6. The 3G Model
6.2. Reducing Selling, General & Administrative Expenses
6.2.2. Selling, General & Administrative expenses in the Industry
By looking at the brewing industry and benchmarking the SG&A to revenue ratio of AB InBev and SAB Miller against peers we will be able to better predict the forecasts for the merged company starting from 2017 onwards.
The SG&A to revenue measure across the brewing sector is shown in Exhibit 14. The values include the depreciation and amortisation expenses as they are recognised in the function to which they belong.For a like to like comparison, the values of AB InBev and SAB Miller also include depreciation and amortisation therefore they do not match the ones from the restated financial statements as depreciation and amortisation had been reclassified.
20%
25%
30%
35%
40%
45%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Brewing Industry SG&A % Revenue
AB InBev SAB Miller Carlsberg Molson Coors Industry average
Exhibit 14: Industry SG&A % Revenue. Source: Bloomberg
34 The industry average of SG&A to revenue for 2015 was 39% which places SAB Miller at 26%, together with AB InBev at 29%, at the top of the pyramid. None of the two companies discloses the SG&A expenses by region. To identify where synergies will happen in terms of cost of administration, finance, marketing and other corporate functions, we need to follow the source of the money. Since SG&A expenses are directly related to revenue, separating regionally the sources of income will lead to identifying the destination regions of the SG&A expenses. The exercise will help us understand which regions have large organisations for both companies as currently, each company has its corporate functions across each region. Once the two companies merge, there will be redundant corporate functions across some areas, and there will be a need for just one organisation per region. We look to identify the areas where the two companies have a significant share of revenue, and therefore they overlap in terms of SG&A expenses for the area.
The two companies have very different strategies; AB is more focused on global and international beer brands while SAB Miller has achieved a significant presence in the national and local beer markets.
However, as Figure 8 highlights, Latin America, Asia-Pacific and Europe are the regions where the two companies overlap most.
17,442
(40%) 16,133
(37%)
5,669
(13%) 4,360
(10%) 6,942
(35%) 198
(1%) 2,380
(12%)
3,768 (19%)
6,545 (33%) 0
5,000 10,000 15,000 20,000 25,000
Latin America North America Asia Pacific Europe Africa
AB InBev and SAB Miller Sales by Region, 2015
AB InBev SAB Miller
Exhibit 15: Sales by region, 2015. Source: AB InBev and SAB Miller Annual Reports
35 Error! Reference source not found. and Error! Reference source not found. show how the two groups were structured before the merger in terms of regional organisation and offices. Error!
Reference source not found. shows how the merged company is organized.
Latin America represents a key market for both companies as Error! Reference source not found. indicated. It is also the region where AB traces its roots to and where the efficiency programmes have been developed as it has been the case with Projeto Manufactura and Zero-Base Budgeting. In the organisation of the merged company, the offices for LATAM have been kept at Sao Paolo and Buenos Aires while SAB Miller’s office in Miami disappeared from the organisation43. SAB Miller’s Latin American organisation had been engulfed into the existing AB structure since the latter one was fully optimised. The following zones overlapping in terms of revenue and organisation implicitly were APAC and Europe. As in the previous case, the APAC office has been kept in
43 (AB InBev, 2016)
Region Office
Global Headquarter London, UK
Latin America Miami, USA
North America Chicago, USA
Europe Zug, Switzerland
APAC Hong Kong & Beijing
Africa Johannesburg, South Africa
Exhibit 16: SAB Miller offices. Source: SAB Miller Annual Reports.
Region Office
Global Headquarter Leuven, Belgium Functional Management Office New York, USA Latin America North Sao Paolo, Brazil
Latin America South Buenos Aires, Argentina Middle Americas Mexico City, Mexico
North America St. Louis, USA
Europe Leuven, Belgium
APAC Shanghai, China
Exhibit 17: AB InBev offices. Source: AB InBev Annual Reports
Region Office
Global Headquarter Leuven, Belgium Functional Management Office New York, USA Latin America North Sao Paolo, Brazil
Latin America South Buenos Aires, Argentina
36 Shanghai while the SAB’s Honk Kong office is gone. The interesting example, however, is Europe, where both
companies had their global headquarter.
SAB Miller had in central and south of London approximately 600 employees. It has been announced that the office will be phased out gradually during the transition period, keeping the global headquarter in Leuven, Belgium44. Additionally, the office from Switzerland will be cut off. The APAC offices Hong Kong and Beijing have had a similar fate. The only office that has been kept was the one in Johannesburg as headquarter for Africa. The region was not on AB’s radar before the merger, and now it represents an opportunity to penetrate or consolidate the market through SAB organisation. AB InBev stated that “Africa will be a critical driver for the future growth of the business”45.
We can conclude that Latin American and Europe is where most of the SG&A costs savings will happen since these are the regions where the SAB Miller organisation has been either scaled down or completely cleared off. On the other side, Africa will represent a source of investment and an increase in SG&A determined by the strategy to develop more in the region.
One SG&A area that will not be affected by cost cutting measures, however, will be sales and marketing, as AB has stated before the completion of the merger. During an analyst call presentation, AB stated that “no significant net savings are expected in consumer and customer facing sales & marketing investments within the cost base of SAB Miller”46. The measure of not touching SAB Miller’s marketing and sales organisation is taken in order to maintain the same level of sales and not decrease them which might be the case if an optimization process would happen in the client-facing roles.
AB InBev 2,015 2016
Est
2017 Est
2018 Est
2019 Est
2020 Est
Distribution Expenses 4,136 4,122 4,284 4,452 4,627 4,809
Sales/Marketing/Ad Expenses 6,455 6,709 6,972 7,246 7,531 7,827 General and Administrative Expenses 2,213 2,300 2,390 2,484 2,582 2,683 Total SG&A (Pro forma statements) 12,804 13,131 13,646 14,183 14,740 15,319
44 (Davis, 2016).
45 (AB InBev, 2015b)
46 (Ab InBev, 2016b)
Middle Americas Mexico City, Mexico
North America St. Louis, USA
APAC Shanghai, China
Africa Johannesburg, South Africa
Exhibit 18: AB InBev+SAB Miller offices. Source: Arthur (2016)
37
Exhibit 19: AB InBev SG&A Forecast. Sources: AB InBev Annual Report, Author's elaboration
The table above shows the estimates of Total SG&A costs for AB InBev according to the pro forma statements.
SAB Miller 2015 2016
Est
2017 Est
2018 Est
2019 Est
2020 Est Sales, Marketing and Distribution Expenses 2,132 2,225 2,242 2,258 2,275 2,292
Administrative expenses 2,232 2,269 2,286 2,303 2,320 2,337
Total SG&A (Pro forma statements) 4,364 4,494 4,528 4,561 4,595 4,629
Cost savings of 10% in Distribution 224 226
Cost savings in Administrative Expenses of
10% in 2017 and 30% in 2018 229 691
Total savings 453 917
Sales, Marketing and Distribution 2,132 2,225 2,017 2,032 2,049 2,066
Administrative expenses 2,232 2,269 2,057 1,612 1,629 1,647
Estimated Total SG&A 4,364 4,494 4,075 3,645 3,679 3,713
Exhibit 20: SAB Miller SG&A estimates. Sources: Bloomberg, Author's elaboration
The first part of Exhibit 20 shows the SG&A expenses as per pro forma statements. The 2017 savings amount to 10% of the distribution costs due to synergies. The sales and marketing costs will not incur any changes as stated before. Since the cost savings of administrative expenses relate to the dismissal of personnel, the significant proportion usually happens after a period of 2 years since takeover due to negotiations and work contract clauses as it was the case with Heinz. Both distribution and administrative cost savings, although they happen in 2017 and 2018, they do not have just a one-time effect. Since they are operational costs, they impact by the same scale also the future SG&A expenses i.e. in the period 2019-2020.
For the combined company, AB InBev & SAB Miller, after the cost cutting measures the total SG&A expenses will be:
AB InBev&SAB Miller 2017 Est
2018 Est
2019 Est
2020 Est
SG&A Expenses 16,919 16,993 17,552 18,131
Exhibit 21: AB InBev & SAB Miller SG&A Expenses. Source: Author's elaboration
38