ANALYSIS OF THE GLOBAL BEER INDUSTRY AND COMPARISON

ANALYSIS OF THE GLOBAL BEER INDUSTRY AND COMPARISON OF COMPETITORS AB INBEV AND SABMILLER Justin Read

ROADMAP • Overview of the Global Beer Industry and the Big Four • PESTEL Analysis of the Global Beer Industry • Industry Driving Forces • Strategic Group Map of the Big Four • Industry Key Success Factors • Competitive Strength Assessment of the Big Four • Five Forces Analysis of the International Beer Industry • AB In. Bev Company Profile and Performance • SABMiller Company Profile and Performance • Recommendations for AB In. Bev and SABMiller

GLOBAL BEER INDUSTRY HAS BEEN GROWING STEADILY • From 2009 to 2013 the Global Beer Industry has performed in the following ways: • Average year on year revenue growth of 2. 7% • Average year on year volume growth of 2. 1% • In 2013 the total market revenue was approximately $514. 5 billion • Net revenue was approximately $177 billion • EBIT was $35. 2 billion • Average profit margins are about 20% • Global beer market projected to grow 3. 4% from 2013 to 2018 (Global Beer Industry Profile)

Lagers Dominate the Most Common Styles of Beer Sold 3% Standard Lager 4% Premium Lager 9% Specialty Beer 26% 58% Ales, Stouts, and Bitters Low- and non-alcoholic beer (Global Beer Industry Profile)

Big Four Brewers Dominated the Global Beer Market at the end of 2013 20. 0% Anheuser-Busch In. Bev SABMiller Heineken 51. 5% 12. 0% 11. 0% 5. 5% (Global Beer Industry Profile) Carlsberg Other

Big Four's Share of Regional Profits at the end of 2012 100 80 Other 60 SABMiller Heineken 40 Carlsberg AB In. Bev 20 0 N. America C. & S. W. Europe America (Alliance. Bernstein ) C. & E. Europe Asia Pacific Africa World

PESTEL FACTORS: POLITICAL FACTORS INDICATES MODERATE IMPACT ON BEER INDUSTRY Region Political Factors North America Consistent tax and regulatory enforcement, politically stable Central and South America Some political instability and government interference in economy Some institutional voids – consistent electricity, quality water, financial institutions Western Europe Consistent tax system, numerous regulations, minor political instability Central and Eastern Europe Tax and regulatory inconsistencies, some political instability Asia Pacific Higher degree of government participation in the economy Africa Higher degree of government participation in the economy Institutional voids to overcome – consistent electricity and (Alliance. Bernstein (Global Beer Industry

PESTEL FACTORS: ECONOMIC FACTORS INDICATES REGIONAL IMPORTANCE FOR BEER INDUSTRY Region Economic Factors North America 17% of global consumption of beer, 24% of net revenue, and 30% of global profit in 2012 Not as sensitive to economic downturns as other commodities Central and South America 13% of global beer consumed, 14% of net revenue, and 24% of global profit in 2012 Monopolistic or duopolistic markets, GDP correlated with consumption Western Europe 14% of global beer consumption, 17% of net revenue, and 12% of global profit in 2012 Structural decline in per capita consumption, fragmented market structure, aggressive concentrated retailers Central and Eastern Europe 13% of global consumption of beer, 11% of net revenue generated, and 8% of global profit in 2012 GDP correlated with consumption Asia Pacific 36% of global beer consumption, 27% of net revenue, and 18% of global profit in 2012 High growth in consumption, mix of market development 6% of global beer consumption, 7% of net revenue, and 10% of (Alliance. Bernstein (Global Beer Industry global profit in 2012 Africa

PESTEL FACTORS: SOCIOCULTURAL FACTORS ARE POSITIVE FOR THE BEER INDUSTRY Region Sociocultural Factors North America Well established beer culture Slow population growth, some change in culture with minority population growth Central and South America Beer is popular; it is paired with soccer, nightlife activities, and dancing Younger demographics Western Europe Strong historical beer culture. Very nationalistic culture Older population, low growth rate Central and Eastern Europe Large population, younger demographics Social acceptance and encouragement of alcohol consumption Asia Pacific Generally not a well established beer culture Growing population and per capita consumption Africa Not a well established culture of beer (Alliance. Bernstein (Global Beer Industry Large population, low per capita consumption

PESTEL FACTORS: TECHNOLOGY AND ENVIRONMENTAL FACTORS ARE GLOBALLY SIMILAR Region Technology Factors Global Similarities Energy and water efficiency manufacturing upgrades Wastewater treatment Reduced materials use in packaging Digital engagement of consumers Region Technology Factors Global Similarities Watershed health in key grain growing regions Supply of water for quality and quantity of hops and grains Wastewater management Reduction of waste from packaging (Alliance. Bernstein (Global Beer Industry

PESTEL FACTORS: LEGAL FACTORS ARE SIMILAR IN AIM BUT DIFFER IN IMPACT BY REGION Region Legal Factors North America Worker safety, product quality standards, appropriate advertising, distribution channels- especially in the US where three tier system is required, and packaging requirements Central and South America Fewer laws concerning worker rights, pay requirements, anti trust, and other areas of operation addressed in North America Less likely to be effective oversight and rule enforcement in this region Western Europe Intrusive regulatory system, varies by country, can involve the purity of the ingredients, what ingredients can be included in beer, how the beer is produced, and requirements to meet in order to sell Central and Eastern Europe Significant regulatory differences and inconsistencies within and between countries in the region Ambiguous and inconsistent application of laws Asia Pacific Intrusive regulatory system by virtue of more active government role in economy Regulate production, sales, content, packaging, distribution, licenses Africa Lower capacity to enforce any labor, consumer, or production laws and a higher chance for corruption to hamper the efforts in law (Alliance. Bernstein (Global Beer Industry

Regional Beer Market Breakdown Illustrates Importance of US and European Markets (2012) 100 80 Africa 60 Asia Pacific C & E Europe W Europe 40 C & S America N. America 20 0 Population (Alliance. Bernstein Volume Revenue EBIT

INDUSTRY DRIVING FORCES INDICATE THE IMPORTANCE OF THE EMERGING MARKETS • Change in Long-term Growth Rate • US and European markets saturated, slowed overall growth • Emerging markets beginning to accelerate in growth • Increasing Globalization • Opening of the emerging markets to the beer industry • Marketing Innovation • Shift towards engaging consumers digitally and more accurately • Growing Preferences for Differentiated Products • Ciders, occasion specific drinks, near beer, pre mixed drinks, fruit beer • Consumers in all markets are open to non-traditional beer products (Alliance. Bernstein

Strategic Group Map Highlights Differences of the Big 4 Regional Markets Present In 7 6 Heineken SABMiller 5 4 3 Carlsberg AB In. Bev 2 1 0 0 100 200 300 Brands in Portfolio (Theheinekencompany. com) (SABMiller) (AB In. Bev) (Grundberg 400 500

(Alliance. Bernstein KEY SUCCESS FACTORS HIGHLIGHT IMPORTANCE OF EFFICIENCY AND COST REDUCTION • Water and Energy Efficient Production • Sustainable image, reduce input costs, promote water security • Economies of Scale • Mass-market segment, price based competition • Largest segment of beer sold • Changes in Cost and Efficiency • Includes two previous factors, large part of competitive advantage in industry

KEY SUCCESS FACTORS HIGHLIGHT IMPORTANCE OF EFFICIENCY AND COST REDUCTION • Strong Network of Wholesaler/Retailer Distributors • 45% of beer sold to retailers - supermarkets, 33% to on trade - restaurants • Breadth of Product Line • Consumers demand a wide range of product and increasingly new products • Well Known and Recognized Brand or Brand Portfolio • Important to stand out in groups of random brands, customer loyalty (Alliance. Bernstein

COMPETITIVE STRENGTH ASSESSMENT REVEALS AB INBEV AND SABMILLER LEAD THE PACK (SABMiller) (AB In. Bev)

COMPETITIVE STRENGTH ASSESSMENT REVEALS HEINEKEN IS A SOLID THIRD PLACE (Theheinekencompany. com) (Grundberg

Threat of New Entrants -- Moderate + Increase threat of new entrants: readily accessible suppliers, retailer need to stock a wide range of beer, many underserved regions with high growth prospect, national breweries enter global market - Barriers to entry: Capital investment in brewing equipment, need for international supply chain, establishing distribution networks, government regulation, oligopolistic market, global brand recognition (Global Beer Industry

Threat of New Entrants -- Moderate + Increase threat of new entrants: readily accessible suppliers, retailer need to stock a wide range of beer, many underserved regions with high growth prospect, national breweries enter global market - Barriers to entry: Capital investment in brewing equipment, need for international supply chain, establishing distribution networks, government regulation, oligopolistic market, global brand recognition Threat of Substitutes – Moderate to Strong + +/- No switching costs for end consumers of beer and substitutes Retailers like supermarkets need to stock a wide range of beer and substitutes, they aren’t likely to replace beer with substitutes. Threat is strong but consistent and limited +/- (Global Beer Industry Pro On trade retailers, like restaurants and bars, tend to heavily favor beer or one of its substitutes and aren’t likely

Threat of New Entrants -- Moderate + Increase threat of new entrants: readily accessible suppliers, retailer need to stock a wide range of beer, many underserved regions with high growth prospect, national breweries enter global market - Barriers to entry: Capital investment in brewing equipment, need for international supply chain, establishing distribution networks, government regulation, oligopolistic market, global brand recognition Bargaining Power of Suppliers Weak to Moderate + Breweries rely heavily on third party suppliers and have minimal vertical integration + Grain suppliers can serve other buyers in the alcohol industry, agriculture industry, or food industry - Hop growers operate on a smaller scale, reducing bargaining power - Low switching costs for breweries when moving between suppliers Threat of Substitutes – Moderate to Strong + +/- No switching costs for end consumers of beer and substitutes Retailers like supermarkets need to stock a wide range of beer and substitutes, they aren’t likely to replace beer with substitutes. Threat is strong but consistent and limited +/- (Global Beer Industry Pro On trade retailers, like restaurants and bars, tend to heavily favor beer or one of its substitutes and aren’t likely

Threat of New Entrants -- Moderate + Increase threat of new entrants: readily accessible suppliers, retailer need to stock a wide range of beer, many underserved regions with high growth prospect, national breweries enter global market - Barriers to entry: Capital investment in brewing equipment, need for international supply chain, establishing distribution networks, government regulation, oligopolistic market, global brand recognition Bargaining Power of Suppliers Weak to Moderate + Breweries rely heavily on third party suppliers and have minimal vertical integration + Grain suppliers can serve other buyers in the alcohol industry, agriculture industry, or food industry Buyers Moderate + Supermarkets represent almost half of all buyers, and are often consolidated + Small or non-existent switching costs for buyers + Producers sell only a small amount of their product, rely heavily on retailers. - - Large buyers, like - - Many oligopolistic Hop growers operate on a smaller scale, reducing bargaining power Low switching costs for breweries when moving between suppliers Threat of Substitutes – Moderate to Strong + +/- No switching costs for end consumers of beer and substitutes supermarkets, need to stock a wide range of beer markets, with limited choices for buyers to switch to Retailers like supermarkets need to stock a wide range of beer and substitutes, they aren’t likely to replace beer with substitutes. Threat is strong but consistent and limited +/- (Global Beer Industry Pro On trade retailers, like restaurants and bars, tend to heavily favor beer or one of its substitutes and aren’t likely

Threat of New Entrants -- Moderate + Increase threat of new entrants: readily accessible suppliers, retailer need to stock a wide range of beer, many underserved regions with high growth prospect, national breweries enter global market - Barriers to entry: Capital investment in brewing equipment, need for international supply chain, establishing distribution networks, government regulation, oligopolistic market, global brand recognition Bargaining Power of Suppliers Weak to Moderate + Breweries rely heavily on third party suppliers and have minimal vertical integration + Grain suppliers can serve other buyers in the alcohol industry, agriculture industry, or food industry - Hop growers operate on a smaller scale, reducing bargaining power Buyers Moderate Rivalry – Strong The global beer market is dominated by the big four, which control almost 50% of the market Supermarkets represent almost half of all buyers, and are often consolidated + + + The mass-market products offered are hardly differentiated, with standard and premium lagers representing almost 84% of beer sold around the world + Beer is subject to downward price pressures by retailers and consumers, and economies of scale are very important in price-based competition + North America and Western Europe, the two largest profit pools, are saturated markets and have low or negative growth Low switching costs for prospects breweries when moving between suppliers Threat of Substitutes – Moderate to Strong - + +/- + No switching costs for end consumers of beer and substitutes Small or non-existent switching costs for buyers + Producers sell only a small amount of their product, rely heavily on retailers. - Large buyers, like supermarkets, need to stock a wide range of beer - Many oligopolistic markets, with limited choices for buyers to switch to Retailers like supermarkets need to stock a wide range of beer and substitutes, they aren’t likely to replace beer with substitutes. Threat is strong but consistent and limited +/- (Global Beer Industry Pro On trade retailers, like restaurants and bars, tend to heavily favor beer or one of its substitutes and aren’t likely

FIVE FORCES ANALYSIS INDICATES THE GLOBAL BEER INDUSTRY ISN’T PARTICULARLY ATTRACTIVE • Breweries already established in the industry have a more attractive position • Newcomers would have to overcome decent barriers to entry and then fight an uphill battle in mainly oligopolistic markets • There are numerous substitutes for beer and many substitutes for any given brand within the beer offerings • Buyer power reduces the attraction for breweries • Emerging markets fragmented (China) or oligopolies (Africa), developed markets saturated and/or declining

AB INBEV COMPETES INTERNATIONALLY WITH A TRANSNATIONAL STRATEGY • Interbrew + Am. Bev + Anheuser-Busch = AB In. Bev (2008) • Best Cost Provider generic strategy • Price based competition in mass-market beer • Differentiation based competition in craft, occasion, near beer, and premixed drinks • Transnational Global Strategy • Focused Brand Strategy – Three-Tier Marketing • Global, International, and Local Champions • Growth Driven Platforms • Emphasize key markets, investment in premium and craft, share of throats, and regional beer brands • Heavily concentrated in the Americas (AB In. Bev)

AB In. Bev Concentrated in the Americas (2014) 100 Global Export and Holding Companies 80 Asia Pacific 60 Europe Latin America South 40 Latin America North 20 North America 0 Volume (% of Total) (AB In. Bev) Revenue (% of Total)

AB INBEV GROWS THROUGH ACQUISITION AND DIVERSIFICATION • Cost saving focus at AB Inbev • Success in acquiring brewers, integrating them into the AB In. Bev group, and streamlining their performance and efficiency • Anheuser-Busch • Modelo Group • Oriental Brewery • Numerous smaller craft brewers • AB In. Bev also operates soft drink bottling plants in the Americas to capitalize on economies of scope • $3, 497 million in net revenue from soft drink operations (AB In. Bev) (Leonard

AB INBEV’S SWOT REVEALS ADVANTAGES IN STRENGTHS AND OPPORTUNITIES Strengths Weaknesses • • Present in large profit pools and emerging markets Well recognized brand portfolio Effective marketing strategy Innovative product development Dominant player in its markets Cost saving expert Opportunities • • Threats Acquire breweries in markets to • establish or improve market share Emerging markets where population • is underserved • • (AB In. Bev) Limited geographic distribution and presence Too focused on cost saving, losing sales volume in American markets Bad current ratio Climate impact on grain or hop supply and quality Declining consumption per capita in some saturated markets Dominated markets becoming fractured by new entrants Possible changes in regulations, taxes, trade agreements

AB INBEV’S STRATEGY AND EXECUTION HAVE RESULTED IN GENERAL SUCCESS Year Current Ratio Net Profit Margin Return on Assets Return on Equity 2010 . 801 11. 1% 3. 5% 11. 4% 2011 . 627 14. 9% 5. 2% 15. 6% 2012 1. 01 18. 2% 5. 9% 17. 6% 2013 . 729 33. 3% 10. 1% 28. 5% 2014 . 680 19. 6% 6. 4% 18. 4% (AB In. Bev) (Financials. morningstar. c

SABMILLER COMPETES INTERNATIONALLY WITH A MULTI-DOMESTIC STRATEGY • South African Breweries + Miller = SABMiller (2008) • Best Cost Provider generic strategy • Price based competition in mass-market beer • Differentiation based competition in craft, occasion, near beer, and premixed drinks • Multi-domestic International Strategy • Focus on local breweries, local expertise, deep knowledge of individual markets • Less focus on international brands in portfolio • Apply global efficiencies through regional hubs to local breweries • Spread out globally, initially focused in emerging markets then entered the US (SABMiller)

SABMiller Operates Fairly Evenly In Volume Across Regions (2014) 100% North America 80% Africa 60% Latin America 40% Europe Asia Pacific 20% 0% Volume (% of Total) (SABMiller) Revenue (% of Total)

SABMILLER GROWS THROUGH ACQUISITION AND DIVERSIFICATION • SABMiller also expands by buying breweries and applying global efficiencies to them to increase profitability • SABMiller is dispersed across a much wider range than AB In. Bev • Strong presence in China with CR Snow • Strong presence in Africa through SAB • SABMiller has invested more into the soft drink business than AB In. Bev • 20. 6% of beverages sold by volume by SABMiller were soft drinks • Work with Coka Cola in Central America, South Africa, and 21 countries in Africa (SABMiller)

SABMILLER’S SWOT INDICATES STRENGTH THROUGH ITS LOCAL FOCUS Strengths Weaknesses • • Present in every region in the world Present in mostly monopoly or duopoly markets Wide portfolio of local and national beers Deep knowledge of markets Consolidating global operations to increase efficiencies Opportunities • • • Threats Acquire breweries in markets to • establish or improve market share Emerging markets where population • is underserved Benefiting from the growth of the • African markets in the long term • (SABMiller) Weak current ratio No global beer brands Patchwork brand awareness Climate impact on grain or hop supply and quality Declining consumption per capita in some saturated markets Dominated markets becoming fractured by new entrants Possible changes in regulations, taxes, trade agreements

SABMILLER’S STRATEGY AND EXECUTION HAVE RESULTED IN GENERAL SUCCESS Year Current Ratio Net Profit Margin Return on Assets Return on Equity 2010 . 651 10. 6% 5. 1% 9. 6% 2011 . 705 12. 4% 6. 1% 10. 9% 2012 . 698 19. 4% 7. 5% 16. 8% 2013 . 669 14. 1% 5. 8% 12. 4% 2014 . 538 20. 2% 6. 3% 12. 8% (SABMiller)(Financials. morningstar. c

RECOMMENDATIONS FOR AB INBEV EMPHASIZE EXPANSION BEYOND THE AMERICAS • Increase exposure to Asia Pacific and Africa in particular • Large potential for future growth • Risk losing opportunity to establish oligopolistic market if wait to move • Opportunity to establish more international champion brands for different regions • Enter markets via acquisition and invest initially to dominate and get returns later when the market takes off

RECOMMENDATIONS FOR SABMILLER FOCUS ON INVESTMENT IN CHINA • China is one of the quickest growing markets with the highest volume of consumption, and a quickly growing consumption per capita • SABMiller already is in a joint venture in China with the CR Snow brewery, the largest brand in the country • CR Snow is a leader among many competitors, with around 20% of a highly fractured market (Zekeria) • SABMiller should invest heavily with the goal of controlling over 40% of the market, which is about the level of control AB In. Bev has in the US • Goal is to increase the profit margin on the high volume operations in China

THANK YOU

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