Analysis of the International Beer Industry and Comparison of AB InBev and SABMiller

Justin Read

Abstract

The Business Administration senior capstone class Business Policy and Strategy gives students a chance to manage a global footwear company in competition with their classmates through the Business Strategy Game. The class challenges students to engage in a global industry by analyzing its trends, assessing its major players, identifying its growth opportunities, and making decisions based off of continuously evolving scenarios. This thesis will analyze another global industry, the beer industry, in the same way that students are expected to look into the Business Strategy Game. It will give a broad overview of the beer industry, identifying its global and regional growth trends, market opportunities, and current environment followed by an analysis of two major international players within the industry, AB InBev and SABMiller. The analysis of the two major payers will identify their current and near future strategies, financial performances, regional market performance, and recommendations for the future operations of each company.

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Table of Contents

Introduction ………………………………………………………………………………………… 3Global Beer Industry Performance ……………………………………………………... 4The Big Four Brewers ………………………………………………………………………….. 5PESTEL Factors …………………………………………………………………………………….. 6

Political Factors ………………………………………………………………………….. 6Economic Factors ………………………………………………………………………... 7Sociocultural Factors …………………………………………………………………... 8Technological Factors …………………………………………………………………. 9Environmental Factors ………………………………………………………………... 9Legal Factors ………………………………………………………………………………. 10

Industry Driving Forces ……………………………………………………………………..... 11Strategic Group Map ……………………………………………………………………………. 13Key Success Factors ............................................................................................................ 14Competitive Strength Assessment .............................................................................. 16Five Forces Analysis ............................................................................................................ 17

Bargaining Power of Buyers ............................................................................... 17Bargaining Power of Suppliers .......................................................................... 17Threat of New Entrants ........................................................................................ 18Threat of Substitutes .............................................................................................. 18Rivalry ........................................................................................................................... 19

Anheuser-Busch InBev Company Profile ................................................................ 21AB InBev Brand Portfolio Marketing ........................................................................ 22AB InBev Growth Driven Platforms ........................................................................... 22AB InBev Diversification ................................................................................................... 23AB InBev Value Chain Analysis ..................................................................................... 23AB InBev Strategy Success Financial Indicators ................................................. 25AB InBev SWOT Analysis ................................................................................................... 25SABMiller Company Profile ............................................................................................. 27SABMiller Brand Portfolio Strategy ........................................................................... 28SABMiller Diversification ................................................................................................. 29SABMiller Value Chain Analysis ................................................................................... 29SABMiller Strategy Success Financial Indicators .............................................. 30SABMiller SWOT Analysis ................................................................................................ 31Financial Comparison of AB InBev and SABMiller 2014 ............................... 33Strategic Recommendations for AB InBev ............................................................. 33Strategic Recommendations for SABMiller ........................................................... 34Conclusion ................................................................................................................................. 35Works Cited .............................................................................................................................. 36

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Introduction

The earliest records of beer consumption date back to the ancient Sumerians in around 4000 BCE. It is unclear how developed their beer production was, however around a thousand years later the Babylonians had recorded 20 different styles of beer in their culture. The Egyptians, around 1500 BCE, also had a well-established tradition of brewing and beer and malts have been found in the tombs of pharaohs. During the Roman Empire beer was widely consumed, however like all beer so far produced in the world it was cloudy and needed to be consumed quickly before it went bad. During the Middle Ages monasteries were the largest breweries, and the Germans introduced hops into the brewing process. The addition of hops spread throughout Europe by the 1500s, and beer has been produced with the same basic process since then. As science had advanced and technology along with it, the process has had major improvements in sanitization, temperature control, understanding of the bacteria and enzymes that are the biological agents behind the actual creation of beer, and improving the longevity of beer products (Beeracademy.co.uk).

For those readers who don’t know what the brewing process consists of, the following explanation is a very basic overview for understanding and the following page will explain some of the major steps.

The malts, or grains, are milled or cracked open so that more fermentable sugars can be extracted from them. The milled malts are steeped in the mash tun at specific temperatures so enzymes break them down and extract fermentable sugars. The grains are then separated from the water, now called wort (unfermented beer),

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and the wort is set to boil. During the boil hops are added for bitterness and flavor. After the boil, the wort is rapidly cooled, which causes solids to sink to the bottom. The wort is filtered then goes into a fermentation tank where yeast is added to convert the sugars into alcohol. The beer is filtered one more time to remove yeast solids and then bottled or kegged (Hofbrauhausnewport.com).

The above description of beer production is as simple as it gets, and in the practical world of brewing the process is highly specific and the product of hundreds of years of refinement. In today’s beer industry much of the process is automated and highly controlled so that beer produced and sold widely under the same brand will taste the same. Unlike the majority of prior beer history, today there are global brewers and the business of brewing has changed dramatically from its historic roots. The purpose of this report is to provide an in depth analysis of the global beer industry and to identify, analyze, and compare two of the major players within the industry. This report will focus on Anheuser-Busch InBev or AB InBev as one major player, and SABMiller as the other. It will compare the two competitors’ strategies, internal value chains, and financial situations and provide recommendations for each company on how to pursue success in the future.

Global Beer Industry Performance Has Been Improving Steadily

The beer consumed globally is segmented into five different categories and is heavily dominated by lagers. Standard lager represents 58% of the total revenue generated by beer sold globally in 2013, while premium lager represents 25.8% of the total revenue, together accounting for 83.8% of all revenue of beer sold in the world. The next largest category of beer sold globally is specialty beer, accounting for 8.8% of total revenue. Next are ales, stouts and bitters, together representing only 4.3% of global beer revenue. Lastly, low or non-alcoholic beer represented 3.1% of global beer revenue (Global Beer Industry Profile)

The global beer industry net revenue has been growing at an average 2.7% annually from 2009 to 2013 while market volume has grown an average 2.1% annually during the same period. The total revenue of the market in 2013 was considered approximately $514.5 billion and the volume has increased from 159 billion liters in 2009 to 172.8 billion liters in 2013 (Global Beer Industry Profile). Around 2013 the net revenue for the beer industry was approximately $177 billion and the EBIT was around $35.2 billion, with a margin of around 20%. However, due to large differences in the profitability margins of individual companies the average isn’t representative of any one company (AllianceBernstein). The market is projected to increase at a slightly faster rate from 2013-2018, with a projected 3.4% annual growth in total revenues and increased volume growth driven primarily by emerging markets (Global Beer Industry Profile).

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The Big Four Dominate the Global Market

Four major players dominated the global beer market, at the end of 2013 controlling almost half the market share between them. In order of market share, these companies are the following:

Anheuser-Busch InBev or AB InBev with approximately 20% SABMiller with 12% Heineken N.V. with 10% Carlsberg A/S with 5.5%.

These and other global players sell the majority of their beer through either supermarkets or on trade through bars, restaurants, etc. The average percentage of beer sold globally through supermarkets in 2013 was approximately 45% and the average sold through on trade sales was approximately 33%. The remaining sales go through specialty retailers, convenience stores, or through other channels (Global Beer Industry Profile).

AB InBev is concentrated in the Americas through its majority ownership of AmBev and ownership of Anheuser-Busch. It accounted for approximately 18% of global beer volume, 21% of global net revenue, and 32% of global EBIT at the end of 2012. The group has the best margins of the big four due to the favorable market structures in the Americas and its tight cost management practices and leadership (AllianceBernstein).

SABMiller is the next largest of the big four and represented 12% of global beer volume, 12% of net revenue, and 14% of global EBIT at the end of 2012. Of the big four SABMiller has the highest exposure to emerging markets with projected fast growth for beer, particularly in Africa and Central and South America (AllianceBernstein).

Heineken is the third largest of the big four with 10% global beer volume, 11% of net revenue, and 9% of EBIT at the end of 2012. The group is strongly entrenched in the Western European beer market and has begun expanding into emerging markets in Africa, Asia Pacific, and South America (AllianceBernstein).

Finally, Carlsberg accounted for an estimated 6% of global beer volume, 5% of net revenue, and 4% of global EBIT in 2012.Carlsberg primarily operates in Europe, where 85% of its profits came from n 2012 (AllianceBernstein).

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N. Amer-ica

C. & S. America

W. Europe C. & E. Europe

Asia Pacific

Africa World0

20

40

60

80

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Big Four's Share of Regional Profits at the End of 2012

OtherSABMillerHeinekenCarlsbergAB InBev

PESTEL Factors of the Global Beer Industry Can Differ By Region

Political Factors

The North American region is pretty consistent in its treatment of the beer industry. Taxes on beer, such as excise taxes, are consistent and aside from being regulated more due to producing alcohol, the industry has been free from extraneous intervention. Politically some of the countries in the Central and South American region are unstable, often as a result of being heavily reliant on one source of national economic success, for example oil exportation. When the economic changes hurt the relied upon industry, the government has to manage deficits, unemployment, inflation, and social unrest, leading to possible disruptions in the business activity of the country. Depending on the country, there are also institutional voids to overcome, such as electricity or water infrastructure, a lacking financial system, or official product quality review/regulation (AllianceBernstein)(AB InBev Annual Report).

Western Europe is an institutionally strong region that is fairly consistent with its tax regimes towards the beer industry. There are some political and economic uncertainties in Western Europe today, concerning Greece mainly, however so long as the European Union remains sound, a commodity industry like the beer industry will carry on business activity relatively unimpacted. The Central and Eastern Europe region is hampered by inconsistencies between several countries in the area of excise taxes and regulations, which have made growth more difficult for the beer industry (AllianceBernstein)(Global Beer Industry Profile).

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Politically, countries in the Asia Pacific region, particularly in South East Asia, intervene in their economies more than happens in the west. For global brewers, this means they will have to respond to government requirements more often than elsewhere. The Africa region also has governments with high levels of involvement in their economies, and more so than Asia Pacific it has nations with significant institutional voids and increased tendencies towards political instability (AllianceBernstein)(SABMiller Annual Report).

Economic Factors

The North American region is one of the most profitable, representing approximately 17% of global consumption of beer, 24% of net revenue, and 30% of global profit in 2012, due to a strong beer culture, favorable market structure, high unit pricing and high margins. The beer industry performs well despite being a commodity industry. Because of the well-entrenched culture of beer in North America, beer sales are impacted much less by economic downturns, unemployment, and the rate of economic growth. Sales may trend with external conditions, but not to a high degree, especially in the mass production market that offers cheap, well-known beer (AllianceBernstein)(Global Beer Industry Profile).

The Central and South American region represented at the end of 2012 approximately 13% of global beer consumed, 14% of global net revenue, and 24% of global industry profit. The market has grown well over the last 15 years due to economic development and demographic changes that accompany economic progress. Many of the national beer markets in this region are monopolies or duopolies, resulting in high profit margins across the region. The countries in the region are developing, with good prospects for GDP growth in the future. In developing countries there is a string correlation between GDP and per capita consumption of beer, so as the GDP grows so will beer sales (AllianceBernstein)(Global Beer Industry Profile).

The Western European region at the end of 2012 represented approximately 14% of global beer consumption, 17% of global net revenue generated from beer sales, and 12% of global beer profit. The market is pretty unattractive due structural decline in per capita consumption, fragmented market structure, aggressive concentrated retailers, and a tough regulatory environment. The growth in Europe is slow or nonexistent for the beer industry. The market is saturated and mature, but the per capita consumption of beer is structurally declining. The industry is less sensitive to economic downturns, however the fragmented nature of the market means that any downturn for breweries can have a large impact on profitability (AllianceBernstein)(Global Beer Industry Profile).

The Central and Eastern Europe region at the end of 2012 represented about 13% of global consumption of beer, 11% of the revenue generated, and only 8% of the global beer industry profit. The market grew quickly in this region from 2000 to 2007 due to economic development, but has since leveled off. Most of the central and eastern European markets are very competitive, and specific problems related to excise duties and regulations in Russia have hindered the development of this region. The region is also very mixed in its consumption of beer, averaging at 52 liters per year but ranging from 13 liters per capita per year in Turkey to 150 liters

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per capita per year in the Czech Republic. Inflation and GDP performances differ between countries, so industry attractiveness depends on the mix of growth and current per capita consumption in each country. However, all the countries in the region still have a strong correlation between GDP growth and consumption of beer, and as GDP grows (or shrinks) beer consumption will mirror it (AllianceBernstein)(Global Beer Industry Profile).

The Asia Pacific region at the end of 2012 accounted for approximately 36% of global beer consumption, 27% of global net revenue, and 18% of global beer profit. Consumption of beer has grown rapidly due to economic development and a favorable demography. The region is a wide mix of national markets, from developed markets in Japan and Australia, to low growth emerging markets such as South Korea and the Philippines, to high growth emerging markets such as China and India (AllianceBernstein)(SABMiller Annual Report)(Global Beer Industry Profile).

The African region at the end of 2012 accounted for only 6% of global beer consumption, 7% of global beer net revenue, and 10% of global beer profit. The African market is considered to be the best prospect for long-term profit, even better than Central and Southern America, due to its large population, low per capita consumption, GDP growth, and oligopolistic market structure in the beer industry. The countries in the region are undeveloped or developing, with large room for growth in GDP, which directly correlates with per capita consumption (AllianceBernstein)(Global Beer Industry Profile).

Sociocultural Factors

Socio-culturally the North American region is very hospitable to beer, as mentioned before the culture of beer is well established. The population of the region is not growing quickly, and other demographic factors such as age and income distribution aren’t changing very fast, so the companies don’t have to react too much to changes in their target markets. In the Central and South American region beer is popular, especially since it is often partnered with culturally relevant things like the professional soccer league in the country or with concerts, nightlife, or music. The demographics of the Central and South American countries tend to be towards a younger population, which is a large portion of the market for beer (AllianceBernstein)(Global Beer Industry Profile)(AB InBev Annual Report).

The Western European region has a historical beer culture that is represented very nationalistically, meaning that beer is strongly identified by country of origin and many people drink beer based on their perceptions of countries’ beer pedigree. The demographics of the region are trending towards an older population and lower or negative population growth rate, both of which are not beneficial to the beer industry. Socio-culturally there is a large population in the Central and Eastern European region with a younger demographic average than in Western Europe. In some cases there is a very strong cultural tendency to drink large quantities of alcohol, such as in the Czech Republic, where the per capita consumption of beer is the highest in the world at around 150 liters per capita per year (AllianceBernstein)(Global Beer Industry Profile).

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Socio-culturally beer is not strongly established in the culture of the Asia Pacific region countries, with the exception of Australia, however it is growing in per capita consumption. The growing population is favorable to brewers since their potential market size increases, especially as per capita consumption increases. In the African region beer is not a well-established commodity in most markets or lifestyles. The population of Africa is very large, and the per capita consumption is very low, allowing for huge growth in the future (AllianceBernstein)(Global Beer Industry Profile).

Technological Factors

Technologically beer production hasn’t had much innovation with perhaps the exceptions of energy and water efficient upgrades, and innovations are applicable to breweries across the globe. Energy efficiency is straightforward, using innovations to reduce the amount of energy used to produce each barrel of beer. Water efficiency is more varied however, and can include innovations that reduce water use in the brewing process, the cleaning process, and reduce water wasted along the way. Other innovations are concerned with the treatment of wastewater so that it can be reused in municipal water supplies or in additional brewing operations. The distribution side has seen more innovation in packaging, distribution, and engaging consumers, usually on a product specific level. The engagement of consumers has moved into the digital realm as breweries seek to establish a more personalized connection to consumers. (AllianceBernstein)(Anheuser-Busch InBev)

In certain markets, primarily in the Africa, Asia Pacific, and to a lesser extent in Central and Southern America other technological factors include adaptations to overcome or circumvent the institutional voids of the region, one example being how the beer is distributed over poor road infrastructure networks, or how a supply chain is managed when the country has poor telecommunication and record keeping standards (AllianceBernstein)(SABMiller Annual Report).

Environmental Factors

Environmentally the main concern for the brewing industry is water shortages, which affect the growing of hops, grains and cereals and also impacts how much beer can be produced. In order to address threats to the supply of grains, some international breweries undertake watershed management programs around key grain growing areas to ensure that the region doesn’t become to dry and to ensure a consistent supply of quality ingredients. The concern for water in the brewing industry is reflected in the focus of technological innovations on water use reduction and efficiency (AllianceBernstein)(AB InBev Annual Report)(SABMiller Annual Report).

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Legal Factors

In the North American region the industry has operated under similar rules for a long time, concerning worker safety, product quality standards, appropriate advertising, distribution channels- especially in the US where the three tier system is required, and packaging requirements. In the legal aspect, Mexico is the outlier of the group, with greater probability of corruption, insufficient oversight, and/or less enforcement of laws than the US or Canada has, however this is relative and the beer industry operates similarly in Mexico as it does in the other two countries (AllianceBernstein)(Global Beer Industry Profile).

Legally the environment in Central and Southern America is less evident than in North America. There are fewer laws concerning worker rights, pay requirements, anti trust, and other areas of operation that are addressed in North America and there is less likely to be effective oversight and rule enforcement in this region. That being said, this is in comparison to North America and the region still enforces rules and maintains controls over the beer industry (AllianceBernstein)(Global Beer Industry Profile).

Western Europe has a very intrusive regulatory structure for beer, which varies by country and can involve the purity of the ingredients, what ingredients can be included in beer, how the beer is produced, and what requirements need to be met in order to sell it. This, on top of the number of countries in the region, makes the legal environment tough to navigate if a brewery operates between countries (AllianceBernstein).

In Central and Eastern Europe there are significant regulatory differences and inconsistencies within and between countries in the region that have hampered growth in the beer industry, most recently in Russia in particular, where rules concerning excise taxes have been ambiguous and inconsistently enforced (AllianceBernstein).

The legal factors in the Asia Pacific region are more intrusive, particularly in countries such as China where the government plays an active role in the economy of the country. They are similar in content, however, regulating production, sales, content, packaging, and many more aspects associated with the brewing and selling of beer (AllianceBernstein)(SABMiller Annual Report).

Legally, the countries in the Africa region have the least capacity enforce any labor, consumer, or production laws and a higher chance for corruption to hamper the efforts in law enforcement. Breweries will face fewer regulations, however they may have to contend with inefficient, corrupt, and inconsistent rule enforcing depending on the countries (AllianceBernstein)(SABMiller Annual Report).

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Population Volume Revenue EBIT0

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40

60

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Regional Beer Market Breakdown at the End of 2012

AfricaAsia PacificC & E EuropeW EuropeC & S AmericaN. America

(AllianceBernstein)

Industry Driving Forces

The industry driving forces concern mainly the emerging markets, the differences in products they will demand, the growth they represent, and the challenges breweries face to market products in an increasingly digital market. Overall, the industry driving forces are acting to make the industry more attractive; the increase in growth will alleviate competitive rivalry somewhat and represents chances for industry incumbents or new comers to enter new markets.

Change in Long-term Growth Rate

The mature markets in the regions of North America and Western Europe represent a large portion of the volume of beer sold and the revenue generated globally. However, they have little room for growth, and in some cases are shrinking. The markets in the Central and South American region and the Central and Eastern European region are developing and, in the case of Central and South America, offer the highest margins of the global beer markets. They still have room to grow until they reach similar levels of consumption and market saturation as North America and Western Europe. Africa and Asia Pacific represent the largest potential for long-term future growth, Africa on a longer-term basis than Asia Pacific due to the need for institutional voids to be filled and the purchasing power of the people to increase (Clark & Willson).

The growth potential represented by Africa and Asia Pacific will drive the global growth of the beer industry in the not too distant future, and the breweries that are well positioned to profit from the growth will dominate the global market with revenue and volume sold much higher than the most dominant market player has now.

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Increasing Globalization

Increasing globalization is the trend represented by the opening up of the Asia Pacific and Africa regions to the international beer industry. The big four compete globally in the different regions through outsourcing production of beer and selling beer to (new) international markets (AB InBev Annual Report).

Marketing Innovation

One of the newest innovations in marketing for the beer industry is in the attempt to reach consumers and engage them on a digital platform, through social and digital media. Efforts in this direction are supplemented with associating a certain beer or product with hash tags, events, music, and other popular media (Clark & Wilson).

Growing Preference for Differentiated Products

Consumers are being provided innovative products from the mainstream ciders to more interesting products like mixed drink inspired beers, fruit beers, pre mixed drinks, occasion specific drinks and even in the increasing styles and flavors offered through creative craft beer recipes. Consumer preference trends differ depending on where they are in the world, but regional trends have emerged, particularly in the occasion specific drinks (Anheuser-Busch InBev).

Industry Driving Forces Indicate the Importance of Emerging Markets

The industry driving forces are all concerned with the growth in the number of potential consumers and how to best communicate with them and serve their needs. As populations grow in emerging markets, and as markets with large numbers of people increase their consumption of beer per capita, breweries will need to establish effective ways of reaching the consumers with their messages and ways of delivering the most meaningful messages to different target segments of consumers. The way to growth in the future is through connecting with the markets while they are still relatively small, so that as the market grows awareness of already established beer brands will grow as well.

Additionally, it is reasonable to believe that as new markets emerge and as existing markets expand, there will be the demand for different products than already are offered. Breweries need to be on top of offering products beyond the mainstream beer styles and shaping brands to conform to the consumer demand of beer. These driving forces make the industry more attractive, as it is moving towards a period of higher growth across many markets in which buyer preferences may be different among regions and countries, all of which allow for growth of incumbents and entry of new breweries.

Strategic Group Map

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This strategic group map compares the number of brands in the portfolios of the Big 4 breweries with the revenue each brewery generated in 2014. The size of the circle for each brewery is representative of their approximate global market share. AB InBev clearly dominates in the revenue section, partly due to Carlos Brito’s focused cost cutting leadership.

0 100 200 300 400 5000

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AB In-Bev

SABMille

r

Heineken Carls

berg

Strategic Group Map Highlights Differences of the Big 4

Brands in Portfolio

Reg

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al M

ark

ets

Pre

sen

t In

(AB InBev Annual Report)(SABMiller Annual Report)(Grundberg)(Theheinekencompany.com)

Noting the strategic map, there is no clear strategy that guarantees success. AB InBev has the largest market share and revenue with low regional coverage, while Carlsberg has the same regional coverage but much less success. On the other side, SABMiller and Heineken have similar brand portfolio sizes but fall behind in market share and revenue. AB InBev has done well to have highly profitable brands in its portfolio and to be concentrated in geographically connected regions where they dominate most of the national markets (AB InBev Annual Report). The lesson to take away here would be to mimic the success of AB InBev a brewer needs to be able to make their brands profitable, regardless of geographic spread. However, it is AB InBev’s geographic isolation that may hurt its global success in the medium-term future.

Key Success Factors

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Water and Energy Efficient Production

There is an increasing concern globally with sustainability in the environment, and under that umbrella concern for the water supply is a big player. For breweries, ensuring adequate water supply to growers of hops and grains is as important as ensuring that they have access to adequate water at a decent price for the actual brewing process. Breweries have consistently invested in increasing the efficiency of the brewing process and reducing their own water usage as well as investing in the environmental well being in areas where significant grains and hops are grown. This is necessary to keep raw materials prices from rising due to environment crisis related shortages, can contribute to a better image for the breweries involved in preserving the environment, and can reduce the costs for breweries generated during the brewing process (AllianceBernstein).

Economies of Scale

As mentioned before, economies of scale allow breweries to compete better in the mass-market beer segment, either by profiting more or by allowing for increased price based competition with competitors. Breweries that achieve significant economies of scale, especially the big four, can sell more beer to wider markets at lower prices than smaller competitors (AllianceBernstein).

Changes in Cost and Efficiency

Economies of scale play a large role in being able to meet the price expectations for the mass-market beer consumers and retailers. This category of beer represents the largest segment of beer sold in the world and by the major breweries, and small cost advantages in the mass-market beer production yields large overall savings. Reducing the cost of mass-market beer also gives a brewery the option of underpricing competitors, reducing their market share and share of throats (Leonard).

Strong Network of Wholesale/Retail Distributors

Only a small portion of a brewery’s beer is sold directly to consumers, with the remainder being sold to retailers and wholesalers. Often retailer groups like supermarket chains or liquor store chains are consolidated and represent a large buyer of beer in a market, with decent buyer bargaining power. The larger the amounts of beer a brewery can sell/distribute to a chain, the more chance they have of further increasing market share through additional chain retailer agreements. Occasionally, only a few major retailers may dominate a country, and in these cases favorable contracts and relationships can both gain and protect market share for a brewery (Global Beer Industry Profile).

Breadth of Product Line

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The mass-market beer segment consists mostly of lagers with a few light ales offered. The premium beer and craft beer segments are defined by their increasing offering of new styles and interpretations of current styles. Consumers choose these beers for their more intense flavors, greater variety of flavors, greater quality of ingredients, quirky appeal of smaller and more personal breweries, and as a statement against mainstream beer. The premium and craft market segment is growing and chipping away at the market share of mainstream beer, and increased styles are important to keeping and gaining consumers (AB InBev Annual Report)(SABMiller Annual Report).

Well-known and Recognized Brand or Brand Portfolio

There are dozens if not hundreds of beer brands in any given country and many of them are geographically limited to the regional market, with few being recognized nationally. Having a well-recognized brand portfolio that mixes both internationally and nationally recognized beer labels is very important for international breweries in competing within regions. International breweries often compete in markets by creating or acquiring a well-known national brewery/brand and supplementing it with the increased capital, supply chain capabilities, and marketing power of an international brewery. They may utilize the national distribution channels they use for the domestic beer to introduce sales of international brands. Either way, well known brands allow these international breweries to gain and/or maintain widespread market share within countries and regions (AB InBev Annual Report) (SABMiller Annual Report).

Clever Advertising

Switching costs for the people who consume beer are very low, since most retailers of beer stock a wide range. It is crucial for the success of a brand of beer to have advertising that not only keeps it in the forefront of the minds of consumers but that also reaches as many potential consumers as possible. The willingness of retailers and wholesalers to stock beer from a brewery depends on the popularity of that beer with the end consumer, and breweries are continuously attempting to develop new ways to convey their messages and new platforms through which to communicate, such as through social media (Anheuser-Busch InBev).

Competitive Strength Assessment

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AB InBevStrength Measure Weight Unweighted WeightedBrand Recognition .25 9 2.25Marketing and Promotion .25 8 2Geographic/Regional Market Coverage .15 6 .9How Well Resources Match Industry KSFs

.20 9 1.8

Relative Market Share .15 10 1.5Total 1.00 Weighted Total: 8.45

SABMillerStrength Measure Weight Unweighted WeightedBrand Recognition .25 8 2Marketing and Promotion .25 7 1.75Geographic/Regional Market Coverage .15 10 1.5How Well Resources Match Industry KSFs

.20 8 1.6

Relative Market Share .15 8 1.2Total 1.00 Weighted Total: 8.05

HeinekenStrength Measure Weight Unweighted WeightedBrand Recognition .25 7 1.75Marketing and Promotion .25 8 2Geographic/Regional Market Coverage .15 8 1.2How Well Resources Match Industry KSFs

.20 7 1.4

Relative Market Share .15 7 1.05Total 1.00 Weighted Total: 7.4

CarlsbergStrength Measure Weight Unweighted WeightedBrand Recognition .25 6 1.5Marketing and Promotion .25 7 1.75Geographic/Regional Market Coverage .15 5 .75How Well Resources Match Industry KSFs

.20 7 1.4

Relative Market Share .15 4 .6Total 1.00 Weighted Total: 6.05

These ratings were determined through a cross analysis of several global beer industry reports as well as through comparison of the importance global brewers place on certain strength measures. The weight is synthesized from this process, and the rating given to each individual brewer is drawn from their

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respective annual reports as well as from information pertaining to them in the beer industry reports.

AB InBev leads the group in competitive strength due to its large market share and brand recognition, having 16 brands that are worth over $1 billion (AB InBev Annual Report). Its weakness is in geographic coverage; it is heavily concentrated in the American markets, and while they consist of large profit pools and emerging market opportunities, this will come back to hurt the group when the market begins to really grow in Africa and Asia Pacific, where competitors like SABMiller have a strong presence (AllianceBernstein)(SABMiller Annual Report). SABMiller is close behind AB InBev in competitive strength, falling behind the leader slightly in each category except geographic coverage. Heineken is a semi-distant third place with its strong points being marketing and geographic coverage, while brand recognition is also a strength. It is a consistent company across the board, but consistently behind the two competitors ahead of it. Finally, Carlsberg is a distant fourth and has weaknesses in market share and geographic coverage, however it is performing moderately on the other indicators.

Five Forces Analysis Indicate A Somewhat Unattractive Industry

Bargaining Power of Buyers – Moderate

The bargaining power of buyers is considered to be moderate in the beer industry. The bargaining power of buyers is increased by several factors, chief among them the consolidated nature of buyers in most markets. The major buyers of beer around the world are supermarkets, and in most countries supermarkets are consolidated into large chains, which represent large volume orders. They are able to bargain for lower prices and favorable contracts because breweries need them to distribute their products. Furthermore, the bargaining power of buyers is increased by the very low or non-existent costs of switching to different beer brands (Global Beer Industry Profile).

Bargaining power of buyers is reduced globally due to the need for retailers to stock a wide range of beer to meet consumer needs. If a brewery’s beer is in demand, then retailers will be willing to buy it on the terms of the brewery. Retailers also may be limited in an area as to how many beer brands are cheaply available. If there are limited selections, they have to buy what they can get. Finally, in many markets around the world national beer markets are duopolies, which severely limits the options retailers have to switch to (Global Beer Industry Profile).

Bargaining Power of Suppliers – Weak-Moderate

The bargaining power of suppliers is considered to be low to moderate in the global beer industry. Most breweries in the world rely entirely upon third party suppliers for most of their ingredients in the brewing process, with very little vertical integration in the industry. While grains are commodities and readily available in large quantities, quality of grains is very important to breweries and limits the suppliers they are willing to source from. Hop growers are usually smaller scale growers, especially compared to their grain counterparts, and so have reduced

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bargaining power. However, there are also many varieties of hops, some in very high demand and short supply, and the quality again is important, which increases the bargaining power of many hop growers. Yeast suppliers are incredibly important to the beer industry, and there are few suppliers with a large range and consistency of strains, which gives them moderate bargaining power (Global Beer Industry Profile).

Bargaining power of suppliers is reduced by the low switching costs breweries face to source ingredients from different suppliers. Other materials involved in the process, such as bottles, cans, and cardboard are commodities and are produced all over the world. The switching costs for these materials and products are incredibly low as well (Global Beer Industry Profile).

Threat of New Entrants – Moderate

The threat of new entrants into the global beer industry is considered to be moderate. There are significant barriers to entry into the beer industry, including large capital investment needed for brewing equipment, the time and effort it takes to establish a reliable and significant supply chain through third party suppliers, the time and effort it takes to establish reliable and sizeable distribution networks through retailers, the lack of an internationally recognized brand, and the more strict regulations governments place on the production and sale of alcohol (Global Beer Industry Profile).

The threat of new entrants into the global beer market is increased by the readily availability of suppliers of grains, hops, yeast, bottles, cans, cardboard, and any other input needed for the brewing process. Due to the need for retailers to carry a wide range of product, new entrants will likely be able to secure some distribution channels and increase distribution upon performance. Finally, new entrants into the global beer market are most likely going to be large domestic breweries that seek to expand internationally. The will already have much of the equipment needed, an established supply chain, some distribution, and an established brand name, which would reduce the barriers to entry (Global Beer Industry Profile).

Threat of Substitutes – Moderate-Strong

The threat of substitutes is considered to be moderate to strong in the global beer industry. The substitutes for beer are pretty easily identified as wine, spirits, liquor, cider, and non-alcoholic drinks. Since the majority of beer is sold to retailers such as supermarkets and restaurants, the threat of substitutes need to be considered in that context. These retailers need to stock not only a range of beer but also of the other substitutes, and so the threat of substitutes is strong but also consistently limited, since these retailers are very unlikely to replace their beer offerings with any of the other substitutes. Some retailers, such as restaurants and bars sometimes focus entirely on one group of alcohol, either offering a wide range of wine and little to no beer, or vice versa. These retailers are not likely to buy the alcoholic substitutes of their chosen alcohol (Global Beer Industry Profile).

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When it comes to the end consumer the threat of substitutes is very strong. There are numerous other alcoholic offerings and non-alcoholic offerings that are in the same price range as beer, and consumers have no switching costs from group to group (Global Beer Industry Profile).

Rivalry – Strong

The rivalry of the global beer industry is considered to be strong. Almost half of the market is controlled by four major players: AB InBev, SABMiller, Heineken, and Carlsberg, which increases competition. The mass-market products offered in the beer industry are not very well differentiated, with approximately 84% of the beer sold worldwide consisting of standard and premium lagers. The mass-market beer sold around the world competes mainly in price, and therefore economies of scale are important to breweries so that they can either profit more at the same price as competitors or underprice competitors (Global Beer Industry Profile).

In North America and Western Europe, the two largest profit pools, the market is saturated and has low or negative growth prospects for the future, which increases rivalry. The regions that represent growth prospects in the future, Central and South America, Africa, and Asia Pacific, do not help too much to alleviate competition. Central and South America and Africa have room to grow and good potential for long term profitability, but the markets in these regions are almost entirely duopolies or oligopolies which reduce competition and limit the opportunity for global rivalry to be alleviated through market growth unless the global brewery is already present in the region’s markets as one of the duopolistic companies. This in turn keeps the competition in other regions and markets at similar levels (Global Beer Industry Profile)(AllianceBernstein).

In Asia Pacific, particularly the high growth markets of China and India, the market is so fragmented that it is unlikely that any brewery emerges with a significantly larger market share than any others. This means that the national markets will be intensely competitive and yield low profits to breweries (Global Beer Industry Profile)(AllianceBernstein).

Conclusion

The Five Forces analysis of the industry indicates that the industry is not very attractive, although for breweries that are well entrenched in the global market already it is moderately attractive. The main advantages that go to the incumbents in the global beer industry, namely to the big four breweries, are strong positions in growing duopolistic or oligopolistic markets, especially in Central and South America and Africa, and large profiles of beer, some of which are globally recognizable and others of which are regional of country specific. The industry is fairly easy to enter into, and there are numerous threats from substitutes and buyer power, but the size and market share of the big four allow them to transcend these issues somewhat (AllianceBernstein)(Global Beer Industry Profile).

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Five Forces Diagram

(Global Beer Industry Profile)

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Anheuser-Busch InBev Company Profile

AB InBev is the result of the merging of Interbrew, from Belgium, with AmBev, from South America, and later with Anheuser-Busch from the US in 2008. Ab InBev is the world’s largest brewer, with approximately 459 million hectoliters of beer sold in 2014. With the group’s ties to the Americas it is no surprise that the majority of the volume of beer sold by AB InBev was sold in North and South America. AB InBev breaks up the Americas into three groups: North America, Latin America North, and Latin America South. Over 70% of the groups volume of beer sold is done so in the Americas, with 34.9% of its volume in North America, 27.3% in Latin America North, and 8% in Latin America South. The revenue generated by these regions also contributes the majority to the group’s total revenue, with 48.6% of revenue coming from North America, 31% from Latin America North, and 7.3% from Latin America South (AB InBev Annual Report)

It is difficult to apply one of the generic strategies to a company as large and complex as AB InBev, however their overall basic strategy could be described as best cost provider. They strive to compete in the mainstream beer market with an emphasis on cost, and some emphasis on differentiated product. In this market are the global and international champion brands, Corona, Budweiser, Stella Artois, Beck’s, Leffe, and Hoegaarden. These beers are produced with the bottom dollar in mind, and are differentiated from other mainstream beers by minor variations in recipe and brewing process. AB InBev also offers highly differentiated products with its local and craft beer breweries as well as with its line of near beer products (AB InBev Annual Report). There is an overall theme of cost reduction in all the operations of the brewery, and the differentiated nature of products offered indicates their strategy could best be described as best cost provider. The mix of global and international beers in their profile with local and national brands also indicates a transnational strategy, in which there are high pressures for both local responsiveness and global efficiencies.

Volume (% of Total) Revenue (% of Total)0

20

40

60

80

100

AB InBev Regional Market Operations 2014

Global Export and Holding CompaniesAsia PacificEuropeLatin America South Latin America NorthNorth America

(AB InBev Annual Report)

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AB InBev Uses a Focused, Three Tier Strategy For Marketing Its Beer Brands

The group has over 200 brands of beer, 16 of which are each worth over $1 billion and 6 of which are in the top 10 most valuable beer brands in the world (AB InBev Annual Report). The group has three tiers of brands, which they refer to in the Focus Brands Strategy. The focus brands are those brands in which AB InBev invests most of their marketing money. The brands are chosen based off of their growth potential within relevant consumer segments. The global focus brands are Budweiser, Corona, and Stella Artois. These brands will be sold globally and promoted most heavily wherever AB InBev is present in a market. The next segment of the focus brands is international brands, which consist of Beck’s, Leffe, and Hoegaarden. These brands are sold internationally, however they are not promoted in every region or market and tend to be most popular in North America and Europe. Finally the last tier of the focus brands strategy is the local champion, which consists of Bud Light, Michelob Ultra, and Skol. The local champions are sold in the American markets, since those markets are the most important globally to AB InBev. They are promoted less than the other two tiers of focus brands, but still much more so than the other brands AB InBev owns (Kudla).

AB InBev Sets Strategy Through Growth Driven Platforms (GDPs)

AB Inbev’s strategy is represented through a series of Growth Driven Platforms (GDPs), which describe the priorities and goals of the group in a given market. The GDPs are used only in markets of higher importance to AB InBev, where a large percentage of revenue is generated, volume is sold, or growth is projected to be (AB InBev Press Release).

For 2015, Ab InBev’s Growth Driven Platforms were concentrated in the US market, the Mexican market, the Brazilian market, and the Chinese market. In the US market, AB InBev’s GDP states three aims: invest behind their brands, grow share of high end beer, and gain share of throats through near beer innovations. Investing behind the brands consists of continuing to promote the relevance of or increased market share of AB InBev’s brands that are present in the US. Growing the share of high-end beer involves investing more heavily in international premium brands and regional and national craft brands. Finally, gaining more of the share of throats through near beer innovations involves promoting and investing in the Rita line, various cider brands, and other drinks that fit between beer and cocktails (AB InBev Press Release).

The Mexican market GDPs consist of growing the beer volume, growing the share of high-end sales, and enhancing the shopping experience. Growing the volume of beer involves growing the per capita consumption through promotion of the focus brands. Growing the share of high-end sales consists of increasing the presence of national and international premium brands offered in the market. Finally, enhancing the shopping experience involves improving the packaging of products and raising in store merchandising standards (AB InBev Press Release).

In the Brazilian Market the GDPs consist of enhancing its mainstream brands, accelerating the growth of premium, and capturing geographic opportunities.

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Enhancing the mainstream brands involves growing preference for Skol, Antartica, and Brahma while addressing the concerns of public affordability with these brands. Accelerating the growth of premium brands consists of elevating the perception of the various AB InBev brands in Brazil and moving into the lead of offering premium near beer brands. Capturing geographic opportunities involves making quick and decisive moves in areas where AB InBev stands to gain in volume or market share (AB InBev Press Release).

In China AB InBev’s GDPs focus on investing in winning brands, driving strong consumer connections, and building scale and capability in in country operations. Investing in winning brands focuses on investing in AB InBev brands such as Budweiser and Harbin, as well as their super premium portfolio, in order to grow per capita consumption. Driving consumer connections involves leveraging AB InBev’s global brands, properties, and digital best practices in order to connect with consumers through brand perception and a strong digital presence. Lastly, building scale and capability in country involves maximizing performance in regional operations, fully integrating acquired businesses and green field investments, continuing to implement sales and marketing best practices, and focusing on operational efficiency (AB InBev Press Release).

AB InBev’s GDPs are customized for their respective markets, however they share several commonalities: increased investment in premium and high quality beer, growing the share of throats consuming beer or near beer products, and marketing regional brands. In markets where AB INbev has had less of a presence comparitively, Mexico and China, the emphasis on brand awareness and growing volume and share of throats is evident. AB InBev competes in these markets with a mix of local brands and global champions, and attempts to leverage the efficiencies of a global brewery group with a local or regional brand.

AB InBev: Diversified Into Soft Drink Bottling to Leverage Economies of Scope

AB InBev earned net revenue of $3,947 million from its non-beer business activities, the most dominant of which is its soft drink business. AB InBev operates 17 plants that produce both beer and soda and another 9 plants completely dedicated to just producing soda. The combination and soda plants are all located in South America, primarily in Brazil and Argentina. The combination plants take advantage of the similar bottling equipment used for both beverages and often the two products share channels of distribution. By including soft drinks into its business profile AB InBev has added large sources of revenue while minimizing the cost it takes to earn that revenue (AB InBev Annual Report).

AB InBev’s Strong Value Chain Focuses on the Environment and Efficiency

The AB InBev value chain is consistently being improved and has provided the brewer with advantages over its competitors. The infrastructure of the global brewer is managed in every detail by its global management system Voyager Plant Optimization (VPO). This system manages and sets benchmarks for water and

23

energy use, quantifies performance gaps, identifies and disseminates best practices and monitors progress of individual brewing plants (Legacy.ab-inbev.com).

The brewer is constantly looking for opportunities to reduce costs, limit environmental impacts and foster economic stability among suppliers and surrounding communities. The brewer takes part in many industry and NGO initiatives, such as AIM-Progress and SEDEX, that seek to improve supply chain performance and efficiency, promote responsible supply chain actions, guarantee ethical and fair treatment of supply chain employees, and strengthen reporting standards and practices towards those ends. A large portion of AB InBev’s value chain is based in its third party partners such as suppliers and distributors, and in order to increase the value it offers to consumers it needs to manage its partners’ actions and standards (Legacy.ab-inbev.com).

AB InBev has set eight goals for its facilities and operations to achieve by 2017 with help and input from shareholders and stakeholders. AB InBev is increasing the value offered by its products in the eyes of stakeholders and consumers with the pursuit of these goals. The goals are environmental in nature but also overlap into efficiency and input costs as well.

Reduce water risks and improve water management in 100 percent of key barley growing regions in partnership with local stakeholders.

Engage in watershed protection measures at all facilities located in key areas in Argentina, Bolivia, Brazil, China, Mexico, Peru and the United States.

Reduce global water usage to 3.2 hectoliters of water per hectoliter of production

Reduce global greenhouse gas emissions per hectoliter of production by 10 percent, and by 15 percent per hectoliter in China.

Reduce global energy usage per hectoliter of production by 10 percent. Reduce packaging materials by 100,000 tons. Reach a 70 percent global average of eco-friendly cooler purchases

annually. Reduce greenhouse gas emissions in logistics operations by 15% per

hectoliter sold from a 2013 baseline.(Legacy.ab-inbev.com)AB InBev’s value chain is increasing the value offered by its products by

ensuring efficient, ethical, and environmental supply chain operations, water and energy conservation practices in production facilities, and reduction in greenhouse gas emissions across both supply chain, distributors, and production. In the pursuit of more efficient and environmental operations, AB InBev has also been able to reduce costs associated with procurement, production, and distribution (Legacy.ab-inbev.com).

AB InBev’s Strategy Has Yielded Overall Financial Success Over the Last 5 Years

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Year Current Ratio Net Profit Margin

Return On Assets

Return On Equity

2010 .801 11.1% 3.5% 11.4%

2011 .627 14.9% 5.2% 15.6%

2012 1.01 18.2% 5.9% 17.6%

2013 .729 33.3% 10.1% 28.5%

2014 .680 19.6% 6.4% 18.4%

(Financials.morningstar.com)(AB InBev Annual Report)

With the exception of 2013, which was a positive outlier in the performance of AB InBev, the financial performance indicators represent a steadily growing or improving trend. The exception is the current ratio, which has been inconsistent and unattractive. A good part of the extra successful year in 2013 for AB InBev was the integration completely of the Modelo Group from Mexico into Ab InBev, the global expansion of Corona as a result, and the cost synergies realized between the two groups (AB InBev Annual Report).

AB InBev SWOT Reveals Competitively Important Capabilities and Opportunities

Strengths

AB InBev is present in the world’s largest profit and volume pools, and has the largest market share is most of its national markets within those pools. Four markets of note are the USA, Mexico, Brazil, and China, where either volume demand or revenue generation is some of the highest globally. It also has a well-recognized portfolio of brands under its umbrella, 16 of which are worth over $1 billion. AB InBev has a well-defined and effective marketing strategy for its brands, the three-tier system, that allows for brands to specialize in their most effective areas, and the group’s economies of scale and cost reduction practices have given it the on average best margins in the industry (Leonard, D). AB InBev is also innovative in its product creation, and uses that to attract consumers that aren’t traditionally beer drinkers. Lastly, in many of its markets AB InBev has enough control to block major entry by global competitors, and to make eventual entry much more time consuming and costly than it otherwise would have been (AB InBev Annual Report).

Weaknesses

AB InBev is weak in its geographical distribution, concentrating mainly in the Americas, however it is beginning to expand out to Asia Pacific. The group, under Carlos Brito, is arguably too focused on cost saving and not enough on selling beer. It has lost volume sales most importantly in North and South America because it

25

compromises on the perceived value of the products it offers by producing them with cheaper ingredients, producing them domestically rather than importing, and closing down historical breweries because they weren’t as efficient as AB InBev would like (Leonard, D). Despite this, the brewer has an unfavorable current ratio, which could spell trouble for it group in the event of an economic shock (AB InBev Annual Report).

Opportunities

AB InBev has the opportunity of buying national beer brands in different countries to get into the markets, and once integrating them into its operation it can cut costs and increase the profitability of the group as a whole. There are numerous opportunities to expand abroad into markets that it isn’t present in or that it only has a small presence in (Leonard, D).

Threats

Threats to AB InBev include climate related impact on water supply, grain supply and quality, and hop supply and quality. It is also threatened by structural declines in its profit pool markets, like the US, where economic conditions or lifestyle changes could result in less beer consumed per capita. There is also the constant threat of substitutes taking a portion of the share of throats from AB InBev. Finally, AB InBev is threatened by the potential entry of a competitor into one of its more controlled markets, which could drive down profitability and reduce its market share, both impacting the wellbeing of the group. And of course, there is the ever-present threat of changes in regulations, taxes, and practices of the numerous governments under which the group operates, many of which could be financially or otherwise troubling (AB InBev Annual Report)(AllianceBernstein).

The SWOT analysis reveals that AB InBev has a strong set of capabilities and resources in brand awareness and reputation, economies of scale, product innovation, and barriers to entry to its major markets. The group is weak geographically, however it is beginning to address the issue, and it needs to focus more on retaining volume sales in its major markets. Overall, the company is in a good position competitively, but needs to expand more beyond the Americas for long-term growth opportunities.

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Strengths• Present in large profit pools and

emerging markets• Well recognized brand portfolio• Effective marketing strategy• Innovative product development• Dominant player in its markets• Cost saving expert

Weaknesses• Limited geographic distribution

and presence• Too focused on cost saving, losing

sales volume in American markets

• Bad current ratio

Opportunities• Acquire breweries in markets to

establish or improve market share

• Emerging markets where population is underserved

Threats• Climate impact on grain or hop

supply and quality• Declining consumption per capita

in some saturated markets• Dominated markets becoming

fractured by new entrants• Possible changes in regulations,

taxes, trade agreements• Substitutes

SABMiller Company Profile

SAB, or South African Breweries, had almost complete control of the South African beer market when it decided to move internationally in 1992. Utilizing its experience with managing a multilingual, emerging market business, SAB decided to move into Eastern Europe, China, and other African countries. It was successful, doing most of its expansion through acquisition. In 2000 it entered into India, and in 2001 it was the first global brewer to enter Central America. In 2002 SAB shifted its focus from emerging markets to developed markets and acquired Miller Brewing Company in the US, becoming SABMiller. For the rest of the decade SABMiller entered into Latin America, as well as forming a joint venture to make MillerCoors in 2008 in the US market, the same year InBev acquired Anheuser-Busch. In 2011 SABMiller acquired Fosters in Australia, and with its success in China became one of the largest brewers in the Asia Pacific region (SABMiller History). The brewer has exposure to a wide range of regions, with its revenue being made up of: 33% from Latin America, 11% from Europe, 12% from North America, 13% from Asia Pacific, and 31% from Africa, 17% of which is from South Africa alone. However, in some cases revenue is disproportionate to volume sold: 29% of volume sold was in Asia Pacific, yet only 13% of the total profit is from there, while Latin America and Africa each account for around 18% of volume and around 32% of profit.

Like AB InBev, SABMiller’s strategy is hard to generically describe but it is most similar to best-cost provider. SABMiller seeks to offer differentiated products to national and regional customers at the lowest cost for the mass-market beer. Its

27

premium national offerings are better described as a broadly differentiated product line, as they don’t seek to compete on price as much. SABMiller’s international strategy is best described by the multi-domestic strategy. SABMiller places a high value on local knowledge and expertise and prefers to offer brands that are from the nation or region, from breweries that have a deep understanding of the local market. SABMiller doesn’t have any global beer brands, and few multi-national ones. While SABMiller caters to the local markets, they also try to incorporate as much global efficiency within the breweries they own so as to maximize profit and minimize waste.

Volume (% of Total) Revenue (% of Total)0%

20%

40%

60%

80%

100%

SABMiller Regional Volume and Revenue 2014

North America

Africa

Latin America

Europe

Asia Pacific

(SABMiller Annual Report)

SABMiller Uses A Local Brand Oriented Approach to Strategy

SABMiller focuses the majority of its beer operations on acquiring, nurturing, and developing local beer brands in the countries in which it operates. SABMiller believes that the expertise and knowledge of the local brewer is crucial to success and seeks to grow those brands and enable them to reach greater portions of the market.

In complementing this strategy, SABMiller is pursuing increasing the efficiency and effectiveness of its supporting activities so that more of the global efficiencies it offers can be applied to every brewery. One of SABMiller’s goals is to create a global business services function that will consolidate many of the back office and specialist functions of the breweries in the group, so that the process is centralized and streamlined. Another goal is to increase the role played by the global procurement organization, which currently handles about half of the procurement for the group, to over 80% in the next 3 years. This will be complimented by a restructuring of the global distribution network of input materials needed by SABMiller’s breweries so that both the purchasing of materials

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and the delivery of materials is more efficient, cost effective, and timely (SABMiller Annual Report).

Soft Drinks Play A Large Role In SABMiller’s Operations

Like AB InBev, SABMiller is also diversified into the soft drink business, but for SABMiller it is a bigger part of business. Soft drinks have grown from accounting for 16.6% of total beverage volume sold by the group in 2010 to 20.6% of total beverage volume sold by the group in 2014. SABMiller either produces, bottles, or distributes soft drinks in all of the regions it operates in except for North America, and is a key partner for Coca Cola in several national markets, including South Africa, El Salvador, and Honduras, as well as for 21 countries in Africa. In total, the group sold 56,778 hectoliters of soft drink in 2014. The total amount of beer sold by the group in 2014 was 244,837 hectoliters (SABMiller Annual Report).

The group has a couple other operations that are less related to brewing and mainly are leftovers from the large SAB business group that dominated the South African market for so long. These operations primarily include hotels and gaming operations (SABMiller Annual Report).

SABMiller’s Value Chain has a Strong Local Focus

SABMiller does almost 75% of its business in emerging markets and has a very localized business strategy. These two factors combine to make SABMiller concerned with the wellbeing of many people in its markets and allows the brewer to engage with them and create value through partnerships. SABMiller has a similar environmental focus to its value chain as AB InBev does, and is concerned with sustainable management of resources. SABMiller has 5 overarching goals that define its value chain:

Accelerate growth and social development in local value chains Promote moderate and responsible drinking Secure shared water resources for the breweries and local communities Reduce waste and carbon emissions Promote responsible, sustainable land use for brewing crops

(SABMiller.com)

SABMiller seeks to improve the value offered by its brand to stakeholders by improving the lives of the people in the communities in which it operates. Since most of these are emerging market communities, there are numerous problems to be addressed, such as unemployment, lack of skills, lack of access to markets, lack of basic necessities, structural discrimination against women, and poverty. To begin to combat these issues, SABMiller establishes partnerships with entrepreneurs, micro- and small- enterprises, and farmers to bring them into SABMiller’s supply chain activities. They are provided with funding, training, and the opportunity to increase their quality of life through employment. Additionally, the small partners are effective at overcoming institutional such as poor roads, lack of electricity in some areas, and scattered locations of suppliers of brewing crops. SABMiller engages with

29

the communities it is present in and seeks to establish a relationship that is mutually beneficial to both the local people and the brewer, which increases the value offered by its products immensely (SABMiller.com).

SABMiller is pursuing increasingly water and energy efficient operations, and in emerging markets it is partnering with local communities to ensure that they have enough supply of water and energy to function completely. In the emerging markets access to water and energy isn’t always a given, and SABMiller recognizes this, making it a priority that its operations wont be at the expense of the locals’ operations. SABMiller is also pushing to reduce waste in its markets, by promoting two way packaging, refillable bottles, and less materials used in packaging (SABMiller.com).

SABMiller creates values for its stakeholders by promoting and pursuing sustainable use of land for brewing crops. It sets increasingly high goals for the use of locally produced brewing crops, which is part of its goal to increase the wellbeing of people in its community. SABMiller and local partners have to work together to meet price, environmental, and sustainable targets in the production of brewing crops, but the process by which it does increases the value offered by SABMiller (SABMiller.com).

SABMiller’s Strategy Execution Has Yielded Overall Success From 2010-2014

Year Current Ratio Net Profit Margin

Return On Assets

Return On Equity

2010 .651 10.6% 5.1% 9.6%

2011 .705 12.4% 6.1% 10.9%

2012 .698 19.4% 7.5% 16.8%

2013 .669 14.1% 5.8% 12.4%

2014 .538 20.2% 6.3% 12.8%

(Financials.morningstar.com)(SABMiller Annual Report)

For SABMiller, like AB InBev, 2013 is the positive outlier in the data set in most categories. SABMiller’s performance is attributed in part to the full integration of Foster’s into the group, as a result of investment in developing market production capacity, commercial capability, and distribution reach, and as a result of emphasis on operating efficiencies (SABMiller Annual Report). Their weakness, like AB InBev’s, is in the current ratio, which is much less attractive than it should be.

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SABMiller SWOT Indicates Strength Through Its Local Focus

Strengths

SABMiller is present in every beer regional market in the world, and has a strong presence in Africa and Asia Pacific, two areas that have the potential to experience large amounts of growth in the industry in the medium- to long-term. Many of the emerging national markets SABMiller is present in are duopolies or oligopolies, where profit margins are higher and the market easier to defend against new entrants. SABMiller has a wide portfolio of local and national beers that appeal heavily to their domestic markets, and by virtue of their local focus they have deep insight into many markets around the world. The brewer is in the process of consolidating many of its international and global operations so it can deliver more global efficiencies to its national and local markets. Finally, the brewer is well diversified into the soft drink business, which provides another source of revenue, a different target market, and yet many economies of scope (SABMiller Annual Report).

Weaknesses

SABMiller has some financial weaknesses, predominantly in its current ratio, which is very low. The group also does not have any global beer brands, which limits its ability to completely utilize its advantages in global efficiencies and knowledge of local markets. Also, by extension of not having a global brand, its brand awareness is patchwork over the countries it operates in and minimal benefits of brand sharing can occur.

Opportunities

The opportunities present for SABMiller include the possibility of acquiring another brewery to further expand its presence in a specific market or region. It can also expand its soft drink business, and possibly even use it as a form of competing against AB InBev without going head to head over beer. Further opportunities for SABMiller include benefiting from the growth of emerging markets, in which they are the most exposed of the big four breweries, which would result in the growth of beer consumption.

Threats

Threats to SABMiller include the possibility of changing regulation, taxation, or practices of governments concerning the beer industry that would impact SABMiller’s performance. There is also the ever-present threat of substitutes gaining a share of throats at the expense of SABMiller. The group is also threatened by the possibility of new entrants in many of its emerging markets, particularly of the entrant of a global beer brand that could seize market share. SABMiller is also threatened by the possibility of downward global economic shifts, which would hurt

31

the group’s emerging market business more than it would hurt developed market business.

The SWOT analysis for SABMiller reveals the brewer’s strength in the emerging markets and in deep knowledge of markets it operates in, combined with the increasing deliverance of global efficiencies to the breweries in the group’s portfolio. Its opportunities are very similar to AB InBev’s and focus on expansion and growth from emerging market performance. Weaknesses and Threats both touch on the lack of a global brand in the SABMiller portfolio, although that is part of their strategy, and the possibility of global brands entering emerging markets and stealing market share. SABMiller is more invested in emerging markets, and any widespread economic downturn will reduce their business in those areas more so that the same effect would reduce business in developed countries. SABMiller is in a pretty strong position, with good long-term growth potential in its emerging market presence, but it will take time and the lack of a widespread economic downturn that would impact emerging markets to catch up to AB InBev in terms of market share and revenue generation.

Strengths• Present in every region in the

world• Present in mostly monopoly or

duopoly markets• Wide portfolio of local and

national beers• Deep knowledge of markets• Consolidating global operations

to increase efficiencies

Weaknesses• Weak current ratio• No global beer brands• Patchwork brand awareness

Opportunities• Acquire breweries in markets to

establish or improve market share

• Emerging markets where population is underserved

• Benefiting from the growth of the African markets in the long term

Threats• Climate impact on grain or hop

supply and quality• Declining consumption per capita

in some saturated markets• Dominated markets becoming

fractured by new entrants• Possible changes in regulations,

taxes, trade agreements• Substitutes

Financial Ratios- 2014 Show AB InBev Has A General Advantage Over SABMiller

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Financial Ratio AB InBev SABMiller

Current Ratio-Current assets to cover current

liabilities.68 .53

Quick Ratio-Most liquid current assets to

cover current liabilities.55 .47

Gross Profit Margin-Profit as a percent of sales

generated.59 .22

Net Profit Margin-Profit as a percent of sales

generated.196 .202

Return on Assets-Efficiency of use of assets 6.4% 6.3%

Return on Equity-How much shareholders earned

on their investment18.4% 12.8%

Debt Ratio-Total debt to total assets .61 .48

Debt-Equity Ratio-Outside lender contribution

versus shareholder contribution1.63 .95

Capitalization Ratio-Debt component of the company’s

source of funds.53 .37

Fixed Asset Turnover-Productivity of fixed assets with

respect to generating sales2.32 2.46

(Financials.morningstar.com)(AB InBev Annual Report) (SABMiller Annual Report)

Recommendations For AB InBev Emphasize Expansion Beyond The Americas

AB InBev is the dominant brewer in the Americas, has a decent presence in Europe, and covers both developed and emerging markets in its markets; however, it needs to increase expansion into Asia Pacific and Africa in anticipation of growth in the future and in order to learn how to function in those markets and cultures before they start growing rapidly. Establishing themselves early reduces the work AB InBev would have to do later once the market growth accelerated, and would give them an existing, integrated platform to work from rather than from a newly acquired brewery that they knew little about and hadn’t yet integrated with.

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Another thing additional international expansion would allow AB InBev to do would be to establish more International Champion beer brands that were based in different regions. The current international champions serve the North American and Central American markets, and the same regional marketing strategy could be applied elsewhere. AB InBev would also be able to expand the market share of its global champions through direct local presence in markets rather than just through exporting (AB InBev Annual Report).

Currently AB InBev is the leading brewer in the world by market share, volume, revenue, and many other metrics for measuring the industry, and its main weakness is that it is concentrated in a developed and partially developed area of the world, when there are so many opportunities emerging around the world that they have little to no presence in. The group should look to acquire breweries in promising emerging markets in Asia and Africa, which will counteract some of the advantages SABMiller has over AB InBev at the moment while retaining the control in the profitable Americas that is one of AB InBev’s advantages over SABMiller (AllianceBernstein).

Recommendations For SABMiller Focus On Investment In Asia Pacific

SABMiller has a well spread out profile of breweries from a geographical standpoint, and is involved in many high potential emerging markets that are characterized by large populations, low per capita consumption of beer, and promising economic performance. In most of these markets, they are the leading brewer in a duopoly or oligopoly, and as a result they are more profitable than a fragmented market would be. Currently China is one of the biggest, quickly growing emerging market, and SABMiller is in a joint venture with China Resources Enterprise that owns the largest brewery in the country, CR Snow. However, the market is very fragmented and profit margins are low due to intense competition. Asia Pacific represents almost 30% of volume sold by SABMiller, yet only 13% of revenue generated because of the level of competition, which drives prices down. SABMiller should invest heavily in making itself the market leader in the country, and set the ambitious goal of controlling 40% of the market by the early 2020s; it currently controls 22% of the market.

The more mature the Chinese beer market gets the less room there will be to grow and the less return that can be generated over time, particularly in the lower earning fragmented market. If SABMiller could lay enough of a claim to China that it could begin earning revenue at similar rates to less competitive markets, then it would be setting itself up to catapult into the pole position in the international beer industry. China currently sells over twice the volume of beer as is sold in the US, and the market isn’t close to reaching its capacity. Getting in now, however tough and painful for SABMiller it may be, would pay off hugely in the future (Zekaria).

One of SABMiller’s weaknesses, especially compared to AB InBev, is that it dominates many markets but none of them are large profit pools like the US market, of which AB InBev controls just less than 50% (Statista). In contrast, SABMiller owns 58% of the MillerCoors joint venture, which controls just less than 25% of the US market, roughly translating to 13% control of the US market for SABMiller

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(Esterl). The potential gain to be had from dominating the Chinese beer market in the future is worth the effort on SABMiller’s part now to try and capture it. In order to implement, SABMiller needs to continue acquiring breweries and brewing assets whenever it can, even if it has to outbid rivals and pay more than it should.

Conclusion

The global beer industry is moving towards a higher growth period in the near future as high growth emerging markets like China begin to demand large quantities of beer. Emerging markets such as India are slower growth emerging markets compared to China, but the population of the market and the room to grow in the sense of per capita consumption is enormous. Finally, emerging markets in Africa have good mixes of large populations with low per capita consumption, and represent a more medium or long-term growth prospect, but taken together with the other emerging markets there is a solid mix of near, medium, and long-term growth in the industry.

The dominant brewers in the industry have a significant advantage in this upcoming growth period. They are the most capable of entering new markets through acquisition, of applying global efficiencies to local operations, and of marketing their products most effectively. The big four, particularly AB InBev and SABMiller, have strong footholds throughout the world except in China, one of the most promising beer markets in the near-term. While there is ample evidence of the brewers already doing so, paying close attention to emerging market growth and investing in the markets while they are still small is a crucial strategy of success. The global brewers have the most success in oligopolistic markets and it is very important for them to ensure that the emerging markets of today become oligopolistic markets in their control tomorrow.

Between the two major competitors this report compared, AB InBev has the advantage today by virtue of market share, profitability, and market security. However, AB InBev is relatively limited to the Americas when compared to major competitors like Heineken and SABMiller, who are present in every region of the world. It is these two brewers that will have the advantage tomorrow over AB InBev when the emerging markets mature a bit and their beer consumption increases dramatically. The battle for the global beer industry will be fought in China and select other South East Asian markets today and in India and Africa tomorrow, and fast, initial control of the majority of the market share is the most crucial step to success for global brewers.

Works Cited

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