Review of the Year 2012 - Part I: Beer & Cider
Craft beer is offering a ray of light for global brewers
With Christmas fast approaching, it's the time of year when just-drinks takes its annual look back at the past 12 months. Between now and the end of the year we'll assess how the soft drinks, spirits, wine and bottled water sectors have fared in 2012. Up first, however, is beer and cider. just-drinks' deputy editor, James Wilmore, takes us through the highs and lows for the long alcoholic beverage (LAB) category.
It didn't get any easier for global brewers in 2012.
As the world has continued to suffer from the economic crisis, big beer companies, on the whole, have reflected that pain. The familiar story of profits being dragged down by developed markets, particularly Western Europe, has remained. Meanwhile, the progress in emerging regions is slow.
How have the big brewers tackled this situation? In the main it's been a story of the two 'Cs': consolidation and craft beer.
By far the biggest M&A story in the sector this year has been Anheuser-Busch InBev's move to buy the family-owned Mexican giant Grupo Modelo. Ever since Modelo became part of the merged A-B InBev in 2008, speculation around a deal has frothed.
But, in June, the groups finally announced a planned US$20.1bn “combination”. Modelo already has a 57% market share in its domestic market, allowing A-B InBev to repeat the success it has enjoyed in Brazil with AmBev, while rolling out its flagship brands in global makets.
Despite an understandable degree of scrutiny from regulators over competition issues, the Belgium-headquartered firm insists the deal will complete by March next year. The tie-up also brought renewed speculation of a “mega-merger” with SABMiller. However, this seems unlikely for the forseeable future, as the Budweiser brewer focusses on bedding-in Modelo and the synergies this will bring. As one observer noted, the two are still fierce rivals meaning a deal would be like “a merger of Catholics and Protestants”.
The big story in Europe was Molson Coors' US$3.54bn swoop for Czech brewer StarBev in April. Coors sees the acquisition as offering twin benefits – extending its key brands in Central and Eastern Europe and rolling out StarBev's flagship brand, Staropramen, in new markets. StarBev, created in late-2009, when A-B InBev sold its brewing assets across Eastern Europe to CVC Capital for $2.2bn, also operates nine breweries in Central and Eastern Europe.
The European brewers have not been left flat-footed this year, however, when it has come to developing their assets. After what seemed like a never-ending game of cat-and-mouse with ThaiBev, Heineken finally got its paws on the whole of Tiger brewer Asia Pacific Breweries from its JV partner Fraser & Neave last month. The Dutch brewer will now be preparing to make the most of APB's brands in Asia's emerging beer markets.
Carlsberg, meanwhile, took full control of Baltika Breweries, Russia's biggest brewery. Some will still get twitchy over the Danish brewer's increased exposure to Russia's notoriously difficult beer market, as the country accounts for around 40% of group volumes and earnings. Meanwhile, an alcohol advertising ban came into effect in Russia in July and an outlawing of beer sales from outdoor kiosks is set to kick in soon. But, the company was confident enough to invite the analyst community to its main Balitka Brewery in September to talk up the opportunity it forsees. Baltika boss Isaac Sheps appears to be relishing the challenge, while his efforts are paying off after Carlsberg reported that it has regained some Russian market share.
A-B InBev must be less convinced by the opportunity in Russia. Volumes for its unit there – SUN InBev - have suffered this year, which has led to the closure of one of its nine breweries. Indeed, one analyst predicted the group could cut its ties in Russia altogether and realise up to US$4bn in assets.
SABMiller was the only one of the big boys who avoided the M&A party this year. That's understandable, though, after its purchase of Foster's in Australia closed late last year. However, restoring the Foster's business to past glories is proving a tough nut to crack. First-half results saw lager volumes at the unit fall by 13%. Earlier this year, we suggested the unit may only need a tweak to reverse its fortunes. But, so far, SABMiller does not appear to have found the winning formula.
The company must continue to take heart, however, from its dominant position in Africa, where the opportunity remains vast. During a seminar in London in October, the group laid out its hopes for the continent revolving around its three-pronged strategy of halving the price of beer, doubling the price of beer and going farming. Africa is a long-term project for the brewer, though, and investment remains key for reaping the rewards.
In Europe this year, the company talked of brand and packaging innovations to help reverse decline in the region. It also flagged that the 'World Beer' sub-category is performing well in the UK, with its Peroni Nastro Azzurro, Pilsner Urquell and Kozel brands. SABMiller believes it is benefiting from the rising interest in craft beer. But, whether the group will follow Coors in swooping for an attractive national ale brand is an interesing one to ponder. Or, it could look east, and finally be the brewer that snares a stake in state-owned Vietnam firm Sabeco.
Indeed, analysts suggested that SABMiller is best placed to take advantage of China's rising beer market, with increasing per capita consumption.
The country's domestic brewers are also eyeing the opportunity as Beijing Yanjing Brewery revealed it is planning to raise up to CNY2.62bn (US$414.8m) to fund 11 projects in China and boost its production capacity. It's not all plain sailing on the home front, however, as Tsingtao reported flat nine-month profits.
Wherever you looked this year, from a beer perspective, it's been impossible to ignore the intensifying chatter around – and sales of – craft beer. The sub-category has been simmering nicely for some time, and this year saw the number of breweries opening both sides of the Atlantic hit a record high.
Global volumes remain tiny, in comparison to mainstream lager brands. But, what marked out 2012 was movement by the big boys to grab a greater slice of the craft pie. A-B InBev revealed plans to launch a 6% dark variant of Budweiser, Black Crown, which it hopes will revive the flagging fortunes of its core brand. “We see the need and the opportunity to really do some line extensions on Budwesier to show the craftmanship, the history, the roots of this brand,” CEO Carlos Brito said.
This news was swiftly followed by the announcement that it was setting-up a craft beer advisory board, to look at industry trends and develop the company's “long-term vision and strategy” for the craft sector. Helping to do this will be Goose Island founder John Hall and COO Tony Bowker, who are both stepping down from the Chicago brewer to allow an A-B InBev insider to take the reigns. This move will surely involve the group eyeing-up more craft acquisitions, so watch this space.
Carlsberg meanwhile revealed in July it was launching a 4.8% craft-style lager, Lawn Mower. This comes from its brewers experimenting in the backyard of its Falcon Brewery in Sweden. Initially, the beer is only available in cans from the state-run Swedish off-trade, but Carlsberg has said a broader roll-out is possible if it proves successful.
In the US, SABMiller and Molson Coors – through their JV MillerCoors – are ahead of the game, as two years ago a standalone craft and import beer busiuness, Tenth & Blake, was launched. Things appear healthy here too. In its latest update, MillerCoors said the division grew its craft and import portfolio by double digits.
Heineken is currently sitting on the sidelines of the craft segment. And, after its APB acquisition this could remain the case for some time. However in October, it was revealed the private equity owners of North American Breweries had agreed a US$388m deal to sell the company to Heineken-affiliated Cerveceria Costa Rica. So, the Dutch brewer has an in, at least.
To prove craft beer really is, dare I say it, going mainstream, even Australia is seeing a boom.
The explosion in small breweries in the UK and US has unquestionably been helped by the favourable regulatory conditions. The UK's Progressive Beer Duty system, in place for ten years now, is still talked of fondly by small brewers, although some bigger producers have questioned whether it is now time for a review. In the US, a similar system sees small brewers get a flat discount on each barrel produced.
However, for the industry as a whole in Europe – particularly the UK and France – beer duty rates continue to cause deep anger among brewers. Trade body, the British Beer & Pub Association sparked a debate and vote in Parliament on the duty escalator, yet it appears to have fallen on deaf ears with the Government. In France, meanwhile, the Government has waved through a 160% beer duty hike.
Regretably, with the state of Europe's finances, administrations see so-called 'sin taxes' as an easy option – especially when health lobbyists continue to hammer home their arguments so consistently.
Looking ahead to 2013, analysts have suggested we may see a pause in large-scale deals as the big boys “digest and deleverage”. This makes sense, as A-B InBev deals with Modelo, Heineken harnesses Asia Pacific Breweries, Carlsberg focusses on Baltika and SABMiller makes the most of Africa.
The real action could be in the moves made on craft brewers. Snapping up an off-the-peg craft beer brand, with the artisanal cache attached, may seem more attractive than starting from scratch in-house.
In the US, Boston Beer Company remains the prime target, but whether Jim Koch is quite ready to give up his baby yet remains debatable. Meanwhile, the performance of Budweiser Black Crown will certainly be worth keeping an eye on. Independent UK brewers could also start to look attractive as acquistion targets as volumes contine to eat into mainstream brands.
Recent moves by the major players have continued to underline cider's ongoing rise.
Undoubtedly, it is the US where this opportunity appears the most appealing. In March, C&C CEO Stephen Glancey suggested that the US cider market mirrored that of the craft beer market 20 years ago and could be seen as an “extension” to the category.
Explaining the reason for cider's growth, he said: “The 'Coca-Cola generation' seems more inclined to this (cider), than to beer, which is difficult to access and difficult to innovate with. Cider is easier to innovate with as a category.” C&C maintained its relatively upbeat note all year, announcing in October that it was acquiring Vermont Hard Cider, the producer of the US' biggest cider brand Woodchuck, for US$305m. By the end of the year, the firm said it is looking to triple its international business by 2016. However, mainstream cider may have reached its zenith in the UK as C&C's Magners and Bulmers brands both saw volumes fall in its fiscal first-half.
Rival Heineken also showed that it was getting serious about the US cider opportunity by bringing distribution of its Strongbow brand in-house this year. The Dutch group also dipped its toe in the M&A cider pond by buying Belgian cider producer Stassen, which produces fruit ciders and an “over-ice” range.
MillerCoors also got involved, through its Tenth & Blake division, by acquiring Crispin Cider Co in February.
Meanwhile, Australia is proving to be an emerging market for cidermakers. The category grew by 35% in 2011, with sweet flavoured ciders driving growth. Westons spotted this opportunity and, in October, announced it was acquiring World Brands Australia, to help it compete with Strongbow and Magners in the country. “There are a lot of ex-pats, a lot of people who understand what cider is about. Combine that with the hot climate and a refreshing product, and you have something that ticks a number of boxes,” Westons' marketing head Ian Lewis told just-drinks. The company is also focussing its attention on Germany and Finland.
Anheuser-Busch InBev's experiments with cider continued, launching a pear variant of its Stella Artois Cidre brand in the UK. The brewer's cider extension of Stella Artois grew by 80% in Q3, the company said, helped by the launch of the pear flavour. In the US, the group launched the gluten-free, low calorie Michelob Ultra Light Cider. A-B InBev said it sees “untapped” potential for making cider a year-round drink.
Describing the US as an emerging market seems odd, but this is the case for cider. And, with C&C's move for Vermont, Heineken's Strongbow strategy, MillerCoors' Cripsin buy, A-B InBev's Michelob Ultra Light and Boston Beer's Angry Orchard the category appears to be, along with craft beer, the apple of the LAB industry's eye.
Sectors: Beer & cider
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