SAB Brews Up Big Trouble for Bud

Published in CSP Daily News

Miller owner shares his thoughts

NEW YORK -- When Philip Morris sold seemingly washed-up Miller Brewing to South African Breweries in 2002, the general view was that the beer guys from abroad overpaid and would struggle in the United States. Turns out, Miller Lite was the fastest-growing major beer brand in America last year, and profits are up, according to Fortune magazine.

SABMiller's stock has nearly doubled since the acquisition. Meanwhile, Anheuser-Busch has seen profits fall for the first time in 10 years, and its stock is down 12% since mid-2002.

Pouring its cash flow from Africa, where it dominates the brew trade, into acquisitionsPeroni in Italy, Pilsner Urquell in the Czech Republic, Tyskie in PolandSAB has more than tripled its sales, to $14.5 billion, in four years.

SAB CEO, South African Graham Mackay, 56, talked to Fortune about A-B's foibles, fashion in the beverage business, and his bid for clout in Latin America.

Fortune: The summer beer wars are raging. What's different?

Graham Mackay: Two seismic shifts: the continuing outperformance of spirits and wine for the first time in many decades, and the stalling of the steamroller advance by Anheuser-Busch. A-B used to take all the incremental growth, while the rest of the industry got weaker. We've become much stronger, and to put it unkindly, there's no longer a carcass to feed on.

Fortune: But except for Miller's revival, the U.S. beer business is in bad shape. What's wrong?

Graham Mackay: The beer industry was doing the same thing for too long. The dominant player was doing fine and didn't have to change the game. Product positioning became downmarket. Meanwhile, the spirits people innovated; you know, you've got 65 varieties of premium flavored vodka. It's being driven by fashion.

Fortune: Anheuser-Busch won't talk with us about its problems. How do you see A-B?

Graham Mackay: It's trying to use price discounts to restore growth momentum. It's an extraordinary thing for it to do. That's the stuff you see being done by failing competitors. It's not what you expect from the leader.

Fortune: How have you revived Miller Lite?

Graham Mackay: Miller Lite didn't stand for anything; it was trying to be a me-too to Budweiser. We focused on the intrinsics of the beer, which hadn't been talked about for ages. That led to the low-carb positioning and the taste challenge against Budweiser.

Fortune: In a 2004 letter to shareholders, you say the global beer industry is entering its second phase of consolidation, where giants will merge. Could Belgium's Inbev (the largest brewer by volume) combine with SAB or A-B?

Graham Mackay: (Laughs.) You don't have to be a rocket scientist. Theoretically, a combination between ourselves and Inbev or ourselves and Heineken could be contemplated. Not between ourselves and A-B because of U.S. market overlap, but between A-B and any of the others.

Fortune: You recently announced your largest acquisition ever: Bavaria, for $7.8 billion. That's not Germany. That's Latin America. Why?

Graham Mackay: The Andean region is set to grow for a very long time. And it's a beer culture.

Fortune: You're Coca-Cola's biggest bottler in Africa. Do you notice improvements at Coke?

Graham Mackay: Coke is very serious about reengineering its system. They're going to great pains under Neville Isdell and his team. Attitudinally, I see tremendous progress. But you don't turn a huge company in a year or two.

Fortune: SAB is known for its vigorous style of competing in the marketplaceand for its vigorous ways of evaluating managers. I understand that you use psychologists to do psychometric testing of your managers.

Graham Mackay: We've always believed in deep analysis of our people. We use psychometrics in hiring and in major promotions to see if people fit into our culture. We prize intellectual rigor and emotional engagement.