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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