SABMiller's beer baron opens up

Fortune's Matthew Boyle sits down with the CEO of the second-largest brewer in the world, and gets the lowdown on brand integration, India's drinking habits and his favorite beer.

By Matthew Boyle, Fortune writer

NEW YORK (Fortune) -- Nearly 30 years ago Graham Mackay joined the South African Breweries - now called SABMiller (Charts) since its acquisition of American brewer Miller in 2002. The world's second-largest brewer (by volume) boosted revenue and operating profits by more than 20 percent last fiscal year, despite another lackluster performance by its U.S. operations.

The soft-spoken Mackay, 57, who has been CEO since 1999 and has seen the firm's stock rise more than 200 percent over that period, recently sat down with Fortune's Matthew Boyle to talk about rival Anheuser-Busch (Charts, Fortune 500), the company's new beer Miller Chill, and why goats make great mascots.

How would you characterize the company's fiscal year just ended?

The year gone by has been very successful. Latin America was amongst the strongest regions of growth, but Europe was as impressive. And we also had very strong volume growth in Asia, so our performance all around is strong.

Is the integration of Bavaria, which you bought in 2005 for $7.8 billion, now complete?

It's pretty much over with. We are now in the middle of changing the trajectory of the business. Bavaria is about a third of our profits, and this year will be one of great investment in the business. For example, we are building a new brewery on the outskirts of Cali in western Columbia. We're essentially taking a disorganized portfolio of regional brands and making that portfolio more national, with a bit of character to it.

Do you often take beers across borders?

We do, if they show signs of suitability for that. We have designated three of our brands for marketing around the world - Peroni Nastro Azzurro, Pilsner Urquell and Miller Genuine Draft.

Which of those three has had the most success overseas?

MGD. We make MGD in Russia, Italy, Poland, Hungary and South Africa, as well as in the U.S. It is almost a billion liter brand in Russia and is very popular on the club scene.

Your growth last year came partly from renovation of mainstream brands. Can you give an example?

We have those three international brands, but we also discovered that other brands have [cross-border] appeal. For example, we have a brand called Kozel, which in the Czech Republic is a lower mainstream brand. The brand's symbol is a goat. In Slavic countries, the goat symbol plays very well and so Kozel has become a roaring success there. I don't really understand why.

What about China and India?

Those markets are polar opposites of each other. The Chinese market is very open commercially - there are very little licensing requirements. It is a very high volume, low price market. We sell roughly as much beer in China as is sold in the entire UK market.

India is the opposite: it is tiny, and has by far the lowest beer consumption per capita, at less than one liter of beer per annum. Their relationship with alcohol is quite troubled. Recall that Gandhi was a teetotaler. The problem is just trying to peel back the state. It is very difficult to get permits to do anything. Ironically, India's economic development is held in check by its democracy.

How are you growing the Chinese market?

What we have been doing in China is taking brands national, getting better distribution, and improving quality dramatically. Our brand Snow is the most national brand but no Chinese beer brands are truly national.

Save for imports and craft beers, the U.S. beer market continues to stagnate, and your profits there declined for the second straight year. What's the problem?

Two years ago we did not declare victory when things were going swimmingly for us in the U.S. so we are not declaring defeat now. The issue right now is cost pressures, in aluminum specifically. We spent about $100 million dollars more on aluminum this past fiscal year than the year prior.

What do you make of the craft beer resurgence in America?

I think it's going to fade. It's inevitable.

Tell us about Miller Chill, which you just launched.

We launched Chill in a few test markets and it was so well received that we are taking it nationwide by the Fourth of July. It's an American take on a Mexican classic - a light beer with lime and salt. That doesn't sound very prepossessing but it drinks extremely well. It is flying off the shelves now.

How is Anheuser-Busch looking?

I would say it's too soon to tell. [New CEO] August Busch IV brings a fresh approach.

"Fresh" how?

I don't want to comment there. They are grappling with their problem, which is essentially the difficulty of providing growth when you have such a huge position in the mainstream U.S. market.

What about a merger of InBev and A-B?

My personal guess is that it's unlikely to happen in the short term. I don't know about the medium or long term.

Do you see A-B more competitive internationally than before?

I don't think so. What seems to be happening is they are paying more attention to international markets, but there's no evidence of change on the ground.

Is it worth it to get into a price war with A-B in the United States?

We try to build brands rather than cutting prices. It sounds pious but it's true. A-B's advantages are in the mainstream, where they have huge operating scale and can provide superior levels of service. So I think we'll take them on in things they are not as good at, which is premium brand development. A head-to-head slugfest with A-B in their heartland is not very smart.

Will we see more acquisitions from you this year?

We are always doing strings of deals. Activity is driven by what comes up.

Haven't most of the likely targets been bought already?

The short answer is yes. In China, we are still acquisitive, but even there things have tightened up. There are still some businesses that might become available in Russia and in [the former Soviet republics], but prices have tightened up. There will be consolidation yet to come but the pace is much slower.

What is your favorite beer?

Pilsner Urquell. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.