The German beer market is being rocked by a period of "tumultuous upheaval". But while sales continue to fall in one of the world's most isolated markets, Ute Ballay, argues there is light at the end of the tunnel in the form of international intervention, the premium sector and pre-mixed beers

The sector's main problem stems from competing in a 21st century economy with a 19th century structure
It's a case of new millennium, same old problems for the German brewing industry. Sales fell 0.4% to 109.7m hectolitres (hl) last year, a figure not visited since the 1960s. Average per head consumption of 155 litres is down 20 litres over the last decade - a period that began so hopefully with the dramatic opening of markets in East Germany and central Europe. And now sales look set to dip below 100m hl in the medium term. Furthermore, a sharp fall of 2% in the first quarter of 2001 suggests the industry will reach this unhappy landmark sooner rather than later.

German brewers face a multitude of problems. Some are beyond their control. As elsewhere in Europe, an ageing population is drinking less, while the key 18-35 demographic is looking elsewhere (including more exotic foreign beers) for its tipple. Plus the German government is set to add an extra layer of costs with a planned eco-tax on packaging.

Yet the sector's main problem stems from competing in a 21st century economy with a 19th century structure. There are still 1,270 breweries in Germany, producing over 4,000 beers. Fewer than half are thought to be profitable, yet just nine breweries closed their doors last year. Only 20 breweries produce over 1m hl per year and over 700 marketed less than 5,000 hl. This patchwork of Mittelstand producers often comes off second best in its dealings with banks, distributors and retailers.

"Around 90% of breweries are small- or medium-sized firms that suffer under cost pressure," says Peter Hahn of trade association Deutsche Brauer-Bund (DBB).

Brauerei Beck Germany's top beer exporter

Overcapacity of 30-40% is also feeding a boom in own-label and other cheap output. Last year 46m hl were sold through supermarkets and cash & carry outlets. Leading retailers often use beer as a loss leader, a trend which Volker Kühl, head of marketing at independent brewer Veltins, warns, "is hitting the entire sector's image". Albert Cramer, boss of leading private brewery Warsteiner, agrees: "The price war unleashed by the big supermarkets is starting to damage brand images."

Yet not all is doom and gloom. Exports broke through 10m hl last year, almost 10% of total output. Top brewers such as Holsten and Brauerei Beck are translating the strong global image of German beer into export success. Overseas sales rose 13% to 1.2m hl at Holsten last year. Meanwhile faced with a shrinking home market, Bremen giant Beck is building on its position as Germany's top beer exporter. Exports account for almost half of total beer sales, with strongest growth in the UK, Italy and the US - three markets where imported premium beers play a growing role.

"Our goal is to grow with these import countries abroad, and to defy the overall downward trend in Germany," says Götz Michael-Müller, head of sales and marketing at Beck.

Ray Winstone in the UK ads for Holsten Pils

Beck may also change its legal structure to promote foreign cooperation deals, such as last year's agreement with Namibian brewery NBL. Indeed the whole question of industry ties with foreign brewers has jumped to the fore, following Heineken's deal with Bavarian brewer Schörghuber. This will allow the German firm to market its leading brand Paulaner in many of Heineken's 170 foreign markets. The world's third biggest brewer is probably more interested in this angle - selling a quality German brand in Eastern Europe and South America - than the dramatic swoop into the German market that was feared by many domestic brewers.

Medieval beer purity laws and the highly regionalised market have long isolated the German market. The international brand Tüborg has been in Germany for 20 years, but sales are still below 1m hl. Yet more foreign brewers are knocking at the door. The heavily indebted Brau & Brunnen group may soon fall into foreign hands. New chairman Michael Hollmann singles out Carlsberg as "an expansion-orientated and strong partner for us."

Hollmann describes his brief as "getting B&B back into profit and in shape to be sold." And he predicts "some surprises over the next 6-12 months" as US, South African, Dutch and Danish brewers vie to enter the German market.

This is part of what DBB president Dieter Ammar labels "tumultuous upheaval" in the industry, with cooperation deals and alliances between many breweries. The latest example is the dramatic alliance between Warsteiner and Schlossbrauerei Kaltenberg, the private brewery still run by a member of the Bavarian Royal family. Prince Luitpold hails this as "the ideal enlargement" of his operation, which is one of Germany's most successful beer exporters. Both breweries have strong premium brands - the most profitable area of German brewing, but also the most costly to promote.

The international brand Tüborg has been in Germany for 20 years, but sales are still below 1m hl

Speciality beers with a high marketing budget and beers with strong brand names are the industry's future. The top ten Pils brands have 25% of beer volumes and some analysts expect this to double by 2010. Cramer suggests "prospects are still good for breweries with premium Pils brands" - such as his own Warsteiner, with 5m hl brewed annually. B&B in Dortmund is to concentrate resources on its premium national brand Jever. "Until now Jever has been buried within the overall concern," says chairman Hollmann. "That has to end."

Holsten is also gaining from its recent purchase of the König private brewery - its premium mark has enjoyed double-digit growth over several years. Clausthaler and Radeberger are the key brews in the Binding group's 11m hl a year beer portfolio. "We aim to stand apart from any concentration process by building up our top national brands," argues Binding chairman Ulrich Kallmeyer.

Such success comes at a price - Warsteiner spends around £30m (US$41.6m) a year on advertising and sponsorship, hence the trend to deals that can pool bottling or distribution costs, and avoid the huge expense of building premium brands from scratch.

Cramer of Warsteiner suggests, "prospects are still good for breweries with premium Pils brands"

Of the foreign giants, US brewer Anheuser Busch clearly has the resources to push its Budweiser brand in Germany. The problem here is the long dispute with Czech brewery Budejovicky Budvar, which prevents the St. Louis giant using the brand name Bud in Germany. Efforts to move from the less-than-snappy name "Anheuser Busch B" to American Bud were blocked by a German court, which accepted claims from Bitburger that drinkers might confuse Bud with their leading brand Bit.

Mixed Up

The other major growth area is in beer-mix drinks. This segment feeds on trends among young drinkers to both low alcohol beers and brightly packaged refreshment drinks. Karlsberg began this trend with Desperados, followed by Holsten and several other brewers. Most products mix beer with cola or lemon, although "crazy mixes" use exotic fruits or Campari. Now Diebels has just launched dimix, a beer-cola mix based for the first time on a national premium brand. Beer-mixers may be the new growth focus, but sales are still below 2m hl a year.

Forcing through price increases is a more urgent issue. "Beer is no longer regarded as something special, or seen as a particular treat," argues Götz-Michael Müller of Beck. "This has to change, and Beck & Co intends to play a leading role with its price increases." Many breweries see next January's launch of the Euro as an occasion to enforce higher margins. DBB boss Ammar also wants to end the trend to "knock-down prices", arguing that "quality has its price, and that must also apply to our beers."

Brewer's Share of Domestic Sales

Source: Canadean Ltd

Key Umbrella Brand Movements

Source: Canadean Ltd

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