A flat market and aggressive competition from more innovative spirits companies has been a worrying trend for beer producers operating in the UK. But Interbrew's 2002 Market Report claims the greatest threat is from within. Chris Brook-Carter investigates claims of value destruction.

The Paparazzi Lounge in London's Mayfair, famous for its rigorous door policy, art deco cool and celebrity clients - not perhaps the obvious venue for the launch of Interbrew's 2002 Beer Market report. Super premium vodka perhaps, but beer?

But this, of course, was the point. While Interbrew used its annual look at the UK brewing industry to push its case for consolidation last year - at a time when it was still fighting to keep both Bass and Whitbread - 2002 sees the company take on what it views as beer's damagingly poor image.

"Beer faces a number of challenges because of its poor image, the fact that it is still linked with 'sessioning' and the fact that it is considered too informal and not special enough for some people," Interbrew UK says in this year's report.

The tone of the presentation and the report itself were surprisingly frank, a course of action Interbrew took because of the seriousness of the issue, marketing director Richard Evans said. "Beer is increasingly under threat from other drinks, FABs wine. The best way of combating them is improving the brands we have," said Evans. And he went on: "The sustainability of beer is under threat from within, by the aggressive pricing seen last year."

It is this sensitive issue of pricing that dominates Interbrew's concerns, which however deep last year, were accelerated by the pricing activity in the UK over the Christmas period. "During Christmas 2001 - with the introduction of £9.99 24-packs of market-leading brands - this festive deflationary spiral hit a worrying low point," the report says. "Some products were as much as 25% cheaper than the previous Christmas, but the limited volume uplift generated by low pricing did not compensate for the value taken out of the category."

The drivers behind these price cuts, which Interbrew calls "value destruction" are primarily the retailers who are using beer to push traffic through their stores. But Interbrew argues: "There needs to be a broader agenda than pricing. Every retailer can match on price - and there are no winners in such a situation. Where is the competitive advantage when the PR 'win' generated by a price cut lasts only for a few days before rivals catch up? There is nothing unique about pricing: it doesn't give a sustainable competitive edge and ultimately other retailers can use the same weapon to damage your business."

Evans said: "We are not saying that price isn't important, but there are two sides to the value equation; price and quality. This is how the consumer determines value for money. Beer has shifted too much one way. We are seeing price discounting as the leading way brewers and retailers are buying business.

"We believe it is better to focus on quality," he continued. "There is plenty of evidence to suggest discounting is not improving consumption, but that it leads to stockpiling, not drinking more."

Interbrew's evidence stems from market research it commissioned last November and December, which it says demonstrated that the consumer appeal of a brand remains the dominant factor at the start of the decision making process, with drinking occasions, promotions and pack formats also figuring.

"Beer shoppers are very brand-conscious and are unlikely to change their shopping habits by pricing deals on lager," the reports says. "The research shows that shoppers do not consider beer to be a destination purchase. That role is reserved for goods essential for the household…Therefore deals on lager are very unlikely to affect long-term shopping behaviour because the choice of outlet is not driven by beer purchase."

Interbrew's argument is that beer desperately needs to focus on the competition coming from the RTD, spirits and wine sectors but that the reliance on price-cutting has left "very little profit to invest in innovation to increase the drinking experience," as Evans said.

"There needs to be a broader agenda to move the focus away from price, through brewers and retailers working together to deliver added-value for consumers…There is a need to put value into the category to balance that type of [pricing] activity," the report concludes.

Convincing consumers to trade-up through value addition has been a dominant theme in the spirits category, but beer has been slow to catch on. And despite beer's more standard image, there are similar opportunities to those taken by the spirits brands to premiumise the category.

"Research shows consumers are ever more quality-focused and that they are prepared to pay a premium for it. For example, 53% of drinkers in on-trade food outlets say they would pay more for a well-served product," says the report. There are three possible routes to travel, Interbrew believes, before listing: improving the quality of the leading brands, developing added-value brands and brand innovation.

Expert Analysis

Europe Beer Report 2001
Exclusive Europe Beer Report containing detailed strategic analysis and data on the Greater European beer market. It provides an overview of recent market trends, and reviews leading brewers and their brands. In addition the report contains top-line volume data on over 30 markets in Europe, both East and West; an analysis of European sales of leading brewery groups; distribution and packaging trends; and 28 country profiles providing key data and market developments.

 

All these strategies have worked in the past for the spirits industry, and the beer producers and retailers have begun to take these issues on board. Quality of the product itself is being addressed in better draught dispense technology and wider availability of chilled products in the take-home sector. Innovation, can be seen in different pack sizes and brand redesigns - Carlsberg is a recent example.

But it is the development of added-value brands that will no doubt capture most people's imagination. The continued consolidation of the global market is allowing producers the opportunity to offer customers in the UK beers from all round the globe as speciality products - Interbrew is the most obvious example here. But Evans believes there is also potential to develop completely new brands to drive growth.

The paradox here is that while many of them will no doubt be beer brands, it cannot be long before the brewers enter the RTD market with just the sort of brands it is currently trying to protect its beers from.