Beer Monopoly

 

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Posted Oktober 2009

 

Avanti Popolo

Italian beer market Knowst thou a country where a former starlette is rumoured to become a minister in the next government; where shop stewards at their company’s expense visit brothels in far-flung places and where a music-loving media tycoon controls 80 percent of his country’s tabloid newspapers? Indeed, knowst thou a country, where the bureaucratic hurdles for start-ups are higher than in Rwanda or Kazakhstan; where managers can bring down their companies but still receive a government bail-out; and where the public prefers to ignore the current economic crisis and pretends it’s dolce vita time?  

When the German magazine Der Spiegel some weeks ago taunted its readers with these questions, many of them would have replied without hesitating: “Do I know this country? Ach ja, it must be Italy!” And they would have chuckled to themselves and asked Mario at their local coffee shop for “due Kapputschino, bitte.”  Mr Berlusconi’s antics, his controversial relationship with a teenage girl from Naples and his very public marital problems became this summer’s most entertaining political story and confirmed suspicions that in Italy politics is a kind of incomprehensible opera buffa.

Although the answer to Der Spiegel’s questions seemed obvious, it was still wrong. The country in question is --- Germany!

Rest assured that this realisation would have made most Germans choke on their cappuccini. Because what does this mean? Is Germany becoming more like Italy? Or is Italy becoming more like Germany? And where will this leave us with our long-cherished cultural stereotypes that in Europe heaven is where the police are British, the cooks French, the mechanics German, the lovers Italian, and all is organised and run by the Swiss?

Puzzles and more puzzles. This calls for something strong. “Mario, dammi una birra, per favore.”

Perhaps the simplest explanation to these vexing questions is that sometimes things are not what they seem. Especially in Italy, where appearance and reality often do not coincide. Ever since European aristocrats and bourgeois began travelling to Italy on their Grand Tour in the 16th century, “Italy has been and will always be the land of sun and song; and neither storms, nor rain, nor snow will ever cool the enthusiasm that the word ‘Italy’ sparks in every poetic soul” (Henry W. Longfellow, poet).

Ours may not be a poetic soul like Mr Longfellow’s, but to this day, “Italy” is the shorthand for the profound knowledge that it has everything that makes life worth living – think of Verdi and the Vespa, Gucci and the Godfather trilogy, Carrara marble and Chianti wine, Pavarotti and Prosciutto, La Loren and Lamborghini, Raffael’s paintings and Eros Ramazzotti’s music… (to be continued ad infinitum!)

Actually, beer is not on that list.  

No matter how much they may have tried, Italian brewers still have not managed to convince their countrymen that to be seen with a glass of beer in their hand when out dining will not ruin their “bella figura”, their “beautiful figure”. Italians abhor the prospect of a “brutta figura” - beer belly and all. Because cutting a “bella figura” is the epitome of being, the essence of the Italian way of life: the dominance of aesthetics, good image, and proper behaviour over everything else.

If beer in Italy is still struggling with the prejudice of “brutta figura”, which loosely means you cannot take it anywhere nice, it does not fare any better outside Italy. For the most part, Italian beer hasn’t gained much respect among gourmands, gastropods and epicures. If they go for Italian booze to accompany pasta dishes and pizza, they chose Italian wine, wine and more wine.  

But as with most aspects of Italian style and culture, there is more to it than meets the eye. The same is true for Italian beer. And perhaps this is the time to straighten out some of the most die-hard misconceptions concerning beer and Italy.

 

1. Italians don’t like beer

Well, it would be more to the point to say that Italians have gone off alcohol full stop. Although Italy is a wine-drinking country like Spain and France, over the past 40 years or so wine consumption has declined dramatically. On a per capita basis, wine consumption has dropped to slightly more than 40 litres from over 100 litres in 1970. During the same period, beer consumption has gone up. While it was only 11.5 litres in 1970, it reached almost 30 litres in 2008. 

But as you will have read often on these pages: “Beware of mean values”. This warning is even more pertinent when dealing with Italy, where appearance and reality often do not coincide (see above). Actual beer consumption varies widely. Like every beer drinking country, Italy has its fair share of so-called heavy users, who knock back quite some volume. Many of them will be found in the north of Italy, in Alto Adige (also know as South Tyrol), where per capita consumption is supposed to be 100 litres – even though locals are quick to point out that it’s thirsty German tourists who come to Alto Adige for skiing in winter and mountaineering in summer that contribute to this relatively high figure.

However, there is little dispute over the fact that many Italians will never touch beer, women among them. Which allows us to conclude that working out per capita beer consumption figures is a pretty pointless exercise south of the Alps. Still, the mean value is held against Italian beer drinkers who continue to bring up the rear in Europe. Only the French drink as little (or as much) beer as the Italians.

Now this is a dubious honour if ever there was one. And pointing fingers is no use if you are up against a formidable adversary like non-alcoholic beverages. If Italians like to drink anything, it’s bottled water. The consumption of mineral water stood at over 200 litres per capita in 2008 – the highest in Europe. That gives water a share of throat of more than 60 percent.

In the past, brewers in Italy used to brush aside their animosities and fund generic beer campaigns to promote beer consumption. Nonetheless, they always stopped short of Italian consumers getting the idea that beer was a soft drink by another name. Privately, insiders say that this seems to have fuelled beer drinking in Spain – large swathes of the Spanish population living under the misapprehension that beer and pop are all the same.

Probably brewers in Italy knew only too well that nothing can be taken for granted when dealing with the powers-that-be. Previously, Italians would have considered laws and regulations a mere suggestion rather than a command. Traffic lights, speed limits, driving under the influence (DUI) – all was personal and open to discussion. Now things are changing. Non-smoking laws, widely predicted to be an absolute failure, have been accepted without a fuss. The same with speed-limits and blood alcohol concentration limits: Italian drivers, for the most part, try not to go over them.

It must be said, though, that the reason for Italians’ new found “will to obey” are draconian “booze it and lose it” laws. Your correspondent has been told that if you are caught over the limit, the police will first slap a fine of about EUR 6000 on your bonnet, before they will confiscate your car and your driver’s licence. Just to make sure you have learnt your lesson well, your car will then be auctioned off and proceeds will go to the state.  

Obviously, DUI penalties have made normal Italians reluctant to go out for a liquid lunch so much so that Italy’s vintners are already beginning to feel the pinch. Alas, brewers have no reason to feel smug. If their countrymen change their tipple, it’s from wine to water and not to beer.    

 

2. The recession will hurt beer consumption

Funnily enough, this does not seem to be the case. Beer consumption this year is expected to be flat even though the economy will have shrunk significantly. The Economist newspaper in its most gloomy analysis yet (September 2009) put the likely shrinkage of the economy this year at 6.0 percent – a bigger drop than in Britain, France or Spain.

However, on the face of it, Italy is having a good recession. This year again, more than 40 million tourists will throng Italy’s cultural sites, clogging up narrow streets and pavement cafés, thus doing their bit to keep up beer consumption levels.

Part of the explanation is that, after more than a decade of underperformance relative to the European Union, Italians are used to economic distress. Or as the Italian columnist Beppe Severgnini puts it in a recent book: “Controllers and controlled have an unspoken agreement: ‘You don’t change, we don’t change, and Italy doesn’t change, but we all complain that we can’t go on like this.’”

As for Italy’s brewers, if they need a culprit for their market’s lacklustre performance, they have always got the Germans.

 

3. German beer bears the blame

France and Italy not only trail Europe when it comes to average beer consumption, their consumers also show the greatest predilection for imported beer brands. One in every three beers consumed is an import.

Imported beer brands have risen steadily in importance. While in 1980 they only represented 11 percent of Italy’s beer consumption, their share had increased to 25 percent in 2000 and to 33 percent in 2008. That translated into more than 5.8 million hl out of a total of 17.6 million hl beer.

The majority of imported beers continue to be sourced from Germany which accounted for almost 60 percent of all imports (2007). One reason for German beers growing in popularity south of the Alps is their low price. Lower excise duties coupled with excess capacity allow German beers to be exported at prices with which Italy’s producers have difficulty competing.

In 2008, estimates say 3.5 million hl beer from Germany crossed the Alps, followed by 700,000 hl from the Netherlands and 500,000 hl from Denmark. That seems like a lot of volume, until you are told that Beck’s alone sold more than 800,000 hl. This makes Beck’s (owned by AB-InBev) the fifth most popular beer brand in Italy after Peroni, Moretti, Heineken and Dreher.

Considering that ten German beer brands represent almost half of all German beer sold in Italy, readers will begin to understand why the German brewing industry as a whole does not brag about its beer exports. Most of them only sell a few thousand hectolitres.

A few decades ago, the conquest of the Apennine Peninsula would have been very much to their heart’s delight. In the 1980s and 1990s, when there was consensus among German tourists that the Alps should be torn down so that they could reach Italy’s beaches in less than no time (Achtung: this was a joke!), Germany’s national beer brands – Beck’s, Warsteiner, Bitburger, Krombacher, Paulaner et al – did their utmost to outpace each other in their race to the Mediterranean, fearing that their German countrymen would drop their brand loyalty as quickly as they drop their pants if they did not find their favourite beer on Italy’s beaches. 

Today, except perhaps for Beck’s and a few other German beer brands, Italy’s brewers have been able to stem the northern onslaught. Unluckily, they are now faced with a much more dangerous intruder: Germany’s discount brewer Oettinger. All over Italy you can find Oettinger’s range of beers in supermarkets, selling for as little as EUR 0.60 for a 0.5 litre can.

Italy’s brewers may scratch their heads and wonder how the privately-owned Oettinger does it: shunt its beer to Italy, covering a distance of several thousand kilometres and still sell at such a low price. And, by the way, we have been told that Oettinger’s beers are not bad. Oettinger may not spend any money on marketing and advertising, but at least the brewer does not stinge on the quality of its raw materials.

Oettinger’s high visibility in the Italian off-trade sector, where 55 percent of all beer is sold, has had several effects already: While Oettinger has not expanded the share of the discount segment (5% of total), the brewer has nevertheless cemented the price of discount beer brands and mainstream brands on offer at below EUR 0.70 per 0.5 litre.

In thus doing, Oettinger has prevented domestic premium beer prices from taking off too high and forced mainstream brands like Peroni, Moretti and Dreher to defend their volume and share through the introduction of attractive (but costly) new packaging and aggressive promotional activity.

Which beggars the question: do brewers in Italy make any money? Or is it the distributors who do?

 

4. Foreign brewers call the shots

There must be something to the Italian beer market that four global brewers try very hard to defend their share of it. Having suspended the rule of thumb that each market only warrants two international brewers, you will find Heineken, SABMiller, Carlsberg and AB-InBev (combined share: 69%) variously stepping on each others’ toes, while making some awkward bedfellows.

Carlsberg Italia (Tuborg, Splugen, Carlsberg) is the smallest of the international brewers, not having made any acquisitions apart from raising the stake in Poretti to 100 percent and changing its name to Carlsberg Italia. The Danish have two breweries and a market share of 6 percent.

SABMiller is the last of the global brewers to enter this market. They bought Birra Peroni in June 2003 for reportedly EUR 560 million, snatching it away from InBev that had hoped to re-enter the market they left when Interbrew (the forerunner of InBev) sold Birra Moretti to Heineken (1996). Confusing? No, call it economics. Moretti, which came into Interbrew’s fold accidentally when the Belgians took over Canadian brewer Labatt in 1995, had been deemed too small by Interbrew and not worth keeping as it had a market share of only 9 percent.

Birra Peroni with a market share of 25 percent and Italy’s number two brewer behind Heineken Italia (31%) offered the kind of scale InBev wanted but the company went to SABMiller which left InBev with a 1.2 million hl beer import business (mostly Beck’s and Stella Artois) and – since the acquisition of Anheuser-Busch last year – a licensing agreement for Budweiser with Heineken Italia.

You see, relationships among Italy’s foreign brewers are complex.

And as to the above question: yes, most international brewers are making money, not least thanks to a strict cost management which has led to the closure of quite a few breweries over the years. There were 31 breweries in 1980 which had a total output of 8.6 million hl beer. Their number has decreased to only 15 in 2008, yet with a total output of 13.3 million hl beer.

In case you wonder what has happened to the Italian brewers: well, there is more than 280 of them, the majority being microbreweries and brewpubs, plus a few second generation regional breweries and the privately-owned Forst (4%), Menabrea (1%) and Castello (5%), whose combined market share adds up to 11 percent.

Italy’s microbrewers are an eclectic lot. Some have weathered the winds of change very well like Hops! in the seaside town of Riccione, which was founded in 1997. Others have come and gone, for reasons well-known to observers of the U.S. craft brewing scene: they were financially over-stretched, yet under-skilled when it came to running a restaurant business. Add to that a highly variable beer quality and you know why the Italian craft brewing scene resembles that of the U.S. circa 1995.

How shall we put this politely: in Italian craft brewing, a lot of passion is still required to compensate the lack of professionalism. As in the U.S., this is not a recipe for business longevity. But while these Italian microbrewers are at it, they will do their best to generate an interest in beer – not as wallop, but as an interesting tipple which does not spoil your bella figura.

More promising in this respect are what we have termed the “second generation regional brewers” like Theresianer, which are fairly recent start-ups but whose owners have the funds and the business wherewithal to go for a certain size without having to compromise on quality or on prize.

The industrialists behind Theresianer and newcomer Bergner Bräu probably do not want to emulate the example of celebrity wine makers like film director Francis Ford Coppola, who proved right the old adage that if you want to make a small fortune out of wine, you need to start out with a large fortune.

Italy’s new brewers have to get things right the first time round because chances are slim they will be given a second chance. Or a new lease on life should their businesses sink.

Which brings us to Birra Castello – and one of the most exciting rescue stories in the brewing industry.

 

5. Resistance is futile    

Readers does it not strike you as odd that the story of market consolidation always ends with a duopoly firmly established? It does not matter which industry you look at, when you close the book there are only two players left that have stamped out all opposition.

For this reason it is worth studying the Italian beer market. It shows that challenging this ostensibly inevitable pattern is worthwhile and can be crowned with success. Take Birra Castello, which has two breweries in northern Italy and is owned by a cooperative of some 40 distributors called BSE. They donned the hat of brewery owner in 1997, when the antitrust authorities told Heineken Italia to sell off one of their seven breweries – which was the one million hl erstwhile Moretti brewery in San Giorgio. Perhaps Heineken Italia was even glad to see this brewery go. Imagine running seven breweries in a market that small. In any case, to sweeten the purchase Heineken Italia gave the buyers three years of contract brewing but took the brand - Moretti - with them. In sum: the buyers got plenty of capacity but only one brand, Castello, which had been dormant for years.

Perhaps this agreement served the distributors right at the time since they had set their eyes on providing themselves with DOBs (Distributors’ Own Brand) for the on-trade. As Managing Director of BSE, Eliano Verardo, explained, his distributors do not want to depend on just three global brewers for their beers. Mr Verardo himself comes from a family of distributors. His own company distributes 65,000 hl beer annually.  

While it may be easy to view the purchase of the San Giorgio brewery as a straightforward business transaction with a longterm perspective – the distributors needed an on-trade beer brand and Italy’s supermarkets a brewery which would produce private labels for them – it’s much harder to see that in BSE’s next purchase, that of the Pedavena brewery.

In retrospect, it looks like Heineken Italia wanted an elegant exit from a plant which was doomed. Companies often seek the assistance of private equity if they intend to leave a business for good but fear a scandal. The investor, prepared to take on the task of grave-digger, usually has his palms lined by the seller and picks over the bones before he flogs off the remaining valuables and, after a time lag of a few years, brings the job to an end. 

Heineken Italia initiated closure procedures (read: stopped investing) at the 600,000 hl Pedavena brewery in 2003. Apparently, Heineken’s management was aware that ticking off the Pedavena brewery with the loss of about 250 jobs would not go down well with the public. Three times over the years they asked Mr Verardo whether he was prepared to buy this brewery too. But Mr Verardo was reluctant. Another brewery with a dormant brand, but this time without the contract-brewing treat? Where was the business rationale?

When in 2006 he finally agreed to take the Pedavena brewery off Heineken’s hands the plant had been down for a year. But what a year it had been for Heineken Italia. First there was only local public protest, yet this soon turned into a nationwide popular movement for the rescue of the brewery. And all was covered by national television. Heineken’s management cannot have been pleased with the course of events. The search for a buyer, initiated by Pedavena’s very vocal major, was not without its opera buffa elements: At some stage the Swedish brewer Kopparberg was wheeled out as a prospective buyer but quickly returned to the wings.

Ultimately, a domestic solution was found to Heineken’s problems. Pedavena brewery joined Birra Castello. To everybody’s surprise, the distributors did not act like pathologists: they did not close down the brewery and shift production to the larger and more modern San Giorgio brewery, which is only some 150 km away from Pedavena. No, they had a sustainable business plan. They have since spent EUR 10 million on kitting out the brewery and introduced marketing in order to push the Pedavena as well as the Dolomiti brands. Although they still produce private labels and bottle soft drinks, Mr Verardo says that in 2008 Birra Castello produced over 900,000 hl of their own beer brands, aiming for one million hl – provided the economy improves and Italy’s major brewers cut back their aggressive price promotions in the off-trade.

The rescue of the Pedavena brewery, it seems, was so stereotypically Italian: grande drama, unpredictable dynamics, shrewd plotting and everybody trying to cut a bella figura. But more than 60 jobs were saved in a town, which has only two employers of some size: the local hospital and --- the brewery.

To wrap it all up, here are some questions for our readers:

Knowst thou a country, where it took the entry of an international brewer to breathe life into the beer category and touch the aspirations of the younger consumers? Knowst thou a country whose beer brands write their success stories on foreign soil rather than at home? Indeed, knowst thou this country?

If you think the answer is “Germany” – think again. It’s Italy. SABMiller and the Peroni brand are currently undertaking just that. Does this mean we have to rethink some of our assumption about beer in Italy and Italian beer brands? Perhaps. But in another report.

 

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