Under the leadership of chief executive Graham Mackay, SABMiller has downed one foreign brewery after another. The company, the world’s No. 2 beer maker by volume, after InBev of Belgium, embarked on an expansion strategy in the mid-1990s by buying into Russia, China and Eastern Europe. The debonair Mackay ramped up the pace after taking the helm at South African Breweries, as the company was known, in 1999, just as it was transferring its main listing from Johannesburg to London. He snapped up breweries from India to Italy and turned SABMiller into a truly global player with the $5.6 billion purchase of Miller Brewing Co. in 2002. Last year he bought a 72 percent stake in South America’s second-largest brewer, Grupo Empresarial Bavaria of Colombia, for $3.5 billion.
Now it seems that Mackay’s thirst for acquisitions has been slaked, at least temporarily. With an empire spanning 60 countries on four continents and brands including Miller Genuine Draft, Pilsner Urquell and Peroni Nastro Azzurro, SABMiller doesn’t lack for scale. Sales have more than tripled over the past four years, to $15.3 billion in the year ended March 31, from $4.4 billion in 2002.
The real issue for Mackay is profitability. He wants to grow his company’s existing brands and close the earnings gap with rival Anheuser-Busch Cos. SABMiller’s net income fell 5 percent in the year ended March 31, to $1.4 billion. That represented just 9 percent of sales, trailing the U.S. brewer’s net of $1.84 billion and 13 percent profit margin.
Restoring momentum at Miller is a key challenge. Sales at the U.S. business, which languished for years under the ownership of Philip Morris Cos. (now Altria Group), grew a modest 2 percent last year, the first increase since 1998. Aggressive discounting by Anheuser-Busch, targeting Miller’s economy and light brands, dented profits, though. Earnings before interest, tax and amortization, the company’s prefered profit metric, fell by 7 percent at Miller last year, to $454 million. North America accounts for 32 percent of group sales but just 21 percent of ebita.
Emerging markets drive growth at SABMiller. South African brewing generated 36 percent of ebita last year, Latin America 15 percent and Africa and Asia 14 percent. That reliance comes at a cost, though. SABMiller’s stock price tumbled in line with the sell-off in emerging equity markets this spring, falling to £9.85 ($18.13) in late June from a peak of £11.96 in late April.
China, which surpassed the U.S. in 2003 as the world’s largest beer market by volume, is a bright spot for Mackay. His company owns 49 percent of China Resources Breweries — China’s second-largest brewery and owner of Snow, the top-selling brand — and it expects double-digit sales growth. Although Anheuser-Busch, which owns the Tsingtao brand, said its Chinese profits declined slightly in the first quarter, SABMiller’s profits in that market are increasing.
Mackay, 56, obtained a bachelor’s degree in engineering from the University of the Witwatersrand in Johannesburg in 1972. He took a job with British Tyre & Rubber Co. in South Africa before moving to SAB as an information technology manager in 1978. When he isn’t minding the shop, he relaxes by playing squash and spending time with his second wife and his young family: he has three children under the age of six. He spoke recently at SABMiller’s London office with Institutional Investor Senior Writer Ben McLannahan.
Institutional Investor: Where does the Miller brand go from here?
Mackay: There’s been a shoring up and a tremendous strengthening of the Miller organization, creating a more competent and powerful competitor. And the management of our wholesaler network has been improved.
Of course, there are some residual problems to overcome. It needs to create more momentum in the “worth more,” or premium, segment. And of course, this is a highly contested market and progress is incremental. Once it was obvious that Miller was becoming much more of a force to be reckoned with, Anheuser-Busch resorted to a huge amount of pricing activity, in different forms and at different levels of the market. But I think that over time our efforts to run a tighter ship will continue to pay off.
Are margins being threatened by pricing pressures elsewhere?
Yes. With the entry of AmBev [owned by InBev] into Ecuador and Peru, for example, there’s a fair amount of price activity. In Russia there’s been a lot of growth in the commodity section of the market. That exists in some of the Eastern European markets too.
China is fiercely price-competitive and always has been. There is a vast stock of commodity beer at the lower end of the market. The trick is to raise one’s brands over that, and we’re managing that pretty well. China is already a big bet for us, and a long-term one.
Your exposure to Western Europe is much smaller than that of some of your competitors. Is that a strength or a weakness?
Western Europe has some large profit pools, but they’re not behaving in a particularly exciting way, and in fact, in some of the bigger countries, they’re in absolute decline.
The region does have some other advantages, though, not least in the drift toward higher-priced premium products. If one is able to ride that trend to one’s own advantage, there is growth to be had. There’s also the fact that Western Europe is a source of aspirational brands, which can be leveraged around the world.
The global brand equity of a Heineken or a Stella Artois is much bigger than that of any of your brands. Are you looking to develop your international big sellers?
Yes, absolutely. Our international brands are growing faster than the portfolio as a whole and are growing faster than the world’s industry, so they’re increasing market share.
But you must remember that beer is fundamentally a local business. The proportion of the global beer volumes made up of brands selling outside their country of origin is tiny — probably less than 5 percent. Even a “global” brand like Budweiser is hugely dominated by its presence in the U.S.
That’s why our focus is local, first and foremost, and it’s why we believe so strongly in locally accountable management. The whole of the beer value chain is run locally, with local procurement, local production, local distribution and local laws and customs, which can vary dramatically from country to country. What kind of retail outlets are there? Is it a café society? Do families stay together when they socialize, or is it stratified by age? The management of those local brand portfolios, and how it all hangs together, requires a great deal of local knowledge and touch.
You’ve said you want to focus on your existing portfolio, but SABMiller has been linked with a number of big players in recent years — Scottish & Newcastle, Carlsberg and Heineken among them. Is another big acquisition off the agenda?
Most of the world’s beer markets are fairly concentrated oligopolies. But if you look at the map of who is where, combinations between a number of the top players can be countenanced with not that much value leakage through antitrust regulation or competition-authority interference.
However, there’s a high degree of residual family ownership and control in the beer industry, because it dates back hundreds of years. A lot of the top players, such as Heineken and Carlsberg, are controlled by families or foundations, and a number of the other groups are controlled by a larger parent entity, which would make it more complicated to do a deal involving only the beer asset—Foster’s, San Miguel and Femsa would be examples.
Concerns about emerging-markets volatility have sent SABMiller’s share price down. Does it worry you that SABMiller is seen as an emerging-markets stock?
I don’t like it. Since 2003 we’ve moved from trading at a nagging and seemingly irreducible discount to the sector to trading more or less in line. We seem to have gone back to a discount now. I find it somewhat curious that this volatility has reemerged in our share price given the broad spread of investments and the uncorrelated nature of most of the risk positions that we have. I’d have to think the current movements are more about sentiment than fundamentals.
Our proposition is global. We see ourselves able to compete in more or less any of the global brewing markets. Yes, we certainly have a bias toward emerging markets, but that’s something of which we’re completely unashamed, because that gives us the growth profile we’ve been trying to build up.
