In this, the final part of just-drinks' management briefing for January, Euromonitor takes a look at what the year ahead has in store for the global brewing industry.

Blurring the line: A ‘craft’ affair

Craft beer is now a fully-established category in mature beer markets. In some markets, it could almost be described as approaching saturation, but its continued evolution has a significant role to play in beer and the wider alcoholic drinks industry.

In the coming year, more microbrewery brands will enter the market and established craft brewers will expand their SKUs in search of growth. This, however, underlines the paradox facing successful breweries as brand equity and scale through consistency of presence are difficult to achieve in a category where 'snob value' is paramount.

Big brewers such as Anheuser-Busch InBev and MillerCoors will look to tap into the halo effect of the craft movement by buying into or conceiving a story of heritage or nostalgia akin to the craft beer characteristic. Successful, commercialised 'craft' brands are unlikely to win over the purists but can generate mass appeal.

The success of craft beer, particularly during the “Great Recession”, has had a profound influence on convincing the industry that consumers are prepared to pay more if they believe they are getting more. In 2014, beer products will continue to tap into this and innovations in flavours, packaging and ingredients will be sold on the basis of quality, value, heritage and authenticity. 

Mixed beers and beer mixers: From an anomaly to a significant category

Flavoured/mixed beers have changed from being an anomalous category in the spectrum of alcoholic drinks to a delimited category in their own right. Now, in 2014, they continue to be popular substitutes for standard lager, especially in Eastern Europe. The prime stimulus for this has been Radlers, which, with a lower abv and sweeter taste, have been able to reach a wider audience. The key to their success has been positioning. Tapping into declining demand for standard beers, Radlers offer an alternative to beer drinkers. Growth in flavoured/mixed beers is set to continue, with an untapped on-trade trend for high-abv beer mixers developing.

There is a growing popularity among on-trade consumers for nostalgic beer mixers, such as Black Velvet’s Guinness and sparkling wine mix or New World variations such as the ‘Caipbeerinha’. However, the development of beer mixers in the on-trade remains in its infancy as the industry is wary of higher taxation. Brands such as A-B InBev’s Bud Light Lime-A-Rita will have to deal with regulatory restrictions on the drinks’ relatively higher ABV when compared to other beers.

Although a rise in point-of-sale promotional activity for beer mixers from brewers would not be a surprising phenomenon in 2014, in the coming year the category’s gradually growing popularity is unlikely to push brewers to develop such tipples for the off-trade channel.

Brewers are worried that such products will be associated with RTDs, limiting their sales to lower-income consumers, where margins are squeezed between higher taxes and consumers’ lower spending power. Brewers will be more likely to adopt a low-abv mixed beer approach to reinvigorating beer volume sales; although higher ABVs could be an attractive proposition if a premium positioning can be promoted to differentiate from lower-value RTDs.

Can innovations and Sam Cans: Will packaging change consumer perception?

In 2014, industry players are expected to focus on packaging as a selling point for their beer brands. This will be an attempt to reinvigorate relatively stagnant mature markets by manipulating consumer perception, in the context that a new look for a beer brand will give a ‘new’ or ‘improved’ drinking experience. 

Major global brewers will seek to use customised cans and designs to ‘improve’ the drinking experience and reinvigorate sales via product perception. However, historically the market has observed that the holding power of new can designs tends to be short-lived.

In the US, this year, the market will see the greater prominence of cans among craft brewers such as Samuel Adams, with its soon-to-be released Sam Cans. There is nothing customised about these cans, with this simply being an attempt to move away from relatively higher-cost glass bottles to what are considered fashionable hipster cans. Nevertheless, the company is receiving criticism from craft beer purists who perceive such packaging to be designed for the mass market.

It seems that this phenomenon in the US will begin to blur the lines between what is considered premium and mass consumer beer packaging. A similar approach is also being taken by cider producers. 

Learning from Africa: Game-changing alternative beers?

Desnoes & Geddes, brewer of the Jamaican lager Red Stripe, has announced that cassava will be used as the main brewing ingredient for its brand in 2014. This will have an insignificant impact on the global market but would appear to be an initial step towards a major trend for brewers, i.e. seeking alternative sources of fermentable starches.

Sorghum and cassava are typical ingredients in traditional concoction beers in Africa, with the latter ingredient being the second most consumed source of carbohydrate in sub-Saharan Africa.

Although more commercialised by companies such as SABMiller and Diageo, the crop's industrial potential has been largely unexploited. Desnoes & Geddes recognises the potential of lowering brewing costs via the use of barley alternatives such as cassava.

As craft brewers seek to capitalise on the niche characteristics of their brands, sourcing alternative base ingredients for brewing will be the next frontier to exploit. Markets beyond Africa have not fully exploited the potential of sorghum-based beers for their gluten-free characteristics, like A-B InBev’s 2006 release of Redbridge sorghum beer. Alternative ingredients may not be a game changer in terms of global volume sales, but can have a significant impact on product positioning as global brewers capture the attention of both premium and economy markets.

Emerging market focus: Smaller acquisitions the next move towards greater consolidation?

The level of major international consolidation is set to continue to slow, primarily as a result of limited opportunities. This will result in major players concentrating their acquisition focus on regional players in emerging markets.

The global beer market is not performing at its best as markets in Europe, Australasia and North America face declining or stagnant volume sales. The post-financial crisis has not been favourable to beer’s performance in these regions, and further legislative changes like Russia’s tax hike to curb beer consumption have added salt to the wounds.

Nevertheless, global brewers will continue to look for acquisition targets across emerging markets, currently favouring Asia Pacific, where regional volume growth is expected to be the highest at 5% in 2014. Furthermore, for the first time, the African market contributed more to SABMiller’s profits than Europe in 2013 as the continent's beer consumption is growing at a rate that is of greater interest to global brewers. Such regions will help companies to supplement global volume sales and maintain revenue growth.

Indication of such movements by the big brewers has been made clear, with A-B InBev’s buy-back of Oriental Brewery Co in South Korea, while not pursuing the repurchase of the Czech Republic’s StarBev in 2012. Although the South Korean market is achieving volume growth of 2% per year, below the regional average, this is relatively progressive when compared with the dismal performance of beer-intensive mature markets such as the Czech Republic.

A-B InBev’s growing cash pile signifies a potential acquisition. One possibility is to purchase various smaller brewers in Asia Pacific, such as China’s Ginsber Beer Co. Another possible acquisition could come from Carlsberg after it obtained permission from Danish regulators to reduce its 30% stake to less than 25%. This will allow the company to loosen its ownership structure, making it more financially flexible for a purchase, likely to be in Asia Pacific.

Pushing for global brands

A-B InBev’s buy-back of Oriental Brewery Co will be an important opportunity to promote the former’s brands in the South Korean market. This goes hand in hand with the emphasis A-B InBev places on its global brands Budweiser, Stella Artois and Beck’s.

The premium positioning and pricing of global brands compared to local brands will offer higher margins, with low-base sales bringing about stronger growth rates. As a result, local champions such as Cass beer are likely to concentrate on maintaining market leadership.

With Budweiser already present in South Korea, the company will mainly focus its international promotional campaign on the Budweiser brand. A-B InBev’s attempt to raise Budweiser’s brand equity globally had seen significant change since the Anheuser-Busch Co acquisition in 2008 as the US’s share of global Budweiser volume sales dropped from 73% to 52%. To a degree, this is the result of declines in US volumes, but also reflects volumes also doubling in international markets. 

Revenue protection versus expansionary consolidation

Expansionary competitive practices adopted by the major brewers to increase global market share are placing significant pressure on companies’ debt to earnings ratios. As these companies purchase brewers at values that are significantly above the original valuation, they are finding that they have to widen their margins to raise the capital for further expansionary initiatives. Organic value creation, therefore, becomes a key feature for these companies to maintain a sustainable level of expansionary consolidation. 

The current mature beer market is not conducive to reducing costs via economies of scale because of its slow volume growth. But, in emerging markets it is commonplace to witness high growth rates from low bases where economies of scale will grow faster. Production efficiency strategies to reduce costs and the premiumisation of a range of SKUs in mature markets will maintain some growth in profit margins for the ‘Big Four’ brewers. As a result, global value growth can be expected to continue to outperform global volume growth in 2014.