How A South African Company Turned Constraints into Global Strengths

On 28 September 2016, the shareholders of South African born international brewer, SABMiller, approved the company’s acquisition by Anheuser-Busch InBev for $104 billion (R1.5 trillion). The deal paved the way for the creation of what is now by far the world’s largest brewing company.

For a company that started out selling beer to miners in Johannesburg during the gold rush of the late 1800s, it’s been quite a journey. But how did a brewing company from a developing country rise to compete with the multinational brewing behemoths from the developed world?

A series of interviews with senior executives and managers who presided over the growth of what was then South African Breweries’ (SAB) rapid expansion during and after the 1990s are revealing. After building up a monopoly-like position in the beer market in South Africa, the company went in search of new markets. It used its experience in South Africa in its entry strategies abroad.

SAB’s path reflects the differences between multinationals from developed and emerging markets in terms of location choices, sequencing, time horizons and motivation.

A two-phased expansion path emerges to explain the remarkable success story. The first pillar to SAB’s international expansion was a focus on developing markets. Coming from a developing country itself, the company would cope better with emerging market conditions than brewers from the developed world. These ventures became a powerful base for SAB to take on developed markets.

The second was to expand into developed countries. This became necessary as it became clear the company was over exposed to emerging markets.

The first phase of expansion

After a few early forays into South Africa’s neighbouring countries prior to 1993, SAB executives realised that the company could exploit its knowledge of institutional shortcomings in its home country. It would use this experience to adapt more easily than its competitors to conditions in developing countries.

And so began the first part of its internationalisation strategy: a rapid expansion into emerging markets worldwide.

Through a series of acquisitions and joint ventures throughout the 1990s, SAB gained a foothold in various countries in Africa, Eastern Europe and Asia. Although many were geographically distant (like Hungary, Czech Republic, China and India), they echoed South Africa in terms of their socioeconomic development. Eastern Europe, for example, was still emerging from political reform in the wake of communism, and infrastructural, institutional and economic weaknesses persisted.

By expanding into countries that shared socioeconomic characteristics with South Africa, SAB was able to make use of its experience to turn a perceived drawback – institutional weakness – into a strength. As one respondent explained:

To be quite frank, we actually accepted that we would live with the political risk and poor institutions. We didn’t really shy away from high-risk countries unless, of course, there was a raging civil war that we would have to wait to subside.

Once it had established this expansion plan, SAB diversified into developed markets such as Italy and the US. As one interviewee put it:

Investors became sceptical of companies whose only business was in emerging markets.

In 2002 it took a step closer to consolidating its position as a multinational brewing giant when it acquired US-based Miller Brewing Company. It became SABMiller.

Turning weakness into strength

The advantages that SAB gained from its experience in its home country are many. One was employee aptitude.

SAB employees had built up an extraordinary resilience, flexibility and entrepreneurial spirit through their exposure to the unsteady South African environment of the 1980s. As one executive said:

They survived labour trouble, survived interest rates at 25%, inflation at 16% to 17%, survived political disorder, political violence… That toughened you, toughened us.

This robustness, combined with an ability to connect with many different cultures, gave the company a valuable flexibility in its risk, location and investment choices.

Another strength was its ability to turn around neglected breweries and businesses. The experience it gained in South Africa, with its large rural population and pockets of poor infrastructure, meant that finding innovative ways to overcome challenges was embedded in the company’s DNA.

Another advantage the company gained was brand development and marketing ability. SAB was developed into a major operation without reliance on strong, globally-recognised brands. Using its home experience the company took brands it acquired in distant countries and built them into powerful national brands.

These became a base from which it launched into premium brands such as Grolsch and Peroni through acquisitions. This offset being over-invested in domestic brands.

SAB also had a philosophical edge over many competitors. It’s risk appetite was much bigger. By comparison a company like Anheuser-Busch had a conservative approach to risk and international expansion.

For example, Anheuser-Busch didn’t react to the rapidly changing global brewer consolidation until it was too late. And when it did, it realised that it had little emerging market experience.

This weakness meant that in 2008 Anheuser-Busch was unable to avoid a hostile takeover by InBev. This gave rise to AB Inbev, then the world’s largest brewer. AB Inbev, in turn, was compelled to make an offer for SABMiller to acquire complementary emerging market presence.

SABMiller’s long journey from the mine heaps of Johannesburg to global brewing colossus may appear to have come to an abrupt end after its acquisition by Anheuser-Busch InbevAB Inbev in 2016. But what’s clear is that its extraordinarily successful approach continues to hold many lessons for aspiring global companies from the developing world.

_This piece was adapted from an academic article by John Luiz, Dustin Stringfellow and Anthea Jefthas that first appeared in the February 2017 issue of Global Strategy Journal, Volume 7, Issue 1 (83-103).
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John Luiz, Professor of International Business Strategy and Emerging Markets, University of Cape Town

This article was originally published on The Conversation. Read the original article.