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SABMiller plc Annual Report 2007

Strategic priority three

Constantly raising the performance of local businesses

While our operating performance compares well with that of the rest of the industry, we know we have to keep improving to stay ahead. Our efforts in the past year have focused on three main aspects of the business.

The first is to become more efficient, especially in our manufacturing. Because efficiency is part of our day-to-day management, we’ve already gone a long way down this route and the opportunity for further, large, cost-cutting projects is limited. Nevertheless, the rise in commodity costs compels us to do whatever we can to counteract the squeeze on our margins. We’ve seen good progress across the group, notably from Miller which again made important savings in its brewing operations while producing less waste and using fewer resources.

The second area of focus – and one that’s hugely important to our success – is to improve our routes to market, both to remove costs and to ensure that the right products reach the right outlets in the right condition, accompanied by the right messages and merchandising material. Colombia and South Africa are just two of several businesses that are working hard to re-engineer their sales and distribution structures to make them more efficient and effective. In markets such as the USA, where the business does not directly control its distribution, we’re making it easier for distributors and customers to do business with SABMiller and are looking for ways to add value to their operations as well as ours.

Thirdly, in our quest to raise local performance, we’re responding to the consolidation of the retail sector by forming mutually beneficial partnerships with major retailers. Our Polish business, for example, has forged a closer relationship with Tesco while Miller has done the same with chains such as Wal-Mart and 7-Eleven.

The case studies below describe in more detail some of the many ways in which SABMiller businesses around the world are improving their operating performance.

Dealing with rising input costs

The past two years have seen an unprecedented rise in the price of inputs, namely barley and hops for brewing and glass and aluminium for packaging. As one of the largest global buyers of these items, we have procurement strategies for managing our risks and mitigating the impact.

Thanks to our scale, we can procure more efficiently by coordinating our buying effort globally but sourcing locally according to where particular expertise lies. Europe, for example, buys a significant amount of malt for the group while aluminium is purchased in the USA where the bulk of our cans are produced. This approach has helped to limit the increases in our commodity costs compared to prices on the open market.

In addition, we have specific risk-management policies to limit our exposure to commodity market volatility. We use hedging strategies to supplement long-term contracts with suppliers in order to ensure supplies at target prices. In the past year we’ve been able to limit the increase in the cost of goods per hectolitre of beer produced (in constant currency) to mid-single digits – a successful result.

Developing relationships with large retailers

In some markets, consumers are increasingly buying their beer from supermarkets and other retailers rather than ordering it in bars and restaurants. This presents a challenge to brewers in that margins on retail sales tend to be tighter. The difficulty is compounded as the retail sector consolidates and drives margins still lower.

Against this background, it’s important to learn how to work with retailers and ensure we become the preferred supplier wherever possible. To this end, our Polish business has forged relationships with Tesco and E.Leclerc that involve developing joint plans for store layouts and sales and promotions. The Polish team has drawn on SABMiller’s knowledge of consumers and its skills in marketing to design new ways of displaying and promoting its products in-store. These are now in place in three Polish hypermarkets – two Tescos and one E.Leclerc.

Thanks to this new relationship, Tesco Poland has made SABMiller’s Polish subsidiary its principal beer supplier and the business is now the nationwide leader in hypermarkets and supermarkets. Shoppers increasingly perceive SABMiller brands as segment leaders and both SABMiller and Tesco are benefiting from a rise in sales.

Miller in the USA has made similar progress in understanding the objectives and strategies of the big national retail chains and is working with them to add value to the relationship. As a result, its sales with the big four – Wal-Mart, 7-Eleven, Kroger and Supervalu – are growing faster than its sales overall.

Introducing 430 million new returnable bottles in South Africa

Mainstream brands in South Africa have normally been sold in returnable quart bottles. Although standardisation made the product more affordable, it was hard to add distinctive labelling and the bottles themselves gradually became outdated.

The business therefore made a decision in 2007 to invest around US$70 million to replace its entire quart bottle stock in a phased project lasting 18 months. As well as using less glass, the new bottle shape has improved the image of the mainstream category and lends itself to new labelling technology which in turn makes for stronger brand differentiation.

Running from April 2007, the project is a massive logistical task involving the introduction of 430 million new bottles. The phased roll-out limits the company’s flexibility to move stock around the country and infrastructure challenges have created further complications. Shortages of glass, for example, have required new sourcing from as far away as the Middle East. Despite the difficult logistics, the results are coming through as evidenced by a return to growth in the mainstream segment.

Expanding production in Colombia

After the transaction with Bavaria, SABMiller decided that production standards in all its Latin American breweries should be lifted to the same stringent levels as in the rest of the group, to ensure that consumers enjoyed the highest quality of beer. As this included fermenting the beer for longer, the move put further pressure on capacity at a time when the local business was struggling to meet rapidly growing demand.

In response, SABMiller has built a new brewery in extremely quick time on a site already earmarked by Bavaria for a future plant. The Valle facility in Colombia is based on Bavaria’s original plans with modifications to take account of SABMiller’s worldwide experience and the need to meet the highest efficiency and environmental standards. Operating since March 2008 and now the most advanced brewery in Colombia, the plant is capable of producing 180,000 bottles of beer an hour.

The US$220 million Valle project is just one example of the heavy investment going on around the world to keep pace with rising demand for SABMiller’s beers.

Miller: Lower costs and a smaller carbon footprint

In 2007, Miller embarked on Project Unicorn with the aim of continuously improving its operations and making further savings in packaging, freight, waste, utilities and maintenance.

The programme incorporates the principles of World Class Manufacturing whereby employees are empowered to search for solutions that cut the number of stoppages on the production line. The resulting improvements have taken Miller’s overall equipment effectiveness to an all-time high of 74.9%.

Reducing the diameter of Miller’s can ends has cut the company’s use of aluminium by over 560 tonnes per year – the equivalent of all the aluminium in 2.2 million cases of beer. A new anaerobic wastewater treatment plant at one of Miller’s plants now generates enough biogas to produce a megawatt of electricity for the brewery each hour – again saving energy and costs and reducing the company’s carbon footprint.

Seventeen months on from its launch, Project Unicorn is on track to achieve its target of reducing costs by US$120 million over three years.

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