Beer Monopoly

 

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Posted July 2009

Why not?

Globalisation and the brewing industry│The struggle between brewers for mastery of the world’s markets over the past twenty years has everything: two mighty foes, AB-InBev and SABMiller, convinced of their own destiny; two boisterous also-rans, Heineken and Carlsberg, who thought they could keep up, but failed; a cast of larger-than-life Brazilian investors, vituperative Mexican families, Belgian nobles, and obdurate American CEOs, whom the media dubbed “the kings of beer”; and one astonishing set-piece battle, the takeover of Anheuser-Busch, that witnessed the sort of savagery and sheer bloody-minded audacity that make one’s hair stand on end.

Heroes, villains, hidden gold, lots of guts, and the promise of great glories. That's basically the story of globalisation of the past two decades if told Enid Blyton-style.

If yours is a more sober, grown-up view, you might think of globalisation as a soulless pursuit of profit by coca-colonising corporations, which took advantage of easy money and some ingenious financial engineering. But still, the story seems like a pretty simple one to tell. It’s about the unrelenting march of brewing companies that grow bigger and bigger as they gobble up smaller competitors and transform themselves into multinational fast moving consumer goods companies from erstwhile technology-led beverage producers.

In fact, the globalisation of the brewing industry offers a much richer and more complex story because globalisation is not simply a result. Rather, it is a process. The writer and politician Otto von Habsburg, who at 97 years of age is one of the last representatives of Europe’s imperial era, once quipped that politics is the sum of history and geography. Applying his dictum to the globalisation of the brewing industry it could be argued that it is the sum of history and geography, with lots of money thrown in for good measure. 

Whichever storyline you prefer and I have offered you three: the Hollywood-esque cloak-and-dagger story, the Harvard Business School growth-of-a-multinational-scenario or the geo-political stuff favoured by Pentagon strategists: you are still a sucker for a good story. And don’t worry: you are not the only one.

 

“Wake me up when the data is over”

Nowadays people like to think in terms of narratives or stories. Stories have come to be viewed as a basic human strategy to cope with time, process and change. Anything that is complex, multifaceted, not immediately easy to grasp - ‑­

like globalisation – is best turned into a story that has a beginning, a middle and an end: a simple logic and a clear message that people can understand and will remember. The first to suss out the importance of storytelling were the political spin doctors in the United States. In the shadow of President Obama’s victorious electoral campaign hid sophisticated “digital storytelling” technicians, who succeeded in repackaging his black male Cinderella story again and again into resonating sound-bites.

In the high-tech world, they like to say that if you can't explain what your company does in the time span of an elevator ride, something is wrong. Many successful top executives are very good storytellers – so good that CEOs have been renamed “Storyteller in Chief”. Think of Bill Gates (Microsoft) or Howard Schultz (Starbucks). They entice us with their stories, telling us how they started their businesses, what they stand for and where they are going.

The globalisation of the brewing industry, which has created one of the biggest consumer goods categories in the world, valued about USD 200 billion in retail sales and 1.78 billion hl in volume, could probably be summed up in a few charts. But you have all heard of “death by powerpoint”, of CEOs turning the boardroom into a bored room, while punishing their audience with an overload of figures and graphs.

Explanatory talk and statistics appeal to the intellect, but people aren't inspired by reason alone. Compelling stories are the most powerful way to convey loads of information and sketch a vision. That is why Germain Hansmaennel’s narrative of the world beer monopoly has such an enduring appeal. You just need to utter the word “monopoly” and people will tap their noses, say “oh yes, Park Lane” and get your drift. 

Actually, not everybody. At Rüdiger Ruoss’ World Beer and Drinks Forum in Munich in 2005, where Mr Hansmaennel introduced his world beer monopoly to a wider audience, some brewers thought it a gross insult – as if Mr Hansmaennel had implied their deal-making depended on throwing some dice. Sorry to drive home the point once more, but the story of the world beer monopoly is a means to an end: it is a brilliant narrative that can help illustrate reality – namely globalisation – in the time span of an elevator ride.

Take any Tom, Dick or Harry for a ride, mention the monopoly game and by the second floor they will have understood why in the global beer business some markets are more profitable than others (blue streets versus orange streets), why it is imperative to be in certain markets (if you want to win you need to own the orange streets) and why monopolies or duopolies are so alluring (the whole point of the game).

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Admittedly, the world beer monopoly was written by an outside commentator. But so were the other stories that have determined the course of the globalisation of the brewing industry. They were written by bankers and consultants with their own agendas to follow. Don’t bother reading them. They only have one word written on them: DEALS. Bankers and consultants like deals. Deals mean bankers sell money and consultants advise. Just to put things into perspective: The fees paid to bankers and advisors in the Anheuser-Busch takeover by InBev came to USD 3 billion alone – or slightly less than half of what Carlsberg is worth today, to make a salient if cruel comparison.

 

Only the strong survive

One of the earliest stories I remember is the one which predicted that the global brewing industry would soon resemble the soft drinks industry with only two players controlling over 80 percent of the market. It was in the early 1990s when consultants brandished this scenario as if it were gospel and scared the s*** out of small brewers who thought that anytime soon they would be some competitor’s lunch.

True, in 2008 the top four brewers AB-InBev, SABMiller, Heineken and Carlsberg controlled nearly 40 percent of global beer volumes, up from 33 percent in 2004 when InBev, Anheuser-Busch, SABMiller and Heineken still formed that elite of mega-brewers.

But what about the rest? Have they all vanished into thin air? Well, no. There are still plenty of medium-sized brewing groups around with volumes between 5 million hl and 100 million hl (FEMSA, Kirin, Asahi, Tsingtao, Yanjing, China Resources Breweries, Guinness/Diageo, San Miguel, Efes, Schincariol, Castel, Radeberger …), that will not give up without a fight.

Besides, don’t forget the small breweries that do 5 million hl beer or less. Here the German brewers Warsteiner, Veltins, Bitburger, Erdinger spring to mind … as well as about 3,300 or so American, British, German, Belgian and Australian  craft brewers.

While it is an undisputable fact that the brewing industry has consolidated and globalised since the Fall of the Iron Curtain twenty years ago, we must also acknowledge that the world of beer is far from having been painted red or blue. Beer consumption continues to be a colourful local affair with traditional brands still holding sway over consumers.

Bud Light (AB-InBev), Budweiser (AB-InBev), Snow (SABMiller), Skol (AB-InBev), Corona Extra (Modelo), Heineken (Heineken), Brahma (AB-InBev), Coors Light (Molson Coors), Miller Lite (SABMiller) and Tsingtao (Tsingtao) – ‑­

in declining order - are the world’s top ten beer brands and represent perhaps 15 percent of total consumption – depending on whose estimates you trust. But try buying a Brahma, a Miller Lite, a Skol or a Snow in, say, Madrid and you will soon give up frustrated. As your sore feet will tell you: sales volume and geographic spread don’t always correlate in the world of beer. At 49 million hl, Bud Light is the world’s major beer brand. Yet unless you buy a ticket and fly to the U.S., you will never be able to taste one if you call Europe your home.

Building a global beer brand is a “3c” affair: it’s complicated, cumbersome and costly. Even those who claim to be the biggest and the best can fail spectacularly at it. Many will remember InBev’s attempt at launching their Brahma brand “globally” (i.e. in 15 countries outside Brazil) in 2005. Poor old John Brock, InBev’s then CEO, who was as buttoned-down as he was straight, tried to act cool as he enthused over Brahma and “ginga” (the Brazilian groove) while Europe’s business journalists silently prayed that someone would stop him from breaking into a Bossa Nova. That would have been too toecurlingly embarrassing. The long and short of it: InBev’s global plans for Brahma were not crowned with success because consumers outside Brazil did not give a toss about the brand. In the end, Brahma had to be relegated to AB-InBev’s “local champions” league.

If global brewers, nonetheless, put most of their money behind a limited number of brands, it is not because they are on a mission to paint the world red, green or blue. It is because the right international brands command a higher price and bring home more … money!

Money - as if on cue. Money is all that counts. Tradition, history, brands, people … all subservient to Mammon. What used to be a fun business has been transformed into a money business. That’s the brewing industry’s real drama, but except for the CAMRA guys, few bewail the brewing industry’s sorry plight. Why? Because it has been overwritten by a powerful Darwinist financial narrative. Listen to any brewers’ newscast these days and you will only hear financial gibberish: EBITDA, EBIT, EPS …and price points. That parameter is music on the ears of analysts. Let’s say local brands sell for a certain price – which shall be price point 100 – then international brands like Heineken, Carlsberg, Stella, Budweiser will sell at a price point of 150, while international specialities like Leffe, Corona Extra and Paulaner will be positioned at price points between 150  and 250.

Therefore, in the long run, the world of beer will become less kaleidoscopic as brewers trim back the number of brands they carry, but it will be anything but monochromatic – thanks to consumers clinging on to brands which they know, like and can afford.  

 

A BRIC in the wall

We live in a funny old world where bankers and investors write the storylines for brewers to follow. Some stories dreamt up by analysts are pure folly (see below) but only at their peril can brewers afford to ignore them. Another all-or-nothing narrative was the “BRIC” story, launched by global investment bank Goldman Sachs in 2001, which specifically identified Brazil, Russia, India and China as economies that would together overtake the economies of the current six richest countries in the world by 2040. For a year or two, Goldman’s theory seemed to work and the “BRIC” acronym became immensely fashionable. For brewers, the story went: “You have to be in BRIC where all the growth is, or you might as well turn up your toes and hope to die.”

In view of their population figures and beer consumption levels, it certainly made sense to be in the BRIC countries. After all, China is the world’s most populous market. Beer-wise it is number one with a beer output (ca. 400 million hl) almost four times Germany’s (105 million hl). Russia (116 million hl) ranks third, Brazil (96 million hl) fifth and India thirty-third (9 million hl).

However, this does not make the BRIC countries any easier to crack or an instant success (as concerns profits). The stories are legion of foreign brewers losing BIG money in China. The cash squandered by Foster’s and Lion Nathan, by the German brewers, and not to forget by Anheuser-Busch earlier this year when they were forced to sell the majority of their stake in Tsingtao following the takeover by InBev, would have bought them lots of market share elsewhere.

SABMiller were lucky that they could hitch up with a Chinese partner early on in the 1990s. Their joint venture – China Resources Breweries – has since become the market leader in China. Unfortunately, this does not mean much. In China, market share, beer volumes and profitability do not correlate. When it comes to making money, international brewers had better take a Buddhist approach and learn patient endurance or take solace in the knowledge that their competitors are not faring any better.      

Compared to India, the eternal beer market hopeful, where lack of money in consumers’ pockets, antiquated laws and bureaucratic protectionism stand in the way of any serious growth in beer consumption, Russia has to be called a success - well, up until 2007, that is. For as long as brewers managed to wean Russians from vodka and the economy kept growing, everything was fine. Profits kept on rolling in. It did not matter that there were more than two international brewers stepping on each others’ toes. And that Carlsberg foolheartedly overpaid when, in a joint deal with Heineken, they acquired Scottish & Newcastle in 2008 so that Carlsberg could lay their hands on the ‑­

other half of Baltic Beverages Holding (incl. Russia’s Baltika Brewery) which they did not yet own. Only the sky was the limit.   

Now there is wailing and gnashing of teeth as the Russian economy declines. There is even a rumour going round that AB-InBev might exit Russia and the Ukraine provided there is a buyer willing to cough up enough money to help ease AB-InBev’s debt burden.

Indeed, since that Goldman paper was written in 2001, the BRIC group of emerging-growth economies has become merely a capital “C”, with a modest “B” trailing behind. There is some possibility of an “I” rejoining the growth acronym, but there’s apparently no current hope for “R”.

When it comes to BRIC, there’s only one conclusion to reach: the acronym is broken and the grand growth story has “hit a wall.”

 

It takes two to tango

 

The former CEO of General Electric, “Neutron Jack” Welch cast a long shadow. He became the most famous advocate of the market share movement in the 1980s when he insisted that his company would exit any business in which it did not hold the number one or number two position. “PIMS” – and I do not mean the staple drink at Wimbledon, Pimm’s, but the acronym “Profit Impact of Marketing Strategy” which has become the mantra for two generations of managers who began to pursue a higher market share in order to get higher profit margins. PIMS says that a supplier with a market share of 40 percent will achieve a margin twice as high as the competitor with just 10 percent of the market. And so the story was spread: “Get market share! Long live economies of scale.” 

With a nod to PIMS conoscenti, AB-InBev on their webpage boast that they hold the number one or number two position in over 20 key markets – allegedly more than any other brewer.

What brewers do not want consumers to hear is what they mumble under their breath: “Down with competition. Long live duopolies.”

Brewers, who have become such ardent followers of fashion that they actually believe what they are saying, have subsequently got out of markets in which they do not hold number one or number two positions. AB-InBev’s rumoured sale of their central European businesses would be a case in point. Or Heineken’s voluntary departure from several African markets some years ago. 

Although some commentators have begun to complain that the lack of competition hurts consumers, it is highly unlikely that listed brewers will take the risk and enter duopoly markets. Their main worry is that analysts will slap their wrists and tell them off for squandering their shareholders’ money on buying market share with a profit margin which, well, does not measure up to the leader’s.

Add to that the bedrock belief in PIMS and you will understand why most of the world’s beer markets will remain duopolies. Out of the world’s top 40 beer markets that represent 93 percent of beer production, there are only seven markets where the top three brewers have less than 70 percent market share. They are: Germany (33%), the United Kingdom (64%), Romania (69%), France (67%), Italy (66%), Austria (63%), China (55%) and Vietnam (62%) according to the Barth/Hansmaennel Report 2007. In Africa the situation is even more suspect: With the exception of Angola, Ethiopia, Nigeria and South Africa, the markets know only one supplier.   

This does not mean that once a market has morphed into a friendly duopoly, governed by the principle of “live and let live” (competition watchdogs: watch out!), new entrants will be shown the door. Not necessarily. If yours is a private business and extremely well run, there is no point in shying away from challenging a beer duopoly. Not even in a mature market. In case you’ve forgotten: The Corona Extra import business in the U.S., shared by the Gambrinus Company and Barton/Constellation until 2006, which would have ranked fourth in size behind Anheuser-Busch, Miller and Coors with a market share of 6 percent, was an extremely profitable business.

 

The perils of swimming naked

Our readers will recall a Warren Buffett classic quote that feels very appropriate right now: “It's only when the tide goes out that you learn who's been swimming naked.” In other words, when everyone is enjoying the good times, you don't know who has taken on excessive risks.

Now is the time to find out which brewer has been swimming naked. Among the four mega-brewers, all except SABMiller are aching under too much debt. Even if they wanted to, they would be hard pressed to make further acquisitions.

Is the globalisation of the brewing industry completed? Has the world beer monopoly been won? Last year, before the world’s economy began its long decline, I would have said: “Yes.” After all, the top two brewers, AB-InBev and SABMiller, had established themselves as truly global brewers through a presence in all the world’s major (and profitable) beer markets. That left only ‑­

two brewers among the world’s top ten, as takeover-targets, and they were the runners-up, Heineken and Carlsberg.

Eight months into 2009 I am more inclined to say: “Nope. It ain’t over yet. Because who would have thought that, so soon, we would see AB-InBev unravel before our very eyes?

There is also a question mark hanging over Heineken and Carlsberg. Market observers still wonder what possessed Heineken to partner with Carlsberg in order to splash out GBP 7.8 billion on Scottish & Newcastle, whose only valuable asset was the Baltika brewery in Russia. Was it a last ditch attempt to snatch S&N away from SABMiller, after SABMiller had snatched Colombia’s Bavaria brewery from Heineken? If so, what did Heineken get in return? S&N’s businesses in the UK, Ireland, Portugal, Finland, Belgium, the U.S. and India. Oh, great. All for the bargain basement price of EUR 5.5 billion?

Frankly, you must be mad or a masochist to want to be a brewer in the UK, where margins have been wiped out by a handful of cutthroat retailers and a similar number of cutthroat pub companies that control their respective sectors.  

And even if Heineken have succeeded in beating SABMiller to S&N’s door – have they managed to fob off SABMiller for good? It’s one of those open secrets that SABMiller have long wanted to buy Heineken. To all appearances, Heineken are not for sale - for the time being, at least. Which is why they have taken to fight SABMiller – in central Europe, in Italy, in the Netherlands, in India and in South Africa.

On the face of it, Carlsberg have done better out of the S&N acquisition than Heineken. They are now the market leader in Russia. But this has come at a price. Carlsberg have since been transformed from a “Nordic Fortress” into a Russian brewer with several European branches. You think I am joking? In 2008, Russia accounted for more than half of Carlsberg’s operating profit. Now consider the implications of this and the old saying “he who pays the piper calls the tune.”  

No, the world monopoly is far from over. For one, the Mexican beer market still needs to be consolidated. Mexico is the world’s sixth major beer market and, with 104 million people, shows very positive demographics as concerns consumption growth. For another, Grupo Modelo’s and FEMSA’s futures are still undecided. Being very profitable, they would justify spending some money if other brewers thought they would fit into their portfolios. Indeed, the fate of Grupo Modelo could be decided sooner rather than later as the brewer’s family shareholders have resorted to in-fighting and undermining the position of their CEO.    

But the musings over the fate of Grupo Modelo, FEMSA and Foster’s, are only twiddle-twaddle as analysts already talk about much greater things to come.

There are so many “ifs” involved the story may sound too good to become true. But if the bankers have their way, red and blue beverage houses could be created in a few years’ time, once PepsiCo has patched up with AB-InBev … and The Coca-Cola Company with SABMiller. At the moment, this sounds like some armchair strategist’s higgledy-piggledy. However, we must not forget that bankers write the storylines for brewers to follow. And if this is what they say will happen – brewers will have to make it happen. 

In the meantime, brewers will continue to cut costs in an effort to prove that they are capable of growing their businesses organically. Secretly, they will keep their fingers crossed and hope that the deal-making activity will pick up again before they have reached the limits of cost cutting as a source of profit growth.

In the go-go 1990s consultants, eager to sell their services in business integration, warned that more than half of all acquisitions fail. Today, brewers will hear none of that. “Times have changed”, they say. “Two plus two do make five.”

But do they? Here’s some parting wisdom: A pious woman dies and goes to heaven. Looking for paradise, she asks St Peter for the way. He points her in a particular direction. But with every step the path becomes steeper and more arduous. Finally, she comes to a door and knocks. The devil opens it. The woman says: “This must be some mistake. I was promised paradise.” To which the devil replies: “That’s all right. You would not know that we merged a fortnight ago.”

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