Business Intelligence

May 2005, an ordinary day at global beer giant SABMiller. It’s 6:00am in the Tanzanian city, Dar es Salaam. A mammoth job awaits the group of distribution workers at the Makambako Depot — on average, the brewery will package 48 000 cases of beer during the course of the day. In an average week, Makambako will distribute 175 000 bottles of beer. Augustine Kissinga, one of a few hundred independent operators who have benefited from Tanzania Breweries Limited’s (TBL’s) Faida Kwa Wote (Profit for All) programme, helps his employees load local brands, Safari and Kilimanjaro lager, into a delivery truck. Minutes later, preloaded delivery vehicles depart. The longest journey will be to Songea, 990 kilometres away from Dar es Salaam.

At 11:00am in Kachumbala, Uganda, Alex Isiagi labours in the lush fields of this subtropical climatic zone alongside two members of his family and two local men. The former subsistence farmer’s been at it since 7:00am. By the end of the day, they will have cut down five acres of sorghum and laid it out to dry. This is Alex’s first sorghum crop, and he will get 90 000 Ugandan shillings (about $480) for it. He reckons he can increase his income to three million shillings ($1 600) — four and a half times more than the average income of most Ugandans, which stands at less than $1 a day.

His sorghum is bought by Nile Breweries for its Eagle lager, a product that has had quite a significant impact on the formal alcohol market in Uganda because of its high-quality and affordable lager.

By guaranteeing prices of 280 000 shillings ($150) per tonne, with purchase agreements signed in advance, Nile has managed to go from 350 farmers growing this new strain of sorghum four years ago to more than 8 000 today. Last year those farmers produced 3 000 tonnes of sorghum, up from 240 tonnes in the first year, and sold it for 840 million shillings ($450 000), giving Nile Breweries around a 50 percent share of Uganda’s beer market. This running log is a steady routine of production, delivery and sales that takes place daily in SABMiller’s breweries, depots and bottling plants all over the continent.

At 8:00am in London, home to the beer giant’s primary listing, CEO Graham Mackay’s powerpoint presentation of SABMiller’s 2004/5 preliminary results literally speaks volumes. The numbers beamed on a large overhead screen portray a company upending old ways, celebrating innovation, rising from an insular South African corporate status more than a decade ago into the second largest brewer in over 40 countries in the world with some of the most coveted brands in the booze business.

The result: Since 2002 the Africa-Asia business has almost doubled reported volumes and more than doubled turnover. For the financial year in Africa alone, earnings per share have increased by 33 percent, the volume of beer has grown organically by 4 percent. Turnover is up by 15 percent and earnings before interest, tax and amortisation have improved by 27 percent.

Interim results released in March this year paint a picture of robust growth: total revenue for Africa and Asia is $2,221bn, and rising.

Mackay attributes the bullish run to improved economic stability in most of the 29 African countries in which SABMiller has financial and beverage interests.

“It’s clear that even in an area of the world which is seen as high risk, the net effect of the portfolio has been steady growth,” he tells shareholders. “Economic stability, which is on the increase, is playing an important role: incomes are rising and investment in infrastructure is improving. That’s driving the demand and, in turn, the volume of beer we sell in Africa.”

Not bad for a company that began life in London well over a century ago, before relocating to South Africa where its primary market has resided — until the close of the 1990s. Not bad, either, for André Parker, the Group’s ebullient MD responsible for Africa-Asia, who’s managed to transform the business into a genuinely pan-African success story.

Fast forward to June this year. In the dainty halls and offices of the Group’s corporate headquarters in Johannesburg, the pallid, white-haired, husky man with a gravel voice pulls the strings on the toughest business in SABMiller — the Africa-Asia operation.

This is essentially the story of a corporate executive who, along with a team of brewery men and women, set out to remake a profoundly South African corporate culture — and instill a sense of global identity in the African continent. Because Parker has been in the company since graduating from Stellenbosch university in the Western Cape 30 years ago, it’s a story without end. This is a rare specimen of tremendous ambition and astonishing loyalty. He decided early on that SAB (as it was formerly known) offered impressive rewards and opportunities — enough to stick around in a world of such untamed economic fluidity and rapid employment mobility. That’s the constant in his life — a corporate he’s evolved with and helped evolve. His life has been variations on, and refinements of, that theme.

Today, approaching his 55th birthday, he slinks back on a mauve sofa in his roomy office during a break from endless rounds of strategy meetings and declares with an air of humility, “You tend to come out of university with an inflated ego, but irrational customers bring you down to earth quickly and you learn that customers are generally right. I tried to do the best I could and things developed with a bit of luck on the way.”

Of course, luck did play a courteous hand, but only to a certain point. To a young South African salesman steeped in certain luxuries at the breweries — a chauffeur and entertainment allowance, for that matter — that lesson dawned early on when a few marketing stints at the Group’s Newlands brewery in Cape Town prefigured an early baptism into the hurly-burly of African business.

He concedes that his responsibilities as marketing manager at the Group’s Swaziland operation were more than he could handle at his tender age. Fortunately, the margin of error was pretty small. “You learn a lot in a small self-sufficient operation like Swaziland. You learn to negotiate around issues and resolve problems, and if you messed up it was not millions of bucks at stake. You had a broader responsibility in small, contained environment,” he says in hindsight.

But there’s a mammoth lesson. The experience was an early training ground for bigger things to come.

So what did Parker do for an encore? “There’s no single highlight in my career,” he says, “nothing that stands out as a defining moment.”

Again, that air of modesty resonates. Yet after holding a number of senior positions in marketing and general management within its African operations, his appointment as MD responsible for SABMiller’s Africa-Asia business in 1994 — the year of South Africa’s first democratic elections — was probably no coincidence.

For years, SAB plodded on in an insular South African market restricted by trade and financial sanctions during the apartheid era.

“The first thing we did, following a damaging strike in the late 1980s, was to institute management and performance-based programmes with the help of US consultants, which pushed ownership down the organisation, espoused concepts like ‘you are the boss of your job’, not just the executive but the operator down the line, and armed workers with multiple skills down the line. That was the start of building a performance culture in the Group which is still alive and well, and which is pretty much behind a lot of our success.”

Then, in February 1999, the Group moved its primary listing to London, with the blessing of the South African government, in a calculated move to raise a staggering amount of capital for a global expansion drive. At a stroke, the Group raised 300 million pounds in international markets and retained a secondary listing on the Johannesburg bourse.

Outside Africa and Asia, the growth of its brand portfolio and international footprint in 50 countries across four continents was accelerated through a flurry of acquisitions and joint ventures since 1999 — including the 100 percent acquisition of Miller from Altria in 2002 — to form a diverse and comprehensive portfolio of regional and global brands including Miller Lite, Miller Genuine Draft, Pilsner Urquell, Castle lager, Peroni Nastro Azzurro, Tyskie Gronie and Snow.

But still, if there was a defining moment that will mark Parker at the brewery, it’s the beer keg of investment opportunities in the continent after the 1994 South African elections that fell upon him with all the gusto of brewery men at happy hour.

For the brewing major, Africa represented something more than a blight on the charts; it was (and still is) a test case that would help determine the world’s next stampede (China and India excluded, of course) — a struggle for virgin markets that mixes geography with economics.

Back then, the hidden wealth was hard to see — let alone reach. Certainly, other beer majors didn’t see it. But in an age of rising supplies and dwindling demand, SABMiller was willing to risk the extra cost of doing business in the continent. The South African market was saturated. Africa was frontier territory.

The next step? “The consolidation of our brewing interests by disposing of our retail and manufacturing operations (a necessary tactical move during apartheid to raise capital) and in 2003 selling off a majority interest in the hotels and gaming business segment to local empowerment partners in South Africa,” says Parker.

With the exception of Swaziland, Lesotho, and Botswana, in which SABMiller always had a strong presence during apartheid, breweries in other African countries weren’t doing terribly well.

“So we could acquire their assets in partnerships with the governments for pretty inexpensive prices. We could fix up broken businesses, bring in equipment and skills from South Africa and turn them around,” says Parker.

The unfortunate side-effect of improving efficiencies was reduced headcounts. “Our model has always been fewer well-trained, well-paid people rather than many.”

This is not to suggest that Parker celebrates the virtues of a low employment-high wage labour tradition: the seniority-based wage system. In fact, he’s helped champion company surveys that have shown conclusively that the knock-on effect is that for every job SABMiller creates, ten are created downstream — “people who harvest sorghum, sell beer, refrigerate, deliver, the owners of little pubs and so on”.

Similarly, Parker defends CEO Graham Mackay’s pledge “to run successful, profitable companies as the greatest contribution business can make to an African country’s development”.

Keeping operations profitable, he insists, makes good business sense and has nothing to do with politics.

But, he concedes, there’s no single elixir for expansion in a continent as tough, unpredictable, ever-changing ­— and unforgiving if you’re ever caught napping. And so there’s no typical day in the life of André Parker. He’s either on his mobile phone with his peers in the continent during Johannesburg’s frenetic early morning rush-hour traffic, or in the company’s private jet to — well, just about anywhere in the vast geography of his portfolio.

“It’s really about staying pretty nimble. If an opportunity emerges, you have to move fast; if a crisis develops, you have to react quickly,” he says.

In that hoary cliché: you snooze, you lose. Yet, translated in the African context, it’s literally the difference between business success and failure, he reckons.

“You can’t strategise too much because of the unpredictability of the environment. And as we have expanded through acquisitions, my job’s increasingly been about looking for willing sellers.”

If there’s a routine to his work, it’s monthly reportbacks from his technical team after periodic conference calls to each brewery in the continent and Asia.

Then there’s the monthly financials. “It’s all about information. The secret is to get your information in here quickly enough to make decisions. Once its two weeks old it’s useless.”

The Group’s decentralised operational structure helps local decision-making and makes it easier to respond to challenges and opportunities. “The guys who run the Tanzania operation, as an example, are pretty autonomous, within rules of course,” says Parker.

On a given day, Parker may spot an opportunity, round up a business development and corporate finance team, and the wheels turn seamlessly.

Meanwhile, back in the brewery in Tanzania, for example, the drone is a constant rhythm. Every day at 9am production supervisors and departmental heads at TBL meet after going through their paperwork to agree the day’s schedule. Sales representatives head out to meet their customers. The rest of the day is pretty mundane.

If there’s a strategic logic to the Group’s expansion since 1994, it’s that SABMiller has grown organically on a natural curve: staving off the challenge from competing multinationals by entering African markets first (when conditions are not rosy), forming partnerships with government-owned breweries and rolling out investment capital to turn around the fortunes of floundering state-owned entities.

As Parker puts it, “In all these countries we have an early-mover advantage — we get in early, take the plunge, and engage with governments. It’s not about South African companies being risk-averse. Our approach is to pay our school fees and get involved rather than sit back and come in at the right time when the country’s infrastructure’s improved.”

The three challenges he had to confront were: affordability issues — beer was heavily taxed and low-end African consumers could hardly afford the price — the rehabilitation of aging state-owned breweries in terminal decline, and unreliable public services like electricity and water.

The answer? “In terms of human resources and equipment, we are fortunate that Africa’s in our own backyard and it was really sweat and equity, using our own expertise more than anything else. On the public infrastructure side, sure we take standby generators. In the beer-brewing process, if your electricity goes in the process of fermentation your beer can spoil.”

But these are short-term problems of growth rather than stagnation, he suggests — which is precisely his point: Get in early when a bearish shadow looms over a country’s future and help with its development.

It is this philosophy, he insists, that will surely determine whether SABMiller builds synergies with its partners and squeezes out profits from a larger consumer market.

“It’s simple really: as the country develops, ordinary people get a bit more affluent and some of that money will come back to beer.”

Most of all, he lauds the partnership model for opening an avenue of dialogue with African governments that would otherwise be closed to foreign corporates. “As a partner, you can sit down and say we don’t have a viable business if you tax at that level, so why don’t you bring your taxes down and get more money back from profits you make as our partner? And apart from the fact that it teaches a lot of dos and don’ts in local conditions, it allows local participation. Rather take a smaller share, but the benefits of being a force for good and a member of the community outweighs the fact that you are sharing your profits.”

Small wonder, then, that the past decade has seen the Group’s African liquor cabinet expand to include Nile Breweries in Uganda, TBL in Tanzania, Accra Brewery in Ghana, Zambian Breweries plc, and a Lubango-based brewery in Angola, among many others.

But the success stories Parker likes to hold up are Tanzania and Uganda. The Group first invested in Tanzania in 1994 with an initial stake of 46 percent management control in partnership with the government of Tanzania. The Group’s current stake is 55,2 percent, producing a broad range of consumer products including clear beer, traditional beer and spirits.

With an investment of $75mn in extensive capacity expansion and an upgrade programme, the Group constructed a new brewery at Mwanza and undertook productivity and efficiency improvements in all areas.

“Then there was the ownership issue,” says Parker, “which, as a result of the government disinvesting in favour of listing on the new local stock exchange, saw the emergence of some 2 000 Tanzanian shareholders.”

In all, market share has grown from 40 to 95 percent.

In Uganda, Parker is counting on economies of scale to help generate faster organic growth that will win market share in the dispersed and largely rural market. There, Nile Breweries made a business decision four years ago to explore the possibility of introducing high-quality, affordable beer into the market. The result was Eagle lager, a classic example, says Parker, of public-private partnerships. Nile approached the Ugandan government and put forward a case for collaboration. The project involved using locally harvested sorghum rather than costly imported ingredients to brew beer for the local market. The government saw the project’s potential for job and wealth creation, and agreed to subject the beer to a reduced excise rate of 20 percent, rather than the 60 percent charged on those made from imported ingredients. This not only meant that Eagle could retail at a third less than the price of lagers that use imported barley, but also the creation of some 8 000 sorghum farmers like Alex Isiagi.

As a result, in just four years Eagle lager has achieved a 25 percent market share. In the next financial year Nile plans to spend $900 000 on sorghum — 55 percent of which will go to the farmers, with the remaining 45 percent allocated to transport, procurement and processing.

The same business model was duplicated in Zambia where sorghum beer has a 60 percent market share of the overall drinks market, with clear beer and carbonated soft drinks commanding only 20 percent. SABMiller already has a 50 percent share of the sorghum beer market via its Chibuku brand, and boasts 100 percent of the local clear beer market.

In a strict business sense, the emphasis on sorghum farmers is non-core. But to come back to Parker’s partnership model, the total benefits the Group recoups in additional volumes outweighs the cost of propping up local farmers, bottlers and distributors.

“You have to adjust your business model in these countries,” he says.

At a time when beer is making a strong comeback as a drink of choice, he’s pleased that SABMiller’s Africa and Asia operations now contribute about 13 percent of Group profits and directly employs some 7 000 people.

The aim now is developing new brands and achieving economies of scale to increase market penetration.

Not everyone agrees that the Group’s bullish run in the continent can be repeated in countries like Nigeria, one of the biggest potential markets in Africa next to South Africa. Some commentators have described the past decade as a “bargain basement sale”, while the higher multiples expected to be paid for new acquisitions point to much less on the upside.

But most of all, Parker is betting on developing newly acquired brands in the continent.

On paper, at least, the thinking looks timely. The Group’s strategic development session for the next five years places a premium on new brands, new product innovation and affordability, rather than virgin markets.

The focus of the African operations is on product availability — “moving the brands beyond the urban centres”, Parkers says.

“It’s like saying here’s our footprint, how do we get full potential from the business?”

Across all 29 African markets there’s certainly scope for consumption growth, given the underdeveloped nature of the beverages markets, while SABMiller has also identified room for productivity improvements.

Looking ahead for Africa, Parker expects mid-to single-digit growth in organic volumes over the medium term, with pricing expected to remain flat in real terms.

Future “A Team” players are Tanzania, Zambia, Mozambique and Angola. The Group’s cash cows include Swaziland, Lesotho and Malawi. Zimbabwe is a problem, with tough but positive results in Uganda and Ghana.

“Going forward, I hope that favourable economic prospects in the continent as a whole will create more affluent consumers. I hope also to lower the price of beer at existing margins through raw materials substitution, for covenience to introduce one-way packs and gain further clear beer market share and traditional beer expansion.”

As early as July last year, the global brewing giant forecasted low double-digit organic growth in its earnings before interest, tax, amortisation, and exceptionals from its operations in Africa and Asia (excluding South Africa) in constant currency terms over the medium term.

According to Parker, SABMiller’s Africa-Asia division now accounts for 50.95 million hectolitres or 28,95 percent of the Group’s total lager sales volumes. The division’s turnover reached almost $2,22bn for the previous financial year, with an EBIT margin of approximately 19 percent and rising.

Of course, the timing of when the Group’s expansion strategy goes from dream to reality isn’t just a matter of an investment here or market share there. It takes years before economies of scale make beer an everyday choice for consumers. Whatever the challenges, a continent of consumers is certainly looking a lot more realistic than a return to the menacing days of irrational statism.

This article was first published in Business in Africa Magazine (International Edition), July 2006. To subscribe click here