Online Extra: When Beer Empires Collide

Consolidation helped Miller's parent challenge mighty Anheuser-Busch. But who will win the battle brewing for world supremacy?

By Adrienne Carter

The battle between Miller Brewing and Anheuser-Busch (BUD ) in the U.S. has been a fascinating story of David and Goliath. But for Miller's parent SABMiller PLC, it's just one front in the beer war that the company is waging across the globe.

Six years ago, SABMiller (then South African Breweries) had a market value that was just a fraction of Anheuser-Busch's. Back then, Anheuser was the undisputed King of Beers -- in the U.S. and globally. But the brewing industry, like many others, has been experiencing a massive wave of consolidation as companies look to boost profits and seek growth. In the early 1990s, the world's five largest brewers accounted for 17% of world beer sales; now it's more like 45%.

While Anheuser has largely sat on the sidelines of this trend, SAB has been at the forefront. After apartheid came to an end, the now 110-year-old brewer aggressively set its sights outside its borders. It jumped into China, now the largest and fastest-growing beer market in the world, back in 1994, and over the years expanded into Europe and the rest of Africa. Then, in 2002, it entered the U.S. with its purchase of Miller and formed SABMiller. And last year, SAB moved into the fast-growing South American market by acquiring a controlling interest in Grupo Empresarial Bavaria, the second-largest brewer in the region.

WORLDWIDE SUDS.

  Such a strategy has helped SABMiller close its market capitalization gap with Anheuser. Back in 2000, the company's market cap (the number of shares multiplied by the stock price) was roughly $6.1 billion, compared with around $41.5 billion for Anheuser. Now, its market cap is around $31 billion, compared with $36 billion for AB. These days, SAB is the second-largest brewer by volume, trailing Belgium-based InBev. AB is No. 3. With its stronghold in the U.S., Anheuser-Busch is still first in profits though, edging out SABMiller, the next most profitable brewer.

"[SABMiller was] able to help put the brakes on AB's stock appreciation in the U.S., and they were able to continue to expand their geographic footprint," says Bear Stearns analyst Carlos Laboy. "Anheuser no longer has a premium valuation [to peers], so when you look at global consolidation it no longer holds a huge advantage."

Whatever the next chapter holds, SAB is in a good position. Among the top brewers, it has one of the most diversified portfolios, with no single country accounting for more than one-third of its earnings. Miller, its North American base, contributes just 15% to its bottom line. At the same time, it has good exposure to highly profitable (if slow-growing) markets like the U.S., along with positions in emerging markets like Latin America and China. Industry analyst Plato Logic estimates SAB's five-year implied volume growth rate is roughly 2.6%, compared with around 2.2% for the world as a whole and around 1% for the U.S.

AB, by comparison, faces some serious limits to growth. It's largely concentrated in the U.S., which accounts for 76% of its revenues. It does have some exposure to emerging and faster-growing areas, including a 50% stake in Grupo Modelo, Mexico's largest brewer, and an operation in China with Tsingtao Brewery and Harbin Brewery Group. But its international businesses still only make up 7% of sales.

PRICE LEVER.

  That said, it would be wrong to discount the power of AB, which has the money and resources to take on any rival. Historically, it's been a marketing juggernaut and its largely exclusive distribution network makes it an especially formidable foe in the U.S.

AB initiated an aggressive price war last summer in the U.S., for example, taking particular aim at Miller's economy and light brands. Although Miller Lite continued to grow, Miller took a big hit in the economy segment, which accounts for 40% of its roughly $5 billion sales. As a result, Miller's sales to retailers dropped 1% in its last fiscal year, which ended in March. "AB showed they can really push the price button," says Harry Schuhmacher of trade publication Beer Business Daily. "It's a formidable competitor."

In the global beer wars, victory is hard to predict -- though SABMiller, Anheuser-Busch, and InBev are clearly the leading contenders. SAB Chief Executive Graham Mackay says consolidation activity has slowed as "small, in-country acquisitions are starting to dry up." Although "larger, more eye-catching M&A activity is possible, those are more difficult to call," says MacKay. However it plays out, there's a good battle brewing.

Carter is a correspondent in BusinessWeek's Chicago bureau

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