Posted July 2009
Why not?
Globalisation and the
brewing industry│The struggle between brewers for mastery of the
world’s markets over the past twenty years has everything: two
mighty foes, AB-InBev and SABMiller, convinced of their own
destiny; two boisterous also-rans, Heineken and Carlsberg, who
thought they could keep up, but failed; a cast of
larger-than-life Brazilian investors, vituperative Mexican
families, Belgian nobles, and obdurate American CEOs, whom the
media dubbed “the kings of beer”; and one astonishing set-piece
battle, the takeover of Anheuser-Busch, that witnessed the sort
of savagery and sheer bloody-minded audacity that make one’s
hair stand on end.
Heroes, villains, hidden gold,
lots of guts, and the promise of great glories. That's basically
the story of globalisation of the past two decades if told Enid
Blyton-style.
If yours is a more sober,
grown-up view, you might think of globalisation as a soulless
pursuit of profit by coca-colonising corporations, which took
advantage of easy money and some ingenious financial
engineering. But still, the story seems like a pretty simple one
to tell. It’s about the unrelenting march of brewing companies
that grow bigger and bigger as they gobble up smaller
competitors and transform themselves into multinational fast
moving consumer goods companies from erstwhile technology-led
beverage producers.
In fact, the globalisation of
the brewing industry offers a much richer and more complex story
because globalisation is not simply a result. Rather, it is a
process. The writer and politician Otto von Habsburg, who at 97
years of age is one of the last representatives of Europe’s
imperial era, once quipped that politics is the sum of history
and geography. Applying his dictum to the globalisation of the
brewing industry it could be argued that it is the sum of
history and geography, with lots of money thrown in for good
measure.
Whichever storyline you prefer
and I have offered you three: the Hollywood-esque
cloak-and-dagger story, the Harvard Business School
growth-of-a-multinational-scenario or the geo-political stuff
favoured by Pentagon strategists: you are still a sucker for a
good story. And don’t worry: you are not the only one.
“Wake me up when the data is over”
Nowadays people like to think
in terms of narratives or stories. Stories have come to be
viewed as a basic human strategy to cope with time, process and
change. Anything that is complex, multifaceted, not immediately
easy to grasp - ‑
like globalisation – is best
turned into a story that has a beginning, a middle and an end: a
simple logic and a clear message that people can understand and
will remember. The first to suss out the importance of
storytelling were the political spin doctors in the United
States. In the shadow of President Obama’s victorious electoral
campaign hid sophisticated “digital storytelling” technicians,
who succeeded in repackaging his black male Cinderella story
again and again into resonating sound-bites.
In the high-tech world, they
like to say that if you can't explain what your company does in
the time span of an elevator ride, something is wrong. Many
successful top executives are very good storytellers – so good
that CEOs have been renamed “Storyteller in Chief”. Think of
Bill Gates (Microsoft) or Howard Schultz (Starbucks). They
entice us with their stories, telling us how they started their
businesses, what they stand for and where they are going.
The globalisation of the
brewing industry, which has created one of the biggest consumer
goods categories in the world, valued about USD 200 billion in
retail sales and 1.78 billion hl in volume, could probably be
summed up in a few charts. But you have all heard of “death by
powerpoint”, of CEOs turning the boardroom into a bored room,
while punishing their audience with an overload of figures and
graphs.
Explanatory talk and
statistics appeal to the intellect, but people aren't inspired
by reason alone. Compelling stories are the most powerful way to
convey loads of information and sketch a vision. That is why
Germain Hansmaennel’s narrative of the world beer monopoly has
such an enduring appeal. You just need to utter the word
“monopoly” and people will tap their noses, say “oh yes, Park
Lane” and get your drift.
Actually, not everybody. At
Rüdiger Ruoss’ World Beer and Drinks Forum in Munich in 2005,
where Mr Hansmaennel introduced his world beer monopoly to a
wider audience, some brewers thought it a gross insult – as if
Mr Hansmaennel had implied their deal-making depended on
throwing some dice. Sorry to drive home the point once more, but
the story of the world beer monopoly is a means to an end: it is
a brilliant narrative that can help illustrate reality – namely
globalisation – in the time span of an elevator ride.
Take any Tom, Dick or Harry
for a ride, mention the monopoly game and by the second floor
they will have understood why in the global beer business some
markets are more profitable than others (blue streets versus
orange streets), why it is imperative to be in certain markets
(if you want to win you need to own the orange streets) and why
monopolies or duopolies are so alluring (the whole point of the
game).
‑
Admittedly, the world beer
monopoly was written by an outside commentator. But so were the
other stories that have determined the course of the
globalisation of the brewing industry. They were written by
bankers and consultants with their own agendas to follow. Don’t
bother reading them. They only have one word written on them:
DEALS. Bankers and consultants like deals. Deals mean bankers
sell money and consultants advise. Just to put things into
perspective: The fees paid to bankers and advisors in the
Anheuser-Busch takeover by InBev came to USD 3 billion alone –
or slightly less than half of what Carlsberg is worth today, to
make a salient if cruel comparison.
Only the strong survive
One of the earliest stories I
remember is the one which predicted that the global brewing
industry would soon resemble the soft drinks industry with only
two players controlling over 80 percent of the market. It was in
the early 1990s when consultants brandished this scenario as if
it were gospel and scared the s*** out of small brewers who
thought that anytime soon they would be some competitor’s lunch.
True, in 2008 the top four
brewers AB-InBev, SABMiller, Heineken and Carlsberg controlled
nearly 40 percent of global beer volumes, up from 33 percent in
2004 when InBev, Anheuser-Busch, SABMiller and Heineken still
formed that elite of mega-brewers.
But what about the rest? Have
they all vanished into thin air? Well, no. There are still
plenty of medium-sized brewing groups around with volumes
between 5 million hl and 100 million hl (FEMSA, Kirin, Asahi,
Tsingtao, Yanjing, China Resources Breweries, Guinness/Diageo,
San Miguel, Efes, Schincariol, Castel, Radeberger …), that will
not give up without a fight.
Besides, don’t forget the
small breweries that do 5 million hl beer or less. Here the
German brewers Warsteiner, Veltins, Bitburger, Erdinger spring
to mind … as well as about 3,300 or so American, British,
German, Belgian and Australian craft brewers.
While it is an undisputable
fact that the brewing industry has consolidated and globalised
since the Fall of the Iron Curtain twenty years ago, we must
also acknowledge that the world of beer is far from having been
painted red or blue. Beer consumption continues to be a
colourful local affair with traditional brands still holding
sway over consumers.
Bud Light (AB-InBev),
Budweiser (AB-InBev), Snow (SABMiller), Skol (AB-InBev), Corona
Extra (Modelo), Heineken (Heineken), Brahma (AB-InBev), Coors
Light (Molson Coors), Miller Lite (SABMiller) and Tsingtao
(Tsingtao) – ‑
in declining order - are the
world’s top ten beer brands and represent perhaps 15 percent of
total consumption – depending on whose estimates you trust. But
try buying a Brahma, a Miller Lite, a Skol or a Snow in, say,
Madrid and you will soon give up frustrated. As your sore feet
will tell you: sales volume and geographic spread don’t always
correlate in the world of beer. At 49 million hl, Bud Light is
the world’s major beer brand. Yet unless you buy a ticket and
fly to the U.S., you will never be able to taste one if you call
Europe your home.
Building a global beer brand
is a “3c” affair: it’s complicated, cumbersome and costly. Even
those who claim to be the biggest and the best can fail
spectacularly at it. Many will remember InBev’s attempt at
launching their Brahma brand “globally” (i.e. in 15 countries
outside Brazil) in 2005. Poor old John Brock, InBev’s then CEO,
who was as buttoned-down as he was straight, tried to act cool
as he enthused over Brahma and “ginga” (the Brazilian groove)
while Europe’s business journalists silently prayed that someone
would stop him from breaking into a Bossa Nova. That would have
been too toecurlingly embarrassing. The long and short of it:
InBev’s global plans for Brahma were not crowned with success
because consumers outside Brazil did not give a toss about the
brand. In the end, Brahma had to be relegated to AB-InBev’s
“local champions” league.
If global brewers,
nonetheless, put most of their money behind a limited number of
brands, it is not because they are on a mission to paint the
world red, green or blue. It is because the right international
brands command a higher price and bring home more … money!
Money - as if on cue. Money is
all that counts. Tradition, history, brands, people … all
subservient to Mammon. What used to be a fun business has been
transformed into a money business. That’s the brewing industry’s
real drama, but except for the CAMRA guys, few bewail the
brewing industry’s sorry plight. Why? Because it has been
overwritten by a powerful Darwinist financial narrative. Listen
to any brewers’ newscast these days and you will only hear
financial gibberish: EBITDA, EBIT, EPS …and price points. That
parameter is music on the ears of analysts. Let’s say local
brands sell for a certain price – which shall be price point 100
– then international brands like Heineken, Carlsberg, Stella,
Budweiser will sell at a price point of 150, while international
specialities like Leffe, Corona Extra and Paulaner will be
positioned at price points between 150 and 250.
Therefore, in the long run,
the world of beer will become less kaleidoscopic as brewers trim
back the number of brands they carry, but it will be anything
but monochromatic – thanks to consumers clinging on to brands
which they know, like and can afford.
A BRIC in the wall
We live in a funny old world
where bankers and investors write the storylines for brewers to
follow. Some stories dreamt up by analysts are pure folly (see
below) but only at their peril can brewers afford to ignore
them. Another all-or-nothing narrative was the “BRIC” story,
launched by global investment bank Goldman Sachs in 2001, which
specifically identified Brazil, Russia, India and China as
economies that would together overtake the economies of the
current six richest countries in the world by 2040. For a year
or two, Goldman’s theory seemed to work and the “BRIC” acronym
became immensely fashionable. For brewers, the story went: “You
have to be in BRIC where all the growth is, or you might as well
turn up your toes and hope to die.”
In view of their population
figures and beer consumption levels, it certainly made sense to
be in the BRIC countries. After all, China is the world’s most
populous market. Beer-wise it is number one with a beer output
(ca. 400 million hl) almost four times Germany’s (105 million
hl). Russia (116 million hl) ranks third, Brazil (96 million hl)
fifth and India thirty-third (9 million hl).
However, this does not make
the BRIC countries any easier to crack or an instant success (as
concerns profits). The stories are legion of foreign brewers
losing BIG money in China. The cash squandered by
Foster’s and Lion Nathan, by the German brewers, and not to
forget by Anheuser-Busch earlier this year when they were forced
to sell the majority of their stake in Tsingtao following the
takeover by InBev, would have bought them lots of market share
elsewhere.
SABMiller were lucky that they
could hitch up with a Chinese partner early on in the 1990s.
Their joint venture – China Resources Breweries – has since
become the market leader in China. Unfortunately, this does not
mean much. In China, market share, beer volumes and
profitability do not correlate. When it comes to making money,
international brewers had better take a Buddhist approach and
learn patient endurance or take solace in the knowledge that
their competitors are not faring any better.
Compared to India, the eternal
beer market hopeful, where lack of money in consumers’ pockets,
antiquated laws and bureaucratic protectionism stand in the way
of any serious growth in beer consumption, Russia has to be
called a success - well, up until 2007, that is. For as long as
brewers managed to wean Russians from vodka and the economy kept
growing, everything was fine. Profits kept on rolling in. It did
not matter that there were more than two international brewers
stepping on each others’ toes. And that Carlsberg foolheartedly
overpaid when, in a joint deal with Heineken, they acquired
Scottish & Newcastle in 2008 so that Carlsberg could lay their
hands on the ‑
other half of Baltic Beverages
Holding (incl. Russia’s Baltika Brewery) which they did not yet
own. Only the sky was the limit.
Now there is wailing and
gnashing of teeth as the Russian economy declines. There is even
a rumour going round that AB-InBev might exit Russia and the
Ukraine provided there is a buyer willing to cough up enough
money to help ease AB-InBev’s debt burden.
Indeed, since that Goldman
paper was written in 2001, the BRIC group of emerging-growth
economies has become merely a capital “C”, with a modest “B”
trailing behind. There is some possibility of an “I” rejoining
the growth acronym, but there’s apparently no current hope for
“R”.
When it comes to BRIC, there’s
only one conclusion to reach: the acronym is broken and the
grand growth story has “hit a wall.”
It takes two to tango
The former CEO of General
Electric, “Neutron Jack” Welch cast a long shadow. He became the
most famous advocate of the market share movement in the 1980s
when he insisted that his company would exit any business in
which it did not hold the number one or number two position.
“PIMS” – and I do not mean the staple drink at Wimbledon,
Pimm’s, but the acronym “Profit Impact of Marketing Strategy”
which has become the mantra for two generations of managers who
began to pursue a higher market share in order to get higher
profit margins. PIMS says that a supplier with a market share of
40 percent will achieve a margin twice as high as the competitor
with just 10 percent of the market. And so the story was spread:
“Get market share! Long live economies of scale.”
With a nod to PIMS conoscenti,
AB-InBev on their webpage boast that they hold the number one or
number two position in over 20 key markets – allegedly more than
any other brewer.
What brewers do not want
consumers to hear is what they mumble under their breath: “Down
with competition. Long live duopolies.”
Brewers, who have become such
ardent followers of fashion that they actually believe what they
are saying, have subsequently got out of markets in which they
do not hold number one or number two positions. AB-InBev’s
rumoured sale of their central European businesses would be a
case in point. Or Heineken’s voluntary departure from several
African markets some years ago.
Although some commentators
have begun to complain that the lack of competition hurts
consumers, it is highly unlikely that listed brewers will take
the risk and enter duopoly markets. Their main worry is that
analysts will slap their wrists and tell them off for
squandering their shareholders’ money on buying market share
with a profit margin which, well, does not measure up to the
leader’s.
Add to that the bedrock belief
in PIMS and you will understand why most of the world’s beer
markets will remain duopolies. Out of the world’s top 40 beer
markets that represent 93 percent of beer production, there are
only seven markets where the top three brewers have less than 70
percent market share. They are: Germany (33%), the United
Kingdom (64%), Romania (69%), France (67%), Italy (66%), Austria
(63%), China (55%) and Vietnam (62%) according to the
Barth/Hansmaennel Report 2007. In Africa the situation is even
more suspect: With the exception of Angola, Ethiopia, Nigeria
and South Africa, the markets know only one supplier.
This does not mean that once a
market has morphed into a friendly duopoly, governed by the
principle of “live and let live” (competition watchdogs: watch
out!), new entrants will be shown the door. Not necessarily. If
yours is a private business and extremely well run, there is no
point in shying away from challenging a beer duopoly. Not even
in a mature market. In case you’ve forgotten: The Corona Extra
import business in the U.S., shared by the Gambrinus Company and
Barton/Constellation until 2006, which would have ranked fourth
in size behind Anheuser-Busch, Miller and Coors with a market
share of 6 percent, was an extremely profitable business.
The perils of swimming naked
Our readers will recall a
Warren Buffett classic quote that feels very appropriate right
now: “It's only when the tide goes out that you learn who's been
swimming naked.” In other words, when everyone is enjoying the
good times, you don't know who has taken on excessive risks.
Now is the time to find out
which brewer has been swimming naked. Among the four
mega-brewers, all except SABMiller are aching under too much
debt. Even if they wanted to, they would be hard pressed to make
further acquisitions.
Is the globalisation of the
brewing industry completed? Has the world beer monopoly been
won? Last year, before the world’s economy began its long
decline, I would have said: “Yes.” After all, the top two
brewers, AB-InBev and SABMiller, had established themselves as
truly global brewers through a presence in all the world’s major
(and profitable) beer markets. That left only ‑
two brewers among the world’s
top ten, as takeover-targets, and they were the runners-up,
Heineken and Carlsberg.
Eight months into 2009 I am
more inclined to say: “Nope. It ain’t over yet. Because who
would have thought that, so soon, we would see AB-InBev unravel
before our very eyes?
There is also a question mark
hanging over Heineken and Carlsberg. Market observers still
wonder what possessed Heineken to partner with Carlsberg in
order to splash out GBP 7.8 billion on Scottish & Newcastle,
whose only valuable asset was the Baltika brewery in Russia. Was
it a last ditch attempt to snatch S&N away from SABMiller, after
SABMiller had snatched Colombia’s Bavaria brewery from Heineken?
If so, what did Heineken get in return? S&N’s businesses in the
UK, Ireland, Portugal, Finland, Belgium, the U.S. and India. Oh,
great. All for the bargain basement price of EUR 5.5 billion?
Frankly, you must be mad or a
masochist to want to be a brewer in the UK, where margins have
been wiped out by a handful of cutthroat retailers and a similar
number of cutthroat pub companies that control their respective
sectors.
And even if Heineken have
succeeded in beating SABMiller to S&N’s door – have they managed
to fob off SABMiller for good? It’s one of those open secrets
that SABMiller have long wanted to buy Heineken. To all
appearances, Heineken are not for sale - for the time being, at
least. Which is why they have taken to fight SABMiller – in
central Europe, in Italy, in the Netherlands, in India and in
South Africa.
On the face of it, Carlsberg
have done better out of the S&N acquisition than Heineken. They
are now the market leader in Russia. But this has come at a
price. Carlsberg have since been transformed from a “Nordic
Fortress” into a Russian brewer with several European branches.
You think I am joking? In 2008, Russia accounted for more than
half of Carlsberg’s operating profit. Now consider the
implications of this and the old saying “he who pays the piper
calls the tune.”
No, the world monopoly is far
from over. For one, the Mexican beer market still needs to be
consolidated. Mexico is the world’s sixth major beer market and,
with 104 million people, shows very positive demographics as
concerns consumption growth. For another, Grupo Modelo’s and
FEMSA’s futures are still undecided. Being very profitable, they
would justify spending some money if other brewers thought they
would fit into their portfolios. Indeed, the fate of Grupo
Modelo could be decided sooner rather than later as the brewer’s
family shareholders have resorted to in-fighting and undermining
the position of their CEO.
But the musings over the fate
of Grupo Modelo, FEMSA and Foster’s, are only twiddle-twaddle as
analysts already talk about much greater things to come.
There are so many “ifs”
involved the story may sound too good to become true. But if the
bankers have their way, red and blue beverage houses could be
created in a few years’ time, once PepsiCo has patched up with
AB-InBev … and The Coca-Cola Company with SABMiller. At the
moment, this sounds like some armchair strategist’s
higgledy-piggledy. However, we must not forget that bankers
write the storylines for brewers to follow. And if this is what
they say will happen – brewers will have to make it happen.
In the meantime, brewers will
continue to cut costs in an effort to prove that they are
capable of growing their businesses organically. Secretly, they
will keep their fingers crossed and hope that the deal-making
activity will pick up again before they have reached the limits
of cost cutting as a source of profit growth.
In the go-go 1990s
consultants, eager to sell their services in business
integration, warned that more than half of all acquisitions
fail. Today, brewers will hear none of that. “Times have
changed”, they say. “Two plus two do make five.”
But do they? Here’s some
parting wisdom: A pious woman dies and goes to heaven. Looking
for paradise, she asks St Peter for the way. He points her in a
particular direction. But with every step the path becomes
steeper and more arduous. Finally, she comes to a door and
knocks. The devil opens it. The woman says: “This must be some
mistake. I was promised paradise.” To which the devil replies:
“That’s all right. You would not know that we merged a fortnight
ago.”
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