Interbrew defends consolidation in uncertain future
Consolidation. Like it or loath it, Stewart Gilliland, managing director of Interbrew UK, believes it is inevitable. "The brewing industry has lagged behind to some extent compared to other industries, so it was inevitable," he says. "The UK was also an exception with its tied system and predominance of ales, so it was difficult for major brewers to break in. But the top four brewers - Scottish Courage, Interbrew, Bass and Carlsberg-Tetley - all have international connections now."
If this is the case is Stephen Byers, the UK trade and industry secretary behind the ruling to force Interbrew to sell Bass, a Cannute-like figure attempting to hold back the process of modernisation? If he is, he still has plenty of supporters. Indeed even High Court judge Alan Moses, who overturned Byers' ruling on Friday, did not disagree with the substance of the call to reject Interbrew's acquisition just the process by which it was being forced to divest.
But Gilliland believes that the continued globalisation of the UK's beer companies is not only inevitable but also necessary if the UK is to have a world class brewing industry. "If you want world class you have to have a balance between consumer concern and big business. If you want to compete on an international platform you need an international presence and you have to be part of an international network to get investment," he explains.
Interbrew's 2001 Market Report into the UK industry is due out in a matter of weeks but just-drinks.com got a sneak preview of the section concerning globalisation, and, unsurprisingly it backed Gilliland's views. "The positive aspect of the new foreign ownership of UK brewing interests is that most companies are purely focused on beer rather than being part of disparate leisure interests," it says. "These international brewers are also aware of world trends and have access to market innovation on a global scale so can develop successful new brands to build the value of the beer category."
Interbrew's ability to bring value to the UK beer industry will no doubt be one of its strongest bargaining tools when it comes to thrashing out a new deal with the UK authorities over competition concerns. Beer in the UK is a stagnant market at best and at worst is losing value and share of throat to the wine and pre-packaged spirits categories. "Beer has lost out, it has a lot of work to do. It has lost credibility with the young," says Gilliland. "We have growth in the premium products, which can continue to grow and develop value. But the real answer is to make beer relevant to young consumers, with new products, quicker ways to dispense, additional value and improved presentation."
The big international brands, backed by huge international marketing spends, will play a large part in driving the beer category forward, especially when they are at the premium end like Stella Artois. And there is no doubt that these big brands will just continue to get bigger. But here there is a perceived conflict of interest. While brands such as Stella and Budweiser may be the key to driving growth, there is a real concern that they will do so at the expense of niche beer brands and not competing categories such as wine and spirits thus greatly limiting the choice of the consumer.
These concerns are intensified when it becomes apparent that Interbrew, a company that prides itself on being the "world's local brewer" will rationalise its portfolio, whatever the outcome of the competition investigation, to focus on the volumes of Stella Artois and other larger brands.
However Gilliland says: "There would be rationalisation but it is in the 'me too' products not those which have distinctive appeal. The big will get bigger but niche brands will grow. Companies such as Fuller's and Green King create real choice rather than just integration. We won't see so much duplication, you'll see brands with appeal."
The Market Report reaffirms this view. It says: "All the major brewers have high profile global brands, along with massive resources to invest behind them, which will inevitably speed the shift towards a limited number of major brands in the UK."
But it goes on: "The consolidation of major brands will open up new opportunities for niche brands. At the same time, successful regional brewers will continue to drive distribution of cask ale." It then concludes: "As lager has risen to prime position in British pubs in the past 25 years, hundreds of tiny niche brewers have started in Britain. The successful small operators are reminders to their giant rivals that one style does not suit all, and that profits can be made from catering to many different tastes."
Despite, the size of the internationals in the UK, Gilliland does believe that the regional brewer will survive, suggesting that those struggling now do so because they do not have a national presence or strong brands they invest in, and again he recalls the likes of Green King and Fuller's as examples of success.
Primarily the role of the regional will be to supply cask ales, according to Interbrew. And yet this is just the area where Interbrew UK will make cuts in its portfolio. "The area of focus [for disposals] is ales," confirms Gilliland. "They are in decline and we can't keep a large number of them. Everyone will continue to rationalise their ale portfolios. We have managed our tale well and it continues to be an evolving process."
Back with Byers
But despite the ruling last week, Interbrew will almost certainly still have to dispose of more than one or two declining ale brands, such as Flower's. "They [the High Court] are saying it was wrong legally Interbrew was forced to divest Bass without giving it an option rather than the competition concerns being wrong themselves. It was the action rather than the message which was wrong," says Kevin Baker, leading drinks analyst with research company Canadean.
"Even Interbrew's comments suggest they are not out of the woods yet. The DTI will come back with another ruling."
The one thing the ruling has bought is time, which at least gives the company the opportunity to make a good fist of selling off Bass if it is still required to do so, making it easier to avoid losses. But Interbrew's future is certainly looking more rosy than it did a week ago. The chances are that it will not be forced to sell Bass in its entirety and that a more reasonable option will be found.
"It was strange they had to divest Bass rather than being told they had to get down to a certain size, which is more usual. I expect Interbrew to be told 'there is a maximum share or volume we will allow you'. I would have thought it will be around the levels of Scottish Courage, around the 28-30% market share," says Baker.
Interbrew has said it hopes to have the situation resolved by the end of the year, with talks starting as soon as possible. All manner of permutations are possible for the final new look Interbrew UK, from the complete loss of Bass to a sale of the former Whitbread assets, although this would be complicated by Whitbread's licensing agreement to brew Stella Artois.
However Interbrew could end up looking something like rival Scottish Courage. With a 28% market share the Interbrew of 2002 might have been forced to sell most of Bass, including the Carling brand, Bass Ale and Stones. However it is feasible it will be allowed to keep Tennants lager. "This would give it a nice national coverage with no geographical overlap, a good strategic fit," says Baker. "They were very badly advised but in the cold light of day I think they may still do very nicely out of it."
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