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SABMiller plc (SBMRY)Stock (Consumer Products Industry, Food & Beverage Industry)
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Since beer is often substitutable with other alcoholic beverages, demand for SABMiller's products can be sensitive to the popularity of wines and spirits. With its wide range of beer brands, the company is safe with respect to shifts in demand for types of beer (premium, value, etc.). Recently, the increasing costs of barley, aluminum, and carbon dioxide, all critical inputs into SABMiller's production process, have driven up overall production costs for the company. As a result, 2006 profit fell by 5%, despite the significant increases in both sales and EBITA. [edit] Business Overview [edit] ProductsSABMiller owns over 200 brands of beer and produces over 17.5 billion liters of lager annually. A few of the most popular brands produced by SABMiller include:
By selling a number of independent brands in a single market, SABMiller is able to capitalize on shifts in demand between different classes of beer, such as value, premium, and ultra-premium brands. In addition to beer, SABMiller is also one of the largest bottlers of Coca-Cola products in the world, producing 4.5 billion liters of non-lager beverages such as Coca-Cola, Minute Made, Sprite, and Crystal. [edit] Geographical PresenceRussia SABMiller’s brewery in Russia only produces premium brands, which sell well in developed cities such as St. Petersburg and Moscow; rural areas, however, have a strong preference for discount brands, essentially limiting SABMiller's presence to urban areas. A new brewery, expected to be completed in 2009, will brew three SABMiller brands, all of which are premium beers. While SABMiller is currently the most profitable brewing company in Russia, investment by competitors such as Baltika, Sun Interbrew, and Heineken N.V. (HINKY), in the lucrative premium market may pressure SABMiller's profit margins in the region.  North America North America is the single largest of SABMiller’s markets, accounting for 28.8% of 2006 revenue. The company faces tough competition in the U.S., where Anheuser-Busch Companies (BUD) controls 48% of the beer market. While SABMiller's EBIT decreased in FY2007, due in large part to a $100 million increase in packaging costs associated with rising aluminum prices, SABMiller is looking to spur growth by cutting costs, improving industry pricing, and increasing brand strength through a substantial marketing campaign focusing on its Miller and Miller Light brands. South Africa Providing 26.5% of SABMiller’s revenue, South Africa was where the company first began brewing beer in 1895 and has remained a large source of business ever since. Despite being a relatively poor country, the premium beer market in South Africa is growing; this is beneficial for SABMiller, since it controls 75% of the South African premium beer market. However, the loss of the Amstel brand (which accounted for 9% SABMiller’s 2006 volume in South Africa) to Heineken may cause SABMiller’s market dominance to slip slightly. The impact of this loss may not be realized until later, as Heineken does not yet have the infrastructure in place to fully capitalize on the acquisition, and SABMiller will attempt to substitute other premium brands, such as Peroni, to minimize the loss. [edit] Trends and Forces [edit] Growing Markets
As the economies of Latin American countries become increasingly stable, disposable income is rising, which is leading to an increase in per capita beer consumption. The average annual beer consumption in Latin American countries of 20-40 liters is much lower than in the US and Western Europe, where the average person drinks 80 and 70 liters per year, respectively. The stable GDP growth forecasted for the region bodes well for SABMiller, as demand for beer is likely to rise along with income. The company is responding to this trend, investing more heavily in the region to take advantage of the large growth potential. By 2012, SABMiller will invest $1.8 billion to develop its production and distribution infrastructure in South America, where the company predicts sales will grow 8% per year. 
With a GDP growth rate of 10.5% in 2006, China is one of the world's fastest growing economies. While it currently has the 4th largest nominal GDP, at $2.68 trillion, China's per capita GDP is $2,034, or 105th in the world. This is changing rapidly, however, with per capita GDP growing at an astonishingly fast rate. The rapid economic growth has led to a dramatic reduction in poverty from 53% in 1981 to 10% in 2004. This strong economic growth, reduction of poverty, and the rise of China's middle class have made China the fastest-growing beer market in the world. Since SABMiller's initial investment in China in 1994, they have grown to control 15% of the market, making it the leading brewer in the country. SABMiller's growth in China has been largely inorganic, with the company acquiring several local breweries, notably the purchase of Blue Sword Brewery in 2001. The Chinese beer market surpassed the U.S. market in 2005 to become the largest in the world, with an annual consumption of 30 billion liters. In 2006, China alone accounted for 18% of SABMiller's beer volume but only 5% of its profits due to much lower margins than in other regions. [edit] Costs of Production
The rising cost of aluminum in the U.S. has recently cut into SABMiller’s profits in the region. The increased cost of production, along with increasing competition from imported brews, caused North American earnings to fall 17% in 2006. Thus, rises in the cost of aluminum could adversely hurt profits in the future. The Cost of Barley In the short term, barley prices are susceptible to weather conditions such as droughts, which may be affected by global climate change. In the long term, barley could become increasingly scarcer as demand for biofuels such as ethanol increases; some farmland traditionally used for barley production is being used to grow corn and other crops that are used in the production of these biofuels. Any shortage of barley will drive driving up prices. In fact, average barley prices have risen 17% since the beginning of 2007. The Cost of Carbon Dioxide In 2007, PetroSA, the leading producer of carbon dioxide in South Africa, closed for planned maintenance, but it remained closed for longer than was anticipated. On top of that, the carbon dioxide stored by PetroSA in anticipation of the closure was contaminated, greatly decreasing the carbon dioxide supply throughout South Africa and driving prices significantly higher. In March 2007, SABMiller announced plans to invest 100 million South African rand (roughly $14 million USD) to construct its own carbon dioxide production facilities in the country. [edit] Discount vs. Premium BrandsIndividual markets often experience shifts in demand between different qualities of beer. For example, in the past few years the US market has been shifting away from the middle-tier premium brands, favoring both lower-cost discount brands and more expensive ultra-premium brands. In contrast, the South African market is currently shifting away from the historically dominant discount segment towards newer, more expensive premium brands. These changing demands are the result of several factors, including changes in disposable income and economic development, as well as marketing and the social appeal of different brands. [edit] SubstitutesThe three major types of alcoholic beverages – beer, wine, and spirits – act as substitutes, with increasing demand for one often accompanied by decreasing demand for one or both of the others. These shifts in demand between different alcoholic beverages are often fluid and unique to individual markets. For example, over the last 20 years, wine consumption in Britain has increased by 180%, spirits consumption has been relatively steady, and beer consumption fell (though recent trends show a slight rise in beer consumption, particularly among premium and ultra-premium brands). On the other hand, Chinese beer consumption has grown 62% in the past 5 years, whereas wine and spirit consumption has remained constant. In the U.S., per capita wine consumption is increasing, while beer is decreasing, and spirits are holding steady. These often region-specific shifts can greatly impact SABMiller's performance in any one market. [edit] CompetitionOver the past 15 years, the brewing industry has been rapidly consolidating. The five largest brewing companies were responsible for only 17% of global beer sales in the early 1990s, whereas they account for 45% today. SABMiller’s two largest competitors are currently InBev and Anheuser-Busch, the first- and third-largest brewing companies in the world (by volume), respectively. Anheuser-Busch, the most profitable of the three, derives 76% of its revenue from the United States, though it has recently been expanding into China and Latin America through acquisitions of local breweries. In contrast, no single country accounts for more than a third of SABMiller’s revenue. Like SABMiller, InBev has geographically diverse operations, though its largest market is Latin America, which accounts for 37% of its revenue.
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