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Posted August 2010

It ain’t over yet

Consolidation of the brewing industry | It must be high summer, when all rational discussion of important issues is cast aside for the perennial debate on “who is doing lunch or being lunch” which has driven mergers and acquisitions in the brewing industry around the world for the past 15 years. Following the break-up of Scottish & Newcastle and the takeover of Anheuser-Busch two years ago, several armchair pundits declared that the beer monopoly game was over. All said and done. Finished. No more. However, many tablecloth strategists would not accept this verdict. Indignantly, they pulled out their crystal balls, polished them off furiously and peered into them. Here is what they saw at the murky bottom.

It must have been in 1997 when I attended a conference by Germany’s guru of management consultants Roland Berger. Mr Berger in his self-styled role of the brewing industry’s Cassandra warned a hall packed to the walls with several hundred German brewers that if they stood in the way of history, they would get knocked down. “Sell up and move on while there is still time” he said. The internationalisation of the brewing industry would lead to rapid domestic market consolidation with perhaps a handful of players calling all the shots. As if to underline his ominous prediction he next pressed a button and up on the wall came a chart of the global soft drink industry. “This”, he murmured portentously, “is what the brewing industry will eventually look like: a global business with only two players controlling over 80 percent of the market.”

In response to Mr Berger’s doomsay I suspect the audience secretly gave him the finger. After all, what were Germany’s 1300 odd brewers supposed to do? Voluntarily sell their breweries, which had been owned by their families for generations? Or turn up their toes and wait to die?

Thirteen years on, the German beer market is as highly fragmented as it was then. There are still 1300 odd breweries around. Four groups share a measly 38 percent of the market. What is more, three of the top four brewers continue to be privately-owned although Interbrew has bought Beck’s, Gilde, Spaten and Diebels while Carlsberg took over Holsten and Heineken acquired a stake in Brau Holding International (Paulaner, Kulmbacher). 

The CEO of the Bavarian Brewers’ Association, Dr Lothar Ebbertz at a recent press conference blew his top when someone pointed out – with an undertone of reproach - that the German beer market was not as consolidated as the rest of the world. “There is no law that markets must consolidate” he fumed. “And Germany is the proof.” After a moment’s hesitation he added that by refusing to consolidate the German beer market has become an appendix to the global beer market. But so what? 

Eat or get eaten?

Nobody has yet discovered a tablet of stone into which someone has chiselled the commandment: “companies must buy up or get out”. However, everybody and his dog is preaching the gospel of “Market Darwinism” – the modern creed which makes market consolidation an inevitable, inescapable and quasi legitimate process of “natural selection”. Bruce Henderson (1915–1992), the founder of the Boston Consulting Group, reportedly said: “Darwin is a better guide to competition than economists.” He implied that if we take Charles Darwin’s theory of evolution and apply it to the market economy we will see that commercial evolution and survival in an increasingly global market place also depend on the “survival of the fittest”. While the weak will diminish and eventually go under, the strong get more power and continue to grow. 

It’s a truism that market consolidation has been a driving force in many industries, including the brewing industry, for some time. Removing competition and achieving cost efficiencies derived from scale have become critical not only to gaining success, but for survival in a new world that is ever evolving in its “sophistication” (another word for “profit maximisation”).

Many of you will probably find all this talk about Market Darwinism a bit thick and heavy-handedly academic. Granted. But imagine you are a stock market listed brewer like AB-InBev, SABMiller, Heineken or Carlsberg. Wouldn’t you be fighting for survival day in day out in what is euphemistically called a “finance-driven” industry? Wouldn’t you be aiming for ever higher EBITDA margins and market shares, well aware that if you don’t bring home the bacon you will receive the financial markets’ equivalent of a “thumbs down”? German brewers may be content with making ends meet as they see their beer volumes decline – but others, who have to answer to analysts and investors, cannot. They must do better than that.

Is bigger ultimately better? In terms of key financial indicators, the answer is a resounding “yes”. But you do not have to enlist Darwin’s theory of evolution to argue this case. If the Market Darwinism hogwash serves any purpose it’s purely ideological in the sense that it’s supposed to blind us to reality. Market Darwinism offers itself as the perfect pseudo-scientific rationalisation of a monopoly or a shared duopoly. That’s why anti-trust bodies should prick up their ears each time someone mentions Darwin.   

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