Battle For World Beer Dominance: SABMiller Enters Brazil

There are striking similarities between the colonial powers of past and contemporary beer conglomerates. For years, there has been an uneasy quiet in the world beer markets as brewers have carved out territories and regions for themselves, often finding themselves in close proximity with competitors.

Until now, they have appeared reluctant to disturb the status quo and encroach on competitors’ turf in pursuit of increased market share. Nevertheless, consolidation has accelerated in recent years, leading to high industry concentration. The growth in demand for beer in emerging markets, coupled with saturation and stagnation in developed markets, promises to unsettle this uneasy calm and force brewers to rethink their strategy. As these large conglomerates come under increasing pressure from restless investors looking for revenue and profit growth, any gentleman’s agreement that might exist is less likely to be honored in the future. Major players are poised to engage in full-blown competitive conflict in order to conquer new markets.

SABMiller
SABMiller is the world’s second largest brewer, with more than 200 beer brands and nearly 70,000 employees operating in over 75 countries. According to analysts, it currently generates 80 percent of its sales and profits from developing and emerging markets. That makes it the “most exposed brewer to faster-growing markets”[i]. It was recently hailed for its growth in these markets as its sales of lager and soft drinks grew by 5% in the quarter ending June 30. SABMiller is the leading brewer by sales volume in China, the world’s largest beer market. It also holds the top position in South Africa and second position in India. SABMiller is known for incorporating local customs, attitudes, and traditions into its promotion of local brands. This strategy appeals to the local psyche in developing brand awareness and loyalty. In contrast, its largest global competitor Anheuser-Busch InBev (AB-InBev) follows a strategy of introducing and promoting global flagship brands[ii]. Despite its success with this strategy in many markets, SABMiller lags AB-InBev in global market share with 11.8% compared to InBev’s 18.8%, according to Euromonitor International. AB-InBev’s recent acquisition of the tag “Largest beer producer by volume” through the Anheuser-Busch and Inbev merger in 2008 has sent SABMiller executives searching for ways to regain the top position. The Brazilian market may present the most promising avenue to that title.

Brazil
Brazil is the largest beer market in Latin America and the third largest beer market in the world by volume. Beer sales in Brazil have grown 7% annually in total volume, and as rapid economic growth has increased income and purchasing power, Brazil has emerged as one of the biggest global beer opportunities. Pilsner beers are the most popular in Brazil and account for about 98% of consumption, but the increased sophistication of beer drinkers in Brazil has opened doors to premium brands and other styles which accounted for the fastest growth in 2010. The landscape is currently dominated by AB-InBev, owing to AmBev’s long history in Brazil. The company boasts over 65% of the market share with popular brands such as Brahma, Antarctica, Bohemia and Skol. Other large global competitors in the Brazilian market include Heineken with 8.7% market share. The remaining market share belongs to several smaller competitors that focus on localized brands in small regions of the country. But Brazil’s attractiveness and growth potential are especially enticing to global competitors without a presence in this huge market.

SABMiller’s entry into Brazil
Currently, SABMiller has no local assets in the Brazilian market. In light of its global footprint and leading presence in other Latin American countries such as Columbia and Peru, its absence from the Brazilian market is perplexing. It is unlikely that SABMiller will continue to let Brazil be dominated by its largest competitor, but the window of opportunity is closing for SABMiller to gain a footing in the country. SABMiller usually expands its global reach through acquisitions and joint ventures, but attractive candidates are few and far in between.

This raises some interesting questions. How does SABMiller plan to challenge InBev in the third largest beer market?  How will it close the gap and regain the top place in the global beer wars?

While SABMiller’s traditional method of entering a new market entails the acquisition of an established name in the market, the firm took a different tack for its first foray into Brazil. It set out to attract Brazilian consumers by importing its mainstay global brand Miller Genuine Draft. This was a surprising entry strategy since it went against the numerous successful past market entries using acquisitions and joint ventures.  An example of its success is the venture in China with China Resources Snow Breweries that has resulted in the “Snow” brand becoming the leading beer in the biggest world market. The new strategy was unsuccessful, as MGD was met with a tepid response from consumers and sales were disappointing.

SABMiller also set its sights on acquiring Brazilian brewer Schincariol, the second- largest brewer in the country behind AB-InBev, with 15% of the market (EuroMontior). Those plans were dashed by the recent acquisition of Schincariol by Japanese brewer Kirin for $2.6 Billion, some 25% above the rumored bid from SABMiller. This is a lost opportunity for SABMiller in gaining a foothold using its traditional method of entry. A successful acquisition of Schincariol would have raised its worldwide volume by an estimated 2 billion liters. A subsequent increase in its market share with Schincariol’s established name in the third largest beer market could have narrowed the gap with AB-InBev in the Brazilian market.

The most attractive remaining buyout target in Brazil is Cervejarias Petropolis SA, which held about 7.2% of the market in 2010. Petropolis is especially strong in the fast-growing premium beer segment, but has struggled to dent AB-InBev’s strong position in “on-trade” channels such as hotels, restaurants and bars. SABMiller is better positioned to capture higher margins to on-trade channels by encouraging them to carry Petropolis brands.  SABMiller’s expertise in other emerging markets may allow it to help Petropolis’ brands grow and challenge AB-InBev’s dominance in the country.

Beyond Petropolis, the roster of potential acquisition candidates is thin. Heineken’s Brazilian subsidiary Cervejarias Kaiser Brazil SA had 2010 market share of 8.7%. Numerous other brewers, including importers and microbrewers, compete for the remaining 2-3% of the market. According to Cervejarias Petropolis SA, it is capable of serving only about 80% of Brazil’s territory. This means that SABMiller would have to invest in new breweries, since beer is a highly localized industry. On the positive side, Cervejarias Petropolis SA has a good portfolio of premium lager brands and is well positioned to capitalize on consumers drifting from standard lager to premium lager segments.

Alternatively, SABMiller could select one of its leading brands from a neighboring Latin American country and extend its appeal to Brazilian market. SABMiller is number one by market share in six other South and Latin American countries where it operates breweries. It recently acquired the third largest brewer in Argentina, the continent’s seventh-largest market.

Future for SABMiller
Although it is not clear how SABMiller plans to recover from the recent blow to its Brazil plans, it is easy to see why the wars between major players are only likely to heat up further. Brazil’s size and growth make it an alluring market for any major player seeking to expand its presence further and keep investors happy. If and when SABMiller makes a serious push into the country, its biggest competitor AB-InBev is unlikely to stand idly by. In addition to competing directly in the Brazilian market, InBev could retaliate by challenging SABMiller on its home turf in Africa, or seek to increase its influence in other SABMiller’s Latin American strongholds where it currently occupies the number 1 position.

Elsewhere, SABMiller’s recent acquisition bid was rejected by Australia’s Fosters, but that prized brand is still up for grabs. While Fosters has not ruled out further talks with SABMiller, acquiring Fosters will be challenging – and likely expensive. In the end, any truce that was historically preserved “spheres of influence” in the global beer markets is soon likely to be a thing of the past, as the major players increasingly encroach on each other’s turf in pursuit of market share in fast growing emerging markets.

[i] http://www.businessweek.com/nzews/2011-03-29/sabmiller-s-mackay-predicts-further-beer-industry-consolidation.html

[ii] “MillerCoors thinks globally, but gets ‘intimate’ locally”, Schultz, E J. Advertising Age81. 35 (Oct 4, 2010)

“Beer-Brazil”, Euromonitor International : Country Sector Briefing, January 2011.

“Global Performance and Prospect for Beer” , Euromonitor  International, July 2011.

“Subcontinent attracts despite the risks”, Jung-a, Song; Watkins, Mary. Financial Times [London (UK)] 11 July 2011: 22.

SABMiller Plc, Annual Report 2011.

[This article has been reproduced with permission from Knowledge Network, the online thought leadership platform for Thunderbird School of Global Management https://thunderbird.asu.edu/knowledge-network/]