Interview with Gary Whitlie of SABMiller

This interview appears in the 3 April 2009 edition of the Budapest Business Journal

Gary Whitlie took up the position of Managing Director of SABMiller’s Dreher Breweries on 1 October 2008, as a homecoming of sorts. He had first come to Hungary in 1999 to take up the position of Finance Director for SABMiller's European operation, but left Budapest at the beginning of 2001 to become Director of Finance & Control for the SABMiller group. Then, just over three years ago, he transferred to the operational role of Managing Director, setting up Miller Brands, SABMiller's operating company in the United Kingdom. His career with SAB began in South Africa in 1984, where he moved after being schooled and qualified as a chartered accountant in Zimbabwe. Now back in Hungary, he had mostly good things to say about the local beer trade and his adopted country he has come to love.

Doyle: The global economic crisis is having a pronounced effect on consumption behavior. How is the crisis affecting your business?

Whitlie: A report by AC Nielsen shows that the overall beer in Hungary is slightly down. Our key accounts are currently flat rather than declining. The austerity measures followed over the past several months helps to explain this. People have been spending less and are more likely to stay at home rather than go out. This has spurred improvements in discount sales. The UK has been facing a similar economic slowdown and there we see the economy brands performing better. In Hungary, the super premium brands, such as Pilsner Urquell, occupy a rather small portion of our market share, but their sales have continued to grow, despite the downturn.

Doyle: How is the beer sector in Hungary different from those in other countries?

Whitlie: The trade structure in Hungary is quite different from other markets. Hungary is characterized by a multitude of unconsolidated, independent operators. There are few chains of pubs and restaurants. On the supply side, the market hosts three similarly-sized international players; Dreher -SABMiller is one. Each of us has a similarly-sized portion of this share. Ours is slightly larger than the others. This situation has brought the unfortunate result of chasing volume at the expense of value to the producer.

Competition for market share among producers results in downward price pressure, as does an increasingly competitive retail trade. This is especially evident among the big box retailers who make high volume purchases. The end result is lower profits for producers.

Doyle: What are some of your practices that illustrate your relationship to consumers?

Whitlie: We pay a great deal of attention to the specific needs of each of our target consumers. It’s important to us to keep them relevant. You can see this attention expressed in our products, labels and packaging. Recent innovations have included putting Arany Ászok in 1 ½ liter plastic bottles with re-closeable tops. This way a consumer can pour a glass and put the bottle back in the fridge, something we found is important to Arany Ászok consumers. We’ve also launched a new alcohol-free beverage, Dreher 24, which has recently increased its share of the alcohol free segment. Traditionally, beer has sold in Hungary in half-liter returnable bottles. Our preference is for returnable bottles and kegs. They’re more cost-effective and more environmentally-friendly. The trend toward non-returnable bottles and cans tends to be convenience-driven from the consumer side. The trend was started by the import of cheap German cans. There is a fee levied on non-returnable containers, which was recently simplified to a flat fee from one based on the percentage of non-returnables that a producer sold. But consumers are willing to pay a premium for convenience.

Doyle: It’s clear from what you say that the Hungarian market is distinct. How do you market your products to the local consumer?

Whitlie: We take a 360 degree approach to marketing. This relies on what we know of the consumer of a particular brand. We pride ourselves on our deep insight of the target consumers of each brand. Some consumers spend a great deal of time watching TV, while others will spend more time online. We also reach them at the point of purchase, in the shop, at the pub, in the restaurant. We study their lifestyles and apply what we learn throughout each campaign in our efforts to reach and serve them. Our ads themselves are weighted to reflect the deep insights we have collected about our target consumers. On the Internet we strive to engage them through online contests. We sponsor events such as the EFOT student festival, which featured Kozel, a brand popular with students.

Doyle: What standards do you follow when it comes to the brewing of your beers?

Whitlie: Germany has its purity law, Hungary does not. We abide by our own international standards. We use all natural ingredients in line with HACCP standards of food purity. What distinguishes German beers is that they are generally all barley malt beers. American Budweiser, on the other hand, is made with rice and malt. Pure barley malt beers are heavier. A large percentage of the beers in CE Europe are barley malt beers.

Rumors that the modern beer making process is somehow speeded up are certainly not true at our brewery. The fermentation process is endeavored to be constantly and exactly the same. Both brewing and storage processes are monitored and the beer is tasted; this is done to ensure that all our beverage is produced within specification. Rushing simply doesn’t work. If alcohol is “just added” to beer, then it ceases to be beer. Consistency is important to us.

Doyle: What in particular distinguishes Hungarian beer?

Whitlie: What distinguishes Hungarian beer is that it tends to be less malty, less bitter and more “crisp,” than Czech or German beers. Hungarians beer tends to be more flavorful than American beer. As a rule, the further east you go, the more flavor you find in the beer. While the UK is still famous for its bitter, the majority of beer consumed today in the UK is lager.

Doyle: It is not uncommon to hear complaints from multinational companies doing business in Hungary. What has your experience been with the business environment here?

Whitlie: The bureaucratic burden is high in Hungary. The regulation and tax environment is difficult to follow. Taxes are burdensome and lack incentives for FDI. Nonetheless, we have invested at least HUF 13bn in total in the last 3 years, 10bn into our facility. I see great potential here. The population is well educated and enterprising. I recently sat on the jury of a business plan contest, part of the Young Entrepreneuer of the Future program I have participated in such events in other countries. I was literally blown away. I have never seen such quality and level of preparation.

We are committed to the community that serves us through sponsorship or culture, sport and education. I believe the benefit to the community of a long-term commitment is immeasurable.

Doyle: You have recently come back to Hungary after being away for several years. What do you like about it? What could be improved?

Whitlie: Budapest is a beautiful city. The list is long of what I love about Hungary: the river, the people, the pubs, the restaurants, the opera, the countryside, Lake Balaton, great beer. Some of the roads, on the other hand could use some work. The public transportation system is very good, but could stand some sprucing up. It’s sad about the graffiti. I do like living here. I belive it’s fitting that I met my South African wife here eight years ago.

Interview with Michael Tippin

An edited version of this interview appears in the 23 January 2009 Budapest Business Journal

Toronto native Michael Tippin went into real estate immediately after leaving university in 1988, working first as an appraiser, and later as an Investment Manager for several investment companies with portfolios across Canada and the US. In 1996 he formed the Tippin Corporation to buy and restore architectural landmarks in Toronto. These included the historic Flatiron Buildings in both Toronto and Atlanta. With an increasing interest on landmarks in Budapest, Tippin sold most of his Toronto portfolio in 2006, just as the real estate market was peaking. In January of that same year, his corporation acquired the former stock exchange building – recently rechristened “Exchange Palace” - on Szabadság square, currently the home of Hungarian Television, with plans for a thorough restoration to its former glory.

JACOB DOYLE: How did you come to Budapest?

MICHAEL TIPPIN: There’s always a connection somewhere. In my case, it was a close business partner in Toronto who lives in Tel Aviv, Israel. He had been investing in Budapest for many years and knew of my personal interest in landmark architectureo. He called me one day and said: “you need to come and meet me in Budapest; you need to see this city.” So I said sure, that sounds great. So we met in Budapest in October, 2004. I came as a tourist, first mistaking Budapest for Bucharest. There happened to be a direct flight on the Hungarian airline, Malev, from Toronto to Budapest in those days. In 2005, Malev awarded me a platinum card and informed me that I had the second highest mileage of anyone flying their airline that year, the first being their CEO. This resulted from my 22+ transcontinental and countless inter-continental trips, all flown on Malev. Boarding the plane and hearing Hungarian spoken got me in the spirit of being here. Now I realize that I was definitely in love with Hungary and not the airline, which is good because Malev has since cancelled its direct flight.

JACOB DOYLE: What are your plans for the Exchange Palace?

MICHAEL TIPPIN: We will do our best to return it to what it was, a house of commerce and a national landmark and – this may sound a little cliché to a country that has a socialist past – to restore it to being a house of the people.

The first time I saw the building I was told by my Israeli business associate that I could compete to buy this building. He walked me to Szabadság square and asked me, “would you like to own this?” I thought at first that the building must be a library or a university building or a museum. As I learned more about the history of the building, that it had housed a stock exchange, I realized that it needed to be something as grand as this again. It needed to be redeveloped and reused as it was originally intended as a house of commerce and a stock exchange, which in a was a house of the people; it’s a public building. So our intention is obviously to restore the building and to reuse it as a commercial building for premium office space and for such innovative retail as an organic food market and a Yoga studio. I really want to see the building join the park on Szabadság square that sits in front of it. I want there to be outdoor cafes and street life. I want to bring life to this square that in my opinion is one of the most beautiful squares in Europe. It’s a little enclave inside of a busy, noisy city. You can walk from Oktogon to Szabadság square in ten minutes and be in a whole different world. One of my favorite squares in Paris, where I lived for some time, is called Place des Vosges. There was an article last year in one of the travel magazines, which rated it as one of the ten best squares in Europe. I am sure that when this article comes out again in five years that Szabadság square will be added to that list.

JACOB DOYLE: In what ways do you see a freshly-restored Exchange Palace adding value to Szabadság square?

MICHAEL TIPPIN: It will add value because it’s well-known, it’s big, it’s important. I think that this project will be one of the largest privately financed historic rehabilitation projects in Budapest, maybe the largest. The building is about 50,000 square meters.

JACOB DOYLE: In addition to buying Exchange Palace, you also bought the neighboring Lipot underground parking garage, a so far expensive and underused facility. Were you criticized for buying it?!

MICHAEL TIPPIN: I guess you’ll have to ask me in five years to find out whether I got a good deal or not. You have to look at it long term. Lipot garage was a very expensive facility to build in a very difficult location. They had – for example – to dismantle the Soviet monument piece by piece and later reassemble it with the help of experts and with the permission and approval of Moscow to be exactly as it was. This delayed the project by six months. So Lipot Garage was expensive, but I think in the long run it will prove to be a wise investment because the value impact of having parking versus not having parking for Exchange Palace is, I think, almost immeasurable.

JACOB DOYLE: What plans do you have to limit the carbon footprint of Exchange Palace itself?

MICHAEL TIPPIN: We have hired an architectural firm in New York that is not only world renowned for its work with historical restorations, such as the Empire State Building and Grand Central Station, they also are experts as executing sustainable design on historic buildings. So it is our intention to make Exchange Palace as environmentally friendly as we can. We have the opportunity to do this because we’re undertaking a total gut and reconstruction. So there will be new systems. We have world-class engineers who are working on this already.

JACOB DOYLE: Despite this total gut and reconstruction, you plan to restore the building to its original design and structure?

MICHAEL TIPPIN: Absolutely. We’re building onto the original structure. And we will preserve as many of the original architectural features as we have found or will find. The sad part is that much of the architectural features of the ! building were damaged or destroyed. A firm we hired to do an inventory of the entire building discovered the extent of the damage. Their comment was that the damage done by the Germans and Soviets to Exchange Palace pales in comparison to the damage that Hungarian Television did to it during its years of occupancy since 1956. Fortunately, we have it all documented: what it was and what it will be.

JACOB DOYLE: Have you begun discussions with prospective tenants?

MICHAEL TIPPIN: No, it’s too early. I think we have to show them the concept, the product, before we can expect them to decide. I already know who many of our clients are going to be. Many of them are on the square already. Bank Centre may wind up empty. Who would rent space in Bank Centre if they can rent monumental modernized space – in a Hungarian Palace?

JACOB DOYLE: How might the Exchange Palace project be affected by the current global financial crisis?

MICHAEL TIPPIN: I think the project will take longer, but it will cost less. It could take longer because I think there will be a recession in 2009 in Hungary, if it’s not happening already. This could cause prospective tenants to hesitate in making decisions to lease new office space for five to ten years at a time. There will be fewer tenants, fewer multinational companies coming to Budapest in the near term. But we’re patient. I think we’re entering a period of deflation that will result in lower building construction costs, which is the most important factor to the economics of this project. Fortunately we’re in a unique position compared to most developers. Firstly, we sold most of our portfolio in 2006 so we are liquid. Secondly, we don’t have much debt because we didn’t need it. Thirdly, we aren’t reliant on the bank to fund our projects. It’s always nice to use a bank because their money is cheap. But if there’s not a bank, then that must mean that other things are cheap. Construction costs will go down because they’re not as many developers building. In the end, I think we will be positively affected by this economic crisis. The other opportunity that I think will open up is the chance to buy more buildings in Budapest over the next few years that will be brought to the market as a result of the crisis, both buildings that we may have been outbid on in the past and buildings that the government may wish to sell in order to raise cash.

JACOB DOYLE: The word is that you recently purchased the international airport in Tblisi, Georgia. If this is true, what was your motivation to do so?

MICHAEL TIPPIN: We bought the assets of the former Georgian Airlines and with that acquisition came a lot of land inside the international airport at Tbilisi, complete with hangars and aviation buildings. This deal came to me by the same partner who brought me Exchange Palace. The premise upon which I invested in Georgia is similar to the premise upon which I invested in Hungary. I felt that people in CEE were and are getting richer every day, little by little. People in North America, on the other hand, for the last ten years have been getting poorer every day as the result of debt. People here have been seeing their wages going up every year, from a very low base. What’s more, they haven’t been taking as much debt, because it hasn’t been available. I felt that Georgia was strategically important. Georgia has no natural resources to speak of. What little land it has, however, is very strategically located running between the Caspian Sea and the Black Sea. It’s the only way you can get from the Caspian Sea to Europe without going through Russia. That’s why a pair of pipelines have been laid across Georgia and down into Turkey, then up into Europe. A lot of people were skeptical of my Georgian acquisition in 2007. You can imagine what they thought on August 7, 2008 when the bombs dropped. But the results are in and the consequence of a fairly insignificant five-day conflict with Russia, which had minor costs to Georgia of around USD 100m to 200m, is that Georgia has received commitments of some USD 4.5bn worth of foreign aid. So my rationale that “Georgia matters,” was right by USD 4.5bn. Since August 7, there have been 45 high level diplomats that have landed at Tbilisi International Airport. We’re in the process of buying more land there. It just got cheaper, thanks to the war. I believe that one of the key objectives of the Obama administration will be to repair relations with Russia. This will force Georgia to repair relations with Russia. All Georgians speak Russian. Russians love Georgia and they will return to it. In 1991, 3m people travelled through Tbilisi International airport, the majority were Russian. In 2008, probably less than 800,000 air passengers will travel through Tbilisi, largely because of the Russian embargo. As soon as relations are repaired, however, Russians will start to return: to ski, to visit the sea and to invest. The Russians love Georgia just as much as Stalin did.