Want to Take On the World? Take a Pils

By Christine Whitehouse/London

Anyone familiar with the delights of what Czechs affectionately call liquid bread will not be surprised to learn that Czechs consume more beer per capita than any other nationality. In 1998 they quaffed around 170 qts. each, beating the Germans, who managed just 134 qts., into a poor second place. (Americans finished 13th, with 88 qts.) In a league of its own is the Czech Republic's most famous beer, Pilsner Urquell. The original bottom-fermented Pils, or lager, it was first brewed in the Bohemian city of Pilsen in 1842. "It's a Rolls-Royce among beers," purrs Pilsner spokesman Jaroslav Pomp.

And look who's behind the wheel now. The new owner of the world's most admired beer is South African Breweries, which last 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, SAB got the right to acquire Nomura's remaining stake by June 30, 2001, for $308 million. That makes SAB Central Europe's biggest brewer and vaults it into third spot worldwide, after Anheuser-Busch of the U.S. and Heineken of the Netherlands.

SAB's record suggests that its ambitions are no small beer. Since its 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. Popular brands like Castle and Lion are nursed in bars and at barbecues across South Africa. SAB's 98% domestic-market share has funded the company's expansion into 20 countries across Africa, Asia and Eastern Europe. In 1998, foreign operations made up 45% of the company's $3 billion in worldwide beer sales. SAB is looking to expand further in Africa and Asia. The firm has only a token presence in the U.S. and Western Europe.

An assault on the U.S. market is not in the cards; further expansion in Europe is more likely. Before its Czech purchases, SAB established itself in Poland, Romania, Hungary, Slovakia and Russia. A top brand like Pilsner Urquell, say industry insiders, will reinforce SAB's No. 1 position in the region and eventually give it the edge over Heineken in Germany as well. But rival Anheuser-Busch has little cause for concern. Although the St. Louis-based giant had expressed an interest in bidding for Nomura's Czech brewing interests, Eastern Europe is "not a priority region for our international development," says Steve Burrows, CEO and president of Anheuser-Busch International. The company has concentrated on increasing its market share in Western Europe. It has gained ground in Britain--one of Budweiser's largest markets outside the U.S.--and the Republic of Ireland, and has built up a following in Italy, Spain and Greece. Similar expansion won't be easy for SAB. Its extensive distribution network in Eastern and Central Europe comes to an abrupt halt at the German border. Without a support organization, it takes a long time to build a brand presence in a mature market. John Wakely, managing director of Lehman Brothers' London office, 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 Western Europe brewer. There is speculation that SAB is eyeing Kronenbourg, part of French food giant Danone.

But SAB might be wise to pause before it signs a large check for another beermaker. The company's competitive edge has long been its ability to produce and distribute beer cheaply, especially in emerging markets. "SAB is probably the most efficient brewer in the world," says Wakely. 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. SAB is well placed to take advantage of the fact that others might be ready to bail out," Wakely notes. And Pilsner Urquell will help SAB tap the 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 is fast becoming a strong global presence without them.

--With reporting by Peter Hawthorne/Cape Town and Jan Stojaspal/Pilsen

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