The South African Breweries Limited

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The South African Breweries Limited

2 Jan Smuts Avenue
Johannesburg 2001
South Africa
(Oil) 407-1700
Fax: (Oil) 339-1830
Web site: http://www.sab.co.za

Public Company
Incorporated: 1895
Employees: 105,000
Sales: R 32.40 billion (1998)
Stock Exchanges: Johannesburg
Ticker Symbol: SBWRY
SICs: 2082 Malt Beverages; 2083 Malt; 2084 Wines, Brandy & Brandy Spirits; 2085 Distilled & Blended Liquors; 2086 Bottled & Canned Soft Drinks & Carbonated Waters; 3211 Flat Glass; 3229 Pressed & Blown Glass & Glassware, Not Elsewhere Classified; 5661 Shoe Stores; 5699 Miscellaneous Apparel & Accessory Stores; 5712 Furniture Stores; 7011 Hotels & Motels

The South African Breweries Limited (SAB) is a holding company whose principal line of business is brewing. The company holds an impressive 98 percent share of the beer market in its home country of South Africa, where it sells 14 brands of beer, including local lagers Castle and Lion as well as foreign brands brewed under license—Heineken, Guinness, Amstel, and Carling Black Label. Aggressive overseas expansion following the end of apartheid, however, has also given SAB ownership of, or stakes in, more than 25 breweries in the emerging markets of central Europe, China, and sub-Saharan Africa. Overall, in terms of volume, South African Breweries is the world’s fourth largest brewer. SAB also has a variety of nonbrewing operations, such as carbonated and natural fruit drinks and other beverages, retailing, hotels and gaming, and manufacturing of safety matches and glass. The company has been divesting many of these noncore assets in the late 1990s.

SAB’s history is in many ways the history of the South African brewing industry, most notably through the government-ordered merger of the largest breweries in 1956. The company’s history was also greatly influenced by the apartheid system and its effect on the domestic economy, on domestic firms, and on foreign investment in South Africa.

Early History

The discovery of gold on the Witwatersrand (a region encompassing Johannesburg) in 1875 brought large numbers of prospectors to South Africa. Small outposts for white settlers were transformed into busy cities with new industries. Several brewmasters, most with little experience, began to produce a variety of beers which immediately gained popularity with the settlers.

In 1889 a British sailor named Frederick Mead left his ship in Durban and took a job working in the canteen of a local army garrison at Fort Napier. While there, Mead, who was only 20, became acquainted with a businessman in Pietermaritzburg named George Raw. Neither of them knew anything about brewing, but they persuaded the local residents to help establish the Natal Brewery Syndicate. After purchasing a factory site, Frederick Mead returned to England to procure machinery and raise capital. In need of brewing expertise, Mead approached W. H. Hackblock, head of Morgan’s Brewery in Norwich. The two men became friends and Hackblock agreed to serve as chairman of Mead’s company, which was registered in 1890 as the Natal Brewery Syndicate (South East Africa) Limited. The company brewed its first beer in July 1891.

Mead remained interested in establishing a brewery in the rapidly growing Witwatersrand. In 1892 he purchased the Castle Brewery in Johannesburg from its proprietor Charles Glass. The expansion of this facility, however, was beyond the means of the Natal Brewery Syndicate, and Mead returned to England to attract new investors. In the final arrangement, Mead formed another larger company based in London called The South African United Breweries. This company took over the operations of both the Natal Brewery Syndicate and the Castle Brewery.

After construction of the new Castle Brewery, South African United Breweries made additional share offerings which were purchased by South Africa’s largest investment houses. Subsequent growth precipitated a restructuring of the company and reincorporation in London on May 15, 1895, as The South African Breweries Limited.

In 1896 South African Breweries purchased its first boarding houses. That same year, Frederick Mead moved to England for health reasons but continued to occupy a seat on the board of directors and frequently returned to South Africa. From London, Mead directed the purchase of machinery for brewing lager beer from the Pfaudler Vacuum Company in the United States. Patent restrictions and mechanical difficulties delayed production of Castle lager until 1898. The beer gained such widespread popularity that competing breweries rushed to introduce their own lagers.

South African Breweries, or SAB, was listed on the London Stock Exchange in 1895 and two years later became the first industrial company to be listed on the Johannesburg Stock Exchange. Through these listings SAB had greater access to additional investor capital.

On October 11, 1899, a war broke out between British colonial forces and Dutch and Huguenot settlers known as Boers. The war drove residents of Johannesburg out of the city and forced the Castle Brewery to close for almost a year. When British troops recovered the area, the brewery had sustained little or no damage. British authorities regarded the plant as an essential industry, and encouraged the company to resume production in August 1900. Disrupted supply lines caused shortages of yeast and other raw materials, but within a year production had returned to full capacity.

The Boer War ended in 1902 but was followed by a severe economic depression. The brewing industry was not as adversely affected as others, however, and SAB was able to continue its expansion across southern Africa. The company acquired the Durban Breweries and Distillers company, and established a new plant at Bloemfontein. SAB purchased Morgan’s Brewery in Port Elizabeth in 1906 and, five years later, acquired another brewery in Salisbury, Rhodesia (now Harare, Zimbabwe). At its northernmost point, SAB established a brewery at Ndola, Northern Rhodesia (now Zambia).

W. H. Hackblock died in 1907 and was succeeded as chairman by Sydney Chambers. In 1912 Chambers led the company into an innovative arrangement with its competitor, Ohlsson’s Brewery, to cultivate hops jointly at a site near the city of George, midway between Port Elizabeth and Cape Town. A joint subsidiary called Union Hop Growers spent many years developing new hybrids, which delayed the first commercial use of South African-grown hops until 1920.

Diversified into Bottles, Lodging, and Mineral Water in Early 20th Century

After Frederick Mead died in August 1915, John Stroyan, who succeeded Sydney Chambers a few months earlier, became the most important figure in SAB management. Stroyan faced a serious challenge the following year when hostilities during World War I interrupted the supply of bottles to South Africa. SAB decided to establish its own bottle-making plants in 1917. Actual production, however, did not begin until 1919, the year the war ended.

Another economic depression beset South Africa after World War I, but steady growth in the demand for beer reduced many of the detrimental effects of the depression. SAB was financially strong enough in 1921 to purchase the Grand Hotel in Cape Town, an important addition to the company’s lodging business. SAB gained an interest in the mineral water business in 1925, when it purchased a substantial interest in the Schweppes Company.

The Great Depression of the early 1930s had little effect on the South African brewing industry; SAB continued to expand its operations and improve its facilities. The company’s biggest problems were shortages of labor and capital. The Spanish Civil War and rising political tensions in Europe during the mid- and late 1930s caused a disruption in the supply of cork to South Africa. Faced with a severe shortage of cork seals for its beer, SAB developed a method of recycling old cork until a new supplier of cork could be found.

Castle Beer accompanied South African soldiers to the East African and Mediterranean theaters of World War II, but apart from its involvement in Europe, South Africa was relatively unaffected by World War II. When hostilities ended in 1945, SAB turned its attention to further modernization and expansion. Arthur Griffith-Boscawen, who had succeeded John Stroyan as chairman in 1940, died in 1946, and was replaced by John Stroyan’s son, Captain John R. A. Stroyan. Under the leadership of the younger Stroyan, SAB concentrated on the establishment of a South African barley industry as an extension of the joint agricultural project it operated with Ohlsson’s.

Company Perspectives

The South African Breweries Limited is a holding company invested in and taking management responsibility for a portfolio of businesses, principally engaged in meeting mass market consumer needs. Beer is the major profit contributor, but an important balance is provided by interests in complementary beverages, retailing, hotels, and the manufacture and supply of selected consumer goods and services, together with strategic investments in businesses which support the mainstream interests.

Takeover of Ohlsson’s and United Breweries in 1956

South African Breweries entered a new stage of its development in 1950. That year, in the midst of a large corporate modernization program, SAB decided to move its head office from London to Johannesburg. In 1951 the company acquired the Hotel Victoria in Johannesburg, and a second brewery in Salisbury. Captain Stroyan retired the following year and returned to England. His successor, a talented barrister named J. K. Cockburn Millar, died after only four months in office, and was replaced by a solicitor, S. J. Constance.

After producing nothing but beer for more than 60 years, SAB began to introduce a range of liquor products. The incentive to diversify was provided by increased taxes on beer. Consumption of beer in South Africa fell for the first time on record and showed every indication of further decline.

Officials of the three largest brewing companies in South Africa, SAB, Ohlsson’s Cape Breweries, and United Breweries, met on several occasions in London and Johannesburg to discuss the viability of competition under deteriorating market conditions. In 1956 these officials decided that the three companies should merge their operations into one large brewing concern. SAB acquired all the shares of Ohlsson’s and United Breweries, thus retaining the South African Breweries name. B. C. Smither of Ohlsson’s and M. W. J. Bull of United Breweries joined the SAB board of directors.

Although the new company controlled 90 percent of the market for beer in South Africa, antiquated production facilities narrowed profit margins. In response, company activities were centralized in the Transvaal and the Vvestern Province, areas where the three companies had previously competed. In addition, the old Castle Brewery in Johannesburg was closed in 1958. After succeeding Constance as chairman in 1959, M. W. J. Bull initiated a further diversification into wines and spirits. In 1960 SAB acquired the Stellenbosch Farmers Winery and later added Monis Wineries. Bull retired at the end of 1964 and was replaced by Dr. Frans J. C. Cronje, an economist and lawyer with substantial experience in government.

The company encountered a severe financial crisis in 1966 when Whitbread and Heineken entered the South African beer market. The most damaging market developments, however, came from government quarters as successive increases in excise duties made beer the most heavily taxed beverage per serving. Consumers began to abandon beer for wine and sorghum beer. SAB was able to reduce the effect of this crisis by increased sales of products from the Stellenbosch winery.

South African Breweries CEO Ted Sceales was instrumental in the creation of a new subsidiary called Barsab Investment Trust, jointly held by SAB and Thomas Barlow & Sons Ltd. (later Barlow Rand), the rapidly expanding mining services group. Barsab permitted SAB and Barlow to invest in each other and pool their managerial and administrative resources. It also provided SAB with the resources needed to adapt to rapidly changing market conditions. Sceales died following an auto accident in 1967, but the success of Barsab continued under the new chief executive, Dick Goss.

South African Breweries first attempted to move its legal domicile from Britain to South Africa in 1950, but was prevented from doing so by complex tax obligations to the British government. Consequently, SAB, which still derived about one-third of its income from investments in Rhodesia and Zambia, was bound to observe the British trade embargo against Rhodesia in 1967.

Reincorporated in South Africa in 1970

Parliamentary motions to permit the reincorporation of SAB in South Africa were initiated in 1968. These motions, however, did not gain approval until March 17, 1970. On May 26, 1970, after 75 years as an English company, SAB became a de jure South African company.

During the late 1960s SAB began brewing a number of new beers—some under license from foreign brewers—including Guinness, Amstel, Carling Black Label, and Rogue. The company also acquired the Old Dutch and Stag brands, as well as Whitbread in South Africa. While sales of wine and spirits continued to rise, SAB sold a number of its liquor-oriented hotels, and reorganized those that remained under a new subsidiary called the Southern Sun Hotel Corporation. Southern Sun, which operated 50 hotels in South Africa, was formed by the merger in 1969 of the existing SAB hotel interests with those of the Sol Kerzner family.

The South African government barred SAB from further investment in the liquor industry and limited its ability to invest overseas. The company then made several attempts to diversify its operations. In 1972 SAB and Barlow Rand decided to alter their collaboration and dissolve Barsab. As a result, two former Barsab holdings, the Shoe Corporation, and Afcol, South Africa’s largest furniture manufacturer, came under SAB control. The following year, SAB acquired OK Bazaars, a large discount department store chain. Certain other investments were disposed of, however, including ventures in banking and food products.

Several brewing interests attempted to challenge SAB’s dominant position in the South African market. Various German interests set up breweries in Botswana and Swaziland in a failed attempt to gain a foothold in South Africa. Louis Luyt, a South African entrepreneur, also failed, and sold his breweries to the Rembrandt Group in 1973. The Luyt breweries, which formed the core of Rembrandt’s alcoholic beverage group, were later incorporated as the Intercontinental Breweries. Determined to succeed, Rembrandt’s chairman, Dr. Anton Rupert, committed his company to a scheme of competition based on control of liquor retail outlets. In 1978 Rembrandt acquired a 49 percent share of Gilbey’s, the third largest liquor group in South Africa. The addition of Gilbey’s 100 retail outlets gave Rembrandt access to a total of 450 stores. South African Breweries responded by acquiring Union Wine, an independent liquor retailer with 24 hotels and over 50 retail outlets.

Once again, market conditions were not conducive to competition. The government, therefore, proposed a rationalization program in which SAB would take over Rembrandt’s brewing interests and turn over its wine and spirits operations to an independent subsidiary called Cape Wine and Distillers. The program, executed in November 1979, also called for Rembrandt to turn over its Oude Meester wine and spirits operations to Cape Wines, in which SAB, Rembrandt, and the KWV wine growers cooperative each owned a 30 percent interest. The remaining 10 percent interest was sold to private investors.

Government Restrictions Led to More Diversification in the 1980s and Early 1990s

By the early 1980s the South African government’s system of racial separation (apartheid) and deteriorating social conditions for blacks had become international issues. Many business leaders openly called for change, but the government still prevented companies such as SAB from transferring capital out of South Africa through foreign investments. Often these companies had little choice but to reinvest their surplus capital in South African ventures, which in turn gave them a more crucial interest in the resolution of social and human rights problems within South Africa.

Many foreign-owned companies, which faced fewer restrictions on divestment, sold their South African subsidiaries and closed their offices in South Africa. This trend made acquisitions by South African companies easier. SAB took over control of the ABI soft drink concern from Coca-Cola, and later added several clothing retailers, including Scotts Stores (acquired in 1981) and the Edgars chain (added in 1982). A government order in 1979 for SAB to sell its Solly Kramer retail liquor stores was completed in 1986, five years before its deadline. Also in 1986 SAB established a joint venture with Ceres Fruit Juices to sell leading noncarbonated juice brands Ceres, Liquifruit, and Fruitee.

In 1987 Murray B. Hofmeyer succeeded Cronje as chairman. Hofmeyer and his successor, Meyer Kahn, continued to diversify through acquisition, adding Lion Match Company, the leading manufacturer of safety matches in Africa, in 1987; Da Gama Textiles Company, a leading South African textile manufacturer, in 1989; and the Plate Glass Group, a manufacturer of glass and board products, in 1992.

End of Apartheid Fueled Major Changes in the 1990s

The dismantling of apartheid finally began in 1990, with the unbanning of opposition political parties, including the African National Congress, and the release of political prisoners, including Nelson Mandela. Major political changes rapidly followed. In 1991 the remaining apartheid laws were repealed. In 1992, an all-white referendum approved a new constitution that would lead to eventual free elections. Finally, in 1994, the first nationwide free elections were held and were won by the ANC, with Mandela elected president.

SAB—acting largely out of self-interest since 85 percent of the beer in South Africa was purchased by blacks—was well out in front of the political changes as it had begun to hire blacks in the early 1980s. By 1985 28 percent of salaried employees were black, a figure that rose to 48 percent by 1994. Nevertheless, the threat of a government-forced breakup of SAB’s beer monopoly hung over the company following the end of apartheid.

Partly in response to this threat, and partly in response to the loosening of laws regarding foreign investment, the Kahn-led South African Breweries aggressively expanded outside its home country starting in 1993. That year, SAB spent US$50 million for an 80 percent stake in Hungary’s largest brewer, Dreher Breweries, the first of a series of moves into the emerging markets of central Europe. In 1996 the company gained joint control of two of the largest breweries in Poland, Lech Brewery and Tyskie Brewery, as well as three breweries in Romania and one in Slovakia. In 1994 SAB created a joint venture with Hong Kong-based China Resources Enterprise Limited; by early 1998 this joint venture had gained majority control of five breweries in China. A third area of foreign growth for SAB was in sub-Saharan Africa, where management control was gained of breweries in Botswana, Swaziland, Lesotho, Zambia, Tanzania, Mozambique, Ghana, Kenya, Ethiopia, Zimbabwe, and Uganda during this period.

In August 1997 Kahn was appointed chief executive of the South African police service, becoming the first civilian to hold the post. The outspoken Kahn, who had been vocal in calling for the rapid liberalization of the economy and for a restoration of law and order, was made responsible for cracking down on a national crime epidemic. Taking over as acting chairman of SAB was Cyril Ramaphosa, South Africa’s most prominent black capitalist and a former militant trade unionist.

By this time, South African Breweries was the world’s fourth largest brewer and had a rapidly expanding international brewing empire. The company was now free to unload its noncore businesses in order to concentrate more closely on brewing and its other beverage operations. Under Ramaphosa, it did just that. In late 1997 and early 1998 SAB divested its holdings in OK Bazaars, Afcol, and Da Gama Textiles, and announced that Lion Match and Conshu Holdings, a footwear maker, were also likely to be jettisoned. These divestments were not proceeding quickly enough for some observers, but SAB had already managed to strengthen its overall position in the face of the continued threat of the breakup of its domestic beer monopoly. Selling off noncore assets was freeing up capital for additional investment in foreign breweries, which would further mitigate the impact of any government intervention.

Principal Subsidiaries

Southern Associated Maltsters (Pty.) Ltd.; SAB Hop Farms (Pty.) Ltd.; SAB International Holdings Inc.; SAB International (Africa) B.V. (Netherlands); Botswana Breweries (Pty.) Ltd. (40%); Kgalagadi Breweries (Pty.) Ltd. (Botswana; 40%); Swaziland Brewers (Pty.) Ltd. (60%); Lesotho Brewing Company (Pty.) Ltd. (39%); Tanzania Breweries Ltd. (46%); Cervejas de Mozambique Limitada (65%); Zambian Breweries Plc (45%); Nile Breweries Limited (Uganda; 40%); SAB International (Europe) B.V. (Netherlands); Dreher Breweries (Hungary; 85%); Lech Browary Wielkopolski S.A. (Poland; 32%); SC Vulturul S.A. (Romania; 70%); Compañia Cervecera de Canarias S.A. (Spain; 51%); SCPitber S.A. (Romania; 81%); SC Ursus S.A. (Romania; 73%); Browary Tyskie Corny Slask S.A. (Poland; 45%); SAB International (Asia) B.V. (Netherlands); China Resources Enterprise Beverages Ltd. (49%); China Resources Shenyang; Snowflake Beer Co. Ltd. (China; 44%); China Resources Dalian Brewery Co. Ltd. (49%); Shenzhen C’est Bon Food and Drink Co. Ltd. (China; 33%); China Resources (Jilin) Brewery Co. Ltd. (90%); Delta Corporation Ltd. (Zimbabwe; 23%); Seychelles Breweries Ltd. (20%); Accra Breweries Limited (Ghana; 50.5%); Amalgamated Beverage Industries Ltd. (68%); Coca-Cola Canners (Pty.) Ltd. (24%); Can Vendors (Pty.) Ltd.; Appletiser South Africa (Pty.) Ltd.; Appletiser Pure Fruit Juices (Pty.) Ltd.; Ceres Fruit Juices (Pty.) Ltd. (35%); Valaqua (Pty.) Ltd.; Associated Fruit Processors (Pty.) Ltd. (50%); Traditional Beer Investments (Pty.) Ltd.; Distillers Corporation (SA) Ltd. (30%); Stellenbosch Farmers’ Winery Group Ltd. (30%); Edgars Stores Ltd. (65%); Amalgamated Retail Ltd. (“Amrel”) (68%); Southern Sun Holdings Ltd.; Plate Glass and Shatterprufe Industries Ltd. (68%); Da Gama Textile Company Ltd. (61%); The Lion Match Company Ltd. (71%); Conshu Holdings Ltd. (67%).