SMC'S International Beer Volumes Up

October 5, 1998 PSE CIRCULAR FOR BROKERS NO. 2306-98 October 5, 1998 SMC'S INTERNATIONAL BEER VOLUMES UP Beer sales volumes have grown vigorously in China in recent months, effectively reversing a declining trend in San Miguel Corporation's international beer sales that had begun late last year, the company reported today. After posting an increase of 5% in the second quarter of 1998, San Miguel's China beer sales grew by 53% in July and 26% in August compared to the same months last year. This performance contrasted sharply with volume declines of 17% in the last quarter of 1997 and 2% for the first three months of 1998. The growth in China was such that, along with improvements in Vietnam and Hong Kong, it pulled up San Miguel's total international beer sales volume from a decline of 8% as of the first half of 1998 to growth of 1% for the first eight months of the year, a swing of nine percentage points in just two months. In Vietnam, sales volume went up by 32% in the first half. Although the volume decline in Hong Kong still has to be arrested, San Miguel managed to slow it down to 9% in the second quarter from 24% in the first. However, for last July and August, sales volumes in Hong Kong posted an increase of 12%. It is only in Indonesia where volumes continue to fall as a result of that country's economic difficulties. San Miguel attributed the dramatic improvement in sales volumes in China to a number of operational improvement programs, principally the rationalization of distributorship and a shift in marketing strategy. The company announced earlier that it had completed a distributor zoning program covering 23 cities in the southern provinces of Guangdong and Hainan. This involved delineating selling territories and assigning them to the 38 best performers from among a total of 307 dealers who previously covered these provinces. The rest were appointed sub-dealers of wholesalers of the 38 main dealers within their respective territories. This system, which led to volume declines in the early months of implementation, has resulted in higher distribution efficiencies, improved coverage of key accounts, and pricing stability. San Miguel also modified its marketing strategy. While it concentrated on the premium market in the past, it is now pushing its low-end brands equally as hard. In order to reduce overhead costs and focus on high-growth markets, the company also revamped its selling and distribution organization, cutting the number of sale offices and warehouses in southern China to 19 from 27. These changes, along with cost-reduction and productivity programs, have significantly reduced operating losses in China. For the first half of 1998, operating losses in China declined by 27% to $8.61 million from $11.7 million. However, when translated into pesos, the losses show an increase of 11% to P344 million from P309 million due to the Philippine currency's devaluation. For the first half of 1998, SMC's total international operating losses amounted to US$19.9 million, an increase of 9% from $18.2 million due mainly to the situation in Indonesia. Without Indonesia, SMC's international operating losses would have shown a decline of 2% to US$20.1 million from US$20.4 million. SMC officials acknowledge that the company's international operations require more improvement, and they have begun discussions with a number of major brewers on the possibility of cooperation, particularly in China. The talks, however, are still at the exploratory level. Meanwhile, in the Philippines, beer volumes slackened in the past three months compared to the same period last year when volumes increased dramatically following the price rollback in July. Nevertheless, San Miguel's domestic beer sales volume for the first eight months of the year are still higher by 4% compared to the same period last year. SMC officials had pointed out earlier that in light of the beer price increases implemented in December 1997 and again last July, expect beer sales volumes to decline in the second semester. They added that depending on how the economy performed, total beer sales for 1998 could either end up flat or show a slight decline compared to 1997. LibLex