SABMiller has saturated the South African beer market. It has to find a way to increase their revenue in the global market and so decided to raise capital through the London Stock Exchange. When they did not succeed in attracting investors, the company made the mistake of acquiring the second largest brewery in the United States in the hope of boosting their stock and transforming their image. But this did not significantly increase their value in the eyes of analysts and investors. SABMiller should focus more on emerging markets especially in Europe. They have proven in the past how they can use their specialized skills to turnaround struggling companies and transform them into proven winners in the local brewing industry. They can do the same to countries in Europe like Poland, Russia, Romania, and Hungary.
Corporate Logics
SABMiller believes in investing in developing markets. While many businesses will shy away from developing markets due to its instability and unpredictability, SABMiller – with its 100 years experience of doing business in emerging markets – does not mind swimming against the current. Their success in South Africa gave them the courage to go where other giant breweries dare not go. As a result they are fearless not only when it comes to establishing breweries in developing countries but also when it comes to hostile takeover of companies, as well as the acquisition of new businesses and investing in joint ventures. Aside from going into countries like Hungary, Slovakia, Romania, Peru, Colombia and Ecuador to form partnerships and acquire companies, SABMiller is also interested in purchasing manufacturing business not related to brewing beer. By doing so SABMiller was able to diversify its investments in order to remain profitable even if emerging markets are unpredictable.
This in a nutshell is their corporate logics for many decades. But at end of the 20th century SABMiller was forced to fine-tune its overall corporate strategy in order to increase their capability to expand in emerging markets. As a result corporate leaders decided that the company should be listed on the London Stock Exchange. The main goal was outlined by the Directors who remarked that the listing would put SAB “…in a strong position to pursue its strategy of growth by giving the group greater access to world capital markets and providing it with the financial resources and flexibility to pursue this strategy in an effective and competitive manner” (Johnson, Scholes & Whittington, 2008: 742). It is easy to understand this business decision but there were things that the Directors overlooked.
They seem to have forgotten that SAB moved headquarters from London to South Africa in the 1950s (Johnson, Scholes & Whittington, 2008: 741). This means that they focused all their energies and resources to make it work in South Africa and after a few decades of persistence and astute management of the company, SAB became the number one brewery in South Africa and other neighboring countries. But they were no longer a major presence in Great Britain for all those time that they spent away from their country of origin. Thus, it was not surprising to find out the lackluster reception of investors and traders in the London Stock Exchange. They may have been well known in South Africa but not in London.
Aside from the problem with name recall, experts also pointed out another major reason why SAB did not fare well in their initial attempt to increase investor confidence. According to analysts it was SAB’s failure to acquire a first-world brand and at the same time its over-reliance on cash cows located in developing markets (Johnson, Scholes & Whittington, 2008: 742). It is easy to understand why analysts and investors alike responded negatively to SAB’s attempt to raise more capital. Developing markets may generate greater margins and increase overall sales but it is also a business built on shifting sands because political and social problems in these parts of the world are unpredictable. On the other hand, cash cows in first-world countries may not yield the same revenues that they used to produce but there is assurance that income will not suddenly dry up in the face of political turmoil and other social issues.
Amidst pressure to diversify its portfolio and not depend on income from emerging markets, SAB was forced to alter its overall corporate strategy one more time. Thus, in 2002 SAB did not only establish its presence in a developed market it also acquired a major brand – the Miller Brewing Company in the United States of America. But this did not work as they expected. The Miller is not a fast-growing business in the U.S. and aside from that it was not the number one brand in America. SAB’s problems were compounded when their presence triggered a price war with their top competitor and this means that they can only manage narrow profit margins. This is perhaps the reason why in 2005 the company shifted gears and refocused their energy and resources to increase their presence in developing markets (Johnson, Scholes & Whittington, 2008: 744). They were aggressive in China, India, and many South American countries.
Strategic Position 2007
In 2007, SABMiller finds itself breaking new ground as it continues to expand its global reach as well as adding more into its arsenal of business tactics. In a simplified version of their strategic position, SAB outlined four priorities: a) Create a balanced and yet attractive global spread of businesses; b) Develop strong relevant brand portfolios in the relevant market; c) Constantly raise the performance of the local businesses; and d) Leverage SAB’s global scale (Johnson, Scholes & Whittington, 2008: 740). The key word is globalization and except for the third priority – raise performance levels of local businesses – it can be argued that SAB is still groping in the dark when it comes to dealing with the other component of their strategic position.
It has always been SAB’s forte to develop beer markets in emerging economies (Johnson, Scholes & Whittington, 2008: 741). But there is no evidence that it has become a major player in an already developed market where barriers for entry are high and the cost of doing business is also difficult to overcome. It can be said that its entry into the American beer market was a desperate move to gain investor confidence. They could no longer pretend that it is business as usual at SAB when analysts downplayed the significance of acquiring Miller. There was more downside than upside to the deal as they absorbed not tens of millions of dollars in debt but $2 billion (Johnson, Scholes & Whittington, 2008: 743). They tried to remedy this problem three years later by consolidation instead of acquisition. SABMiller merged with Grupo Empresarial Bavaria. Although they increased revenue due to the fact that Bavaria is the second largest brewer in South America, SABMiller’s debt ration increased significantly from 25.2 to 52.1 percent (Johnson, Scholes & Whittington, 2008: 744). This is not a good trend for SABMiller.
Implications of Strategy
SABMiller is not oblivious to these problems. This is the reason for the four major priorities outlined before the beginning of fiscal year 2007. But this does not mean that by following these strategic guidelines the company can turn things around. It has to be pointed out that SABMiller is no longer managing a brewery in one continent but hundreds of small and large breweries all over the world. The best way to understand their position is to use two types of management tools: PEST Analysis and Ansoff Growth Matrix. Aside from using these tools it must also be made clear that analysis must be directed on three distinct areas of management, firstly in Africa which is the main anchor of the SABMiller conglomerate; secondly in emerging economies in Europe, Asia and South America; and thirdly in developed economies like the United Kingdom and the United States of America.
PEST Analysis in South Africa
SAB was hugely successful in South America. The political climate greatly improved in the latter part of the 20th century and there are no problems that can be foreseen in this area. This is especially true beginning in the year 2000 when SAB was able to weather the political storms of the past few decades. The economy of South Africa is also improving and this is seen by its ability to impose its presence in places outside South Africa such as Swaziland, Lesotho, Rhodesia and Botswana (Johnson, Scholes & Whittington, 2008: 741). There is no problem when it comes to technology and the need for appropriate facilities to produce quality beers. The company has mastered the ability to upgrade quality and consistency of the product (Johnson, Scholes & Whittington, 2008: 741). The only problematic area of management comes from the social sphere – the HIV/AIDS pandemic can easily create a devastating impact on SAB’s workforce.
PEST Analysis in Emerging Economies of Asia, South America and other parts of Europe
It can be said that Asian and European countries are far more stable when compared with the political climate of South American countries like Colombia, Panama, and Ecuador. It does not require a political scientist to realize that these countries appear in news headlines regarding the political stance of their leaders. But SABMiller is perhaps encouraged by the potential of emerging economies and their ability to achieve healthier profit margins. This is the only upside to this business relationship as social and technological problems can also be a source of problems in the future. For instance, SABMiller has to spend more money in upgrading newly acquired companies in South America in order to make them at par with global quality standards. There is also the problem of hurricanes and severe flooding in the Latin American region.
PEST Analysis in Developed Economies – the U.S.A and UK
When it comes to developed markets like the United States and UK there is only one problem that they need to deal with and it is the economic aspect of brewing beer in these countries. With the current financial crisis affecting the labor market and disposable income of many people in America and the UK it would be doubtful if SABMiller can post record-breaking sales. The economic downturn will force people to save money rather than to spend it on things that they do not really need. Aside from that their number one competitor was able to put a stop on SABMiller’s initial success by initiating price cuts. It would be difficult for SABMiller to engage in a price war considering that they spent so much money acquiring Miller. When it comes to politics, social and technological aspects of the industry SABMiller need not be concerned with the stability of social and political structures in highly-industrialized countries.
Ansoff Growth Matrix in South Africa
In the year 2000, 49 out of 50 beers consumed in South Africa were brewed by SAB (Johnson, Scholes & Whittington, 2008: 740). This is a good example of market dominance. The best thing that they can do is to maintain their dominance in this region. It is also time for them to look into neighboring countries and duplicate what they were able to achieve in South Africa. On the other hand they can be more aggressive so that they can drive out the remaining competitors in South Africa.
Ansoff Growth Matrix in Emerging Economies of Asia, South America and Europe
SABMiller was unsuccessful in acquiring or merging with the most dominant competitor in emerging markets. It is only capable of acquiring or merging with the second largest brewer in the region. When it attempted to acquire Harbin Brewery in China, their efforts were blocked by their main rival Anheuser-Busch with an offer that is $130 million more than they believed is rational. Their inability to acquire the best is perhaps the reason why they settled for the second largest brewer in China, the Snow brand and the second largest brewer in South America, the Bravaria. Thus, SABMiller will have to work on market penetration, product development and market development in order to increase their share of the market and hopefully to drive away potential competitors from emerging markets.
Ansoff Growth Matrix in Developed Economies – the U.S.A and Italy
In developed economies, like the United States and UK SABMiller does not have the same market dominance that they enjoy in South Africa. They are only the second largest brewer in the United States and although they are upbeat with their performance in the UK the value of SABMiller shares in the London Stock Exchange tell a different tale. Thus, SABMiller need to be aggressive when it comes to increasing their market share in developed markets. But instead of diversification and producing new products, SABMiller is focused on producing premium brands that they will market internationally.
Recommendations
In 2007 one can find SAB in a risky position because it allowed itself to be spread thin all over the globe. In the first decade of the 21st century, SABMiller went through a series of costly acquisition and mergers. When it realized the folly of buying up the second largest brewery in the U.S. it shifted gears to do a merger in South America but the result is still the same, the debt ratio increased making it harder for the company to expand its business and sustain their acquisitions or mergers. It will force the company to increase their revenue in the face of uncertainties brought about by global financial crisis as well as the instability of emerging markets. SABMiller is desperate to increase profits while at the same time improve its image in the international community so that investors will be attracted to pour more capital into the company. Their decision to be listed in the London Stock Exchange did not significantly improve their value.
Based on the Ansoff Growth Matrix one can see that SABMiller will have to work doubly hard to increase their market share in both emerging and developed markets. It is only in South Africa that they enjoy market dominance but in the rest of the world they are lagging behind their main competitor. Anheuuser-Bush is not only dominant in the U.S. for it has moved into the Chinese market by acquiring Harbin a leading brewery in China. With these developments Anheuuser-Bush is the only one who can leverage its global scale and not SABMiller. Thus, SABMiller has to act fast and prove that it is indeed a turnaround specialist.
In order for SABMiller to implement a perfect turnaround strategy it must make tough decisions regarding what businesses they have to sell and retain. Their venture into developed markets did not provide them what they needed which is a boost in the stock market and massive inflow of capital. On top of that they incurred debts of up to 2 billion dollars. This is dead weight for the company and so they have to let go of Miller. They need to find a buyer for this company and if they cannot do it then they must break it down to be able to sell it to other competitors.
After selling Miller they need to refocus on emerging markets but they must stay away from countries that may have social problems that are unsolvable such as the recurrent flooding and hurricanes in Latin America. It is also difficult to understand why they should invest heavily in Colombia and Panama when the political and social climate in the said region is not attractive to investors. They can continue their South American operations but it would be best to increase their presence in India and find ways on how to leverage their assets and acquisitions in China. One way to do this is to make China a hub for their manufacturing facilities in order to capitalize the cheap labor in the said country. But their main focus should be Europe. Their success in Hungary can be a good sign of things to come. They can easily ease their way into Russia and Poland and strengthened their presence there.
Conclusion
SABMiller is a company that was built on the idea that there is fortune in emerging markets. But in their attempt to grow even bigger, they made the mistake of going into developed economies like the United States and acquired a popular brand like Miller and then changing their image from a South African company to one that is global in reach and influence. There is nothing wrong with becoming a global corporation but instead of spreading itself thin by going into highly industrialized companies where there are small profit margins and intense competition, SABMiller should instead focus on emerging markets, especially in Europe.
References
G., Scholes, K. & Whittington, R (2008), Exploring Corporate Strategy – Text and Cases, 8th Edition, Prentice Hall.