THE SUCCESS OF SAN MIGUEL CORPORATION

Best known for its internationally distributed beer, San Miguel Corporation can only be described
in superlatives. It is southeast Asia's oldest and largest brewer. It also ranks as the Philippines' largest
and one of its most consistently profitable companies. San Miguel's flagship beer utterly dominates the
Filipino market, with a 90 percent market share. A 1988 brief in the Economist noted that Filipinos order
"beer" at bars and restaurants, knowing that they will receive a San Miguel. But San Miguel did not make
it to the top of the regional heap on good beer alone. It also makes agricultural feeds, processed and
fresh meats, dairy products, coconut products, hard liquor, nonalcoholic beverages, and packaging
products such as glass containers, corrugated cartons, aluminum cans, and metal crowns and caps.
Through wholly or majority-owned subsidiaries, San Miguel holds dominating market shares in several
food and beverage sectors in the Philippines: 90 percent of carbonated beverages, 58 percent of
powdered juice, 56 percent of hard liquor, and more than 80 percent of margarine and butter. By the early
2000s, beer and other alcoholic beverages constituted only about one-third of San Miguel's annual
turnover. In fact, the conglomerate had, by 2001, grown over the course of its more than 110 years in
business to generate 3.6 percent of its home country's gross domestic product and 4.5 percent of
government tax revenue.
San Miguel grew to its commanding position in the southeast Asian market in spite of political upheaval,
infrastructure glitches, and high taxes. It achieved its status through aggressive competitive strategies
and shrewd long-range planning over the decades. Having diversified into agribusiness, foods, and
packaging in the mid-20th century, the conglomerate dominated its domestic markets by the early 1980s.
At that time, San Miguel undertook an aggressive program of international expansion that came to fruition
in the mid-to-late 1990s.

Early History
Don Enrique Ma Barretto de Ycaza established the brewery, southeast Asia's first, in 1890 as La
Fabrica de Cerveza de San Miguel. He named the company after the section of Manila in which he lived
and worked. He was soon joined by Don Pedro Pablo Roxas, who brought with him a German
brewmaster. San Miguel's brew won its first major award at 1895's Philippines Regional Exposition, and
led its imported competitors by a five-to-one margin by the turn of the 20th century. The company was
incorporated in 1913 following the death of Don Pedro Roxas.
By that time, San Miguel was exporting its namesake brew to Hong Kong, Shanghai, and Guam.
Andrés Soriano y Roxas joined San Miguel in 1918, beginning a multigeneration (albeit  interrupted) reign
of Sorianos. In 1990, San Miguel's Beer Bulletin noted that "Beer was the heart of San Miguel's business,
and the soul from which emanated all its other businesses." Andrés Soriano initiated the company's
diversification, which proceeded rather logically via vertical integration. The experience cultivating barley
naturally evolved into other agricultural businesses, for example. San Miguel gathered steam in the
1920s, when the company expanded into nonalcoholic beverages with the creation of the Royal Soft
Drinks Plant in 1922. San Miguel entered the frozen foods market in 1925 with the creation of the
Magnolia Ice Cream Plant. By the early 1990s, Magnolia held four-fifths of the frozen dessert market.
Soriano created the first non-U.S. national Coca-Cola bottling and distribution franchise in 1927. The
Philippine company owned 70 percent of the joint venture, which grew to become Coke's sixth largest
operation. By the early 1990s, San Miguel had captured over two-thirds of the domestic soft drink market.
Although World War II interrupted San Miguel's brewing business, the company got back on the
growth track in the postwar era, acquiring production facilities in Hong Kong in 1948. The company also
resumed its program of vertical integration, even building its own power plant so that it would not
be dependent on the Philippines' notoriously poor infrastructure. San Miguel also built a liquid carbon
dioxide plant, glass bottle manufacturing facilities, and a carton plant during the postwar period.
The company shortened its name to San Miguel Corporation in 1963, and Andrés Soriano, Jr., advanced
to the company's presidency upon his father's 1964 death. He has been credited with instituting modern
management theory, including decentralization along product lines. Soriano, Jr., continued to diversify the
food business during the early 1980s, expanding into poultry production in 1982, building an ice cream
plant in 1983, and adding shrimp processing and freezing in 1984.
 Over the decades, San Miguel earned a formidable reputation as a fierce competitor. The
company used all the tools at its disposal. When it could not beat a rival through traditional means, it
acquired and intimidated upstarts into submission. The Filipino government's complicity did not hurt,
either. Long protected by high tariffs, San Miguel encountered its first major competitor in the beer market
in the late 1970s. That was when Asia Brewery entered the segment. The rivalry between Asia Brewery
and San Miguel came to a head in 1988, when Asia Brewery cannily introduced a bargain-priced "brand"
called, simply, "Beer." The imported product looked and tasted like its primary competitor, playing upon
the fact that in the Philippines, the San Miguel brand was synonymous with "beer." It was a creative
counter to San Miguel's notoriously aggressive and sometimes cutthroat competitive strategy, which had
reportedly included "attempts to sabotage [Asia Brewery's] sales network and smash its empty bottles."
Asia Brewery, whose owner was reputedly connected to Marcos sympathizers, even hired away San
Miguel's brewmaster.
Although San Miguel enjoyed virtual monopolies in its markets, that status did not shield it from the
political machinations of the Philippines. The dictatorial reign of Ferdinand Marcos brought this element
into sharp focus in the 1980s, when an intra-familial proxy fight at San Miguel turned political. The dispute
was instigated in 1983 by Enrique Zobel, a wealthy cousin of the Sorianos who owned the Ayala banking
and real estate group and sided with the Marcos government. Unable to execute a takeover on his own,
Zobel sold his 19.5 percent stake to Eduardo Cojuangco, Jr. (known in some circles as "the coconut
king"). Although Cojuangco was a cousin of Marcos opponent Corazon Aquino, he too sided with Marcos.
Cojuangco's Coconut Industry Investment Fund (a.k.a., United Coconut Planters Bank) accumulated an
additional 31 percent of San Miguel, giving him effective control of the conglomerate and leaving the
Soriano family with a mere 3 percent. Cojuangco scooped up the chairmanship in 1984, when Andrés
Soriano, Jr., died of cancer. However, his reign over San Miguel lasted only two years. When Marcos lost
the 1986 election to Aquino amidst the "people power" revolution, Cojuangco and many other Marcos
backers fled the country. (In fact, Marcos and Cojuangco left in the same helicopter.)

Andrés Soriano III resumed San Miguel's chairmanship and launched a campaign to reclaim the
family legacy that year. But when the new chairman tried to buy back the abandoned shares, he was
blocked by an unexpected agency; the Aquino administration's Presidential Commission on Good
Government (PCGG) assumed control (but not legal ownership) of the 51.4 percent stake and refused to
relinquish it. The government asserted that the stake had been illegally obtained. In the 1970s Marcos
had imposed a tax on the production of coconuts, a major Philippine cash crop, with the proceeds
supposed to fund that industry's development. It was alleged, however, that the money was funneled into
the Cojuangco-controlled United Coconut Planters Bank, and that Cojuangco then used much of the
funds to help him purchase his controlling stake in San Miguel. The controlling interest carried nine of San
Miguel's 15 directors seats with it. The PCGG continued to tend its San Miguel stake into the early 1990s,
but it acceded de facto control of the conglomerate to Andrés Soriano III via a management contract with
his A. Soriano Corp.

Soriano III was characterized by Business Week's Maria Shao as an "introverted, almost
reclusive" leader. Schooled at the University of Pennsylvania's prestigious Wharton School, Soriano III
had dabbled in investment banking in New York City before returning to the Philippines. Soriano tried
everything from legal machinations to joint-venture buyout schemes to wrest control of San Miguel from
the PCGG, but to no avail.
At the same time, Soriano III continued the company's program of expansion, acquiring majority control of
La Tondeña Distillers, Inc., the leading producer of hard liquor in the Philippines, in 1987 and adding beef
and pork production to the company's food operations in 1988.

In 1990 San Miguel threw a five-month party to celebrate its centenary. President Corazon
Aquino called San Miguel "the best showcase of a Filipino company, a shining example of creative
management and commitment to its public." The Economist contrastingly called San Miguel "a showcase
for much that is wrong with business in the Philippines." The latter assertion was substantiated that same
year, when Cojuangco returned to the Philippines (the  Journal of Commerce noted that he "sneaked back
into the country [in 1990] despite a ban on his return") to lay claim to his holdings. Notwithstanding the
circumstances of his repatriation, a November 1992 article in  Asian Business noted that "Cojuangco [was]
expected to win eventually." All the same, Soriano III continued to hold the chairmanship. (Cojuangco,
meantime, unsuccessfully ran for the Philippine presidency in 1992.)

International Expansion: 1980s-90s

Soriano III led the company to a new era of dramatic growth based on internationalization. This
move was motivated by a number of factors. First, San Miguel had developed its core Philippine and
Hong Kong markets to maturity and was faced with relatively slow growth there. Soriano hoped to expand
into other countries and thereby mitigate the effects of the Philippines' unstable economy. Finally, the
leader wanted to head off encroaching competition from the world's biggest breweries, namely Anheuser-
Busch and Miller of the United States, Kirin of Japan, and BSN of France. In an interview with   Asian
Business' Michael Selwyn, San Miguel President Francisco C. Eizmendi, Jr., said that "what we are
aiming to do is be a David among the Goliaths of international business, without losing our grip on the
local market."
Having determined that overseas growth was imperative, Soriano allocated $1 billion to a five-year
strategic internationalization program that focused on shaping up domestic operations, then progressing
to licensing and exporting, overseas production, and finally to distribution of non-beer products. San
Miguel's plant modernization plan involved sweeping improvements, from computerization to quality
circles. These efforts laid the groundwork that would enable the company to compete with the world's
food and beverage multinationals. A subsequent decentralization created a holding company structure
with the 18 non-beer operations positioned as subsidiaries. This corporate reorganization freed the spun-
off businesses from the bureaucratic shackles of a large conglomerate. In the course of this multifaceted
effort to attain optimum efficiency, San Miguel reduced its workforce by more than 16 percent, from a
1989 high of 39,138 to 32,832 by 1993.  Asian Business noted that these programs helped increase profit
per employee by 56 percent in 1991 alone.
With its domestic "ducks in a row," San Miguel turned to the next stage in its internationalization,
beer licensing, and exporting initiative. Although the company had exported beer for most of its history,
this effort was intensified dramatically in the late 1980s. San Miguel's beer exports grew by 150 percent
from 1985 to 1989 alone, and the brand was soon exported to 24 countries, including all of Asia's key
markets as well as the United States, Australia, and the Middle East. Once the core brand was
established in a particular market, San Miguel would begin to create production facilities, sometimes on
an independent basis and sometimes in concert with an indigenous joint-venture partner. By 1995, San
Miguel had manufacturing plants in Hong Kong, China, Indonesia, Vietnam, Taiwan, and Guam.

Thus, in spite of the overarching quarrel regarding San Miguel's ownership (not to mention other
problems endemic to operating in the Philippines), the company's sales quintupled from P 12.23 billion in
1986 to P 68.43 billion by 1994. Net income increased twice as fast, from P 1.11 billion to P 11.86 billion
over the same period, although San Miguel's overseas operations (as a whole) were not yet profitable.

In 1996 San Miguel purchased full control of its Hong Kong arm, San Miguel Brewery Hong Kong
Limited. In April of the following year, San Miguel's domestic soft-drink bottling unit, Coca-Cola Bottlers
Philippines, Inc., was merged into the Australia-based Coca-Cola Amatil Limited (CCA). In effect, San
Miguel exchanged its 70 percent interest in a Philippine-only operation for a 25 percent stake in CCA,
which had operations in 17 countries--both in the Asia-Pacific region and in Eastern Europe. CCA soon
demerged the latter operations into a U.K.-based firm called Coca-Cola Beverages plc (resulting in a
reduction of San Miguel's stake in CCA to 22 percent). Seeking to maintain its focus on the Asia-Pacific
region, San Miguel sold its stake in the new U.K. entity in mid-1998.

From 1995 through 1997, San Miguel suffered from a downturn in its main domestic businesses,
while overseas operations were still in the red. Profits plummeted. In response, a major restructuring of
the company's loss-making food businesses was undertaken. San Miguel's ice cream and pasteurized
milk business was merged with operations of Nestlé to form Nestlé Philippines, Inc., and late in 1998 San
Miguel's stake in this business was sold off. San Miguel also exited from the ready-to-eat meal sector and
curtailed the operations of its shrimp farming business.
 By late 1997 the company was also beginning to feel the effects of the exploding Asian economic
crisis. In addition, the price of its stock was declining. At this point, a Hong Kong-based conglomerate,
First Pacific, stepped into the picture, acquiring a 2 percent stake in San Miguel and entering into
negotiations to pay as much as $1.3 billion for the two government-sequestered stakes that remained the
subject of lengthy litigation. First Pacific abandoned its takeover bid early in 1998, however, when the
negotiations--which required a resolution of the status of the disputed stakes--ran afoul of Philippine
election-year politics.

A New Cojuangco Era: Late 1990s and Early 2000s

In April 1998 the anti-graft court handling the case of the disputed San Miguel stakes ruled that
Cojuangco was entitled to vote 20 percent of the shares, although he was not given ownership of the
shares. This enabled Cojuangco to install three new directors on the company board. Then in May,
Joseph Estrada won the Philippine presidential election. Cojuangco had been the main financial backer of
Estrada, a former movie actor who had been Cojuangco's vice-presidential running mate during their
unsuccessful 1992 campaign, and Cojuangco also became chairman of Estrada's political party following
Estrada's electoral victory. By early July 1998, Soriano III had resigned from his position as chairman of
San Miguel, and the board of directors, which included seven government-controlled (and hence Estrada-
controlled) seats, voted to return Cojuangco to the chairmanship. This marked an amazing comeback for
the once-disgraced Cojuangco, and also left many observers worried about a possible return to the crony
capitalism of the Marcos era.

Cojuangco moved quickly to turn around the fortunes of the foundering company. Restructuring
moves included a flattening of management layers to speed up decision-making and make the company
more responsive to the marketplace. Overseas, the international headquarters were moved from high-
priced Hong Kong to low-priced Manila as part of a larger cost-cutting initiative. The company also raised
its domestic beer prices to make up for revenue lost from higher taxes on beverages and liquor. San
Miguel increased its share of the domestic bottled water market by acquiring Metro Bottled Water
Corporation, maker of Wilkins Distilled Water, in July 1999. Later in 1999 San Miguel announced that it
would sell its minority stake in CCA through a stock offering, but these plans were soon abandoned when
CCA's stock price declined sharply. Income from operations for San Miguel rose slightly in 1998 before
surging 63 percent in 1999.

Using a huge hoard of cash built through the recent asset sales, Cojuangco completed a series of
acquisitions from 2000 to early 2002. During 2000, San Miguel purchased J. Boag & Son Limited, an
Australian brewer, for about P 2.4 billion ($56 million), as well as Sugarland Multi-Food Corporation, a
Philippine juice maker, for P 2.9 billion. The latter firm--renamed Sugarland Beverage Corporation--was
jointly acquired by San Miguel and its majority-owned subsidiary, La Tondeña Distillers. Two major
acquisitions of Philippine firms were then completed in 2001. Pure Foods Corporation was acquired for P
7.02 billion. Renamed San Miguel Pure Foods Company, Inc., the acquired company was a market leader
in both processed meats and flour. The deal thereby expanded San Miguel's processed meat portfolio
and also marked its first foray into the flour industry. In July 2001 San Miguel joined forces with the Coca-
Cola Company to reacquire Coca-Cola Bottlers Philippines, with San Miguel taking a 65 percent stake
and Coca-Cola the remaining 35 percent. As part of the deal, San Miguel sold its shares in CCA back to
that company. Later in 2001, San Miguel sold its bottled water and juice businesses, now amalgamated
as Philippine Beverage Partners, Inc., to Coca-Cola Bottlers Philippines. Finally, in February 2002, San
Miguel completed the acquisition of an 83 percent stake in Cosmos Bottling Corporation in a P 15 billion
($282 million) deal completed through Coca-Cola Bottlers Philippines. Cosmos specialized in low-priced
soft drinks and held the number two position in the Philippine market. The combination of Coca-Cola
Bottlers Philippines and Cosmos gave San Miguel control of more than 90 percent of the Philippine soft-
drink industry.

During and following this period of acquisitiveness, the question of who owned San Miguel
remained unresolved. Estrada became embroiled in a corruption scandal and was then forced from power
in January 2001 in a popular uprising backed by the military. Replacing Estrada as president was Gloria
Macapagal-Arroyo, who almost immediately began maneuvering to oust Cojuangco from the
chairmanship of San Miguel as part of her campaign to rid the country of corruption. Arroyo sought to
replace five directors appointed by Estrada, but a technicality prevented her from doing so prior to the
May 2001 annual meeting. Cojuangco was thus able to retain his position as chairman. Then in
December 2001 the Philippine Supreme Court ruled that Arroyo could in fact replace the five directors.
Simultaneously, however, Cojuangco arranged a deal with the Japanese brewer Kirin Brewery Company,
Limited whereby Kirin would invest P 27.88 billion ($544 million) for a 15 percent stake in San Miguel.
Kirin finalized its investment in February 2002, gaining two board seats that Cojuangco could now count
on to help him remain in power. By this time, Cojuangco had also gained popularity among investors for
turning around the company and making it one of the most profitable in the country--despite a prolonged
economic downswing; the government recognized this support by reaching a deal with Cojuangco in early
2002. Cojuangco could remain in control of the conglomerate until the anti-graft court determined the true
ownership of the disputed shareholdings; in return the government would gain representation on
important management committees and on the boards of 13 company subsidiaries.

San Miguel thus stood in the early 2000s as one of the most respected corporations in the
Philippines, while at the same time facing an uncertain future because of the long-unresolved ownership
dispute. In addition, there was a potential complication: Cojuangco was reportedly considering another
run at the Philippine presidency for the May 2004 election.

Principal Subsidiaries: 
 BEVERAGE BUSINESS:
 San Miguel Brewing International Ltd. (British Virgin Islands)
 San Miguel Brewery Hong Kong Limited
 Guangzhou San Miguel Brewery Company Limited (China)
 San Miguel Bada Baoding Brewery Company Limited (China)
 San Miguel Shunde Brewery Company Limited (China)
 San Miguel Brewery Vietnam Limited; J. Boag & Son Limited (Australia); PT Delta Djakarta Tbk
(Indonesia)
 La Tondeña Distillers, Inc. (78.81%)
 Coca-Cola Bottlers Philippines, Inc. (65%)
 Philippine Beverage Partners, Inc. (65%)
 Cosmos Bottling Corporation (83.2%)
 FOOD BUSINESS:
 Magnolia, Inc.; Star Dari, Inc.
 San Miguel Pure Foods Company, Inc. (99.75%)
 San Miguel Foods, Inc. (99.75%)
 Monterey Foods Corporation (98%)
 PACKAGING BUSINESS:
 San Miguel Packaging International Limited (British Virgin Islands)
 San Miguel Yamamura Haiphong Glass Co., Ltd. (Vietnam)
 Zhaoqing San Miguel Glass Company Limited (China)
 Premium Packaging International, Inc.; Rightpak International Corporation; San Miguel
Yamamura Ball Corporation (99%)
 San Miguel Rengo Packaging Corporation (70%)
 Mindanao Corrugated Fibreboard, Inc. (60%)
 San Miguel Yamamura Asia Corporation (60%)
 SMC Yamamura Fuso Molds Corporation (60%)
 REAL ESTATE BUSINESS:
 San Miguel Properties, Inc. (99%)
 OTHERS:
 ArchEn Technologies, Inc.
 Beverage Packaging Specialist, Inc.
 Challenger Aero Air Corp.; SMC Logistics Asia
  SMC Stock Transfer Service Corporation
 SMITS, Inc.
 SMC Shipping & Lighterage Corporation (70%)
 Anchor Insurance Brokerage Corporation (58%).

Questions:
1. What Makes San Miguel Corporation Successful?
2. What are the strategies of San Miguel Corporation which brings them to success?
3. How does this San Miguel Corporation affect the Philippine Economy? Does it bring rapid wealth
or not?
4. What type of business dies SMC offers and how does it handle its business activities.?
5. Based on the business case above, Does SMC help Philippine economy? Why? or why not?