Africa firmly in AB InBev’s crosshairs
South Africa is still a key market for the world’s largest brewer, Anheuser-Busch InBev. The brewer is building its world domination on the emerging market lessons learned from acquiring SABMiller two years ago.
AB InBev, also the biggest company on the JSE, believes that bigger is indeed better — for market domination, that is — but also that you need a specific strategy for a particular market.
Analysts say that the African market, opened up by AB InBev’s SABMiller acquisition, will be a key driver of the kind of growth the brewing behemoth is eyeing.
The Belgium-based company produces a third of the world’s beer and its R1.27‑trillion takeover of SABMiller in 2016 was largely done to acquire SABMiller’s emerging markets, of which South Africa was regarded as the crown jewel.
Neil Brown, a co-fund manager and equity analyst at Electus Fund Managers, said AB InBev was indeed very powerful, with about 30% of global beer sales by volume and 45% of the global beer profit pool.
The brewer’s regional chief executive, Ricardo Tadeu, told the Mail & Guardian that the brewer’s investment had paid off and that SABMiller had provided enlightening insights into emerging markets.
“We learned from SABMiller about understanding the market maturities of each country much better,” he said. “And that you have different strategies for each country, depending on its maturity scale.”
Access to the African market was one of the main reasons AB InBev bought SABMiller, with analysts forecasting that beer sales in Africa would grow by nearly three times the global rate between 2014 and 2025.
At the moment, about a fifth of the brewing industry’s revenue is in Africa and a quarter of the profits come from South Africa. AB InBev is believed to control more than three-quarters of the South African beer market, with rival Heineken lagging behind with 7%.
Tadeu said that before the merger AB InBev only had a tiny footprint in African markets but that the continent was critical to the company’s future strategy. “These markets have lower maturity, which means they can be developed more fully in the future,” he said.
Brown said that SABMiller was competitive in Africa, on the back of its star product, Castle Lager.
But South Africa also holds huge promise. “We believe in the medium term South Africa will have growth above the world average. It will be a very good space for the next three to five years,” said Tadeu.
He said AB InBev had already made significant investments in the local market. Last year, it set a R2.8‑billion capital expenditure programme in motion to expand its capacity by installing new packaging lines. It is also expanding its breweries in Alrode near Johannesburg and Rosslyn in Pretoria, while launching another line in Port Elizabeth later this year.
Brown said that even though it is smaller than the key markets of the United States, Brazil and Mexico, South Africa is an important market for the brewer.
Critics have pointed out that AB InBev’s growth has come on the back of cutting costs and incorporating better business flows at its acquisitions, including SABMiller, Interbrew and Anheuser-Busch.
AB InBev board member Jorge Paulo Lemann commented during a panel discussion at Harvard Business School that options were now limited for the massive brewer because there is not much else left to buy. AB InBev is betting on a spike in demand from its African markets to deliver the monster growth needed.
Electus said SABMiller had been successfully integrated into the stable since its acquisition in 2015. He explained that although a high price was paid for SABMiller, it was funded by very cheap dollars and euro debt.
“On aggregate, we would consider it as a neutral acquisition in terms of AB InBev,” Brown said.
In its first year since acquiring SABMiller, AB InBev’s focus was on restructuring and consolidation. Its subsequent growth has astonished critics.
Tadeu said the company was extremely happy with the merger. “Our second year has been much stabler than the first year. The company is now integrated with the global company. It is not just another country isolated any more, but part of a larger organisation.”
It has achieved synergies of $175‑billion since completing its purchase of SABMiller last October. The financial benefits from its takeover of SABMiller are expected to reach $3.2‑billion by October 2020.
Its shipments in Africa, excluding South Africa, increased by as much as 20% in 2017, putting it among the fastest-growing territories for the brewer. Its revenue per hectolitre of beer sold, after duties, increased by 5% in South Africa in the last financial year.
Last year, AB InBev also reported second-quarter profit growth that beat analysts’ estimates as it benefited from higher prices and cost savings after the acquisition of SABMiller. When combined with the soft drink business, the South African business delivered 8.8% revenue growth in the second quarter of 2017 and 6.1% overall in 2017.
Beer revenues in South Africa grew by 13.4% in the second quarter of 2017, driven by revenue growth of 2.4% and beer volume growth of 10.8%, benefiting from the fact that the Easter long weekend fell during that period, AB InBev said in its last financials.
Brown said the AB InBev merger had, however, come at a price. “As part of the SABMiller acquisition, competition issues caused AB InBev to have to sell its 58% stake in MillerCoors (US) and certain quality brands such as Peroni, Grolsch and Snow (China),” he said.
Tadeu said the local sports scene is still dominated by Castle Lager, and that sales at rugby Tests trump those of any Budweiser World Cup promotion in South Africa.
“Castle Lager is one of the few beers in the world that is 100% manufactured locally,” he said. “Even Corona, which is made in Mexico, has to import hops. Castle Lager’s hops are locally grown in George.”
A promotion that has paid off is selling Carling Black Label in larger bottles as part of a strategy to attract price-conscious South Africans. Drinkers can close the bottle and put it in the fridge to finish later.
The brewer also reintroduced an old favourite, Lion Lager, to win back share from inexpensive wines and spirits, a strategy it says has paid off. AB InBev also launched an alcohol-free version of Castle recently.