South African Breweries

South African Breweries (SAB) is an international company committed to achieving sustained commercial success, principally in beer and other beverages, but with strategic investments in hotels and gaming. The company was founded in 1895 in response to the demand by gold miners in the Johannesburg region. Prior to the introduction of beer, the miners’ drink of choice was raw potato spirits mixed with tobacco juice and pepper. No wonder why the new beer was well received!

Because of Apartheid, South Africa was excluded from the United Nations from 1974 to 1990 . Due to the political isolation experienced throughout these sixteen years, SAB pursued a domestic policy of purchasing cross-holdings in other South African firms, and eventually controlled 98% of the South African beer market. Cross-holding was a form of capitalization for SAB because the local capital markets were drying up due to the international boycott of the country.

In the late 1990’s, per capita beer consumption in South Africa was in decline, and SAB was working hard to sustain revenue growth. The fall in consumption is attributed to a number of factors, including the bad South African economy.

Now that South Africa’s economy is open to the world the result will be an increased globalization strategy, necessitating an increased focus on, and benchmarking against, world-class standards in order to ensure competitiveness.

To what extent is a global strategy or a multinational strategy effective in the brewing industry?

There are two basic alternative strategic orientations in every industry -a multinational strategy and a global strategy . Beer companies expand outside their domestic markets for several reasons -to gain access to new customers, to lower costs and become more competitive on price, to leverage its core competencies, and to spread its business risk across a wider market base. The strategies a beer company uses to compete in foreign markets have to be situation-driven -cultural, demographic, and market conditions vary significantly among the countries of the world.

The following chart has been designed to portray the pros and cons for a beer company in deciding for a multinational or a global strategy:

There are four key factors that drive an industry toward globalization :

·The market factors that lead an industry toward globalization are: homogeneous market needs, global customers, shortening product life cycle, transferable brands, and common international distribution channels. In the case of the beer industry the market needs are not homogeneous as there is a wide variation of taste and prices, there hardly is a global customer, the international product life cycle is not a major factor, and on top of all that, the distribution channels are very much local, and vary on a country-to-country basis.

·The economic factors that lead an industry to globalization are: worldwide economies of scale in manufacturing and distribution, steep learning curve, significant differences in country costs, rising product development costs, and logistics. In the case of the beer industry the economies of scale in manufacturing and distribution are regional or national, not global. The learning curve is not a factor, and although country costs differ, it is not a traded product. The development costs are low, and sourcing efficiencies are unlikely at global level. Logistics not favorable for global strategy.

·The environmental factors that lead an industry toward globalization are: falling transport costs, improving communications, government policies, and technology change. In the case of the beer industry the transport costs only affect super-premium imports. Communications may create some brand awareness spillover but otherwise it is not a factor. Government policies make new foreign entry and investment easier. Technology change is pushing up minimum economic size in manufacturing, but still below national levels.

·The competitive factors that lead an industry toward globalization are: competitive interdependence among countries, global moves of competitors, and the opportunity to preempt a competitor’s global moves. In the case of the beer industry the competitive factors are: little competitive interdependence among countries, firms are quick to match each other’s moves, most beer companies are pure “beer companies” -not diversified-, and face slow growth in their home markets. One of the ideal alternatives for the beer industry is to acquire an existing brewer in a new market even if it is at a high cost, since the cost to gain market share when entering a new country is even higher.

The bottom line is that in the beer industry it is not ideal to follow a global strategy (cross-border standardization, rationalization, integration). But it should be driven toward global companies. Companies cannot be either purely global or not global.

What resources and competencies can SAB use to improve local breweries that it acquires?

SAB’s competitive advantage is based on its value-adding capability and cost leadership. Its core competencies are brand building and people management. It offers high quality products, stays close to its customers, and especially has the necessary competencies to operate successful in emerging markets. All these competencies can be used to improve the acquired local breweries. Most of SAB’s acquisitions are done in developing countries; therefore SAB’s experience from South Africa is very helpful as South Africa is an emerging economy. The company can add value to the distribution strategies of local operations by introducing cost control and relationship marketing, since it knows how to build lean enough distribution channels. But even more important are its intangible assets. The company has a high goodwill and the necessary management skills to improve the internal structure of the acquired companies. Here, SAB’s company values can be extremely helpful as well. For example, empowering, developing and rewarding employees, as well as taking social responsibility can enhance the newly acquired brewery and finally lead to a higher market share and profit.

Combining SAB’s competencies with local breweries is optimal to succeed in the beer business. Consumers prefer local brands, and due to difficulty of storing and transporting the product, most beer is bought, sold, and drunk locally. Therefore SAB can add additional value to the acquired companies by using its brand building expertise and its approach in giving each emerging market consumer its own local, emotional, passionate brand. Furthermore, the acquisition of local breweries, in contrast to new market entries, includes the advantage of lower investment costs and avoids bureaucratic hurdles.

Advantages/disadvantages of merging with a major beer producer

In general, the advantages of a merger are to gain economies of scale in production and marketing, to fill gaps in technical expertise and knowledge of local markets and to share distribution facilities.

In this particular case, physical scale alone is no longer a competitive advantage. SAB could bring its experience from emerging markets in a merger. As a countermove, the company aims for a partner with a stable currency cash flow to improve its access to equity and debt for growth. Because in the beer market as a whole a race for consolidation had begun, another advantage of the merger would be an increase in the global market share.

On the other hand, a merger could also result in several disadvantages: The partners first have to build mutual trust and have to cope with cultural differences. The process of the merger can lead to slow decision-making and high coordination costs, and it is likely that the focus is put on this process instead of the operations. In addition, SAB has to balance between its internationalization and its South African interests. And the main challenge is to find the right partner.

For a successful merger it is important to choose a partner that shares the same values and vision. Ideally, both sides benefit from the merger. SAB is looking for a partner that supplements its existing competencies and, as SAB lacks exposure to stable currency cash flows, it strives for a partnership with a more balanced developed player. An American company would be very interesting due to the strong currency and the huge market volume. Anheuser-Busch, which is the largest brewer in the world, probably has no interest in a merger, whereas Miller (number 3) has almost the same market volume as SAB (number 4). This could be an additional advantage for a merger because the two partners are in a way equally powerful. In addition, Miller produces a high quality beer and operates in a market that doesn’t intersect the SAB’s one and therefore complements.

Another option would be to merge with a company in the UK, as SAB already has its headquarters in London. A potential partner is Scottish Newcastle, which is looking for partners as well because the company has to expand abroad due to the strong regulations in the UK. But based on this, it is questionable if it is strong enough to be an interesting partner for SAB.

Heineken, the second largest producer in the world, already has a strong global brand, a fact that wouldn’t allow SAB to continue its own strategy. Therefore, the company is not an interesting partner for SAB. Interbrew, the number six producer in the world, could be an interesting partner when it comes to market volume because both partners could reach their goal of improving the position in the ranking of the Top 10 Global Breweries. But as Interbrew also focuses on the emerging countries in Eastern Europe, it is questionable if the company really supplements SAB’s existing competencies.

Advantages/disadvantages of taking over a minor beer producer

Because taste for beer is rather local, and pride in the local brewery is strong, success potential in acquisitions of minor beer producers is high. However, because income is directly related to beer consumption, rich markets are considered to have reached their capacity and therefore they are no longer attractive in terms of growth potential. Then, emerging markets are a good option when targeting minor beer producers. Some emerging economies like Mexico, China, and countries in Southeast Asia are growing in a rather fast manner, hence increasing the income of its inhabitants. The potential for growth in the consumption of beer is enormous. Some of these countries have many small, inefficient breweries that can be purchased at a relative low price, and supplies of resources needed for beer itself in these countries don’t appear to be a constraint.

However, when targeting takeovers in emerging economies, other problems may arise. Although the growth potential is big, the supply of materials, like cans or bottles, could be a problem, since it is not likely to be multiple suppliers in the region. The success of the brewery is highly dependent on continued economic growth, factors that are exogenous to the company. Consolidation of a small brewery is also dependent on infrastructure improvements, such as roads, electronic communication technology, vehicles, etc., hard to achieve in third world countries.

Advantages/disadvantages of organic growth

There are many advantages as well as disadvantages for SAB when it comes to organic growth. SAB has been in operation for more than a hundred years, and the company knows its business to the core. SAB has a proven success trajectory in the beer industry, and it has evolved through good and bad times. Because South Africa is an emerging market, and SAB has managed to grow organically despite of world blockade during Apartheid, the amount of experience and knowledge developed through the years is an advantage to SAB. SAB can open subsidiaries in other emerging markets with increased potential for beer consumption growth. By keeping the company’s values and culture, and building critical mass from inside the company, SAB can actually develop an attractive growth strategy that may lead to success. In doing so, SAB may avoid the instability factors that arise from acquisitions and mergers. By growing organically SAB is able to focus further in its home market, balancing internationalization and South African interests.

However, the disadvantages of organic growth need to be considered. As we mentioned before, pride in the local beer is important in most countries, and therefore producing beer abroad for consumption in the market where it is produced is a risky business. However, a strategy that can be implemented is to create new brands in the new market -names that can relate to people in the local area. When planning to grow organically by building on emerging markets, the risk factor of political/monetary instability is a palpable reality, and a positive prognosis may very well plummet when crisis strikes leading the company to great loses and possibly an unfriendly takeover. Organic growth in a third world country has the additional disadvantage of low access to capital.

Recommendation

The most important aspect for SAB is to get access to equity and debt for growth, due to currency instability in South Africa. By doing so the company can lower the risk of being taken over by a competitor. Thus, we suggest merging with a major beer producer, which has a stable currency cash flow, a high quality product and which complements SAB’s competencies and geographical strengths. Based on the analysis above, we recommend beginning negotiations with Miller, which, on the other side, would benefit from SAB’s emerging market competencies.