SABMiller may have seen beer volumes rise by 3% in the first six months of the year but the impact of rising commodity prices, the global economic downturn and the credit crunch have given the brewer a cautious, if not downbeat, outlook for the second half. However, Chris Mercer writes, the company believes its premium positioning will bolster it during the tough times ahead.

Shares in SABMiller plunged 8% yesterday (15 October), mirroring a general slide on the FTSE 100 but also reflecting a growing feeling among some analysts that consumer product companies have yet to feel the worst of the global credit crunch.

SABMiller's beer volumes rose 3% in the six months to the end of September, the company said this week. However, the brewer warned: "Deteriorating global economic conditions, weakening consumer demand and volatile exchange rates make the prospects for the rest of the financial year increasingly uncertain."

Alan Clark, managing director of SABMiller Europe, believes the group's premium brand positioning will help. He told journalists on a media trip to Poland and Romania last week that middle-market brands were at greater risk. "In times of economic uncertainty, people will tend to buy down into the discount sector, but buy up into premium to treat themselves when they go out."

SABMiller's Peroni Nastro Azzurro beer has performed particularly well in the UK's premium sector, and the group last week cited Nielsen figures showing growth of 46% year-on-year for the brand.

One concern raised by analysts is that SABMiller has over-exposed itself to emerging markets. Africa, Asia and Latin America account for 39% of group operating profit and half of volumes, and that is excluding the likes of Russia, Romania and Poland.

However, chief financial officer Malcolm Wyman said this week that, although emerging markets were suffering, they would still see "reasonable levels of GDP growth".

GDP growth in Poland, where SABMiller owns leading brewer Kompania Piwowarska, is expected to fall from 5.3% to 3.8% between 2008 and 2009, according to figures compiled by the Economist Intelligence Unit. Still, that compares to predicted average growth of just 1.1% across the EU in 2009.

Russia is one emerging beer market that has run into trouble in 2008. Poor weather and consumer price inflation have disrupted growth, with SABMiller this week reporting a 4% drop in volumes in the first half.

Wyman declined to comment on the brewer's growth expectations in the country for the full year, but predicted the market as a whole would rise in the low single digits "over the longer term".

Europe managing director Alan Clark said last week that a lower rate of growth in Russia "does not come as a surprise", adding that the premium category continued to outperform. SABMiller holds a 6% share of the Russian beer sector, compared to leading player Baltika, which controls more than a third.

Clark said SABMiller intends to increase its presence in the country over the next five years. "We don't see ourselves as a major player, but an ambition of 8% to10% would not be unrealistic for us to strive for," Clark said, adding that the company "needs to expand its geographical footprint" in Russia. To this end, it is currently building a new brewery in the Volga, around 1,000km south of Moscow.
As if the global credit crisis was not enough, raw material costs have also continued to soar during the last year. Many brewers have found themselves in the nightmarish scenario of having to raise prices at a time when consumer confidence appears to be hanging by a thread.

Clark said that hop prices had tripled in the last two years, while barley prices were up by between 40% and 50%. This, he said, has pushed beer prices ahead of consumer price inflation.

"It's unusual and it's a cycle that we want to get out of, but we have had no option because of the higher commodity prices. We do expect [commodity] prices to moderate in the coming years, but they will remain quite volatile." Long-term contracts with suppliers, he said, would help larger brewers to absorb the increases.

Clark believes that efficiency gains and cost savings will take on even greater importance in the brewing sector, and expects that SABMiller will need to consolidate its operations in Europe. "If you look forward ten years, it is likely that we will have less breweries than we have today," he said.

Brand growth, however, is expected to continue apace. SABMiller clearly has ambitious plans for Grolsch, the Dutch brewer it bought last autumn for EUR816m (US$1.1bn).

"It's a classic northern European lager," said Clark. "That's what we were missing from our portfolio." He said Grolsch had the potential to be an international brand and a "strong driver" of growth in the company's main markets in the coming years. Those markets, he added, ranged from the UK and France to Poland, Latin America and Australia.