In the Spotlight - SABMiller in Decent Shape, but Challenges Loom

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Emerging markets are still doing the business for SABMiller, but the brewer faces myriad challenges that could define its progress in 2012.


Those challenges include cut-price beer in Europe, ongoing decline in the US, capacity constraints in Africa, a leaky Foster's business and the need to smoothly integrate its Russian operations with Anadolu Efes. For now, strong demand for beer across Africa, China and Latin America is sustaining SABMiller's growth: underlining the brewer's tag as an 'emerging markets story'. 

SABMiller's report this week of a 3% rise in third-quarter volume sales and a 7% increase in net sales, on an organic basis, underlines the current strength of its emerging markets model. However, the issues outlined above ensured a mixed reception to yesterday's results announcement, despite a broadly positive tone from many observers.

Analysts at Investec Securities argued that SABMiller faces structural problems in both the US and Central & Eastern Europe. Meanwhile, Morningstar analyst Thomas Mullarkey labelled the group's developed market beer sales as "dreary".

In Europe specifically, the brewer has struggled against cut-price competition from other mainstream lager producers. Sanford Bernstein analysts said of the group's performance in the region: "It appears that volume trends remain weak and, if anything, are slightly deteriorating".

In the US, where SABMiller operates MillerCoors with Molson Coors, the country's beer market continues to decline amid high unemployment among key male lager drinkers. This is in spite of growing demand for small-scale craft and imported beers, which SABMiller caters for through its Tenth & Blake business.

Investec's Gideon Adler told just-drinks: "Both Miller Lite and Coors Light are in volume decline and that's concerning for us. In H1, at least they had Coors Light in growth." He noted that MillerCoors has also run out of rope on its US$750m synergies target, set following the SABMiller-Molson Coors tie-up. 

"In 2009 and 2010 they were averaging synergies of $70m a quarter, now it's more like $20m and there's only $11m [of the target] to go," said Adler. Given strong growth in emerging markets, he added: "Ultimately, the US will become a more marginal part of the business."

Morningstar's Mullarkey portrayed a downcast scene for MillerCoors in calendar 2012. "We expect the MillerCoors joint venture to muddle through calendar 2012, with continued volume erosion in the core Miller Lite and Coors Light brands more than offsetting growth stemming from Tenth and Blake craft brews," he said in a note.

Many observers, including SABMiller itself, have put forward the view that problems in mature markets will not be catastrophic for the group as long as emerging markets continue to perform. Latin America looks particularly important, accounting for around 31% of SABMiller's annual profits, a little more than North America and Europe combined, according to Bernstein figures. 

In the three months to to the end of December, SABMiller reported volumes up by 11%, 8% and 7% in Africa, Latin America and Asia respectively. Among these, Africa looks vulnerable from a volume perspective. "They've warned that they have got capacity problems and that double-digit growth in volumes in unsustainable," said Adler. The brewer is planning to expand capacity in Zambia, Ghana, Uganda and Tanzania. Bernstein said that it expects the capacity constraints to hit the brewer's volumes next quarter, but that the firm may use price "to temporarily curb demand".

Beyond its existing markets, SABMiller will be under pressure to demonstrate swift progress at Foster's in Australia, which it acquired for an enterprise value of AUD11.5bn (US$12.03bn) in December. Although SABMiller was not yet in control, Foster's volume sales fell by 6% in the three months to the end of December. This was "slightly" faster than the market, indicating further market share loss.

The UK's Telegraph newspaper declared Foster's to be the "sour note" in an otherwise strong set of results. Morningstar's Mullarkey said: "We expect SABMiller to leverage the Foster's and Pacific Beverages brands by slashing back-office costs, optimising the combined supply chain, and introducing the Australian brands into additional international markets."

Beyond the Foster's turnaround, SABMiller will be looking to ensure a smooth combination with Anadolu Efes in Russia. Before the end of March, Efes is set to take on SABMiller's Russia and Ukraine operations, in exchange for SABMiller taking a 24% stake in Anadolu Efes' global business. This will create a new number two brewer in Russia, albeit some way behind Carlsberg. Longer-term, this should dilute SABMiller's exposure to Russia's turbulent beer market, but investors will want to see both firms combining with minimum disruption. 

Emerging markets, then, are keeping SABMiller on a decent course in its current fiscal year, but it is far from plain sailing.

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