In a quarter century at the former South African Breweries, and as CEO since 1999, Graham Mackay has been instrumental in the company's rise to mega-brewer status. He engineered the acquisition in 2002 of Miller Brewing, and now SABMiller is the second-largest brewer in the world, behind Belgium's Interbrew following that company's pending merger with Brazil's AmBev. Mackay recently spoke in London with BusinessWeek Frankfurt Bureau Chief Jack Ewing about SAB's growth, the Miller turnaround, and future strategy. Following are edited excerpts of their conversation:
Q: Why, of all the beer companies in the world, did SABMiller wind up growing so large?
A:One [set of reason] is historical and cultural [concerning] South Africa. It has always had an international history and view. All international brewers started out as regional brewers. Beer is a very local product. You could ask, well how did Interbrew grow to be a big international brewer, how did Heineken? If you take other national champions, some of them have come up on the world stage, and some have been consolidated out. But South Africa's trading history with the rest of the world and openness of the economy is probably ahead of most [other countries'].
The other set of the reasons has to do with the company itself. It has concentrated for many decades on acquiring very high-quality management talent. That was what struck me most about the company when I joined 25 years ago. There were some visionary heads of human resources. That created a restlessness and a striving and a desire to compare the company with everybody else in the world.
Even in the depths of apartheid, when the country was isolated, we still would travel the world comparing our operating practices with those we found overseas, and studying how the Americans ran their wholesaling system, how the Germans ran their quality. There was benchmarking all the time.
Q: Did you have a master plan to be one of the top brewers?
A:We had a master aspiration, to be among the top five in the world. It was an aspiration rather than a plan. Communism collapsed around the world at pretty much the same time as the isolation of South Africa diminished. We were able to use our newfound freedom to expand.
Timing is obviously very important. The affordability and availability of acquisition targets improved dramatically with the privatization of state-run companies. Had we done it later, the targets would have been snapped up by others. To the extent we created our destiny, what we did is move quickly into the newly privatizing businesses. We secured some early-mover advantage in parts of the world that weren't high on the radar screens of the others.
Q: Is culture a big issue when you're operating in so many countries?
A:It's a huge issue, but pinning down what culture means and how you deal with it requires whole textbooks. On that score we have something of an advantage in that South Africa doesn't have a cultural hegemony it's trying to establish. It's not a world power. There was less resistance against South Africans coming in. It's hard to imagine a country in Eastern Europe being South Africanized, whereas it's easy for locals to believe they're being Americanized.
Q: What's next on the agenda? Does the Interbrew-AmBev merger put any pressure on you to make a move?
A:I don't think so. We've never had any position in Latin America at all. There has never been any specific pressure on us to acquire one either. I never felt that was a transaction that particularly suited us. Any direct influence on our business from the Interbrew-AmBev deal is still quite a long way off.
Q: What else do you feel SAB needs to do in the world? Are there holes in the map you want to fill?
A:I don't think it works like that. The safest and strongest way to get short-term growth is in-country synergy, in-country consolidation. If you have a position in a country, adding to it in a sensible way can add short-term profit.
But those things are quite difficult to find. Most of the world's beer markets are already pretty consolidated. The ones that are not dominated by international majors are typically national oligopolies. And it's quite difficult to improve on the value that has already been extracted. If you're going to look at a completely new area of the world, there has to be some different kind of proposition -- [such as] a management turnaround you think can be accomplished.
There's no global compulsion [to do major deals]. We are big enough, our platform is big enough that we can't be disadvantaged by economies of scale. So the situation in each part of the world has to be judged on its local merit rather than be subject to some sort of global strategic imperative.
Q: Does that mean the pace of consolidation is going to slow down?
A:I think it probably will slow down, but I think the real point is it becomes lumpier. Instead of a large number of relatively small transactions in cash, we're moving into a smaller number of larger deals.
Q: What about products? How important is it to have a worldwide brand like Heineken?
A:Ultimately the top brewers will [build] a portfolio of top international brands, but I think that's going to be quite slow to develop. The recognized international names are growing faster than the world industry as a whole. So there's a gradual drift, but very gradual, even for Heineken.
I think Pilsner Urquell and other of our international brands will grow faster than the average, and we have hopes for them. But I don't specifically think the world is waiting for another European-style lager a la Heineken or Carlsberg or Stella Artois. What is the unique proposition behind those brands? Once you get into true international branding, the answer to that question has to be more than just, well, it's a very old, high-quality European lager, because that ground is pretty well trodden.
Q: So where do profits come from?
A:What we call core brands are the ones that really drive profits in the bigger markets, which are enormously important to us although they're not recognized international names. For instance, Carling Black Label as well as Castle in South Africa, Lech in Poland, Gambrinus in the Czech Republic. Those brands tend to be positioned at the leading edge of the mainstream segment in each market and to be drivers of profitability and productivity. You layer premium brands above them and regional brands below them, but those brands are really the heart of the market. Miller Lite in America, the biggest brand we have, falls squarely into that market.
Q: What has been the most important factor in turning Miller around?
A:That's not an easy question to answer. I can answer it in a trivial way and say we've put people in that understand beer technology, but that doesn't really answer the question. It's not rocket science. What it does require is operational excellence. A lot of things have to work. Anheuser-Busch didn't get to where they are by having better advertising. They got to where they are by being better at operating across a broad spectrum of activities over a long period of time.
That's what we do as well. You have to raise the game across a broad front, and that's starting to happen at Miller. The thing that people seize on is, of course, the advertising. That's kind of the tip of the iceberg.
Q: You did a lot of research about how consumers perceive Miller. What did you learn?
A:There's a sort of toughness and grittiness and true-to-itselfness that emerged from the research -- not too strongly, because the Miller brands were in some disrepair. But where it had a resonance was in that sort of area. Another finding was that Miller had neglected its statements about quality. It had neglected to remind the consumer it's a very fine beer.