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SABMiller plc Annual Report 2007

Operations review

South Africa


Economic growth in South Africa slowed in the second half of the year as the effects of higher fuel and food costs as well as increased levels of household debt in a higher interest rate environment slowed consumer spending. Gross domestic product growth for calendar year 2007 of 3.9% was down on the 5% growth rate for 2006.

Volume performance was satisfactory with lager volumes in line with those of the prior year, notwithstanding the loss of our licence for the Amstel brand in March 2007 (9% of volumes in the year to March 2007). Soft drinks were 4% up despite cycling tough comparatives in the prior year, when volumes grew by 7%, and the carbon dioxide shortages experienced in the country over the fourth quarter of this year, and despite a decline in volumes in the lower margin alternative beverage category, primarily due to the discontinuation of the Bibo fruit cordial and Milo brands.

Volumes grew in both the mainstream lager and flavoured alcoholic beverage (FAB) categories. Robust growth in Hansa Pilsener and Castle Milk Stout underpinned mid single digit growth in the mainstream category and strong growth across the Brutal Fruit range contributed to the double digit increase in FAB volumes. In the premium segment, we successfully launched our new brand, Hansa Marzen Gold, Castle Lite grew strongly and Peroni Nastro Azzurro volumes more than doubled, but this did not fully offset the anticipated loss of premium volumes as the competing product re-entered the market.

Revenue grew by 6% on a constant currency basis. Price increases were at a level somewhat below inflation for both lager and soft drinks, and revenue growth was constrained by adverse mix effects in lager, driven by the swing out of higher priced premium brands into mainstream.

Higher raw material input costs in the beer business placed margins under pressure. Increasing international commodity prices led to a large increase in key brewing raw materials, and packaging costs rose on the back of higher energy and oil prices. Glass costs were also up significantly following the importation of glass in the current year at a premium to local supply, due to capacity constraints at local glass manufacturers.

Distribution costs rose by over 30% in the current year. Higher international crude oil prices together with the depreciation of the rand drove South African diesel costs up by some 47% in the year to March 2008. This was exacerbated by incremental distribution costs associated with servicing the 16% increase in main market outlets (totalling 23,400 outlets in the full year) which is in line with our direct distribution initiative.


of total premium volumes contributed by Hanza Marzen Gold

EBITA on a constant currency basis for the year was 6% lower than the prior year, driven primarily by higher raw material input and distribution cost increases. In addition, the EBITA impact of the loss of the Amstel licence is estimated at approximately US$50 million for the year driven by adverse mix, incremental investments in marketing and new products and packaging development. The competitor product re-entered the South African market in the second quarter of the financial year. EBITA benefited from some foreign currency gains on contracts related to procurement. Overall EBITA margin decreased by 270 basis points to 23.1%.

Good progress was made in the phased replacement of the 750ml returnable bottle population for our mainstream brands and by March 2008 all but two of our breweries were producing product in the new bottle. The market has reacted positively to the modernised new bottle, contributing to a resurgence in growth of the mainstream category. This renovation programme is scheduled to be complete by September 2008. The phased introduction of 430 million new bottles has added complexity to the supply grid which has resulted in increased transport expenditure.

There were a number of new product launches and pack renovations in the year. The May 2007 launch of Hansa Marzen Gold proved to be very successful and contributed over 23% of total premium sales in the year. Innovation in the FAB category saw two new brands being launched in the last quarter of the financial year. Sarita Ruby, a dry, red, apple-flavoured FAB and Skelter’s Straight, a citrus flavoured offering, were launched in February 2008 and March 2008 respectively. Both the Hansa Pilsener and Castle brands received label redesigns in the year to coincide with the introduction of the new 750ml returnable bottle. In the premium segment, the Peroni Nastro Azzurro range was extended to include draught, 330ml cans and a new 660ml returnable bulk pack.

Despite the slow progress by local authorities in the granting of retail liquor licences, our Mahlasedi taverner programme trained some 3,400 taverners during the year, bringing the total number to date to over 13,400. This is in line with our commitment to invest US$14 million in this initiative over five years. Administrative delays at local government level continue to hamper the progress of liquor licensing across the country.

The Department of Trade and Industry issued the final Broad Based Black Economic Empowerment (BBBEE) Codes of Good Practice in early February 2007. The liquor industry’s formulation of a Sector Code had been suspended pending the publication of the BBBEE Codes, but resumed in mid 2007 with the active involvement of the Department of Trade and Industry (DTI). The DTI has required that the industry involve a very broad group of stakeholders in the process. It is anticipated that the Sector Code will be finalised towards the end of calendar year 2008.

Appletiser continued to show strong volume growth of 18%, arising mainly from its international markets.

Distell’s results benefited from improvements in both domestic and international volumes. Domestic sales volume increases have been driven by cider brands and the ready-to-drink categories, despite shortages in the supply of packaging materials and carbon dioxide. Margins were also improved through operating efficiencies.

Hotels and Gaming

SABMiller is a 49% shareholder in the Tsogo Sun group. The financial performance of Tsogo Sun continues to be strong. The gaming industry in South Africa has grown steadily, with real growth in casino win being experienced by all participants. However, economic circumstances in recent months indicate a slowdown in activity.

The South African hotel industry has again enjoyed strong Revpar growth as a result of a robust local economy and growth in international arrivals. Increased demand coupled with limited capacity growth, has assisted Tsogo Sun in achieving a year on year increase in Revpar of 24% in constant currency.

The improved level of trading, assisted by control of costs, resulted in strong growth in EBITA and margins.

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Financial summary South
Group revenue1 (US$m) 4,446 4,274 4
EBITA (US$m) 1,026 1,102 (7)
EBITA margin (%) 23.1 25.8  
Sales volumes (hl 000):      
– Lager 26,526 26,543
– Soft drinks 16,657 15,986 4

1 Including share of associates, US$490 million (2007: US$447 million).


Key focus areas

  • Continue to develop a strong and differentiated portfolio of brands
  • Expand our direct distribution reach and capability
  • Continuously improve the supply chain and manufacturing
  • Lead and support local economic development


  South Africa
Hotels and Gaming
2008 2007 %
Revenue (US$m)1 396 340 16
EBITA (US$m) 141 100 41
EBITA margin (%) 35.6 29.3  
RevPAR (US$)2 76.10 62.21  

1 Share of associates revenue.

2 Revenue per available room.