South Africa: SABMiller's highly acquisitive personality makes it the most extensive beer group

SABMiller's acquisition of South American beer group Bavaria ensures that it is geographically the most extensive beer group and that, among the major global players, it has the greatest exposure to emerging markets, The Business Report posted June 6.

When SAB first listed in London in 1999, its profile as an emerging market beer group held back its share rating. Three years later the acquisition of the second-largest beer group in the US, Miller Brewing, not only helped to ensure that SAB would be big enough not to be swallowed up, but also gave it a position in the single largest First World market.

It has also helped that the world investment community has become familiar with the highly acquisitive SABMiller, its management and its widespread portfolio and has also become familiar with the strong profit growth that can come from emerging markets.

Results for the 12 months to March would seem to justify management's affection for emerging markets. They indicated that there was little relief from the difficulties facing Miller, but that most other operations, which are largely in emerging markets, continued to show reasonable progress.

At the recent results presentation, group chief executive Graham Mackay said Miller had concluded a three-year turnaround plan and "all aspects of its business have been substantially reshaped to ensure it is a more able and vigorous competitor in the US".

However, Miller is prevented from converting this progress into bottom line improvements due to the aggressive pricing of Anheuser-Busch's Budweiser, the substantially largest player in the US. Budweiser's sustained discounting severely restricts Miller's opportunity to gain market share and limits margin improvement.

Added to this were sharp increases in aluminium prices of 75 percent over 12 months in the US, where cans represent 48 percent of the product mix.

Analysts now seem less optimistic about SABMiller's US performance than they did a year or two ago. They are concerned that most of the performance is coming from one product, Miller Lite, and that there is little excitement from the rest of the portfolio.

In this context the Bavaria acquisition is good news as it makes the group considerably larger and therefore less reliant on Miller. While there is a risk the group will not achieve its operational efficiency targets for Bavaria in the next five years, the feeling is that SABMiller has better potential in Latin America than in the US.

In addition, the group's strong cash-generating ability is expected to pump enough cash in the next few years to ensure the debt burden from the Bavaria acquisition will not be of a long-term nature.

But back home in South Africa, SABMiller faces challenges in its core market, which suffered a marginal reduction in volumes for the first time in years. This market, which accounts for 80 percent of beer volumes sold by the local division, Beer South Africa, largely comprises blue-collar workers.

Tony van Kralingen, Beer SA's managing director, said the reduction indicated that this core segment of the population was not sharing the benefits of growth. He believed that the government's accelerated and shared growth initiative and its increasing focus on infrastructure development should help this segment of the population to enjoy the benefits of growth.

However, Julian Wentzel, the head of research at First South Securities, believed Beer SA's above-inflation price hikes in each of the past two years had exacerbated the situation.

"It's all about price, and in the last two years price increases have been ahead of inflation. This has hit demand," Wentzel said. He added that consumers at this end of the market had been hard hit by taxi fare increases.

Beer SA's price increases in its core market could be behind a 40 percent hike in the sales of sorghum beer in South Africa.

There was 45 percent volume growth in premium beer brands, which enabled Beer SA to increase beer volumes 1 percent despite poor weather and the absence of an Easter holiday period in financial 2006.

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