CASH ON THE BARREL

JAMES TENSER

MILWAUKEE -- In the world of global branding, when you can't be the biggest, it is good business to be the first.

That has so far proved a winning strategy for U.S.-based S&P Brewing Co. here, which over two years has built its Pabst Blue Ribbon brand into the hottest-selling import beer in China, where it is known as Lam Dai, Mandarin for Blue Ribbon.

"They happen to like Lam Dai. We were the first American brewer there," said Lutz Issleib, S&P president.

No joint ventures or long-term outlooks for Issleib. When it comes to selling beer to the Chinese, he has taken the position that cash on the barrel-head is the way to go.

Its contract brewer, Zhaoqing Pabst Blue Ribbon Brewery Co. Ltd., in Guangdong Province, has just finished its third expansion project. "They are now at 2.8 million barrels, and this is dedicated to making only Pabst beer," he said.

"They now want to double that to about 5.6 million barrels. In cases that is 77 million cases, just out of these guys. They sell every drop they make. Do you know they have retailers standing in line, and to be able to buy the beer they have to put a fourth down in advance. So they are taking preorders. Isn't that something?"

Partly of necessity and partly of opportunity, Pabst has stuck to a brand licensing strategy in China, as Issleib described it. S&P was assembled from the acquisition of a handful of regional brewers across the United States, and markets beer and malt beverages under about 94 brand names. In recent years, the company has consolidated its U.S. brewery capacity to lower its costs and maintain price competitiveness with America's big-three brewers -- Anheuser-Busch, Miller, and Coors.

Tight on cash due to discount wars in its home markets, Issleib saw that what S&P may lack in investment capital it could partly offset in excess physical assets. While his larger rivals sought out joint ventures with long-term profit outlooks, S&P chose to find a contract packer in China and start earning royalties right away.

"I sell them good used equipment from our old shutdown breweries, which I have a lot of -- like the Newark plant in New Jersey," he said.

Issleib freely admitted that the resulting flow of income from Lam Dai helped bolster Pabst last summer when it was overmatched by cutthroat price promotions run by its giant U.S. competition. Export sales also have added to the brewer's favorable flow of cash from off-shore.

In Hong Kong, where Pabst is the No. 2 import brew behind Philippines label San Miguel, the S&P wholesaler there had purchased 8.8 million cases by midyear, all shipped from the Pabst brewery in Vancouver, Wash., he said.

"In the month of July we shipped him 1,200 containers of beer, in one month. He is by far the largest wholesaler that I have," said Issleib.

"So that makes it possible for me then to do my deep, deep discounting, my advertising, my merchandising, and keep my huge sales force of 16 to 18 people," he said with ironic reference to S&P's ultra-lean organization.

Issleib compared his royalties-up-front approach in China with the more patient approach of an Anheuser-Busch joint venture there. "With all the ballyhoo about them buying a chunk of a brewery in China, I don't think anybody looked to see that it is only a 150,000-barrel brewery," he said.

He is plainly uncomfortable with the economics of such joint ventures, which take a necessarily long view of profitability and market share, and pose issues of control for the foreign partner.

"There is no way that you can get a Price-Waterhouse in there, and any question or any dispute is handled in a Chinese court."

He added, "With my royalty, they have to pay me or I can snatch the license."

Issleib intends to build further on Pabst's early success among the Chinese during 1995 and in the process install more idle U.S. equipment into working breweries there. "We are going to build one in Shanghai, we're building one in Chengdu and we are working on one on Hainan Island," he said.

"I said two years ago that we would be doing 100 million cases of product, that we were going to sell that much, for a contract packer -- that much in China -- by 1997. We are going to hit it a year before I said we would. We are going to be doing 100 million cases in 1996 at the latest."