They Just Get Lager And Lager

Anyone familiar with the delights of what Czechs affectionately call liquid bread will not be surprised to learn that they consume more beer per capita than anyone else in the world. In 1997, they quaffed around 161 liters each, beating the Germans, who managed just 131 liters, into a poor second place. And in a league of its own is the Czech Republic's most famous beer: Pilsner Urquell, the original bottom-fermented Pils, or lager, first brewed in the Bohemian city of Plzen in 1842. "It's a Rolls-Royce among beers," purrs Pilsner spokesman Jaroslav Pomp.

Driving that Rolls nowadays is South African Breweries, which in early October bought a controlling interest in Pilsner Urquell and Radegast, the Czech Republic's two top brewers, from investment bank Nomura International in a $321 million deal. With it, they got the right to acquire Nomura's remaining stake by June 30, 2001 for $308 million. That makes Africa's leading brewer also Central Europe's biggest and vaults SAB into third spot worldwide, after Anheuser-Busch of the U.S. and Dutch company Heineken.

The so-called First Pilsner on Earth has "strong international potential," says Graham Mackay, SAB's group chief executive. "We are confident that with this unique brand ... we can expand our presence not only in Europe but also farther afield." Adds Philip Morrisey, beverages analyst at Warburg Dillon Read, "[This purchase] shouldn't be seen as a stand-alone move."

SAB's record suggests that its global ambitions are no small beer. Since its humble beginnings more than a century ago in Johannesburg's gold mining camps, SAB has established a near-monopoly in its vast--and thirsty--home market. Brands like Castle, Lion and Black Label are nursed in bars and at barbecues across South Africa. Its massive 98% market share has funded expansion across three continents: last year, foreign operations made up 45% of the company's beer sales. With further growth in mind, SAB in March moved its primary stock listing to London, giving it access to new capital and contacts. Now, the company is looking to add Ethiopia, the Ivory Coast and Nigeria to its African brew. In China, it plans to double capacity in some regions and acquire new businesses in others. A move into India is imminent.

In Central and Eastern Europe, SAB has established itself in Poland, Romania, Hungary, Slovakia and Russia. SAB's track record in the region--it is No.1 in Hungary and No.2 in Poland and Slovakia--gave the company the edge over other major players who had expressed an interest in bidding for the Czech brands, says Randall Dillard, managing director of Nomura International. Another reason for the bank's choice is that SAB didn't have an international flagship brand like Heineken or Budweiser. "They are going to use Pilsner Urquell as their top beer," he says. Daniel Martinu, beer analyst with Czech investment bank Patria Finance, adds that for SAB the acquisition is "an excellent springboard not only for expanding east but also west."

The brand may become even more valuable should the First Pilsner become the Only Pilsner on Earth. The Czech government has asked the World Trade Organization to grant its beer regions the same protection of intellectual property rights enjoyed by France's wine regions. If the petition is approved, only lagers brewed in Plzen will be able to use the trademark Pilsner or Pils. The Czechs' case may be weakened by WTO exemptions--for instance, where geographical references have become generic--but the publicity from the effort is not likely to harm sales.

Still, westward expansion may be difficult. SAB's extensive distribution network in Eastern and Central Europe comes to an abrupt halt at the region's border with Germany. Without an underlying infrastructure it will take a long time to build a brand presence in a mature market. Moreover, growth in beer consumption is slow to flat in many key Western markets. John Wakely, managing director of Lehman Brothers, notes that it took Heineken 30 years to establish itself in the U.S. One way to speed things up would be to buy a West European brewer. The company's recent announcement that it may sell its southern African hotel and casino operations to sharpen its focus on its core business has fueled speculation that it is eyeing Kronenbourg, part of French food giant Danone.

But SAB may do well to pause before it signs a large check for a Kronenbourg or a Guinness. The company's competitive edge has long been its ability to produce and distribute beer cheaply, particularly in emerging markets. "[SAB] is probably the most efficient brewer in the world," says Wakely. He notes that the company is believed to be the only international brewer making money in China--a huge growth market: "China is a horror show for most brewers there, the Fosters, the Heinekens, the Anheuser-Busches. SAB is well placed to take advantage of the fact that others might be ready to bail out." And Pilsner Urquell will help SAB tap the burgeoning--and very brand-conscious--middle class market in places like Thailand and Malaysia. Although the markets of Western Europe and the U.S. may remain largely beyond its grasp for now, SAB seems sure to find its future full of Eastern promise.

With reporting by Peter Hawthorne/Cape Town and Jan Stojaspal/Plzen