The Perfect Brew – How SABMiller Rose to the Top

When researchers Plato Logic announced in February that SABMiller had overtaken InBev as the world's largest brewer, it completed a remarkable transformation for a company that had until 20 years ago been a predominantly provincial concern.

Although the proposed merger between InBev and Anheuser-Busch threatens to remove SABMiller's number one ranking, there is no disputing the company's status as a heavyweight international brewer – it currently operates more than 200 brands worldwide including Pilsner Urquell, Peroni Nastro Azzurro, Miller Genuine Draft and Grolsch, and generated revenue of $21,410m in the year ended 31 March 2008.

Creating a market

South African Breweries (SABMiller) was formed in 1895 with share capital of £350,000.

Its first beer, Castle Lager, was launched from a newly commissioned brewery with a capacity of 50,000 barrels a year and immediately proved successful.

"The drink of choice in South Africa's dusty prospecting fields was raw potato spirit mixed with tobacco juice and pepper," explains SABMiller spokesman Jonathan Oates. "So its small wonder beer was well received."

The company spent the best part of the next 100 years stimulating growth by merging with and acquiring companies with which it shared certain synergies such as Union Glass (for bottles) and the Stellenbosch Farmers' Winery. As the 20th century progressed, SAB targeted unrelated sectors as a means to achieving growth and widened its mergers and acquisitions [M&A] policy to secure interests in companies as diverse as Shoecorp, Southern Sun Hotels and the Lion Match Company.

SAB goes abroad

Everything changed in the 1990s. The release of Nelson Mandela from prison led to the opening of international trade gates that had been shut for years and SAB decided to apply it's tried and tested M&A approach to the market it knew best: beer.

With the experience of taking over several African breweries under its belt, SAB made its first foray into Europe in 1993 with the acquisition of Hungary's largest brewery Dreher. The following year, it took joint control of China's second largest brewery and moved into Poland, Romania and Slovakia followed shortly after. The expansions were so successful that in 1997 all non-core business activities were sold or closed down.

In the intervening years, SAB has followed a vigorous M&A programme with breweries around the world including Grolsh, Pilsner Urquell and Miller Brewing Company, with which it merged in 2002 to become SABMiller, coming into the fold. This refinement of the company's traditional M&A policy, combined with a cultural sensitivity and adaptability, has put SABMiller where it is today.

"It is SABMiller's sensitivity to other cultures, having come from a multicultural society, that differentiates its global style," says Oates. "From its emerging market beginnings, the company has also developed an ability to adapt and a cultural curiosity that has served its expansion interests positively."

Refining the supply chain

When SAB bought Ohlsson's and Chandlers Union Breweries groups for £400,000 in 1956, they set a blueprint for how the business should operate. Capturing control of their rival brewers enabled SAB to rationalise production and distribution facilities while eliminating much of their competition in one fell swoop, a rationale that works on a global scale to this day.

"Because efficiency is part of our day-to-day management, we’ve already gone a long way down this route and the opportunity for further, large, cost-cutting projects is limited," says Oates. "Nevertheless, the rise in commodity costs compels us to do whatever we can to counteract the squeeze on our margins. We've seen good progress across the group, notably from Miller which again made important savings in its brewing operations while producing less waste and using fewer resources."

Another important aspect of improving group efficiency is improving the company's routes to market. SABMiller is working hard to remove costs and ensure that the right products reach the right outlets in the right condition, accompanied by the right messages and merchandising material.

"Colombia and South Africa are just two of several businesses that are working hard to re-engineer their sales and distribution structures to make them more efficient and effective," says J Oates. "In markets such as the US, where the business does not directly control its distribution, we're making it easier for distributors and customers to do business with SABMiller and are looking for ways to add value to their operations as well as ours."

Think global, act local

SABMiller's success has been built on becoming a global company that thinks and acts locally. When it acquires breweries in new countries, it does not try and impose the values and business practices that are successful elsewhere for the sake of it, but is instead sympathetic to each area's particular nuances.

"SABMiller's tactic has been to buy local brands and then invest intelligently in emerging markets rather than exporting one homogeneous brand to every corner of the globe and the origins of the company have played an influential role in this strategy," Oates says. "We were also the first global company to see the beer market as a series of local brands, identifying that you can't impose a brand, a way of thinking or business, the key is to customise things to the local market."

This also works with marketing. Since 1963 SAB has demonstrated a flair for marketing, when the company arrested a decade-long slow down in South African beer consumption by using targeted marketing methods to tempt drinkers back into the market. Marketing is a key ingredient in SABMiller's growth story – if you don’t sell you don’t grow – and, with more than 200 brands worldwide, it is a complex challenge to keep getting it right.

"Managing full portfolios of brands in this way is more complicated than the single-brand approach," says Oates. "A premium beer with an unusual heritage requires different marketing compared to a mainstream brand – something more akin to viral marketing that gives consumers a sense of having discovered it for themselves. Brands targeted at the clubbing generation of legal age drinkers might be best communicated through new media such as the internet, as we’re doing with Miller Genuine Draft in Russia. Among the skills we need, we're learning the best ways to communicate with multiple target audiences."

The next challenge

One way that SABMiller hopes to generate growth in the future is through taking advantage of economies of scale. However, in a predominantly local business, that isn't as easy as it seems, even for a huge global player like SABMiller.

"It is important to remember that beer is a local business and global acquisitions do not automatically bring about strong synergies," Oates says. "Global beer brands are still in their infancy and it will take time before a global company with global brands can actually make a difference at such a scale.

"SABMiller appreciates that global size alone doesn't get you anywhere in the beer market and that it is more important to leverage it to your advantage in the local markets. Within a country, size is very relevant and if you're the market leader in a country and work efficiently, you normally make more money than your rivals."

So what does the future hold for SABMiller? With InBev and Anheuser-Busch's merger due for completion by the end of the year, SABMiller's ranking as the world’s largest brewer is in danger of disappearing less than 12 months after taking the crown. Can the M&A policy that has been so successful so far take them back to the top of the pile?

"The brewing industry is not a natural candidate for rapid consolidation, but privatisations in Eastern Europe and other parts of the world have created many opportunities," Oates says. "Businesses such as SABMiller have grown quickly and now have an aggressive international management with the resources to match their ambitions.

"There are parts of the world in which SABMiller would like to strengthen our position, such as South East Asia and also South America and we will continue to monitor these markets for opportunities that may arise."