Showing volume growth in an essentially flat market is an achievement but Australian brewing combine Lion Nathan sees the premiumisation of its product mix as the key to growth. Andrew Reeves, managing director of Lion Nathan Australia, spoke with just-drinks about the premiumisation trend, the impact of a new competitor and Lion's interest in the RTD sector.

J-D: How do you see the current state of the Australian beer market?

Reeves: The beer market continues to be broadly flat in volume terms, in the medium term, although as we indicated in our recent Q3 announcement, we have seen an improvement in beer volumes on a year-to-date basis. While we would always like to improve volume, positive mix changes achieved by focusing on growing our core brand portfolio and premium brands are delivering strong value growth.

J-D: According to your most recent annual report, Lion Nathan currently controls 42.3% of the Australian beer market. Which markets will you be targeting over the coming year?

Reeves: We're very much focusing on Australasia. We've made a decision to focus on our heartland (of Australia and New Zealand), where we have competitive advantage, and we don't really have the scale to be a major player in global market consolidation. We intend to invest in our brands to take full advantage of the premiumisation trend, and to drive our national brand strategy. We're progressing towards our fair share of the premium market in Australia.

Andrew ReevesJ-D: What is driving growth in the Australian beverage market?

Reeves: Consumers are seeking better quality products and services, and FMCG products like beer and RTDs, when marketed as premium products, are seen as an affordable luxury. This trend extends beyond what you would conventionally term premium, we're also seeing a premiumisation of mainstream brands with a shift to higher-equity mainstream brands like Tooheys New and Tooheys Extra Dry. Consequently we are investing in our core brands and premium innovation.

J-D: What kind of impact do you think the newly formed Pacific Beverages joint venture between Coca Cola Amatil and SABMiller will have on the Australian beer market?

Reeves: We don't yet know what Pacific Beverages aspires to be, but whatever it becomes we'll just view it as another competitor in an already very competitive market. Only 25% of beer drinkers just drink beer, 44% drink beer plus either wine, spirits or RTDs, 24% drink beer plus two others, and 7% choose from all four. You see we're not just competing with other brewers, but with all beverage types.

J-D: What factors do you think will shape the beverage market over the next five years?

Reeves: In terms of trends in the Australian market, premiumisation and changes in the media environment are having a significant impact on the way we do business. Alcohol brands are an emotionally driven purchase - the great thing about our industry is that people actually care about the products they drink! Young adults are rejecting traditional communication and are more attracted to marketing with a sense of discovery that delivers an experience. A brand has got to be constantly evolving to remain relevant. This evolution and fragmentation in the media environment, along with consumers having increased power over how they receive messages is really going to change the way we market out products over the coming years.

J-D: What prompted Lion Nathan to investigate the possibility of acquiring the Independent Liquor RTD business in New Zealand?

Reeves: RTDs are highly complementary to beer. Their positioning is based on sociability, and they're branded products which also require sustained marketing investment. Demand is actually the key economic constraint. They're high turnover, high gross margin products.

Australia has the highest RTD penetration in the world - 11% compared to 3% in the US and 6% in the UK - and five of the top 10 liquor brands in the Australian market are premixed spirits. The RTD category is worth A$2.2bn in retail value terms and represents a considerable, and growing, profit pool. Independent Liquor is in our space so we're taking a look at it. That said, we don't yet have enough information to decide whether we would make an offer for the business.