Global forces and the European brewing industry Mike Blee This case is centred on the European brewing

industry and examines how the increasingly competitive pressure of operating within global markets is causing consolidation through acquisitions, alliances and closures within the industry. This has resulted in the growth of the brewers reliance upon super brands. In the mid 2000s the major centre for production of beer in the world was Europe; its production was twice that of the USA, which in 2003 was the worlds largest beerproducing country. In the alcoholic drinks sector beer sales are dominant: total sales across the world accounted for 74 percent of all alcoholic purchases (Euromonitor 2002). Although the European market as a whole is mature, with beer sales showing slight falls in most markets, Datamonitor 2003 reported that the alcoholic beverage sector grew at an annual rate in value terms by 2.6 per cent year between 1997 and 2002. Table 1 European beer consumption by country and year (000 hectolitres ) Country 1980 1997 1998 1999 2000 2001 Austria Beigiu m Denmar k Finland France German y# Greece Ireland Italy Luxembourg Netherlands Norway * Portuga l Spain Sweden Switzerland* UK Total# 7651 12945 6698 2738 23745 89820 N/A 4174 9539 417 12213 7651 3534 9145 10243 6165 4170 21655 10767 9 3940 5406 14535 466 13475 2330 6318 8736 10011 5707 4084 22663 10455 0 4211 5592 15501 452 13225 2203 6494 8810 10203 5562 4087 22833 10462 9 4354 5699 15675 474 13309 2305 6475 8762 10064 5452 4024 21420 10310 5 4288 5594 16289 472 13129 2327 6453 8627 9986 5282 4085 21331 10090 4 4181 5625 16694 445 12922 2290 6276 31126 4932 4141 58234 29708 1

2002 8734 9901 5200 4136 20629 10038 5 4247 5536 16340 440 11985 2420 5943 30715 4999 4127 59384 29512 1

20065 26238 26677 3935 5459 5077 4433 4249 4277 65490 61114 58835 26935 30258 29829 8 7 5 *Non-EU countries, 1980 excludes GDR. Figures Source: www.Brewersofeurope.org

27772 29151 5258 5011 4212 4194 58917 57007 30057 29674 4 2 adjusted.

Table 2 Annual consumption per capital by country and year (litres) Country 1980 1997 1998 1999 2000 Austria Beigiu m Denmar k Finland France German y# Greece Ireland Italy Luxembourg Netherlands Norway * Portuga l Spain 53.7 66.7 Sweden 47.4 61.7 Switzerland* 69.5 59.5 UK 118.3 103.6 Total# 82.5 78.6 *Non-EU countries Source: www.Brewersofeurope.org 66.9 57.3 59.9 99.3 77.2 69.1 59.3 58.8 99.0 77.6 72.0 56.4 58.3 97.2 75.9 35.0 63.6 63.3 64.9 646 101.9 131.0 130.7 56.6 44.3 145.9 N/A 121.7 16.7 115.8 86.4 48.1 113.3 101.0 116.7 84.0 37.0 131.2 39.0 123.7 25.4 112.0 86.4 52.9 108.1 98.0 107.7 80.0 38.6 127.5 42.0 124.2 26.9 107.0 84.3 49.7 108.9 100.0 104.6 80.1 38.7 127.5 43.0 126.0 27.1 110.0 84.4 51.7 108.1 99.0 102.2 77.9 36.2 125.3 40.0 125.0 28.1 108.2 82.8 52.0

2001 107.0 98.0 98.6 80.2 35.9 122.4 39.0 125.0 28.9 100.9 80.5 51.0 61.3 75.7 55.4 57.2 99.0 75.9

2002 108.5 96.0 96.7 79.5 34.7 121.5 39.0 125.0 28.2 98.5 79.2 53.7 58.6 73.4 55.9 56.6 100.6 76.8

The Interbrew market trend report 2002 states that within Europe the on-trade market (sold through licensed premises) beer accounts for 59 per cent of all alcoholic beverage sales by volume , while in the take-home market this figure increase to 72 per cent.. Two key trends within Europe were the rapid growth in leisure spending and the consumers increased awareness of health and fitness. These factors had resulted in a drop in the volumes of beer consumed. Another current trend across Europe is towards drinking a wider range of alcoholic beverages. There has been a growth in demand for flavoured alcoholic beverages, with wine consumption having shown large increases. Within the UK alone wine sales had grown from 14 per cent of the market in 1980 to 26 per cent of the market in 2002. Meanwhile there has been a negative trend in the overall consumption of spirits. Acquisition, licensing and strategic alliances have all occurred as the leading brewers battle to

control the market. There are global pressures for consolidation due to over capacity within the industry and this has resulted in a focus upon cost containment and brand reinforcement (see table 5). Interbrews market trend survey 2002 shows that the consolidated global share of the top 20 brewers increased from 51 per cent in 1990 to 65 per cent in the year 2000. The report suggests that consolidation will further increase and compares brewing with the cigarette industry. In 2002 the five largest global brewers accounted for 30 per cent of production volume, whereas in the cigarette industry the five leading players had a 60 per cent market share.

Table3 European production by country and year (000 hectolitres) Country 1990 1997 1998 1999 Austria Beigiu m Denmar k Finland France German y# Greece Ireland Italy Luxembourg Netherlands Norway * Portuga l Spain 7606 14291 9145 2823 2168 4 9234 2 N/A 6000 8569 729 12213 2001 3557 9366 14014 9181 4804 19483 11480 0 3945 8152 11455 481 2470 1 2299 6623
8830 14105 8075 4697 19807 111700 4022 8478 12193 8869 14575 8024 4700 19866 112800 4359 8648 12179 469 23988 2222 6760

2000
8750 14734 7460 4612 18926 110000 4500 8324 12575 450 24502 2223 6451 26414 4495 3599 55279 313883

2001
8588 14966 7233 4631 18866 108500 4454 8712 12782 438 25072 2216 6554 27741 4449 3630 56802

2002
8731 15696 8534 4797 18117 108400 4443 8113 12592 25232 2300 7121 27860 4376 3551 56672 316530

469 23988
2169 6784

24991 25852 2002 24773 7 4568 4673 Sweden 3759 4858 3586 Switzerland* 4433 3563 3586 56652 57854 UK 6483 59139 0 315114 319932 Total# 27619 32163 8 7 *Non-EU countries, 1980 excludes GDR. Figures adjusted. Source: www.Brewersofeurope.org

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Consolidation trends are indeed continuing: Interbrew had purchased in 2001 parts of the old Bass Empire, Becks and Whitbread and in 2004 announced a merger with Am Bev, the Brazilian brewery group. Meanwhile Scottish and Newcastle had acquired the Danone French brewing operations as well as Bulmer cider. In 2003 it targeted Eastern Europe and China, acquiring Finland's biggest brewery, Hartwall, for 1.2bn

(1.8bn) together with a purchase in December 2003 of a 20 per cent shareholding in a leading Chinese brewing. It is interesting to note that Bass contradicted this trend prior to the sale of the company in 2001, when a disposal took place of its interests in Northern China and some of its operations in the Czech Republic. In 2003 Anheuser-Busch was the world's largest brewer ranked by sales volume but with limited overseas operations. It had invested in a Mainland Chinese brewery and had a significant shareholding in Modelo of Mexico. However, its European operations were limited to just one brewery in the UK at Mortlake. In 2004 its world no.1 position merger. This gave Interbrew 14 per cent global market share which made it no.1 (by volume but not by value). Coors, another large American brewer, had gained European market entry by purchase from Interbrew in 2002 of the Caring Brewing Company. This sale was forced upon Interbrew by the UK regulatory authorities as they felt the dominant position held by Interbrew within the UK's large market was against the consumers' interest. South African Breweries has also been extremely active. In early 2002 there were market rumours of a merger with Interbrew; these were unfounded, however 2002 resulted in two major acquisitions-the Miller Group(USA)and Pilsner Urquell in the Czech Republic. These large global brewers (Table 4) control a range of key brands with which they will start to achieve large cost savings with the premium lagers leading the way. Volume sales will help to contain costs and should lead to increased economies of scale. However , differences will occur in the various local country markets. Where there are significant taste and product differentials potential savings are limited. The large groups, however, hope to utilise increased knowledge management systems and linked technologies across these combined brands to improve performance. During 2003, due to the activity highlighted above, there were major changes to the world market shares of the leading brewers (Table 4) with an ever increasing domination of global brands (Table 5) .Trends within Western Europe (Table 6) reinforced the dominance of the key players and the importance of the lager market in branding terms. Table4 The worlds top 10 brewery companies by volume:2003 Position Compa Country of Origin ny 1 2 3 4 5 6 7 8 9 Anheuser-Busch South African Breweries/Miller Heineke n Interbrew Carlsberg Am Bev Scottish Newcastle Coors Modelo USA South Africa Netherlands Beigium Denmark Brazil United Kingdom USA Mexico

10 Kirin Source: Coors Brewers Limited UK

Japan

Table 5 Top exported lager brands (world), 2001 Brand Name Ownership Export sales (million hectolitres) Heineken Heineken 17.7 Carisberg Carisberg 8.9 Amstel Heineken 8.5 Budweiser Anheuser-Busch 8 Corona Extra Groupo Modelo 7.7 Stella Artois Interbrew 6.8 Fosters Fosters 5.7 Skol Carisberg 5.2 Tuborg Carisberg 5.3 Becks Interbrew 2.7 Source: Impact/ Interbrew SA/ Industry Estimates/ Company reports

Percentage of global sales 82 87.6 78.7 17.1 32 88.5 68.7 18 63.3 62.5

Table 6 European beer market: top companies, 2001, by market share by volume Compa Home Country Market Share ny Heineke n Interbrew Carisberg ScottishNewcastle Mahou SA Holsten Brauerei Diageo PLG Binding-Brauerei SA Damm BrauBrunnen Source: Euromonitor 2002 Netherlands Belgium Denmark United Kingdom Spain Germany United Kingdom Germany Spain Germany 11.70% 10.40% 6.90% 6.90% 2.90% 2.60% 2.20% 2.10% 2.10% 1.90%

Leading Brand Heineken Stella Artois Carlsberg Kronenbourg San Miguel Konig Guinness Radeberger Super Bock Jever

The two largest Western European markets Germany At nearly twice the size of the UK market in consumption terms, the German beer market is very different to that of the UK. It is highly fragmented, having in excess of 1,200 breweries. However, acquisition has happened in this market with Becks going to Interbrew in 2002 and Holsten being acquired by Carlsberg in 2004. German beer drinkers are used to strict German purity laws and therefore generally trust and drink German beer as against imports. This has resulted in large numbers of regional

breweries satisfying the home market. Exports from Germany are nearly double that of the UK in volume percentage terms(Table 7). Table 7 imports and exports of beer by country (2001) Country Import (% of Consumptio n)

Export(% of Consumption)

Austria 5.3 4.8 Belgiu 19 39 m Denmar 1.7 34.1 k Finland 1.9 6 France 25.5 12.4 German 3.2 10 y Greece 4 10 Holland 6.1 51.9 Ireland 11.9 28 Italy 26.4 3.9 Luxemburg 37.6 Norway 4.1 0.8 * Portuga 4.7 11.2 l Spain 13 2.3 Sweden 11.6 Switzerland* 14.8 0.6 United Kingdom 8.6 5.6 Total 9.3 14.1# Note: Import figures do not include beers brewed under licence in home country ;export figures do not include licensed brews produced elsewhere. *excludes Sweden; #Non-EU countries. Source: www.brewersofeurope.org Packaging in Germany differs form many major markets with 60 per cent of all beer produced being sold in bottles. Due to a deposit scheme being introduced on cans in 2003 the sales of bottled beers have grown significantly. Discount own-lable beers have increased the off-trade to 70 per cent of total beer volume. However, sales in Germany during 2002 dropped at their highest annual rate in the previous decade and sales since 1998 have declined overall by 7 per cent. The outlook for the later part of the decade is that there will be declining consumption and a gradual drop in the number of breweries, with increases in merger and acquisition as the market consolidates to contain costs. This follows the trends being experienced already

in the majority of European markets. The fastest growing niche in 2003 was within the youth market. Sales of flavoured beer mixed with either lemon-lime soda or cola, available in draught and bottles, had an increasing market share, up 30 per cent in 2002. These accounted for 3 per cent of the total annual beer consumption. Pilsner-type beers in 2002 still dominated the market holding a 67 per cent market share. United Kingdom Beer sales were fairly mature and although there was a steady decline in the 1990s the market has begun to stabilise at around 55 million hectolitres per year. However, there are some definite market trends. The major change in the UK industry has been the disposal of the tied pub chains by the national breweries. Scottish and Newcastle became the last of the large companies to dispose of their chains in 2003. These public house chains are now independently managed separate companies and this has increased the distribution chain access to a much wider variety of brewers. These large independent chains of public houses exert high buyer power on the brewing industry. Meanwhile ownership of breweries within the UK had rapidly changed. Foreign multinationals have targeted and entered the industry. The Keynote Report 2003 shows three foreign multinationals, Interbrew, Coors and Carlsberg, control 53 per cent of the market. The leading brewer is Scottish and Newcastle with 27 per cent of the market. There are a number of large regional brewers with well-known speciality brands but the trend by the majors in the market has been to consolidate production, closing down plants and containing costs. Lagers and premium lagers dominate the home market and many are brewed under licence arrangements. Consumption of large has grown from just over 50 per cent in 2002. In 2003 60 per cent of UK beer was packaged in draught from. As the UK market switches more towards production of large the trend will be for incteasing sales through supermarkets resulting in a reduction of draught beer demand. There is limited export of traditional UK beers as demand is relatively limited and therefore the reliance is on the internal market. As supermarkets within the UK sell high volumes of beer, they exert high buyer power over the supplying breweries and are in a position to dictate terms for the supply of product. As a result there is heavy discounting and brand value destruction as the brewers find themselves operating in an over capacity market with low profit margins. The market is moving more and more towards increased sales in the off-trade. BBPA
data 2003 reported that the wholesale price of beer had declined by 16 per cent from the level that was obtained in 1992. However, home sales are additionally hindered by the booze cruise. Excise duties on alcoholic beverages are much lower in France and importation of alcoholic beverages for personal use is legal. These cruises have almost become a feature of daily life with large quantities of beer carrying low excise duties being imported both legally for personal use and illegally for onward sale. Four brewing companies Heineken (The Netherlands) In 2004 Heineken was by far the biggest and most global of the European brewery businesses. It

remains a family business and its brands are available in more than 170 countries. It owns more than 110 breweries in over 50 countries and exports all over the world. In the UK its licence agreement with Whitbread ceased in 2003 and this was followed by the introduction of its full-strength range, Heineken is now sold as a premium beer in all markets except its home market. Heineken has become Europes favourite brand of beer and the most international beer in the world, with sales increasing annually, Founded in Amsterdam in 1963, the companys other brands include Amstel and Murphys. Heineken had been acquiring other brewing groups since 1991 and in 2003 announced its biggest acquisition to date, the Austrian brewery BBAG. Of Heinekens turnover,76.5 per cent is European based. The four major strategic objectives for Heineken were to: remain one of the top global brewers; be more profitable per cent than other international brewers; build the most valuable brand portfolio with Heineken as the international flagship brand; remain independent. By the utilization of its key brands the company aims for a broad leadership position with a target of being NO.1 or NO.2 in its local markets. Achieving this in production ,marketing and distribution brings economies of scale. The local breweries give it market access from which they can sell their high-premium Heineken and Amstel beers. Groisch (the Netherlands ) In 2001 Groisch NV is a medium size international brewing group, less than one-tenth the size of Heineken, with overall sales in 2002 of 3.27 million hectolitres. The groups strategy calls for this to increase to 4.6 million hectolitres by the end of 2006. Its key products include Groisch premium lager and new flavoured beers(Groisch lemon and Groisch pink grapefruit). In the Netherlands Groisch holds the right for the sales and distribution of the valued US Miller brand. The Groisch Brewery has been established since 1615 and has been exporting since 1946. The brand is available in over 50 countries; however in certain territories, including the UK and Poland, the brand is brewed under licence. In the five years to 2002 the group turnover had increased by 20 per cent with net profits increasing by more than 30 per cent. Although the home market for beer is declining, The Netherlands is still the companys most important market and accounts for over 50 per cent of its sales volume. Export sales are increasing, with the UK, USA and Canada being the most important overseas territories. Groisch has two main breweries that are situated in Enschede and Groenio. From 2005 production is situated within a single new site at Bokelo. Efficiency is the key driver behind this relocation: by concentrating brewing on one site, Groisch will again ultimate cost control and will also increase volume capacity significantly. Groischs drive to optimize costs has included the outsourcing of its distribution and a move within The Netherlands to use inland shipping rather road. Interbrew (Belgium) Interbrew is one of the oldest beer companies in the world. It has operations in 21 countries and Interbrews beers are sold in more than 120 countries. The company strategy is to build strong local brand reputation as well as to market its international labels. These include Becks, Stella Artois, Bass, Hoegaarden and Labatts. Interbrew has been on the acquisition and organic growth trail as a determined strategy since 1993. In the five years to 2003 the company had made over 20 acquisitions and 35 per cent of the operating income during 2002 was derived from this

acquisition programme. 2004 saw the merger between interbrew and Brazils largest brewer Am Bev. Interbrews philosophy is reinforced by its claim to be The Worlds Local Brewer.

In 2001 the company acquired Bass (UK), Whitbreads (UK) and Becks (Germany). At the time of acquisition Bass brands accounted for 24 percent of the UK market. The acquisition from Bass was unconditional and when the UK regulatory authorities challenged the decision to acquire Bass, Interbrew was forced into a sale situation. Due to this forced sale the stock market at that time formed the view that Interbrew had overpaid for the company. On appeal to the High Court Interbrew managed to overturn the competition authority decision agreeing as a result to sell the Carling Brewing Company to Coors but retaining much of the Bass Empire. Between 2000 and 2002 net turnover for the Interbrew company increased in excess of 20 percent. In 2002 Interbrew invested heavily in the growth market of China and in 2004 Interbrew became the largest brewer in Germany, following a partnership with Spaten giving them an 11 percent market share. Scottish and Newcastle (UK)
Scottish and Newcastle is an international brewing group with leading positions in 13 European countries. These countries include the UK, France, Finland and Russia. Its strategy is to be a major force within the global brewing industry with a concentration of effort upon expanding a number of leading positions in the Western European market. In 2003 the company disposed of its retail and leisure businesses, which had been significant in the companys past. In the year 2000 this business alone had accounted for 1.1bn of turnover and 246m of profits. The companys expansion strategy is to enter high-growth emerging markets. This will be achieved by working through alliances with experienced local breweries that hold strong market positions. Its key brands include John Smith, Kronebourg, Kanterbrau and Baltika and it brews Fosters under licence for the UK market. In 2003 turnover had increased by 17 percent, with profits up 8 percent and overall volume up 2.4 percent. The brand of Kronebourg, Fosters and Newcastle Brown all showed substantial volume growth in the year 2003. Acquisitions in the early 2000s have included Hartwell, Kronebourg from Danone in France,Buliners Cider and investments in Mainland China and India. The Hartwell acquisition is particularly important as this gives the group a 50 percent investment in Baltic Beverages. This results in exposure to the high growth markets of Russia, Ukraine and the Baltic countries. The growth rate of the Russian market was such than in 2002 it was bigger than any Western European countrys home market other than Germany. The future Forecasts from Euromonitor 2002 conclude that the world market for beer between 2002 and 2007 will increase by 35 percent in Eastern Europe and the Asian Pacific region by 28 percent whilst Canadeans latest annual global beer report forecasts sales of 1.5bn hectoliters in 2005. The Interbrew market report 2002 concludes that most beer markets in Europe are now relatively mature with limited potential for growth resulting in the focus now moving towards Asia and

Eastern Europe.

Questions 1. Using the data from the case, what are the major trends in the European brewing industry? 2. For the four breweries outlined above(or breweries of your own choice) explain: (a) how these trends will impact differently on these different companies; and (b) how you think the strategy of each company should change. 078 027 048 058 079 087 088