Beer Monopoly




    International Reports






Posted October 2013

The world that was

Globalisation of the brewing industry | "We will be the world's beer company", August Busch III, the President of Anheuser-Busch predicted in 1996. Twelve years later, Anheuser-Busch was no more. The "King of Beer" got taken over by a Brazilian-Belgian go-getter called InBev, which had only been formed four years previously. Was the Third's retrospectively ill-judged prophecy a case of "pride goes before a fall"? Or had he not seen the writing on the wall, which spelt "do lunch or be lunch"? August III was an extremely competent corporate chieftain, which his son and successor August IV was not. Still, both Buschs proved blinkered. While they kept gazing at the U.S. from their executive suites in St Louis, the world of beer was changing beyond recognition. Those who took part in globalisation and its maddening frenzy of mergers and acquisitions survived. Those who only reluctantly did so - like Anheuser-Busch - became ultimate prey.

Globalisation - in words and deeds - has been with us for so long that few can remember when it all started in the brewing industry. Was it in the late 1970s, when several western brewers entered China through joint ventures that eventually proved doomed? Or was it in the 1980s when two swashbuckling Australian brewers dreamt up the madcap plan to conquer the world by acquiring breweries in Canada, the U.S. and the UK? Or did it only begin in earnest in1991 when some undauntable Finns and Swedes crossed the Baltic Sea to Estonia to take over a state-owned brewery, Saku, that had been chalked up for privatisation? Could they perhaps have been beaten to the title of "first mover" by an Australian of the name of Tony Oates who arrived in the Polish port city of Gdansk in 1990 to buy some run-down breweries, whose beer, EB, would become the most popular brand within a few years? Or would that title have to go to Belgium's Interbrew which in 1991 purchased a brewery in Hungary?

Before memories fade to sepia, it's time for me to lean back in the chair, lace my fingers behind my head, stare into the embers, and tell the story. What a story it is. The plot is thick with brash Yankees, boisterous Aussies, soft-spoken Scandinavians, laddish Icelanders, hardboiled Brazilians, pussyfooting Mexicans, no-fuss South Africans, fun-seeking Belgians, dithering Dutch, plus a few clueless Germans and Brits in supporting roles who quickly moved themselves to the side-lines. All had a go at mergers and acquisitions, the grown-up version of Battleship, because they came to realise this was the best way to create value for their companies. As in all good stories, there have been winners and losers; there were hazardeurs and also-rans. And there were what the military calls "collateral damage" - secondary casualties but casualties nonetheless.

Of course, all industries that went global in the past two decades have had their fair share of dumb blunders and rookie mistakes, usually made by people with big egos, who were over-confident but under-informed, not least about cultural differences, thus miscalculating the time horizon needed and the risks involved. But few other industries had such infamous yet colourful characters who hammed it centre stage with the limelight fully on them. Admittedly, none were a match for August III Busch, the Machiavellian operator, who cold-bloodedly ousted his father Gussie in a 1975 boardroom putsch and backstabbed his own son during the InBev takeover. But in terms of serviceable yet likeable villains, the asset-stripper and convicted fraudster Alan Bond - he who became the world's fifth-ranking brewer in 1987 - would be a close second on my list.

If this were a novel, any good editor would send the manuscript back to the author with the comment: "overdone, overworked, too many protagonists for the reader to keep track of. Needs major revisions." But this is not a piece of fiction. It's how the brewing industry came to look the way it does today: In 1990 the top four brewers controlled 25 percent of global beer production (1.1 billion hl). In 2010 it was 50 percent (1.8 billion hl).

Doing it the slow way

So when does our story begin? I'd say it all began with Heineken in 1931 when, together with Fraser & Neave of Singapore, they set up Malayan Breweries, later to be called Asia Pacific Breweries. Eighty-one years down the road, in 2012, Heineken bought F&N's stake back for USD 4.5 billion, or at a phenomenally expensive 17 times earnings. Back in the 1930s, going alone was not an issue for Heineken. A few years later, the Dutch brewer clinched similar deals. In 1935 they acquired interests in existing breweries in Angola, Egypt, Morocco, the former Dutch Indies, French Indochina, the Belgian Congo and Palestine. In effect, these deals mark the beginning of Heineken's worldwide expansion.

From exports, to licensed production, to buying a stake in breweries, to eventually seeing a continuous stream of nice foreign revenues - this proved to be a time-consuming strategy, often taking years if not decades to implement. But it came to be known as the "Heineken Model" and other brewers too adopted this modus operandi when seeking to tap into international markets. Nevertheless, for most brewers in the 20th century, beer exports were merely pocket money, not their main focus. All the while punters back home were chucking back their beer by the litre mugs, they had better things to do: counting their money.

We are so used now to hearing Europe's brewers moan about diminishing returns because of supermarket price wars and declining consumption, it's easy to forget that there were times, not so long ago, when brewing was a licence to print money. As recently as the 1970s, a German brewer's business plan was such that all the profits they made from selling mineral water were enough to cover brewing costs. The way they saw it, net revenues in brewing equalled net profits. Earnings rose even higher when brewers discovered that consumers were willing to pay more for a beer purely on the basis of branding. That's when they began advertising their brands as premium beers and turned them into national brands with the help of broadcasting (hence the derogatory term "TV beers" for large national beer brands). Anheuser-Busch clearly excelled at this because, by branding Budweiser as a premium beer and lifting its price, they increased their market share from 6 percent in 1950 to over 45 percent in 1990 without having to buy a single domestic rival.

One look at the ranking of the world's major brewers in 1987 and you can see that most of them were focused on their home markets. That's because they still had it so good. In those days, brewers were the pillars of their societies. In the English-speaking countries there was even a word for them: "beerage" (a pun on peerage) or "brewing royalty". Whether they were called Santo Domingo (Colombia), Fernandez (Mexico), Busch, Coors, Molson, Bass, Guinness or Heineken - all believed themselves to be beerage. A cut above the rest.

Britain has always had an ambivalent attitude towards its beerage, a commentator for the Spectator magazine wrote in 2008, as this "cosseted bunch of arrogant monopolists" used their enormous wealth to "grease the political system, bankrolling the Conservatives who duly obliged by preserving the industry’s traditional privileges — including ownership of vast pub estates that sold only the brewers’ own beers. What the workers thought of the beerage was clear from the old song: ‘I’m the man, the very fat man, who waters the workers’ beer,/ And what do I care if it makes them ill,/ If it make them terribly queer,/ I’ve got a car and a yacht and an aeroplane,/ And I water the workers’ beer.’"

In the 1980s, the brewers' golden years came to an end. In Western Europe, per capita consumption of beer peaked: at 140 litres per capita in Germany and Belgium, compared with 120 litres in the UK. There was only one way for it to go: down. The UK brewers had their comeuppance when Elders, the then owner of Foster's and Courage, launched a hostile bid for Scottish & Newcastle in 1988 and the UK's Monopolies and Mergers Commission concluded this was a step too far. It didn’t just block the deal, it proposed a complete restructuring of the industry in what became known as the Beer Orders. When the UK's brewers were forced by law to reduce their vast pub estates they decided to turn up their toes and die (or be bought), rather than seek salvation elsewhere.

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