South African Breweries.

University Degree Business and Administrative studies

South African Breweries

BY Abdalla Bader Abdalla Hamed

MBA, MSc Information System

Bader Alhasse & Co ( charted accounting and auditors) , Libya

South African Breweries:

In 2001 South African Breweries (SAB) finds itself as the fifth largest brewer in the world. SAB has brewing operations in 21 different countries around the world with an annual output of “77 million hectolitres of beer. South African Breweries also holds a chain of 77 Southern Sun hotels throughout Southern Africa and also owns three casinos.”( )

South African Breweries (SAB) has grown on the basis of its strength in developing markets, first in Africa and then in other parts of the world.

SAB has become one of the major beer and beverage companies in the world. It was registered in London by a syndicate of investors from the UK and South Africa in 1895. Castle Large was launched in Johannesburg in 1898 and in same year SAB was listed on the London stock exchange.

In South Africa, SAB leads the beer market with Castl Larger. However, its wider portfolio included:

SAB: beer- south Africa and continental Africa with breweries for both larger and sorghum and brands such as Castle, Carling Black Lable, hansa Pilsner, Lion, Amstel, Heineken, Hoftbrau, Dakota Ice and 24 other brands.
SABI Asia: breweries in china and India; with 18 major beer brands in China and purified water and Soya milk.
SAB Europe: breweries in the Canary Island, Czech Republic, Hungary, Poland, Romania, Russia and Slovakia and brands including Pilsner Urquell, Gambrinus, Radegast, Keller, Ursus, Redd’s, lech and Tyskie.
Other beverage interests: butting plants in Africa of spring water, soft drinks, juices and sparkling water, including the Coca-Cola, Schweppes, and Appetiser range.
Southern Sun hotels (77 hotels throughout Southern Africa) and 3 casinos.

( Jonson, G & Scholes, K, 2002 PG 898)

The 1998 annual report of SAB explained the Group’s strategy:

SAB’s International focus has been on countries in which it believes it could use it expertise, which has been gained over 100 yeas in south Africa, to develop beer markets in emerging economies. SAB has invested significantly in its core business, and has commenced brewing operation in a future 5 African countries, 3 Chinese provinces, and 4 Eastern European countries since 1995. SAB intends to continue to protect and further develop its South Africa operation

This start with upgrading quality and consistency to create a beer for which people are prepared to pay more and which can give us a healthy profit margin. Then comes improvement to marketing and distribution. Next we improve productivity and capacity

South Africa was the original market for SAB and remains centrally important. However, here, the company had experienced mixed fortunes. In 2000 it had suffered a2 per cent decline in volume, but could report an increase in its margins as a result of continuing productivity initiatives. The main reason for the downturn was the domestic situation in South Africa, and in particular a switch in consumer spending.

The proportion of disposable income which the average south African spends on beverage and tobacco has fallen steadily since 1992.the normalisation theory suggests that this shift in consumer expenditure will continue as a higher proportion of discretionary expenditure moves from immediate gratification to self-improvement.

According to the SAB’s, in the meantime, we continue to work hard to increase our market share in the total south African liquor market by making beer the alcoholic drink of first choice for more people primarily through better channel segmentation, distribution and promotions. Our percentage share of the total liquor market is in the mid-50’s, so there is scope for future increase.

SABI operated in 13 other countries in Africa. In many African countries, SAB’s South African brands, particularly Castle Larger, are already known and are used by SABIA is currently pursuing a strategy to make Castel Larger the first pan-African beer. Castel larger is currently brewed in 10 African countries. SABIA’s strategy is to invest in African countries with lo per capital beer consumption but where SAB believes there is growth potential. SABIA have pursued a policy of expansion into other African states by acquisition and by establishing Greenfield breweries

China is second largest beer market in the world ...

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China is second largest beer market in the world in terms of consumption and is currently growing at over 10 per cent per annum. SAB now sells over eight million hectolitres; last year we grew by 38 per cent. China is a fragmented market of around 200 million hectolitres a year, which vast potential for SAB the aim in china is to develop the quality end of the mainstream brand sector. This allow SAB to keep the cost of capital expenditure down and avoid the expensive marketing programmes characteristic of area such as Beijing and Shanghai, where competition is intense.

SABIE’s strategy has been to invest in countries whose markets are developing from state-run economies to market economies, which typically leads to increased consumer demand. Due in part to the previous state ownership of many breweries and associated business, there had been a lack of capital investment in plans and distribution system, and many of the working practices were inefficient and outdated. SABIE seeks to identify existing operations where, by upgrading brewery and distribution infrastructures and augmenting the operations with SABIE management skills, it can improve marketing, product quality, and productivity so as to increase market share and profitability. Operations in each country are run autonomously

SAB completed renovation and construction of its brewery at Kaluga, south west of Moscow, in just eight months and launched its own brand ‘Golden Barrel’. This brand has now provided such a great success that the Kaluga brewery’s capacity is being expanded from 480,000 to 1.4 million hectolitres is planned. In addition to Golden Barrel brand our portfolio will include a number of foreign brands brewed under licence, such as Staropraman, Holsten Premium and Miller Genuine Draft.

In 1999 SAB merged the two beer companies which it controlled jointly with Euro Agro Centrum to create a single company Kompania Piwowarska SAB, bewaring three Polish brand this merger enabled SAB to create a unified brand portfolio, increase productivity, and make saving on aspects of the business ranging from 24 hour operations to distribution synergies.

In Hungary SAB had well-established brands, including Dreher, but the market was fiercely competitive and there had been a considerable switch away from alcoholic drink and a consequent decline in beer consumption. SAB had reduced its production capacity in 1999 by closing one of its two breweries and by 2000 was in the process of reducing its distribution centres from 18 to 9.

Many commentators believed that for a brewery of its size SAB needed to have a major brand in developed markets. It had tired to do so. It had attempted to acquire bass brewers but this was taken by Interbrew of Belgium. Kronenbourg had been acquired by Scottish & Newcastle. And it was known that ASB was on the lookout for such a major brand.

In recent year’s SAB has committed significant resources both to international acquisitions and to the reconstruction of acquired business. SAB intended to continue to protect and further develop its SA operations, while investing for growth in its international beer business, where a profitable base, with critical mass in selected developing markets and regions, has now been achieved. Incremental growth, both organic and through acquisition, is being pursued aggressively ( Johnson, G & Scholes, K, 2002 PG ???????????)

It also SAB gave an attentiona to the e-commerce marketing by creating a web site with Microsoft Company. The SAB acquisition of the US brand Miller may create an opportunity for marketing its established brands in the world’s largest market, but it has also been necessary to consolidate the position of the famous names in local markets. Hence the creation of the Castle lager Web site ().

Flexibility was just one concern for SAB,” says Warren. “The Castle lager site is both interactive – users can submit their own pictures for snap competitions, for example – and transactional. A number of Castle-brand merchandise products can be ordered via the site. Another advantage for SAB is the depth of Microsoft skills among their own staff, as well as the obvious ease with which Content Management Server integrates with the company’s existing Microsoft server products.

The strategic position that SAB has chosen to follow is to “continue to protect and further develop its South African operations, whilst investing for growth in its international beer business, where a profitable base, with critical mass in selected developing markets and regions has been achieved, incremental growth, both organic and through acquisitions is being pursued aggressively”.( Johnson, G & Scholes, K ,2002 PG 898)

South African Breweries has chosen to follow an aggressive strategic business plan in its overseas ventures, based on market expansion. SAB takes a share in a brewery with a local partner and whilst retaining the brand, transforms the business by upgrading the quality and consistency of the beer, for which people are prepared to pay more, thus giving a healthy profit margin. Once SAB has acquired an initial local strong hold they then advance into regions beyond the brewery’s original catchment area. They continue to build initial mass in the region and progress over time to a national basis.

Many believe that for a Brewery the size of South African Breweries and with such international presence the company needs to have a major brand in the developed markets. Whilst in South Africa there is a strong presence of the Beer, Castle lager and of other such alcoholic fruit juices, there is little brand recognition in countries such as Europe or China. SAB has attempted in the past to acquire a leading brand but has failed. They had attempted to acquire Bass Brewers but this was taken by Interbrew of Belgium, Kronenbourg had been acquired by Scottish & Newcastle. The directors of SAB believed that the listing of south African Breweries on the London Stock Exchange would “put SAB in a strong position to pursue its strategy of growth by giving the group greater access to world capital markets and providing it with the financial resources and flexibility to pursue this strategy in an effective and competitive manner.( Jonson, G & Scholes, K, 2002 PG 898)

South African Breweries concentrates it’s targeting on the mainstream, rather than the premium beer market. There are concerns in parts of Africa that the castle brand is insufficiently differentiated and was ‘caught in the middle’. Premium brands such as Heineken or Amstel are not much more expensive then Castle larger, whilst Sorghum beer, often drunk in townships was a good deal cheaper and positioned Castle as a premium beer in relation to it.

South African Breweries already has an established portfolio of businesses across the world (excluding new ventures with Miller and central America). There has been volume growth and improved margins in South Africa, Europe, Africa and Asia.

South African Breweries must therefore, improve the promotional aspect of their company if they are to see increased profits. SAB is struggling to achieve a perfect correlation between price and quality as the cost of raw materials is becoming greater and they have encountered increased energy and selling costs.

SAB could continue to operate as separate business units across the world with different brands, different niche markets and different marketing plans or they could integrate the business into a single organisation with a well-differentiated brand. They

would then have to create divisions around the target markets (e.g. geographically) or centred on consumer groups (e.g. by age group). Whatever the strategy South African Breweries chooses to adopt they need to identify the bases of competitive advantage, which will arise from an understanding of both markets and customers.

South African Breweries needs to understand what a particular customer requires from their product and how they differ between segments. For example, the Castle Larger was poorly differentiated in parts of Africa. The beer didn’t hold the prestige that some of the more quality beers did such as Heineken or Amstel and was much more expensive then the cheaper beer Sorghum that was drunk in many townships.

South African Breweries needs to be able to predict possible scenarios in the emerging market for at least 5-10 years time, “sharing and debating these scenarios improves organisational learning by making managers more perceptive about the forces in the business environment and what is really important”.( Jonson, G & Scholes, K, 2002 PG 107). There is no point in just waiting for a future event to happen and then implementing a strategy

South African Breweries needs to be aware that the average beer drinker is becoming more fashion conscious. According to a report by Audience selection by Mintel Reports in the UK, this millennium “55% of the 18-24 year olds expected to be drinking more than usual. Research has shown that the 18-34 year old age group’s share of purchasing beer has grown from 71% in 1997 to 85% in 1999, which again emphasises how critical the brewers’ advertising and imagery must be in this sector. Today’s generations are growing up in a larger-orientated environment which means the shift to larger should continue in the long term”.( Mintel International Group LTD, 2003).

South African Breweries should adopt they must develop a strong business plan comprising of five key stages. Which are; Segmentation of the market, develop a strong marketing mix concentrating on the 4p’s, product, price, promotion and place.

PESTEL Analysis of the macro-environment, political, economic, sociological, technological, ecological and legal, recognise the strengths, weaknesses, threats and opportunities (SWOT) of the company, predict Future scenarios and market trends

Beer drinkers purchase frequently and quickly becomes brand loyal switching only when there is a more competitively priced product or promotion. SAB needs to step up the brand image especially in continental Europe and the United Kingdom where the company is still relatively unknown.

SAB needs to think carefully about where they are going to sell their product, supermarkets, off-licences, the Internet, Wholesalers. They have to be aware that selling in supermarkets is extremely competitive and from time to time they will have to run promotions. SAB must understand that here in the UK “a rule of thumb is that at least £1million per year is required to achieve impact in a national advertising campaign.”( Jobber D, 2001, PG 19)

South African Breweries should choose to follow the ‘hybrid strategy’. The success of this strategy will be evident when the company is able to “deliver enhanced value in terms of customer needs, whilst also having a cost base that permits low prices and is sufficient for reinvestment to maintain and develop bases of differentiation”. SAB is already a worldwide organisation with a growing presence. This strategy would work well for the company if they are able to achieve much greater volumes then the competition, the low selling prices will be offset. The hybrid strategy also works very well with entry into new markets. As SAB has a strong history of foreign acquisitions this will help them ultimately “take share, divert the attention of the competitor, and establish a foothold from which they could move forward”. (Jonson, G & Scholes, K, 2002, PG 328)

SAB is not yet developed in the majority developed countries or created international brands, SAB Miller needs to create an international brand after the several mergers and acquisitions it has done. The African heritage could be considered as a weakness for SAB Miller

SAB has been following the acquisition strategy for many of years, to be able to expand geographically and also diversify its operations in different sectors. Although, we are assuming that SAB has been able to generate a high rate of ‘retained earnings’ and/or access to debt agreements with financial institutions, the ability to improve the marketing and distribution channels of its acquired businesses, underline the financial power of SAB.

Since the mission of the group is to be a world class manufacturer and deliver high quality beer, the strategy used by SAB is appropriate. SAB has been able to gain a significant market share and improve its quality by not only acquiring different companies around the globe, but by having a decentralized marketing and sales group within each country. This strategy has also helped it to increase the economies of scale by effectively utilizing its capacity and productive methods.

SAB, has been using its resources and capabilities as effectively as possible in order to follow and attain its strategies

SAB has achieved to establish a global business network. By doing so, the company increases its turnover and its profits, which without doubt satisfies stakeholders’ expectations. That’s why they should support the pursue of the strategy even if they feel insecure about certain acquisitions.

References:

Johnson Gerry & Scholes Kevan, (2002), Exploring Corporate Strategy, sexith edition.
Johnson Gerry & Scholes Kevan, (2002), Exploring Corporate Strategy, Tenth edition.
Jobber David, (2001), Principles & Practice of Marketing, McGraw-Hill Publishing, UK.
Mintel International Group 2003-08-19