That sinking feeling
German beer market |How much worse can it get for German brewers? After two decades of volume decline and profit haemorrhage, the rest of the world is finally taking note of their plight. In January 2014 the New Yorker magazine ran an article headlined “German beer’s existential crisis”. A year previously, some graduates from the University of Pennsylvania had penned a piece “Is the end of the German beer industry near?” Both analyses may be a bit exaggerated. But as far as anyone can see over here, there is no light at the end of the tunnel either.
Big blunder. It was at a Rüdiger Ruoss conference in Switzerland in early 2001 when I – unwillingly, I admit – ventured the opinion that acquisitive international brewers would give Germany a wide berth. In those days Germany still ranked third world-wide amongst beer producing countries, behind the U.S. and China, with per capita beer consumption as high as 122 litres. Although the market had been in decline for several years, German brewers had obstinately refused to consolidate. Unlike the rest of the world, where markets fell into broadly two categories – monopolies or duopolies – Germany had remained highly fragmented, which is to say, atomistic. Even the country’s biggest brewers at this stage had single-digit market shares only, although legions of men in suits with briefcases had travelled up and down the country, extolling the virtues of Mergers & Acquisitions. But their advice that only the creation of larger units would give brewers greater pricing power vis à vis the country’s cut-throat retailers, not to mention all kinds of other economic benefits, had fallen on deaf ears. The mostly privately-owned brewers had decided they preferred to go alone.
Still, that remark of mine seemed to soothe a certain feeling of paranoia amongst the audience that Anheuser-Busch, SAB, Interbrew, Heineken at al. were secretly plotting an ambush on Germany. Incidentally, the metaphor of a raid on Germany would have fallen foul with reality: this was Germany and not Russia, where changes in ownership only took a slight nod by some big-wig politico. In our part of the world, it would take two to tango: one willing to buy and one equally willing to sell. So you can image my discomfiture when a few months’ later I stood corrected as Interbrew clinched a deal with Beck’s and Heineken with Schörghuber. I then decided I’d better keep my head low all the while Interbrew continued its acquisitive track around Germany and Carlsberg bought Holsten. While I could see their strategy at work, the finer point – making a profit – nonetheless eluded me. At least that much I told the analysts, who then still took an interest in the German beer market.
Fast forward to 2014. The German beer market, which has since been relegated to fifth rank world-wide, has continued its downward trend, losing an average volume of 2 percent annually. By 2013 sales had declined to 94 million hl beer, which translates into a loss of 20 million hl since the early 1990s. Per capita consumption for the time being remains slightly above 100 litres. But many wonder how much further it can drop? To under 80 litres like in neighbouring Belgium, which also used to be a country of beer quaffers? And how many hl would German brewers need to wipe off their spread-sheets to get there? Another 20 million hl?
In all honesty, Germany’s beer market is a tale of woe and the reason this escapes attention by the analysts is that they have plainly lost interest in it. As Nomura’s analyst Ian Shackleton, who happens to be one of the most knowledgeable experts in the beer business, recently told me: “Germany is pretty immaterial for all the international brewers so I spend virtually no time analysing the market.” This is a good thing because international brewers would have to admit that they all got their noses bloodied here. Whatever their original plans, no one managed to consolidate the market in any significant way; no one has gained any market clout. And as to their profits – let’s pull a veil over them too. It is just as well that they do not have to disclose any country-by-country data in their financial reports or investors would ask them what they were thinking when they entered Germany in the first place.
Where the action is
Nomura was kind when it estimated the German beer profit pool (that is the total profits earned by all measured in EBIT) to have been flat since 2008 because hearsay suggests otherwise. In the meantime, though, the global beer profit pool has expanded to USD 32 billion in 2013 (say AB-InBev) from USD 25 billion 2008, which indicates why international brewers consider Germany “immaterial”. Germany’s contribution to the global beer profit pool in 2013 was far below 3 percent and thus almost negligible when contrasted with the U.S., Brazil, Mexico and China: those four markets alone represented 48 percent of global profits in beer. When putting Germany next to other countries, the comparison is even less flattering. For example, in 2012 all of Germany’s brewers made as much in profits as the two Canadian brewers, who only sold about 23 million hl beer. But Germany’s profit pool pales next to Mexico’s, a duopoly, where beer sales were 69 million hl, or South Africa’s, a virtual monopoly, where they stood at 31 million hl.
If you were to take profits per hl (EBIT), the picture turns still darker. Estimates put them at USD 10 in Germany. That’s far below the global average of USD 18/hl and merely a third of what brewers make in Africa.
What I am driving at is this: It’s not because German beer sales are in decline that profits are so low. It’s because Germany has remained an atomistic beer market. It’s the fragmentation of the beer industry, which leads to so little pricing muscle.