The Beer Wars Come To A Head

It almost looks like a rival's revenge. By bidding for China's Harbin Brewery Group, Anheuser-Busch Cos. (BUD) threatens to snatch a choice asset from London-based SABMiller PLC (SBMRY), which owns a minority stake in Harbin. At the very least, SAB faces a bidding war that will force it to pay as much as $500 million to defend its turf in China. The mainland is a must for any global beermaker, but that's still a lot of money for any brewer to sink into the Chinese market.

It's probably coincidence, but the battle in China comes as SAB's Miller Lite is gaining on Anheuser's Bud Light in the U.S. Still, the rivalry in China shows how fiercely megabrewers are competing as the fragmented global beer market consolidates. "Harbin is one of the few Chinese breweries open to takeover," says Anthony Geard, who follows SAB for Investec Securities in London. "At the same time, Anheuser-Busch has the opportunity to give SAB a bloody nose, so why not?"

No one doubts SAB's ability to go one-on-one with St. Louis-based Anheuser, which has almost half the U.S. market. Since the former South African Breweries PLC began breaking out of its home base a decade ago under the leadership of CEO Graham Mackay, SAB has used acquisitions to build beverage revenues fivefold, Merrill Lynch & Co. (MER) estimates, to $12.6 billion. It is now the world's No. 2 brewer after Belgium's Interbrew -- which is taking the top spot via its merger with Brazil's AmBev (ABV) -- and a notch above Anheuser. SAB is also one of the most profitable brewers. For the year to Mar. 31, Merrill estimates, earnings rose 74%, to $514 million. This year, it expects earnings to rise an additional 18%. In London, the stock is up 62% in the past year.

SAB's boldest move was its acquisition in 2002 of Milwaukee's Miller Brewing Co. from Philip Morris Cos. The $5.6 billion price was seen as high, given that top-selling Miller Lite was in decline. But Miller Lite is bouncing back following a management shake-up, new labels, and ads that capitalize on the low-carb craze. "They drifted down over a decade, and suddenly they're growing at double-digit rates," says Benj Steinman, editor of Beer Marketer's Insights, a newsletter in West Nyack, N.Y. "That's not something we've seen in the beer business."

It seems unlikely that a South African brewer would become a global player in a decade. But ambition, talent, timing, and cash from a near monopoly at home did the job. South Africa's first democratic elections, in 1994, ended its pariah status and allowed SAB to expand abroad. New markets were also opening in Eastern Europe. SAB moved quickly into countries such as Hungary, Poland, and the Czech Republic; in 1999 it shifted its primary share listing to London. "There was a restlessness, a desire to compare ourselves with the best in the world," Mackay recalls.

FAMILIAR DIFFICULTIES. SAB's earlier confinement to Africa proved a blessing in disguise. Experience in developing countries, with their primitive distribution networks and antiquated production, was invaluable in Eastern Europe, which was rich in brewing tradition but suffered a plethora of regional brands with iffy quality and zero marketing. "It was a difficult market, but difficult within our frame of reference," says Alan Clark, managing director for Europe. SAB closed down inefficient breweries and focused on the strongest brands. Now, Czech-made Pilsner Urquell, from the city of Pilsen, is growing in its home market while finding new drinkers in the rest of Europe and the U.S.

The task is to keep the momentum -- especially in the U.S., where Miller brands account for 23% of the market. Miller Lite boosted sales by 12.4% in the year through March, according to Merrill Lynch. Much of the turnaround was the result of a new focus on marketing. Miller has added 200 sales and marketing staff. SAB is spending 50% more than last year to advertise Miller Lite and Miller Genuine Draft from April through July, the peak beer-drinking season. Norman J. Adami, Miller's chief executive, traveled the country promising distributors that beer would be a higher priority than it was under Philip Morris. "We are beer people, just like you," he told them.

SAB also spent months on consumer research. One finding: Miller wasn't stressing quality. "It had neglected to remind consumers that it is a very fine beer," says Mackay. Current ads poke fun at Budweiser, the "King of Beers," with the line: "America, you don't need a King. You need a president -- of beers." The final thought is: "Choose taste."

Miller Lite is also benefiting from its low carbohydrate count. While it is lighter than Bud Light, analysts wonder if that advantage will lose its fizz as consumers realize the difference in carb content among light beers is slight. More important, Anheuser hasn't fully unleashed its marketing force. Bud Light is already lowering prices in some markets -- and could pound Miller Lite if it goes further. "A-B has the wherewithal to do almost anything it wants," says Frank C. Walters, director of research for trade publisher M. Shanken Communications Inc. in New York.

PREMIUM PROFITS. SAB will also find it harder to keep up its acquisitions. Much of its growth is the result of dozens of small deals, such as the May 10 purchase of Aurora, which boasts one brewery and 5% of the Romanian market. But it's getting tough to find little breweries. "The biggest issue for everyone is lack of acquisition targets," says Kevin Baker, director of alcoholic beverages at Canadean Ltd., a British market researcher.

SAB also lacks an international premium beer. That's the most profitable segment and one of the few growing in developed countries. Pilsner Urquell and Italy's Peroni Group, acquired last year, lag Interbrew's Stella Artois and Beck's in recognition. And nobody comes close to Heineken (HINKY). In places such as Poland and Spain, the Dutch brewer has built a distribution network by buying local brands and then introducing high-margin Heineken. "It was hard enough for Heineken," says John W. Walsh, a marketing professor at Swiss business school IMD International. "SAB is late to the party."

No one underestimates SAB, though. Analysts like its depth of management talent. SAB nurtures execs by letting them soak up experience around the company. Europe chief Clark worked in human resources, marketing, and sales and distribution -- and ran a brewery -- before leaving Africa. "It's not rocket science," Mackay, also a South African, says of the beer industry. "What it requires is operational excellence." That management philosophy will never go flat. By Jack Ewing in London, with Joseph Weber in Chicago

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