Ten years ago, when South African Breweries moved its headquarters to London, it sought to become one of the major players in a consolidating global beer business. The plan not only made the brewer, now known as SABMiller, the world’s second-largest brewer, it also positioned the company to succeed in both good times and bad, including one of the worst economic recessions in a century.
The architect of that plan, Chief Executive Officer Graham Mackay, says the company met its global ambitions, but even he did not anticipate the rapid pace of consolidation during the past decade.
“Certainly, in the most general conceptual terms, we’ve achieved pretty much exactly what we set out to achieve,” he says. “But I certainly can’t claim that I had a detailed roadmap of that in my mind, for the very simple reason that, although we anticipated that the beer industry worldwide would start to consolidate and to some extent globalize, we didn’t have any developed idea as to how fast that would happen, the extent to which that would happen, and what it would involve in the medium and long term. We simply wanted to set ourselves up for that process so that we could participate in it.”
According to reports, the company spent nearly $17 billion on acquisitions during the past decade, including Miller Brewing Co. in the United States, Grolsch in the Netherlands and Bavaria in Latin America.
Today, SABMiller operates in 75 countries and owns more than 200 brands. Its lineup includes global beers — Miller Genuine Draft, Grolsch, Peroni Nastro Azzurro and Pilsner Urquell — as well as regional products and dozens of locally relevant brands. The business is fairly evenly represented in six regions, with 28 percent in Latin America, 22 percent in Europe, 21 percent in North America, 15 percent in Africa and Asia, and 14 percent in its original market in South Africa.
The exposure to both developed beer markets and emerging markets has positioned the company to weather even the most recent economic downturn.
“We did try very hard to position the business as a growth business, and that, I think, has served us in good stead,” Mackay says. “We’ve moved into a variety of emerging markets of the world, and those are not all correlated to each other. So if one part of the world is being particularly hard hit, for instance in the current downturn, we nevertheless have positions to counterbalance that in places like Africa and China, which have been much less hit.”
Local attitudes
SABMiller’s operating philosophy fits the adage “think global, act local.” Mackay says the company works to develop locally relevant brands, advertising and go-to-market strategies, but uses its global clout where it might be beneficial.
“Our very local approach — creating local portfolios, creating local brands which are attuned to local customers’ needs — we think gives it a sort of robustness and resilience, which serves us in good times and bad,” he says.
But he adds: “It presents us and the other players in the industry with a real dichotomy, I suppose — that is how to justify size, how to derive benefits of size through economies of scale, while maintaining enough local connection and enough local focus to be relevant to all of these local consumers through local brand portfolios.”
Balancing the local and global parts of the business is part of the company’s current evolution. In areas where global size is not necessarily beneficial, it focuses on what Mackay calls “economies of skill.”
“We develop ways of brand portfolio management, individual brand management, distribution management and so on, which we feel are superior,” he says. “We try to make them better than what a purely local company could come up with in its own right.”
Differences throughout SABMiller’s markets range from consumer taste preferences to distribution systems, minimum age requirements and differences in returnable and one-way packaging, calling for local expertise.
“At the one end of the spectrum are places like several in Latin America and in Africa, where effectively there’s no liquor licensing law, even things like minimum drinking age legislation,” he says. “It’s a complete wholesale and retail free for all ... On the other end of the spectrum are very highly regulated and restricted markets, so we have to learn how to operate across that spectrum.”
One example of the company’s success in navigating local terrain is its business in China. The company is arguably the most successful brewer to enter that market and operates through a joint venture with China Resources Enterprise. The partnership’s Snow brand is the company’s top-selling beer by volume at around 61 million hectoliters, and in fact, the largest beer brand in the world by some volume estimates. It also is one of the only brands to approach national status in China.
Like much of its business, SABMiller built Snow through both acquisition and organic growth. Rather than one brand, Snow actually is a family of local brands acquired over time that were assimilated under the Snow name.
Mackay says China has been a particularly strong part of the business in the current economy.
“It’s been, in the latest economic downturn, extraordinarily robust,” he says. “Whereas every other major market in the world has come down in growth terms, generally to about zero or even negative territory, our Chinese business continues to grow.”
He points out, however, that the beer market in China provides volume but very low margins, at least for the time being.
“It’s a very low-priced market,” Mackay says. “Prices are low and margins are extremely low. When we went in there, which was in about ‘93 or ‘94, there was a substantial excess of capacity in the market — very low-quality capacity and low-quality beer being produced by a large number of different players. What we’ve tried to do over the years is forge a business as a consolidator and drive quality much higher, and institute branding, much more formal distribution systems and so on, into what was a very commodity-based, unbranded market.
“We’ve been more successful probably than any other major player there in the sense that we’ve always made a profit,” he adds. “Margins are still very thin, but they are improving quite rapidly right now.”
SABMiller also has been at work consolidating more developed beer markets, including North America during the past year. Its joint venture with Molson Coors created MillerCoors in 2008, giving it about 30 percent of U.S. beer sales.
The company acquired Miller Brewing Co. in 2002, with the primary goal of turning around the Miller business. But Mackay says it knew then that other acquisitions or joint ventures eventually might be part of the U.S. picture. A merger between the second- and third-largest U.S. brewers had been talked about in the industry for some time, but in 2007 the idea took shape formally.
“We’d made the business a little bit more profitable, certainly more stable, but to get really attractive returns, we needed a structural change, and that’s effectively where the Coors deal came in,” he says.
In Mackay’s estimation, the move “revolutionized that business, certainly in terms of profitability, and also stability, structural stability.”
He explains that the merger took costs out the business, particularly in the area of brewing and supply chain efficiencies. He says the group is well on its way to its stated goal of saving $500 million a year in cost synergies.
“Probably more important than that in the long term is that we felt that putting those brand portfolios together though the wholesale network would allow us to create a much more attractive portfolio for our distributors and encourage them to apply the right kind of resources to our portfolio, and would free up marketing dollars to support the brands better,” Mackay says.
Sustainable growth
In addition to industry consolidation, SABMiller has set its sights on greener operations, which include a newly released water footprint report, created in conjunction with the World Wildlife Fund, as well as a stated goal last year of reducing water consumption by 25 percent per hectoliter of beer by 2015. This year, it added the intention to reduce fossil fuel emissions by 50 percent per hectoliter of beer by 2020.
When the emissions target was announced, Mackay said: “Climate change is an issue of growing global concern; with likely impacts on weather patterns, water availability and crop yields our business will feel direct effects,” and added that he expects the company to reach that goal, despite growth in production volume.
The company also is a member of the U.N. Global Compact, along with other key beverage industry players like Coca-Cola, PepsiCo and Heineken. In fact, SABMiller is a Coca-Cola bottler in South Africa, and cited its partnership with the soft drink company and their combined effort to reduce carbon emissions in that country in its 2009 Sustainable Development Report.
Other efforts so far include a 50 percent carbon reduction in its Czech business Plzenský Prazdroj, the purchase of renewable energy sources in India, and an investment of $145 million to implement what the company calls “super returnable” bottles in Colombia. The bottles are lighter, shaped to reduce wear during transportation and have a special film to protect the surface of the glass so they can be used twice as often. The company also announced an investment in biofuel research in the United Kingdom this year.
In addition, it continues to invest in technology and advertising, despite an economy that has some companies putting off such plans. It announced a new research brewery in the United Kingdom this year that will focus on new technologies and processes that will enhance beer quality and shelf life. Plans for the facility include testing new raw materials and simulating extreme brewing conditions to challenge current methods.
While the technologies discovered in the research labs likely will be applied to brands worldwide, brand building and marketing remain local considerations.
“We apply a lot of thinking and technology to how to manage … firstly, how to segment the market at the local level so that we identify the attractive value propositions in the beer or ‘near beer’ space, and then make sure that we have a portfolio of individual brands that address every interesting piece of that,” Mackay says.
“That’s quite a big job because you obviously can’t have a portfolio of 65 brands in a country, and equally, you can’t do the job with two or three,” he adds. “So the number of brands, where they’re positioned, their price, their emotional proposition, how you hook into the consumer’s needs, aspirations, local allegiances, loyalties, how they link to sponsorships, sports, other properties — all of that kind of stuff — is a big part of that.”
Ultimately, it is those qualities and considerations that have made the beer business attractive to Mackay for the 31 years he has spent at SABMiller.
“It’s a fun business,” he says. “At its heart, it’s a very simple product. It’s a product which, when used as intended, makes people happy and makes life a happier place to be.
“It’s also a business that’s been around a long, long time; it’s one of the oldest industries on earth,” he adds. “So you’re dealing with … very interesting businesses owned by people — even when we’re dealing with mergers and acquisitions — people who really have a strong emotional linkage to their business and believe strongly in it and want the best for it.”
The previous 10 years for SABMiller have been dominated by those mergers and acquisitions, and Mackay has said a number of times that the company will be involved in future consolidation. But he says the next decade and beyond likely will rely more on execution and brand premiumization than acquisition.
“We’ve come through the phase of global consolidation; that can’t happen again,” he says. “The industry is now a relatively highly consolidated industry, and one of the things that you can say about the future is that growth in the future is going to be determined much more by in-country execution and value growth through trading up and new products and innovation than through M&A.
“So what we’re trying to do is turn our business more and more into one which can identify local opportunities, local trade-up opportunities, local efficiencies, new local innovative propositions, and drive value from existing markets … That’s what I’d like to see the business becoming.”