Beer Companies Quench Their Thirst For Profits by Tapping Into Emerging Markets

By: Money_Morning

Jason Simpkins writes: With sales volume plunging in Western markets, Molson Coors Brewing Co. (NYSE: TAP) and SABMiller PLC (OTC ADR: SBMRY) are tapping into emerging markets for refreshing growth.

SABMiller, for instance, saw beer sales slump 7% in Europe and 0.8% in the United States, while Africa and Asia combined for 11% sales growth.  Sales in China alone soared 17% in the quarter.

"While demand in Europe has dropped sharply, countries in emerging markets such as Africa and Asia have fared relatively well despite falling back from the high ' one might say unsustainable rates of growth of recent years,' said SABMiller Chairman Meyer Kahn.

Beer's share of commercially produced alcohol now stands at 49.0% in Africa and 32.8% in Asia, Meyer said.

In China, SABMiller's success is largely attributable to the popularity of a Chinese beer named Snow, which recently supplanted Bud Light as the world's most popular beer. Snow is a brand of beer brewed by SABMiller and its partner China Resources Enterprise Ltd. (OTC ADR: CRHKY) and it encompasses at least two-dozen varieties.

The only problem is that while SABMiller's Chinese unit accounted for about 14% of sales volume, it contributed just 2% to earnings because of low pricing. But that's something the company expects will change as sales rise.

Asia's growth in beer over the past five years remains the highest of any region, averaging 8.4%, according to SABMiller. China in particular has seen growth in beer averaging 10.7% per year.

The "margin story is improving gradually,' SABMiller spokesman Jonathan Oates told Bloomberg News.

There's a similar story unfolding in Africa, where total beverage volumes grew by around 10% organically. That increase has been helped greatly by particularly strong growth in Tanzania and Angola, where the company is building new brewing facilities.

SABMiller's brewing and beverage operations cover 14 countries in Africa with a further 19 covered through a strategic alliance with French wine and beer distributor Castel group. SABMiller is the number one brewer by market share in most of these countries. (One notable exception is South Africa, which is the home of Heineken N.V. (OTC ADR: HINKY)

The company has operations in Vietnam, a joint venture in Australia, and exports significant volumes to South Korea and Taiwan, as well.

"We are also judiciously expanding our geographic footprint in other parts of the world where it makes sense to do so,' said Kahn. "In the past year we've acquired one of the larger breweries in the Ukraine and a beer and malt operation in Nigeria, each marking our first entry to the country in question. In the case of Nigeria, the move takes us into the only major African market in which SABMiller did not previously have a presence.'

Molson Coors' Blowout Quarter

Molson Coors is looking to broaden its geographical footprint as well. And it's working.

Taking a global approach to its business helped Molson Coors to more than double its profit in the second quarter from a year ago. Second-quarter profit at Molson Coors jumped 136.3% to $187.3 million from $79.4 million in 2008. Underlying after-tax income rose 20.6% to $205.4 million or $1.11 per diluted share, up from $170.3 million, or 92 cents per diluted share a year ago.

Those gains came despite sales volume declines of 2.9% in Canada and 12.4% in the United Kingdom ' two of the company's biggest markets.

Molson Coors' joint venture with SABMiller, known as MillerCoors, was also a big help.

The two companies struck a deal last July that combined the shipping, transportation, and brewing resources of America's two largest breweries. Now, instead of being shipped from Denver, Coors Light can be made and shipped out of Miller's East Coast production plants, saving on shipping.

The companies predicted $50 million of cost savings in the first year of the joint venture, but had reached $78.4 million by March of this year. Miller and Coors now expect cost savings to be $128 million in the first year, and have shaved six months off their three-year goal of saving $500 million.

MillerCoors reported underlying net income, excluding special items, increased by 16.4% to $325 million. Even more impressive, the company grew its global markets business by 18% in the second quarter, thanks in large part to strong Coors Light sales in China.

"For Molson Coors Brewing Co., it's been an unqualified success,' Sam Walker, chief legal officer and managing director, told the Denver Business Journal. "Our objectives of brand-building take time, but we're starting to see evidence that giving more choice to consumers in many markets is ultimately going to lead to success.'

Another way Molson Coors expanded choices for its customers was by obtaining the exclusive distribution rights to Singha, a Thai lager that has 95% distribution in Thai restaurants.

"For our customers its positioning as an authentic brand offers an opportunity to build their retail offer around high value, growing, Thai, Japanese and Asian Far Eastern food occasions as well as becoming part of a valuable "World Beer' segment,' the company said.

Singha joined Molson Coors' portfolio of ten specialty beers that make up the Different World Drinks Co., a business-to-business company that aims to promote foreign beers to bars and retailers. The other nine beers include: Blue Moon, Dos Equis Lager, Dos Equis Ambar, Groelsch, Groelsch Weizen, Kasteel Cru, Kasteel Cru Rose, White Shield, and Zatec.

Molson Coors has also hired Adeye, a mobile marketing company with offices in Norway, Sweden and Denmark, to promote the line of beers.

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