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Posted November 2009

 

Waiting for Godot

 

Belgian beer market | ESTRAGON: Do you know the story of Belgium’s beer cafés? VLADIMIR: Stop it! ESTRAGON: They go quietly. More than 1,500 last year. VLADIMIR: STOP IT! ESTRAGON: Some stay and fight. But many retreat into the shadows. VLADIMIR: I remain in the dark. ESTRAGON: This is how it is. In western Europe, beer consumption is going down. Yet, in Germany they worry themselves sick over Feinstaub, in Britain they angst over Europe, and in Belgium, where the writing is on the wall for most village cafés, punters just shrug their shoulders and drink their beer elsewhere. VLADIMIR: Nothing can be done. ESTRAGON: Well, there is always the black economy and tax dodging. VLADIMIR: What do brewers do? ESTRAGON: They cry into their beer. And wait for Godot, err the taxman, to clamp down on errant publicans. Or, if they are clever, they rev up beer exports to the U.S.  

“Belgian Beer Paradise”. Great marketing ploy – if ever there was one. It conjures up images of brewing as one of the fine arts, of cavalier brewers who overcome mundane issues of competition to become the custodians of a noble tradition which lies at the heart of Belgium’s culture. Belgian Beer Paradise – just let the words drip off your lips - alludes to a multitude of beers and beer styles, whether light or strong, blond, amber-coloured, reddish or brown, fruity, bitter or acid, yet served with love and pride in beautifully shaped glasses.

“Look no further”, it seemed to say, “Belgian beer is nectar from heaven, the drink of paradise par excellence: for everyone and for all occasions. Why not have one now?”

This is what Belgian brewers wanted the whole world to believe. But what on earth did they really think, all those years ago, when they were sitting round the table at the Brewers’ Mansion that overlooks Brussels’ Grand Place? Did they slap the adman on the back, saying, “well done”? Or did they chuckle to themselves, wondering: “what will the media make of this?”

On the face of it, a Belgian Beer Paradise sounds like a jolly good idea. It suggests an idyll where everything is nice and clean and everybody gets on so very well: Godot, Adam, Eve and even the snake. Who wouldn’t want a “des res” there?

Trouble is, “paradise” to most consumers is just a metaphor. No one will take it literally. In effect, the notion of a Belgian Beer Paradise has been too ambiguous for its own good all along. Because, whenever there is talk about a paradise, we tend to turn around to see if there aren’t any clouds approaching. Sorry to have to rub it in, but you cannot have a Paradise without the Fall. They come in a package.  

Of course, some readers will now jump to the conclusion that a Belgian Beer Paradise BF (ie Before the Fall) should have been frozen in time circa 1982, when ten Belgian family brewers got together and set up the Flemish Gourmet Beer Marketing Board in the U.S.

This marketing initiative, which laid the foundations for the Belgian Beer Paradise, was incredibly farsighted. Show us any other brewers who at the time would have dared launch a collective export campaign while domestic consumption was still on the increase? True, individual brewing companies like Heineken, Beck’s and Carlsberg were already out on the prowl in far-flung places. But who had ever heard of a concerted effort by small brewers before?

The Belgians’ exertions not only raised the profile – and sales - of their beers across the Atlantic, it also convinced American homebrewers that there was a Life after Lite – and that they should break into their piggy banks and set up craft breweries specialising in Belgian-type beers. And before the cobwebs of oblivion grow too thick – let’s remind ourselves that it was the Belgians’ show-stopping number a quarter of a century ago which persuaded the Rocky Mountains brewer Coors to introduce Blue Moon into the market – a brand which is climbing from success to success only today.     

Unfortunately, the foray into the U.S. market by these “strange beers from Belgium”, as they were called, was cut short five years later when a slump of the U.S. dollar priced them out of the market. While Duvel and Chimay decided to persevere, the rest of them beat a retreat, but with a time lag of several years returned – this time with better luck.

To cut a long story short: the Belgian Beer Paradise disappeared in the mists of history a long time ago, which, in our era of short-termism, is the same as saying about two decades ago. Nevertheless, it has not stopped Belgian brewers from recreating it in the minds of their consumers, especially when they had their Fall from Grace – which in less prosaic terms refers to the massive drop in Belgium’s domestic beer consumption which started in the 1990s.

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ESTRAGON: Don't let's do anything. It's safer. VLADIMIR: Let's wait and see what he says. ESTRAGON: Who? VLADIMIR: Godot. ESTRAGON: Good idea.

*

Obviously, Belgian brewers did not heed Vladimir’s advice. All they had to do was to look at the numbers. And they made depressing reading. According to data issued by the Belgian Brewers’ Association, beer consumption has dropped from 12 million hl in 1990 to 8.7 million hl in 2008. For a country of only 10.6 million people, seeing 3.3 million hl disappear was a serious blow to brewers especially as this translates into 27 percent of their erstwhile volume.

As in other western European markets, the decline in consumption has been gradual, although in Belgium, it was more severe in the 1990s compared to the years 1998 to 2008, when it dropped 12 percent.

With average consumption slightly in excess of 80 litres, Belgians drink far less than their neighbours. Which is remarkable, given that Belgium traditionally used to be a beer country. However, if you acknowledge that Belgians in the course of a year knock back quite a few bottles of their strong high-fermented beers, they do not compare unfavourably with others.

In general, Belgium’s beer market figures need to be treated with great suspicion as their hold over reality is fairly tenuous. Take a look at beer imports. They stood at 880,000 hl in 2008 (2000: 801,200 hl), with more beer coming into Belgium from Mexico (149,784 hl) than from Denmark (111,507 hl).

¡Hola! Does this mean that Corona Extra is the Belgians’ favourite import beer?  Far from it, Carlsberg is still the leading import and has been for a long time, although its sales are going down in sync with the market. Why imports from Mexico rank before Denmark’s can easily be explained: Mexico’s Grupo Modelo, the brewer of Corona Extra, uses Belgium as its port of call for Europe.

When it comes to Belgium’s beer exports, market observers will issue another warning. Without some insider’s knowledge figures will not add up. In 2008, beer exports stood at 55 percent of total production, making Belgium one of the top European beer exporters – in a league with the Netherlands (Heineken) and Ireland (Guinness).

Now, matters become more complicated. For example, Belgium’s beer exports to Germany have risen to 1.5 million hl in 2008 from 518,700 hl in 2000. Are Germans falling over themselves to get a bottle of a Belgian beer speciality as these figures might suggest? Not really. Most of the beer volume exported to Germany from Belgium is produced by one brewery – Martens – which specialises in private label beers for German retailers.

Another example. Let’s look at beer exports to France. They were 3.3 million hl in 2007 and 2.9 million in 2008. Non-insiders will perhaps scratch their heads and wonder what has happened here. Nothing spectacular. Belgium’s major brewer AB-InBev has probably just re-shuffled production among its western European breweries to increase efficiencies.

Ah, those were the days when working out a country’s beer consumption was a matter of simple algebra. You took production volumes, added imports, subtracted exports and the result stood up to reason – and reality.  

Now, it takes in-depth studies and reports like this one.

Still, readers need not despair. If there is one figure that is beyond dispute and can be taken at face value, it’s Belgium’s beer exports to the U.S. They have risen to 967,000 hl in 2008 from 62,500 hl in 2000. That’s a remarkable feat – and the result of a collective effort by the country’s 100-plus breweries.

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ESTRAGON: He should be here.VLADIMIR: He didn't say for sure he'd come.

ESTRAGON: And if he doesn't come? VLADIMIR: We'll come back tomorrow. ESTRAGON: And then the day after tomorrow. VLADIMIR: Possibly.

*

What’s become of the Belgian Beer Paradise AF (ie After the Fall)? Has it disappeared altogether with Interbrew’s quasi-meteoric rise to world leadership? Are Belgium’s brewers now eating their bread “in the sweat of their face” like all of us lesser mortals who know the Scriptures? Or are they faring better than their colleagues in Britain and Germany who are stretching their necks to survive as they see margins and volumes vanish?

The good news first: market leader AB-InBev has not increased its firm grasp over Belgian beer consumption. Its market share is 57 percent, followed by Alken Maes (Heineken) with 11 percent, Haacht (Primus) with 4 percent, Palm (Palm) with 4 percent and Duvel Moortgat (Duvel) with 3 percent. All the other brewers share 11 percent, while private labels represent 10 percent.

Of Belgium’s top 10 beer brands – Jupiler, Stella Artois, Maes, Leffe, Primus, Hoegaarden, Cristal, Palm, Duvel and Carlsberg – InBev owns four. Perhaps contrary to our readers’ expectations, AB-InBev’s leading brand in Belgium is a pils called Jupiler. It dominates the market by a wide margin and outsells the number two brand – Stella Artois – by 6:1.

Fortunately, AB-InBev has always stuck to the rule of increasing prices as the market declined to maintain profitability. Otherwise it might have been tempted to use its scale and pricing power to eradicate some of its competition. As said, Belgium’s brewers have been fortunate that AB-InBev has played by the rules in this respect, although they have regularly protested loudly when AB-InBev raised prices – only to follow AB-InBev’s lead eventually. 

The dual strategy of raising prices at home and driving up exports has so far prevented a large-scale consolidation of the Belgian beer market. But with the economic crisis catching hold and the market environment changing, casualty numbers may rise – by which I do not just mean bankruptcies. We might see a few fire sales too in the coming years.     

Reorganisations have been announced as InBev Belgium changes to a Benelux organisation (most likely reducing the head count further), as Heineken steps up its takeover of Alken Maes (which it got when Heineken acquired Scottish & Newcastle early in 2008 together with Carlsberg) and struggles with the relaunch of its pils brand Maes, as brewer Palm seeks more contract work and the others hope and pray that distribution channels remain open so that they can still reach their customers.

In this fairly grim scenario one brewer stands out: it’s Duvel Moortgat, a listed  but privately-controlled independent company, which has changed from a single-brand brewer, famous for its 8.5 percent ABV strong ale Duvel, to a multi-brand company with an abbey beer (Maredsous), a Belgian-type wheat beer (Vedett Extra White) and fruit beers (Liefmans) rounding out its portfolio.

Duvel is a 500,000 hl brewer and has managed to up its domestic sales even as the overall market has shrunk, helped perhaps by the fact that its Duvel brand, sold in bottles, is available in almost every Belgian café. The straightforward explanation for Duvel’s popularity could be that Duvel does not pose any competition for the limited number of beer pumps per café.

If only life were as simple as that.  

While AB-InBev, Alken-Maes, Haacht, Duvel and Palm have carefully sought to keep the notion of the Belgian Beer Paradise alive by offering a huge variety of beers and styles, the picture takes on a somewhat different hue when you look more closely at how certain beer styles have fared over the years. Here consumers have to take their share of blame if the Belgian Beer Paradise, the professedly peaceful live-and-let-live coexistence of beer styles, is disappearing slowly before our eyes. There can be no doubt about it: pilsner beers have increased their share to around 70 percent of the market. And who is responsible for that? The consumers.  

However, at the same time, high-alcohol blond beers (Duvel), abbey beers (Affligem, Leffe, Grimbergen, Maredsous, Tongerlo) and Trappist beers (Orval, Chimay, Westvleteren, Rochefort, Westmalle and Achel) have also gained in prominence, ‘cannibalising’ the sweet brown and amber coloured beers, such as Palm.

The white/wheat beers (Hoegaarden) are still popular, say market researchers at Canadean, but they are dependent upon new line extensions, like rosé and lemon, to keep this segment vibrant. The Gueuze, Kriek and fruit beers, for which Belgium is rightfully famous, are brewed in many flavours and in numerous small breweries. Over the past couple of years, many new fruit flavours have been added. Unfortunately, flavour proliferation has not led to an increase in consumption but to market saturation. Sadly but true, these beers seem to have passed their peak and volumes have started to fall.

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ESTRAGON: I'm asking you if we're tied. VLADIMIR: Tied? ESTRAGON:

Ti-ed. VLADIMIR: How do you mean tied? ESTRAGON: Down. VLADIMIR: But to whom? By whom? ESTRAGON: To your man. VLADIMIR: To Godot?

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If there is a trend that has put the Belgian Beer Paradise into serious jeopardy it’s the decline in out-of-home consumption. As late as last decade, Belgians used to drink their beer mostly in pubs. It was part of their life-style. Even today, women of a certain age would not think twice about having a blonde for aperitif – that is before noon – when they go out “doing lunch”.

Beer with lunch used to be the norm. And having a beer or two, or three at a café before going home for dinner was what men did. After all, speciality beers come in 0.33 litre bottles and pils is drunk out of 0.25 litre glasses. Having “one for the road” would have been considered a negligible amount of alcohol by most Belgians.

In Belgium, beer is still fairly cheap. Tourists probably will not agree, since they drink their beer in places like Bruges’ Grote Markt, where they charge you anything from EUR 1.60 to EUR 3.50 for a glass of pils (0.25 litres). In a village pub, expect to pay EUR 1.40 for a Jupiler (0.25 litres), EUR 1.90 for a bottle of a fruit beer, EUR 2.30 for a Duvel and EUR 2.50 for a Trappist beer (November 2009).   

Like the community-type pubs in England, Belgian village cafés are Mom-and-Dad-affairs. The woman would run the place during the day while her man tends to his day-job. In the evenings he would take over. They wouldn’t sell much food, if any, but, with a loyal clientele, they would get through 100 litres of beer in four afternoon hours: that includes the lunchtime crowd and the people returning from work. How have these types of cafés survived? Well, by not paying taxes.  

Market research company Canadean has called Belgium “over-crowded with cafés”. I mean: what do you call “over-crowded”? 100 inhabitants per café, as the ratio used to be, or 200 inhabitants per café, which is today’s figure? Brewers say there are still some 45,000 outlets selling beer of which 15,000 are classified as cafés.

Although the on-trade’s share of consumption has been in free fall, it continues to be the dominant channel, selling far more than the 50 percent of all beer which is officially attributed to it. How did brewers arrive at this conclusion? Easy. It’s called cross-channel sales. Many café-owners stock up on bottled beers in supermarkets, where they often get a better deal than from their distributors or brewers.     

What has sustained the Belgian Beer Paradise for many years was the brewers’ tight grip on tied cafés and the Belgian taxman turning a blind eye to his countrymen’s tax-dodging. Many suspect that a succession of Belgian governments preferred not to know what goes on in the on-trade. Estimates vary as to how much activity in Belgium’s on-trade ought to be termed “black economy”, but it’s said to be between 20 percent and 40 percent of the on-trade’s turnover.

On a positive note, the authority’s leniency makes sure the sector absorbs a lot of people who would be unemployed otherwise. As they say in Belgium: “If you cannot find a job you open a café.” The side effect is that the average life cycle of a café is two years.    

Despite this, cafés operating, ahem, “informally” are typically more profitable than rivals in the formal economy, which is another benefit of not paying tax. There is also little incentive for them to grow because bigger outlets tend to attract the attention of the taxman. But they are hard to compete with and thus prevent consolidation in the sector.

All this may help to explain why Belgium’s on-trade sector is still so fragmented. Yet, things may be changing, though not necessarily for the better.

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ESTRAGON: Oh yes, let's go far away from here. VLADIMIR: We can't. ESTRAGON: Why not? VLADIMIR: We have to come back tomorrow.

ESTRAGON: What for? VLADIMIR: To wait for Godot.

*

In 2008, beer consumption declined by a record 4 percent. For 2009, Belgian brewers expect beer consumption to drop another 4.4 percent in the on-trade and to rise 1.3 percent in the off-trade (supermarkets). That’s tough, especially since brewers had hoped that a wage increase of 4.5 percent in January 2009 would prevent another massive decline in consumption.

It was not to be. Therefore, market observers expect more violations against good practices by the country’s big brewers than in the past two years when they began to offer huge discounts to supermarkets and cafés in an effort to push pils volumes. Needless to say that distributors and smaller brewers were not amused. Distributors especially have begun to complain against these practices since the big brewers are already poaching in their domain by doing direct distribution. To most distributors, AB-InBev is both a client and a competitor, which is awkward at the best of times. But distributors now quite willingly admit that without carrying a full range of beverage products they would not be able to survive if they depended on AB-InBev’s products alone.

Most brewers openly state that the pils market in Belgium has become a killer market. Of the EUR 1.66 charged for a 0.25 litre glass of pils the brewer gets EUR 0.29 (of which he has to pay 5 cents in excise), the distributor EUR 0.14, the publican EUR 0.88 and the government EUR 0.35 (VAT).

As if this were not enough, small brewers worry that price wars fought in the pils segment could spill over into the abbey beer segment. They fear that AB-InBev and Heineken might try to compensate for their losses in the pils segment by promoting their abbey beers.

Shrinking profits, fiercer competition, and price wars: could it be that Belgian brewers are finally experiencing the full impact of their fall from paradise?

Looks like it. And the country’s publicans are in for a hard landing too.

As of January 2012, café owners will feel the full brunt of the ban on smoking. To date, small cafés have been exempted from becoming a smoke-free environment if they sell little or no food. Although this law had been shoddily crafted and awaited revision, everybody expected the status-quo to be maintained albeit in sounder legal fashion. But no. In November 2009, the loophole for small café owners was closed by a cross-party initiative in the Belgian Parliament, which resulted in a total ban.

Moreover, the much-anticipated VAT cut (from 21 percent to 12 percent) for the on-trade, which should have boosted consumer spending, was limited to restaurants only.

Whichever way you look at it, there is no denying that Belgium’s publicans have been slapped in the face by their politicians, which might be just another way of telling them off for tax-dodging.

Expect the shake-out of the on-trade sector to gather momentum.   

For a running commentary on future events, I recommend Beckett’s play “Waiting for Godot”. Most quotes in this report are his. Some dialogues are mine. For decades, theatre-goers have wondered who Beckett’s protagonists Estragon and Vladimir represent. I say: they could be anybody and everybody. Surely, Belgian brewers with their acute sense of the absurd will agree.

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