South African Breweries - Achieving Growth in the Global Beer Market

South African Breweries
Achieving Growth in the Global Beer Market

Group Research

Market – Global Beer Industry

The opportunity for South African Breweries (SAB) is to leverage their expertise and expand into new international markets.

Facts
SAB held a 98% share of beer in 1999 in South Africa
4th largest brewer in the world by volume
50% in the African continent
Their biggest share is in Europe
Beer is local

Assumptions
SAB had long been the dominate player in Africa and growing rapidly in emerging markets
At one time they had a negative brand image in the United States
The company’s vision was to be rated one of the top 5 brewing companies in the world
Beer was forecasted to increase from 18 billion to 28 billion by 2010

Core Competencies
SAB strength drives from its abnormal skill at cooping with the demands of a highly abnormal market
Geared towards emerging market economies:
Understanding developing world conditions
Understanding how to utilize assets
Cost Management
Delivery of a product that was both high quality and low cost.

Alternative #1: Purchase Foster’s Brewing Group and operates globally. Porter’s Strategy: Differentiation

Advantages:
Foster’s has an existing positive brand image
Foster’s is available in over 140 world markets already
We can use some of our low-cost strategies to streamline production
Foster’s flagship brand has recently grown 10% annually

Disadvantages:
Purchase will be expensive
Much of Foster’s international expansion has been through licensing ventures, which will all need to be transferred to SAB-could face legal intricacies
Foster’s also provides other alcoholic beverages, so SAB will have to become familiar with these new products and their customers
There will be cultural barriers to buying an Australian company

Alternative #2: Create a new high-end beer to sell in America. This would be a new recipe based on what we think the American beer drinker would enjoy branded as a South African import.
Porter’s Strategy: Focused Differentiation

Advantages
There is currently not a South African import that has significant market share in the United States, so Americans will be excited about a new product
The United States is at the larger end of the spectrum with regard to per capita beer consumption as well as per capita income, so there is a market and there is money in it
Since we will operate within the United States, there will be no need for licensing a current name
It would be a higher end imported beer with higher margins

Disadvantages
We have to count on the fact that Americans will like our beer
South Africa has a negative image due to its past issues with Apartheid, which might deter some beer drinkers from buying South African beer
The marketing costs for developing and selling a new brand are often extremely high
The labor costs in the United States are higher than South Africa and other areas of the world, which will make this beer more expensive to produce than some of SAB’s other ventures

Alternative #3: SAB would partner with Carlsberg in Eastern Europe to streamline operations, leverage the Carlsberg brand, and become the low cost provider in the region. Porter’s Strategy: Low-Cost provider.
SAB has some experience in Eastern Europe, so the market is not completely foreign to them.
As a partner, SAB only shares in part of the financial risk, if the venture is not a success.
Carlsberg has a positive brand image already
Labor costs in Eastern Europe are relatively low, which will make it easier to become the low cost provider

Disadvantages
Per capita income in Eastern Europe is relatively low, which would lead to low prices
Imports may not be successful in Eastern Europe
Carlsberg employees may be resistant to the cultural changes brought about by working with a South African company, including language barriers
Neither Carlsberg nor SAB have experience in Eastern Europe and may have problems integrating a brand into this culture.

We chose Alternative #3: SAB would partner with Carlsberg in Eastern Europe to streamline operations, leverage the Carlsberg brand, and become the low cost provider in the region. Porter’s Strategy: Low-Cost provider

C is better than A because SAB can specialize in an area that they already do very well, which is produce and distribute beer at a low cost. If SAB were to purchase Fosters (choice A), SAB would not be able to focus on their biggest strengths, which are production and distribution.
C is also better than B because, again, SAB can specialize in an area that they already do very well, which is produce and distribute beer at a low cost. B is not as good as C because imports from South Africa are not considered premium, and it would be difficult to establish that fact in the U.S.
SAB’s mission is to produce and distribute beer at a low cost to customers throughout the world in an efficient, streamlined manner.
Financial objective: Annual increase in profits of 5% by 3rd year. SAB can achieve this goal by partnering with other beer companies who want to expand their brand globally yet do not have the production and distribution experience.
Strategic objective: Derive 10% of total revenues from the new production and distribution operations after 3 years.
Porter’s strategy: Low-cost provider – SAB will be the low-cost provider providing production and distributing expertise for other beer companies throughout the world. They will be the worldwide efficiency experts in the beer industry.

#6 Key Positions:
Manager of Production: specific to the Carlsberg account
Manager of Distribution: specific to the Carlsberg account
Government Liaison – interface between SAB/Carlsberg and various Eastern European governments

Core Competencies
Leverage SAB’s strength as a beer provider in emerging market economies by partnering with an experienced international brewer (Carlsberg) and expanding into Slovakia.
SAB will utilize their existing Eastern European breweries to produce Carlsberg beer and distribute throughout Eastern Europe.
SAB’s experience in understanding developing world conditions will allow them to leverage this knowledge to successfully expand the Carlsberg brand into Eastern Europe.
SAB will help Carlsberg save production and distribution costs as SAB is very experienced with cost management.
SAB is also experienced at providing high quality products and can produce a good quality product for Carlsberg, protecting their brand.

Budget
SAB/Carlsberg - In U.S. Dollars

2000/2001 2001/2002 2002/2003

Revenue $9,189,333 $22,973,333 $41,352,000

Costs and Expenses
COGS $4,594,667 $11,486,667 $20,676,000
New Headcount $36,000 $36,720 $37,454
Operational Costs $1,837,867 $4,594,667 $8,270,400
Shipping Costs $459,467 $1,148,667 $2,067,600
Facility Upgrades $1,500,000 $0 $0
Total Cost of Sales $8,428,000 $17,266,720 $31,051,454
Operating Income $761,333 $5,706,613 $10,300,546

Assumptions: Year 1 revenue is a conservative 2% of SABs 99/00 EBIT
Year 2, revenue based on 10% market share of total Eastern Europe
Year 3, revenue based on 20% market share of all of Eastern Europe
COGS - 50% of revenue
Headcount based on double the GNP of Czech republic in 1991
Operational Costs - 20% of revenue
Shipping Costs - 5% of revenue
Facility upgrades for modifying processes for Carlsberg production

Policies and Procedures
When purchasing raw materials, SAB will always acquire the best value material – high quality at a low cost to support our low-cost provider strategy.
We will have stringent quality assurance measures to assure consistent taste in every batch of beer we produce.
We will distribute our beer products within a week of production in all of our facilities in Eastern Europe.

Benchmarking Best Practices
Anheuser Busch for distribution – Anheuser Busch is such a high volume producer and distributes internationally. Their skills at international distribution would be an excellent place to benchmark our superiority, or garner best practices with which we could streamline our distribution processes.
Heineken for global branding – Heineken has the worlds most well known brand. SAB and Carlsberg could both benefit from studying the tactics that Heineken utilizes in how they approach there marketing and leveraging of their brand.
Starbucks for quality assurance – Starbucks has stringent quality assurance for their beans and raw goods. SAB can benchmark their raw materials purchasing process against Starbucks bean purchasing process.

Support Systems
Accounting System – implement a computer program that manages the multi company revenue splits and cost
Software that can be accessed by both companies for monitoring
Integrates with buyers and distribution centers

Quality Assurance by implementing computer controls to monitor every step of the brewing process
It would monitor brewing time, heat, ingredients, alcohol percentage per batch

Distribution Management Process
Computer system set up to keep track of batches of brewing
When they are brewed or dated
General inventory control – when the batches are shipped

Designing a reward system

Currently, SAB has a Wealth creation, reward and recognition program. They are optimizing the creation of wealth to provide security but providing fair rewards and recognition for the contributors of all stakeholders. Our recommendation would be to build off of the current program. We will be expanding the reward system to individual, team and corporate rewards. For instance a tiered structure could be set in place.

Individual Rewards
These would be on the spot recognition for meeting production and distribution quotas.

Factory Distribution Workers
If they meet 98% of the monthly production and distribution quotas they will receive a free case of beer.
If they meet 99% of the monthly production and distribution quotas they will receive a free case of beer and half a day pay.
If they meet 100% of the monthly production and distribution quotas they will receive a free case of beer and a full day of pay.

Performance Rewards for Management
Performance rewards could be provided to management when the meet and exceed quarterly revenue projections:
ODB – Officers Discretionary Bonus – Monetary amounts of $250, $500, $1000

Company Goals
SAB could set up a “TIP” program, Target Incentive Program. This would be as the company hits certain goals and objectives they would be able to provide the employees bonuses on an annual basis that reflect the company’s success. For instance: If SAB hits certain revenue objectives the company would provide a percentage of the employees salary based of the company’s targeted amount to be set. The employee would get 30% of their salary based on their individual performance and then a 70% of the company target factor. So if the company targeted 100% the employee would get 30% of their base salary plus 100% of the targeted amount worked out in a formula set by the financial team at SAB.

Organization Culture
SAB and its employees share a commitment to and responsibility for, as it relates to the company’s values and beliefs towards its culture. They have created an environment that has open, honest, respectful communication and freedom of expression. This important because then all employees feel valued. In the customer service area the provide quality and value to satisfy the requirements of all their internal and external customers. This mission enables the employees to focus on the most important person – their customers. By focusing on quality and value they are learning behaviors about their products that translate into the performance on the job. Deliver the highest quality service and value all customers. Deliver on promise of product quality. Because the product quality is not compromised the employee’s will behave in a similar fashion. Providing products of uncompromising quality to meet the needs of their customers and consumers is top priority.

The company is focused on continuous improvement. As we move forward we will be creative and innovative in all that they do to insure continuous learning and improvement. By investing in their employee’s and their products this creates an environment of loyalty, dedication while improving the business on all cylinders.

The company’s policy regarding people is to treat each of them with trust and respect, upholding human dignity and ensuring treatment and equal opportunity exits. Creating a culture that respects everyone from the maintenance crew all the way up to the top is important. No one person should be treated different then the rest. Out of respect for each employee, the SAB also allows each employee to participate and empower them to do their jobs.

Employees’, who participate in problem-solving and decision-making processes through effective individual and team empowerment, work better together and work to resolve issues and/or better the company. One of them is not as good as all of them. Working together helps build the team environment and allows them to make decisions by “Freedom with-in a Framework”.

A culture that focuses on employee development is creating a win-win for the organization. SAB created an environment for all individuals and teams to develop to their potential for the benefit of themselves and the company. To invest in the individuals, ultimately improves the company. SAB is concerned about the community and the environments, which they are in. They company is actively involved in the improvement of the environment and quality of life in the communities within the areas they operate. A culture that not only cares about their employees, but cares about the environment speaks volumes of their dedication towards on another. It shows they value all aspects of their business from their customer, management, and employee’s and where they brew, sell and provide their products.

6-H
Leadership Practices

Keeping the internal organization focused on operations excellence is key to the company’s strategy. This will continue to provide SAB the ability to create customer loyalty while gaining market share.

Leadership style 1
Ensuring that the rewards for successful champions are large and visible and that people who champion an unsuccessful idea are not punished or sidelined but rather encourages them to try again.

For SAB, creating an environment where leaders visibly recognize staff is important. A manager from the distribution center will publicly recognize its employees who provide innovative ideas for improving process. They will be given a full day pay if the process is implemented.

Leadership style 2
Encouraging individuals and groups to brainstorm ideas. By letting their imagination fly in all directions this will help them come up with proposals for improving how things are done.

Our recommendation would be that SAB Sr. Management would create a Matrix environment where employees from different departments form teams to work together on brainstorming ideas to streamline process and consolidation. These Matrix teams would work together sharing different perspectives from their disciplined area’s but would come together to come up with innovative ideas to better the business in the production and distribution areas.

Leadership style 3
Taking special pains to foster, nourish, and support people who are eager for a chance to try turning their ideas into better ways of operating.

How this would look like is that SAB Sr. Management would set up a creative program such as the “BRIGHT IDEA” club. Employees would be encouraged to submit new ideas to a central depository. The ideas would be brought before a committee where they would vote on the viability of the idea and how to implement it into the system. The employee would receive a “BRIGHT IDEA” award and would also get a monetary amount of $100. Being that the employee came up with the idea they would also participate in the process of implementation and refinement.

#7)
SAB Partnership with Carlsberg in the Eastern Europe market. (U.S. Dollars)

Financial pro forma 2000/2001 2001/2002 2002/2003
Revenue 9,189,333 22,973,333 41,352,000
ROI 38% 248% 343%
Income from ops. 761,333 5,706,613 10,300,546

Strategic pro forma
Market Share 3% 10% 20%
Geographic coverage in East Europe 5% 30% 60%
Number of countries 2 4 6

Assumptions:
Total invested assets 2,000,000 2,300,000 3,000,000
Based on investment in facility upgrades, personnel costs, and licensing
SAB EBIT 2000 68,920,000
EBIT in Eastern Europe 1,378,400

#8

#9) Competitive Advantages
SAB already has breweries and distribution capabilities in six eastern European countries.
We will leverage this to expand the Carlsberg brand. Carlsberg already has 88% sales internationally and will leverage the international brand awareness into Eastern Europe.
SAB has streamlined its production capabilities to become low cost provider and will extend the capabilities into Eastern Europe.
Eastern Europe is an emerging market. SAB has a lot of experience in establishing beer brands in emerging markets.

Sustainability
We will sign a three year contract with Carlsberg to be their exclusive brewer and distributor in Eastern Europe.
Our strategic market plan is to form exclusive sales with bars and liquor stores to be the exclusive imported brand.
We will partner with restaurants to create exclusive Carlsberg signature dishes as well as be the exclusive imported brands in restaurants. Example: Jack Daniels dishes in Friday’s restaurants in the US. We could create specials for cheese and beer, or beer bread, and beer battered fish dinners.

Implementation Problems
An unanticipated burst in the European beer market could overload our production capabilities. The predicted demand could be greater than the production capabilities.
Bringing the three cultures, the Danish, South African, Eastern European, may not work.

Implementation Opportunities
We could leverage our distribution capabilities as proven with Carlsberg to be the low cost distributor with Coke in Eastern Europe.
We could expand the Carlsberg brand into the rest of Europe because we already have production capabilities.