Graham: Beer Deals Trading at Unthinkable Prices


Dear Client:

It's been a long time coming: SABMiller executive chairman Graham Mackay headlined the full-day Beer Industry Summit yesterday, regaling us with his wit and global beer industry knowledge. Commenting on how many times had had asked him to speak, your editor quipped that "I'm was glad he ran out of countries to be in. When he ran out of those, he started inventing countries." But we were honored to have him speak this time in San Antonio.

ON THEIR "LOCALLY BESPOKE" MODEL. When I indicated that ABI used to call themselves the world's local brewer, it was actually the other way around. A-B InBev is really more like into big brands and you guys have more I would say local beers - that fair?" Harry asked. Graham said they indeed bank on a "locally bespoke" model: "We analyze the potential value, profit pools in the different parts of the beer market, in every country we go into, and try and fashion local portfolios that ... optimize whatever is available." They delegate a lot of local autonomy to managers. "And the focus is, if you like, bottom-up from the market ... much more decentralized from our competitors, we think." But you can't get away from "facts of life" like scale and cost competitive practices, and they're also are in the process of "purchasing some aspects of supply chain, account, HR management ... so that people who run the markets will be making commercial decisions," but there will still be economies of scale.

Today, they are "trying to reorient the portfolio and the business more into the growing segments," said Graham. "Our strongest position is in premium lights ... Coors Light is doing very well ... but that's not the growth segment. In fact we overindex in premium light and economy," while "what is growing is the above-premium. We have business in Tenth and Blake ... we are gaining more incremental volume than anyone else but it's still coming from a long way down."

ON GETTING MILLER VIA STOCK. How'd they convince Altria to take stock in exchange for Miller? "Altria wouldn't take anything but stock," said Graham. "They wanted the upside. Same thing is true of all the other acquisitions for shares that we've made - including that of the Bavaria business ... it wasn't on the table to take cash." Then Graham had to ask - "was this business fixable, and could we fix it? "That was agonizing," he said.

ON THE AMERICAN 3-TIER SYSTEM. "How do you view the 3-tier system?" Harry asked, reminding Graham of his audience makeup. Graham outlined its "strengths and weaknesses: it provides effective route to market," helps with the "increasingly complex" retail sector, and offers "local attention to detail," all which are hard to manage "particularly in a market as complex as the U.S."

But it's also a "high cost" system; margins are "healthy in wholesaling - much higher than rest of the world" and it has so many laws around it, "some of which you can see the logic of, and some of which you can't." But, "it is the American way" and it's "very effective."

WHAT ABOUT AN ABI BUYOUT? "Our job is to make our business as expensive as possible to buy," said Graham. Then he pointed out the obvious differences in their two business models. SABMiller has the highest share price rating in the industry because of their growth profile. "We have an embedded growth rate which the market thinks is higher than competitors, but the price we pay for that is complexity ... " Integrating the companies would be a nightmare.

GROWTH THROUGH ACQUISITION? Harry asked of the opportunities. The targets are out there, Graham said, and "it doesn't take rocket science to sort the various possible transactions of the world. ... And then there are smaller regional businesses and individual businesses." But the top 4 brewers account for 55% of global volumes ... so what is left is not as much." It's also "particularly more expensive" as owners see skyrocketing multiples - some of which have been at "unthinkable levels," like 19X EBITA.

ON CRAFT. Graham thinks it's unlikely even the current number of brewers will survive. "Trends don't last forever," he said. He outlined "conventional wisdom" wherein national mainstream brands grow until ubiquity, "and consumers drift above into more premium ... international premium brands ... now the upscale move is into fragmented or local brands. I don't think that'll last forever."

He believes the U.S. craft industry is unique. "In some ways it seems to represent a reaction to where the U.S. business had got to in the form of very bland beers: low flavor profiles, low bitterness, low everything. Mainstream beers in the U.S. are blander than the rest of the world."

Q&A: ON BEER AND SODA ON SAME TRUCKS: Graham says they have big Coke business in spots over the world - In Africa it accounts for well over 1/3 of all Coke profits on the continent. But "the selling of soft drinks is very different" and "the overlap of the distribution footprint in many countries is not that strong." In the end, at a certain size, it's not worth the complexity.

Q&A: THOUGHTS ON AN ABI-MODELO DEAL. "I think the deal will go through; exactly what has to be conceded over I really don't know," Graham said.

Q&A: ON REYES AND CHESBAY. Graham of course followed the situation with "enormous interest." Bottom line, it was an "unfortunate episode, and we think we're going from strength to strength thereafter."


JJ TAYLOR COMPANIES ANNOUCED the launch of its private compressed natural gas (CNG) fueling station and its transition to CNG. JJ Taylor has ordered 43 Freightliner Business Class M2 112 CNG tractors and plans to completely replace its Tampa-based fleet consisting of 95 diesel tractors to the cleaner burning CNG units within the next 36 months. The tractors are arriving in Tampa and will be in-service by February 2013. Plans for a second station and conversion of the company's 75 tractor fleet in Fort Myers, FL are underway.

HEIDELBURG DISTRIBUTING has purchased a long-shuttered former Cooper Tire & Rubber Co. warehouse in Dayton, and is investing $21.2 million in renovations and planning to move its north Dayton operations to the mammoth former industrial building in about six months.

TENN BILLS SEEK TO RESTRUCTURE BEER TAX. The Beer Tax Reform Act of 2013, supported by a coalition of Tennessee businesses and consumers as well as the Tennessee Malt Beverage Association , would change the way the state's local wholesale beer tax is structured, though it would still preserve the current levels of funding that the state's local governments receive from the tax.


SABMiller's Graham Mackay and BBD's Harry Schuhmacher solving the global beer issues of the time.

Until tomorrow, Harry

"If computers get too powerful, we can organize them into a committee -- that will do them in."
-Bradley's Bromide

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