South African Breweries

Case 21

South African Breweries

Executive Summary

South African Breweries (SAB) one of the biggest global producer of beer which is facing several problems such as:

* SAB has operated in many countries with instable currencies which makes company looking for other alternatives of sufficient capital.

* Whether is better to enter emerging markets or developed markets.

* SAB stays on intersection which leads to many local brands in one direction and one global brand in other direction.

* Stay alone with implementing more effective information technologies or merge with other serious global competitor.

SAB can implement several alternatives which can solve those issues and lead to higher profitability such as:

* Preferring emerging markets instead of developed markets because of higher potential of increase in profitability.

* Establishing one global brand but with keeping local brand productions with its local names but only as variety kinds of one main international brand name.

* Changing existing accountings in countries with instable currencies where SAB operates to accountings based on harder currencies such as Euro, British pound, or American dollar.

* Merge with other international competitor which plays major role in different areas of the world and be better off. Moreover, there is a potential to cooperate or make consolidation with other competitor and invest into untouched areas such as Muslim countries.

In spite of the fact that there are many strengths which SAB poses, there are some weaknesses too which SAB should deal with. On of the major weaknesses is a weak currency by which SAB operates in Africa. Because SAB covers almost 98%of the whole market in the beer industry and all contracts, accounts payable and receivable or any earnings are in South African Rand which is instable currency. Moreover, according to many statistics, most of the customers in South Africa who drink a beer have HIV or AIDS. In other words, an average lifetime of the particular customer is shorter than an average lifetime of a customer in Europe or China. SAB has to take it into account and participate on solving that problem ("NEWS ANALYSIS: Interbrew refuses to rule out future bid for SAB", 29 November, 2001).

Problem of HIV/AIDS

Weaknesses Strengths

- many employees are in potential risk

- many infected costumers can prefer other cheaper items instead of beer

- higher level of crime which increases fixed costs of the company in the terms of security

- higher level of unemployment - company is adapted to operate in hard condition which enables SAB to be more effective and competitive in international or global conditions

Instable Currency

Weaknesses Strengths

- smaller earnings in respect to other companies which use harder currency

- instable company position among world competitors

- potential risk of loosing relevant revenues for stakeholders - no need to have any sophisticated system to transfer earnings from more stable currencies into national currency

There are several possibilities which SAB can use to solve that problem. First step which SAB already did was putting its stock on the London Stock Exchange in 1999. that step enables SAB operate in more stable conditions and increase its capital which can be used for more effective strategies in competitive markets. Other way which can increase sufficient capital is to sell other portfolio's segments which are not in a direct interdependence with beer industry. Second alternative is to change all accounting in every country where the currency is instable to harder currency such as American dollar, British pound, or Euro. It would secure position from economical risks; moreover, it would help to overcome some crisis such as wars or political uprisings without influencing BAS earnings in a particular currency. On the other hand, this kind of process of changing current accounting into different currency takes time and installation of new computer programs. In addition, some training for responsible employees has to be done too.

SAB position on the London Stock Exchange

Weaknesses Strenghts

- potential risk when some unpredictable situation occurs (attack against WTC, world economic crisis, natural disasters) -possibility for constant increase in capital

-potential for better rating

- potential to be interesting for investors from different areas of the business

Other problem which occurs among competitors is whether is better to invest in emerging or already developed countries. Investing in developed countries has several pros and cons. Positive aspect of investing in those countries is higher price which a costumer is adopted to pay. In other words, company would have the same earnings for less sold beers compared with sales in emerging countries or even higher earnings for the same sold volume. Negative aspect of investing in developed countries is that BAS can not expect immense increase in sales annually because the particular market is already divided among several major competitors and overall market is full. There is no place where to sell more because the whole market is covered. Other aspect which influences the sales is GDP per capita which usually much higher in developed markets than in emerging markets. In spite of the fact that GDP per capita is higher and consumer prices are more interesting for investors, emerging markets are more interesting because of many aspects which have to be taken into account by any investor. First aspect is that emerging markets are not already bordered in the terms of consumption or sales volumes. There is a big potential which could be transformed