When South African Breweries bought Miller Brewing in 2002, many wondered if it had overpaid for a company that was destined always to shrink in the shadow of Anheuser-Busch. However, midway through its turnaround programme, SABMiller is proving its doubters wrong. With the all-important summer period ahead, CEO Graham Mackay may yet have the class to pull out an upset or two.

Like two heavyweight boxers preparing for a title fight, SABMiller and Anheuser-Busch have been squaring up to each other in fascinating fashion over the last month, not just in China but in the US too.

Advertising campaigns have been launched by both sides in the US, each countering the other's messages. The very fact that Anheuser-Busch has been forced to respond to Miller's ads is a sign that the challenger is growing in stature. As Miller president and chief executive Norman Adami said in an interview last week: "The dominant brand is now engaging in a 'choice' conversation with a much smaller brand."

While SABMiller has long played the role of underachiever to A-B's World Champion, these are growing signs that an upset is on the cards over the summer. While a knock out is hardly realistic, a bloody nose for the number one may well be.

SABMiller, the world's second largest brewer, last week reported a forecast-beating jump in annual profits of 49%. Although it was boosted by one-off items, such as the popularity of the Atkins Diet in the US and the strength of the South African rand, the underlying growth was encouraging.

The battle between SABMiller and A-B for Harbin in China is perhaps attracting the headlines at present, but more interesting to long-term investors in both brewers was that overall Miller volumes showed a 5.3% rise in the second half, slowing the fall in annual volumes to 0.8%.

When the emerging market specialist South African Breweries acquired Miller Brewing in 2002, it raised more than a few eyebrows when it said it could turn around the troubled US business. But now the company looks on schedule to see stable beer volumes by 2005.

The turnaround has been led by Miller Lite, which has grown volumes since July 2003 and posted a double-digit growth rate in the last six months.
That said, there are, of course, concerns that the growth in Miller Lite has been fuelled by the current mania in the US for all things "low-carb", begging the question, what will happen once the craze fades?

"I think that even though the low-carb phenomenon may plateau and fade, there's every evidence that we've made progress with broadening the appeal of Miller Lite and spurring reconsideration amongst a broad category of drinkers. So I think that its reliance on low-carb as a proposition will decline over time," said SABMiller CEO Graham Mackay in an interview on cantos.com last week.

So the challenge now is to maintain the progress. To that end a good base has been laid down in the US. A new focus on marketing - including a 50% rise on last year's advertising spend for Miller Genuine Draft and Miller Lite between April and July - and 200 new sales and marketing personnel are leading the charge.
There has also been a strong dialogue between SABMiller and its distributors, which saw the brewer assure its partners it was serious about growing Miller. It appears to be paying dividends.

"I think that what the distributors are seeing is evidence of our work," said Mackay last week. "I think they have the feeling that this is a business with more purpose, with more leadership and anecdotally, and on average, I think it's quite clear that they are starting to believe in the Miller Company as a whole. Emotionally as well as just in response to the detailed work that has been done."

Certainly there are going to be hard times ahead. Acquisitions of the scale that SABMiller has grown on in the past are drying up. And a backlash from Anheuser cannot be underestimated, particularly if the US giant decides to cut prices in the battle between Bud Light and Miller Lite - a strategy A-B can much better weather than its smaller rival.

There are also questions concerning the SABMiller portfolio and its lack of a blockbuster international brand. However, the company has already achieved what many people thought beyond it and breathed new life into the struggling Miller business, turning in rates of growth few can match in a developed market such as the US.
Mackay, for one, appears confident he can maintain the recent run of form. "Certainly in the short-term there are no signs that the momentum is fading," he said. "We have a full pipeline of marketing activities which are supporting Miller Lite and Genuine Draft right now."

He is not alone. "Large companies rarely succeed on all fronts. There are always areas of weakness. This makes SABMiller's results for the year ended in March all the more intoxicating," wrote the UK's Financial Times last week - praise indeed. Anheuser can ill afford to underestimate this challenger.