The Global Brewing Industry

TABLE OF CONTENTS

1 Industry Definition

2 The Industry's Current Position
2.1 The Markets
2.2 The Players

3 The Industry Structure.
3.1 The Macro-environmental Influence.
3.2 The Micro-environmental Influence

4 Globalisation Potential of the Beer Industry
4.1 Relevant Globalisation Drivers
4.2 Outlook on Future Industry Development

BIBLIOGRAPHY

APPENDICES INDEX

1 Industry Definition

For the purpose of this business report the global brewing industry is defined as the group of those companies,¹ that are producing beer and operate on a national or a global scale. For diversified companies the report focuses on the beer brewing activities of those respective firms.²

2 The Industry's Current Position

As already predicted by Stewart Gilliland^{3 4} of Whitbread PLC as well as many other industry experts, during the last two years crucial developments have taken place. First, in terms of industry concentration and global expansion of dominant players. Second in terms of consumer taste and behaviour which again had an impact on company's strategies and product portfolios.

2.1 The Markets

The industry's main markets are Western Europe, Eastern Europe, America including North- and South America, Africa and Asia including China and India. In each of those regions the industry is in a completely different stage of the industry lifecycle.⁵ Moreover population and per capita consumption indicate growth opportunities and hence potential attractiveness of the respective markets.⁶ (See: Appendix A and B)

According to this data, the world's beer market can be divided in regions with stable or declining consumption and regions where the demand for beer is growing. The latter is mostly the case in underdeveloped countries, where beer has a relatively short history and where the economic conditions have restricted consumption for the majority of the population. Stable or declining markets are predominantly developed countries with a long brewing tradition, such as Germany or the UK. Here per capita consumption has already achieved saturate levels and shifting consumer behaviour favours increasingly substitute products.⁷

2.2 The Players

The industry's players can be distinguished in terms of their market coverage: regional and global players.(See: Appendix C) Especially in traditional markets beer consumption is based on regional preferences, thus for example in Germany 1300 breweries provide a variety of 5000 brands.⁸ Most of them are only distributed locally. Nevertheless, global players try to enter new markets by acquiring existing brands. However, those brewers rather maintain the variety of beer brands instead of just selling one or two international beers.⁹ The slogan of the world's third largest brewer Interbrew: "The world's local brewer"¹⁰ shows that those global players are aware of the importance of local preferences.

During the last few years two crucial processes can be identified. On the one hand a rapid concentration of breweries within mature markets such as Western Europe and America took place. On the other hand most global players expanded into emerging markets¹¹ such as Asia, Latin America, and Eastern Europe by forming strategic partnerships with existing local breweries or simply by acquisition of the latter.¹² (See: Appendix D)

These substantial developments have completely changed the industry structure over the recent years. (See: Appendix E) Thus the list of the top breweries, in terms of production volume, is still led by the American giant Anheuser Bush, followed by the eager SAB Miller, which some say will be the future number one.¹³ Interbrew and Heineken recently changed position with Interbrew being placed number three and Heineken number four.

3 The Industry Structure

As outlined in part 1 the present industry can be described as a battlefield in which acquisitions and takeovers lead to an enormous increase in industry concentration and pace of globalisation. By early 2000, the top two or three brewers in a country often held more than 80 percent market share of the national market.^{14 15} (See: Appendix F). Today, Canadean, the leading global beverage research company, claims that the top ten brewers take a 45.7 per cent stake in the worldwide beer production.¹⁶

To explain and to evaluate the present industry structure the Business environment¹⁷ must be analysed.

3.1 The Macro-environmental Influence

The macro-environment comprising influences such as: Political, Economic, Social, and Technological trends (PEST) critically determines opportunities and threats a company will face in the future.¹⁸ For the beer industry the most crucial aspects are political and economic and social trends.¹⁹

In the field of policy especially the regulations on mergers and acquisitions define the industry structure. All activities that could jeopardize competition in Europe are either subject to governmental or European approval, depending on the transaction's impact. For example the UK authorities forced Interbrew to resell the Bass brand "Carling"²⁰. The trend that competition is under close supervision of governmental agencies like the American anti-trust commission can be observed all over the world.

In Eastern Europe the transformation from planned economics to free markets is still in progress. Consequently a framework for legal codes is still not fully established.²¹ Generally, underdeveloped legal infrastructures in emerging markets might be an opportunity for unrestricted growth. However, in China the controlled system only allows market entry via Joint Ventures with domestic firms.²²

Prior to the establishment of the Single European Market in 1992 the German “Reinheitsgebot” was for a long time another political issue in Europe. It defined the composition of beer and therefore represented a barrier to competition.²³ A potential threat is also given if governments limit activities of breweries in their country due to religious reasons. An example is the Malaysian government banning Carlsberg from sponsoring the Commonwealth Games.²⁴

Within economic trends the standard of living, which is directly related to a nation's GDP per capita is the most crucial aspect. In poor countries, where people tend to consume rather self produced spirits, beer can be regarded as a luxury good. Therefore beer is only consumed if economic conditions improve.²⁵ In contrast, due to a very high standard of living, beer becomes an ordinary product in traditional markets. This increases the threat of more differentiated substitutes. As a conclusion emerging markets with growing economic prosperity are likely to become new target markets for international brewers.

A social trend having a significant influence on the industry structure is the increasing homogeneity of customer tastes. Due to growing world wide travelling, tourism and immigration a general assimilation of drinking and eating habits can be observed. This trend might give brewers the ability to sell one brand all over the world.²⁶

3.2 The Micro-environmental Influence

The assessment of the beer industry's attractiveness shall be supported by analysing the micro-environmental influences as researched by Michael E. Porter.^{27 28} The crucial forces are bargaining power of buyers, competition from substitutes, and rivalry between established players.

In mature markets there is a trend towards buying through off-licence stores and supermarkets.²⁹ Therefore increased buyer power at the retail level lead to an opposing force to the market power of the consolidated brewers.³⁰ The power of the end consumer is also high. Firstly, they do not have any real transition costs to switch from one brand to another and secondly there is a huge variety of substitute products. The “brand switching” occurs especially in the Chinese market, where the buyers are very brand disloyal.³¹

The threat from substitutes like wine, sprits and alternative malt drinks influences the structure of the mature beer markets. The consumption of wine and distilled spirits has increased for example in America and in northern European countries which has been traditionally beer-drinking.³²,³³ Moreover, there is a worldwide trend towards drinking non-alcoholic brew or also called “near beer”. In Russia the biggest brewery “Baltika” launched the non-alcoholic “Baltika No. 0” in the beginning of 2001 and now the sales have been tripled.³⁴

Both presented threats, increased buyer power as well as substitutes lead to an aggressive internal rivalry among established players. The beer industry, offering a relatively homogenous product produced in a standardised way, the competitive focus is rather on capabilities such as marketing than on R&D and production.³⁵ Therefore, operational gearing and massive marketing expenditures have to be recouped by a large number of sold production units. This leads to the crucial necessity of economies of scale which can only be achieved by rising production and sales through consolidation on a global scale.

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¹ Stewart Gilliland, Sales & Marketing Director of Whitbread PLC (today part of the Interbrew group), reported in The Grocer, 6ht May 2000, in Key Note on "Premium Lagers, Beers & Ciders", Markt Report Plus 2000

² "If industries are defined by competitive relationships among firms (…)" Grant, Robert M. (1998), Contemporary Strategic Analysis, p. 85

³ For the purpose of this report the "position of an industry" is defined as the stage of the industry within the industry life cycle.

⁴ "The beer market will change more in the next 5 years than it has in the last 15.", Stewart

Gilliland, Sales & Marketing Director of Whitbread PLC (today part of the Interbrew group),

quoted by The Grocer, 6ht May 2000, in Key Note on "Premium Lagers, Beers & Ciders", Market Report Plus 2000

⁵ Heineken, Annual Report 2001, Report of the Executive Board, p. 15

⁶ Saul Klein (2000), "South African Breweries: Achieving Growth in the Global Beer Market", ECCH-Collection, p. 6

⁷ BBC, "Bad Times for Beer", http://news.bbc.co.uk/1/hi/business/1468932.stm

⁸ News.de: "Die Biervielfalt in Deutschland bleibt", http://www.news.de/346/13Die_Biervielfalt_in_Deutschland_bleibt.html

⁹ News.de: "Die Biervielfalt in Deutschland bleibt", http://www.news.de/346/13Die_Biervielfalt_in_Deutschland_bleibt.html

¹⁰ Interbrew: http://www.interbrew.com/

¹¹ Although broadly defined as emerging markets the various regions show huge heterogeneity from country to country.

¹² Ian Bickerton (24/9/2002), "Heineken taps emerging markets", Financial Times, p. 26

¹³ Business Week, "This Brewer Has an Unquenchable Thirst", http://www.businessweek.com/magazine/content/02_23/b3786137.htm,

¹⁴ For the purpose of this report, the industry structure is defined as the stage of industry concentration and the industry's exposure to international competition.

¹⁵ Saul Klein (2000), "South African Breweries: Achieving Growth in the Global Beer Market", ECCH-Collection, p. 5

¹⁶ Canadean: "Top ten producers now produce almost half of world's beer", http://www.canadean.com/ba_feb.html,

¹⁷ The business environment comprises macro-environment and micro-environment.

¹⁸ Robert M. Grant (1998): Contemporary Strategy Analysis, p. 52-53

¹⁹ In order to provide a comprehensive PEST analysis the less important technological trends are outlined in appendix G.

²⁰ BBC: "Carling sold to US Brewer", http://news.bbc.co.uk/1/hi/business/1726850.stm

²¹ Boudewijn Dezutter (1997), Experiences of investing in Eastern Europe: a study of a multinational brewing company, European Business Review, p. 140

²² Ulrich Schüle (1995), "Vertrieb ausländischer Investitionsgüter in der VR China", in Marion Grein, "Der asiatische Wirtschaftsraum", p. 98

²³ Internet FAQ Consortium: "What is the Reinheitsgebot?" www.faqs.org/faqs/beer-faq/part2/section-7.html,

²⁴ BBC : " Malaysia’s Beer Ban ", http://news.bbc.co.uk/1/hi/world/asia-pacific/128017.stm

²⁵ Saul Klein, "South African Breweries: Achieving Growth in the Global Beer Market", ECCHCollection, 2000, p. 6

²⁶ George S. Yip (1992): "Total Global Strategy", Prentice-Hall Inc., p. 35

²⁷ Micro-environment means industry environment.

²⁸ Michael E. Porter (1998), Competitive Strategy, p. 34

²⁹ Arnold James (02/08/2001), Bad times for beer, BBC News Online

³⁰ Knowles Tim & Egan David (2002), The changing structure of UK brewing and pub retailing, International Journal of Contemporary Hospitality Management, 14/2, p. 65-71

³¹ Blackman Carolyn, "China’s beer battle", Business Asia, p.29-30

³² Adams Beer handbook 2001, Ranked on Volume Consumption (Gallons) and Strategic Assessment: the importance of branding in the European beer market, p. 76

³³ Knowles Tim & Egan David (2002), The changing structure of UK brewing and pub retailing, International Journal of Contemporary Hospitality Management, p 66

³⁴ Schmid John (07/10/2002), "A lush market for near beer", International Herald Tribune

³⁵ Tim Knowles and David Egan: "The changing structure of UK brewing and pub retailing" International Journal of Contemporary Hospitality Management, taken from http://www.emeraldinsight.com/0959-6119.htm