Since they could not lay their hands on Heineken – much as they would love to buy that company – Grolsch seemed like the next best thing. Also, Grolsch offered them the opportunity to study a mature western European beer market in detail.

Critics argue that with only Grolsch, Peroni, Miller Genuine Draft and Pilsner Urquell in their international portfolio, SABMiller still lack a brand with established global credentials. But that raises the question: does one really have to have one of these more established international brands, considering that the international premium segment in markets around the world on average represents 10 percent of sales?

And who knows, if Mr Mackay plays his cards right, one brand might just drop into his laps. The business that many analysts would love him to buy is Mexico’s Grupo Modelo with the Corona Extra brand. Mexico has very promising demographics and Corona Extra alone has a 9 percent dollar share of the U.S. market. Admittedly, that would involve Mr Mackay overcoming several “ifs” – however, if one can pull off this feat, it’s him. 

When I began my research into SABMiller’s rise to global brewer that operates on six continents, has more than 200 brands, about 140 breweries, 240 million hectolitres of beer output (2008), and employs over 60,000 operations in 60 or so countries, I was struck how often people said to me “well, Graham [Mackay], said” … “Graham knew” … “Graham did” as if the company’s progress over the past twenty years solely depended on him. If this idea had been propounded by SABMiller’s PR department, I would have put it down to them consciously promoting the CEO cult. Since it was people who have worked for SABMiller or with them, I am more inclined to believe that a lot of SABMiller’s successes are down to them believing in people – to which Mr Mackay as one of the longest serving CEOs in the brewing industry and Chairman Kahn (who has been with SAB since 1966) bear testimony.

Over the past twenty years, Mr Mackay has put SAB on a steep learning curve. Given their background as a monopoly operator with the corresponding mind-set, he made them learn how to operate in competitive environments and how to develop global brands.     

You have to give it to him, Mr Mackay has shrewdly played with the expectations of the international investment community. When there was talk about “you have to be in BRICS” – he said “we are there already” (to the exception of Brazil). When they talked about a first world income stream, voilà he presented them with the Miller deal. And when the mantra changed from “you have to be among the top five companies in the world” to “you have to be among the top two in each market” he probably only shrugged his shoulders and said “done”.

True, the Russian beer market may have entered a period of decline, India will continue to progress slowly and the Chinese market may not have performed as expected. After 15 years in the market, SABMiller (and others) are far from pleased with what they have accomplished, but to put things into perspective: profit margins in China’s beer industry on average are as high as in Germany’s. SABMiller may take consolation from the facts that they did not overpay for their assets and that the business is cash-positive.

1989 and all that – that’s history. And SABMiller’s ascent to global player that I have recounted here is history too. But the people who masterminded it are not and serve as a powerful reminder that globalisation in the brewing industry did not happen because investors and bankers put artful deals together. No, globalisation was done on the ground. In the market place. That’s where it was won. By people.

And that’s where it can be undone too.

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