SAB entry into U.S. is sign of perceived A-B vulnerability, analyst Rodman says - South African Breweries, Anheuser-Busch, Mark H. Rodman - Brief Article

Modern Brewery Age, June 17, 2002

Mark H. Rodman of Beverage Distribution Consultants, Swampscott, MA, has been much quoted in the general media on the SAB/Miller deal. His general reaction to the deal: "A truly historic event. But not for reasons most spin-minded analysts offer."

According to Rodman, the birth of SABMiller marks a "comedown for America's once dominant beer marketers." That's because Rodman says the SAB deal--along with strong entry into the U.S. by Diageo and Interbrew--is based on the premise that A-B "is no longer invincible."

"SAB, like Diageo before it, is saying A-B is vulnerable," Rodman says, "and it is putting $5.6B plus big marketing spends where its mouth is. The four multinationals--SABMiller, Diageo, Interbrew and Heineken...and note I've left Scottish & Newcastle off this list...are shouting at A-B and Coors, and the rest of the downtrodden, sideways slipping domestic drinks industry, that the American parts of the business pie is no longer in control their own destiny."

Rodman says that the SAB deal will push A-B to react, perhaps "by spending big to swallow the Corona system lock, stock and barrels--so as to round off its portfolio at the high end, or what now is "the high margin end."

Rodman says it might cost A-B $1-2 billion "to merge with Gambrinus and Constellation and/or to bring Ambev/Quilmes into the fold to lock up the US Hispanic markets and invade the South American markets.

"However Rodman notes that SABMiller will have to spend big in the U.S. to wrest beer share from A-B.

"It's grossly inadequate for SABMiller to raise marketing/ad spending only to "competitive levels" vis-a-vis A-B," Rodman says. "Rather, SABMiller must outspend A-B over the next 3-5 years. My best guess is $500MM a year over 3-5 years or $3B total. Without spending more than its competition, the gaps in market share and share of profit pool won't narrow a bit but likely will continue to grow."

Rodman says that Miller execs statements that Miller marketing spending is reaching competitive levels, "is a dreamy absurdity, which ignores rudimentary economic theory as applied to a highly-concentrated industry with a single market leader."

Rodman says that unless SABMiller is willing to outspend A-B, "SABMiller's plan remains nothing but a vague subtle promise wrapped in the mirage of a dream. The whole theory of spending to overcame a dominant, market-leader could blow up in SABMiller's face in practice, depending on A-B's reaction."

Rodman says A-B is ever more likely to react now that "Pat Stokes is caretaker and August IV must prove himself. This is the occasion that separates the bright from the brightest The most obvious A-B reaction is to accelerate its now low-key effort to bring Corona into the family fold and then boost Corona ad spending."

Rodman says that overall winners in the deal are SAB and Philip Morris, with beer wholesalers the greatest losers. "We hear nada about what SAB senior managers intend to do to ignite the passion of Miller wholesalers and their incentive to continue to reinvest their shrinking share of the beer industry profit pool," Rodman notes. "This share has been declining roughly at the rate of 1/2 of one percent per year for the last half decade."

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