Market research
As 2011 draws to a close, just-drinks once again launches its review of the global drinks industry. Made up of five parts, the review makes up December's management briefing for just-drinks suscribers. Coming up between now and Christmas, we'll look at how the last 12 months have treated the soft drinks, spirits, bottled water and wine sectors. To start, Chris Mercer takes a look at how the beer industry fared in 2011.
//i2.aroq.com/1/92665240.jpgConsolidation marches on, but 2011 will go down as a year of contrasts for the global beer sector. For all the big multinational brewers would like us to marvel at their abilities to sell more beer to drinkers in Africa, Asia and Latin America, the dire state of affairs across Europe and North America casts a long shadow.
From Moscow to London to San Francisco, rising raw materials costs and falling beer sales have turned mainstream brewers into meddling technocrats, tweaking price models and cutting excess fat in order to sustain profits.
To quote SABMiller's CEO, Graham Mackay, there is a "two-speed" global beer industry. However, different speeds exist in different guises within both developing and developed regions, as well as between them. Across Africa and in China, for example, there continues to be a strong disparity between high volume sales growth and profits. In many western markets, meanwhile, rising demand for small-scale 'craft' beer brands shows that consumers are still interested in beer and are still willing to pay premium prices.
In short, brewers have plenty to digest alongside their Christmas dinners, which will be served to macroeconomic mood music that is more uncertain at the global level and downright miserable in Europe. What's more, volatility in commodity prices has turned the spotlight on brewers' plans to deal with a new era of resource scarcity.
Before dwelling on such challenges, however, let's consider the emerging market story in 2011.
Brewers have collectively accelerated their drive into Asia, Africa and Latin America during the year, no doubt with the travails of Europe and the US ringing in their ears. Early in the year, Heineken snapped up five breweries in Nigeria, before going on to acquire the state-owned Harar and Bedele breweries in Ethiopia.
Despite a lot of talk in 2010 about Heineken's transformational swoop for FEMSA Cerveza, the Netherlands-based brewer's CEO told just-drinks that Africa, not Mexico, is the "cornerstone" of its business. "What Brazil is for Anheuser-Busch InBev, Africa is for Heineken," Jean-François van Boxmeer said in an interview published in May. Meanwhile, Diageo's CEO, Paul Walsh, described Africa as a "gem" in the Guinness brewer's business, in a separate interview with just-drinks. Heineken, SABMiller and Diageo are at the forefront of the beer push in sub-Saharan Africa. Diageo and SABMiller are engaged in an increasingly competitive tussle in East Africa, with both looking to take share off the other in Kenya and Tanzania.
We have also seen strong M&A activity in Asia in 2011. In April, Carlsberg's CEO, Jørgen Buhl Rasmussen, told just-drinks that the brewer would seek to expand its emergent Asia business via acquisitions. In October, Carlsberg signed a deal to buy the rest of Vietnam's Hue Brewery. Prior to that, in China, Carlsberg extended its partnership with Chongqing Brewery Co by agreeing to form a three-way JV with the group and another of its shareholders, while in India the group gained greater direct control over its operations. Competition is hotting up in India, with Molson Coors joining the fray via its acquisition of Cobra. Nevertheless, Vijay Mallya-controlled United Breweries has extended its lead over the rest, with its volume share of India's fledgling beer market surpassing 50% earlier in the year.
Asia-Pacific in general has been described as the last frontier in a global beer industry that has so often carved up national markets into duopolies and monopolies. In China, in particular, none of the big brewers has emerged as dominant, with most vying for space. During 2011, SABMiller's joint-venture in China, CR Snow Breweries, acquired Aoke Beer and Shangqiu Lanpai Brewery in the country's Henan province. It also agreed to buy all remaining shares in Hangzhou Xihu Breweries Asahi and bought control of Guizhou Moutai Beer. SABMiller's arch-rival, Anheuser-Busch InBev, was also active in China, acquiring Henan-based Weixue Beer Group Co and Liaoning Dalian Daxue Brewery Co. Meanwhile, local powerhouse Tsingtao Brewery, which is 20%-owned by Japan's Asahi, reported strong sales rises throughout the year.
For all the excitement, however, profits are still coming up short. In 2010, China accounted for 70% of beer sold in Asia-Pacific, but just 18% of the region's profits, according to Sanford Bernstein figures. By contrast, Japan, which is a mature and declining market controlled by native brewers, accounted for only 9% of regional volumes but 34% of profits. As a whole, Asia-Pacific represents around 35% of global beer volume sales, but only 13% of global beer profits, said Bernstein. On a smaller scale, figures from SABMiller specifically show that there is a similar story in Africa, excluing South Africa. A key issue, then, is how quickly brewers can begin translating consumer thirst for beer into hard profits.
Latin America is the emerging market region where this is less of a problem, mainly to the benefit of A-B InBev and SABMiller. Latin America contributes around one third of SABMiller's profits and 31% of A-B InBev's equity adjusted earnings before interest and tax, according to Bernstein. SABMiller's profits in the region rose strongly for its half-year to the end of September and it plans to invest US$295m to increase production in Peru. In comparison, A-B InBev's AmBev unit has had a subdued year, mainly reflecting a sluggish atmosphere in its key Brazil market. Still, Brazil's beer market is expected to return to form in 2012, following a rise in the minimum wage.
Brazil is going to be an interesting market to watch over the next few years. How will AmBev, which has a 70% volume market share, cope with the arrival of Kirin Holdings and Heineken in its backyard? SABMiller is also peering over the fence from Argentina. Kirin's deal to acquire Brazil's second largest brewer, Schincariol, was a signature piece of M&A during 2011. The Japanese brewer was initially lampooned for valuing Schincariol at around 20 times its earnings, a price labelled as "unprecedented" by one analyst. Kirin also spent much of 2011 staring at a prolonged and costly legal battle with rebel shareholders within the Schincariol family, the fear of which kept both Diageo and Heineken out of the bidding race. In November, though, Kirin resolved the matter by agreeing to buy the out the disgruntled shareholders, taking full ownership of the brewer for a total BRL3.95bn ($2.2bn). Now, the real challenge begins.
The Schincariol saga could be a sign of the times for beer M&A. As the number of publicly-listed targets dwindles, deals have the potential to get expensive and messy. In March, SABMiller's Mackay told the Consumer Analyst Group Europe's annual conference that potential acquisition targets have increase their asking prices, because they know that opportunities are few and far between. "They want higher prices and it generally makes the transactions less attractive," he told analysts.
Could this be a factor in SABMiller's decision to risk rebuke from its own shareholders by chasing down one of the last big publicly-listed targets? The Peroni brewer's pursuit of Foster's Group filled the just-drinks news and comment pages for most of the second half of 2011. Once the initial offer was made in June, the belief among observers switched firmly from 'if' to 'when'. Sure enough, in September, Foster's yielded and the deal was done with SABMiller paying AUD5.1 per share. By 2 December, the Australian brewer ceased to exist as an independent entity. Nervous investors, though, will want reassurance in 2012 that SABMiller can make good on its projections for Foster's. To this end, the group has been keen to present Foster's as the owner of a rusty crown washed up by a falling tide.
In truth, the Foster's deal proved a little underwhelming. A long build-up, prior to its spin-off of Treasury Wine Estates in May, did not end in an explosion of takeover interest. There were rumours of a punt by an unlikely alliance of Grupo Modelo and Molson Coors, but this came to nothing. Everyone else appeared to have eyes either on their own debt or on other markets. For SABMiller, 2011 goes down as the year when the group finally flinched, after years of being linked to every trinket on the market. Following Foster's, the firm signed a tie-up with Anadolu Efes, giving it a 24% stake in Efes' business in return for the Turkish brewer gaining control of SABMiller's Russian operations.
Ah yes, Russia. Remember when Russia was the future? The tough years of 2009 and 2010 turned nigh-on catastrophic in 2011 for Russia's leading brewer, Carlsberg. Beer sales continued to drop amid tough economic conditions and the hangover from a three-hold tax hike on beer in January 2010, while raw materials costs rose due to the rollover from Russia's poor grain harvest. More regulation is coming in 2012 and 2013, when brewers will have to cease advertising on television and beer will be banned from street kiosks. In August, Russia caused Carlsberg to report a 26% drop in half-year net profits. The brewer halved its full-year profits guidance, prompting a nosedive on shares and headlines such as: "Probably the worst day of trading in the world?" Today, Russia stands apart from both developed and developing markets, locked in its own microcosm of contradictions and uncertainty. At least cheap vodka is getting a rough deal, too.
In the more developed markets, the beer industry landscape looks remarkably similar to this time last year, if not a little worse. Unemployment among key beer drinkers - young men - is high in many countries, consumption of mainstream beers is falling and the economic outlook is poor. In Europe, only four countries registered an increase in per capita beer consumption between 2008 and 2010, according to trade body Brewers of Europe. At the same time, the number of jobs linked to the production and sale of beer in the EU fell by 12%, or 226,000, over the same period. More cuts are likely. It's a tale that has been echoed in North America, with the US beer market continuing to contract in low single digits.
At the same time, costs are rising. Malting barley costs rocketed in the first half of the year, reflecting drought fears in Europe. Subsequent wet weather has brought prices down by a fifth versus June, but they remain around 30% above this time in 2010, according to Bernstein. In 2012, brewers with high exposure to Europe, such as Carlsberg and Heineken, will have to increase prices just to cover barley, before they begin thinking about energy and profits growth. Indeed, commodity costs have been a key theme for the food and drink industry in general in 2011, even causing waves at the G20. The United Nations Food & Agriculture Organisation has warned repeatedly that companies and governments face a new era of price volatility. Meanwhile, consultancy group McKinsey said last month that commodity prices, including energy commodities, have risen by 147% in real terms in the last decade, erasing all successes in reducing prices in the 20th Century. Sustainable business practices have never looked so important.
In Europe and North America, squeezed brewers are left to twiddle their price models and uncover efficiency savings. It's a hard situation. In the US, MillerCoors' luck ran out in the third quarter of the year, after synergy savings ceased to offset tough market conditions. The brewer's nine-month net profits fell by 11%. And, although A-B InBev managed to increase global nine-month profits, there was no mistaking its report of a sedated market atmosphere in the US, where Budweiser has continued to lose market share. Analysts will haggle over potential savings here and there, or signs that market decline is slowing, but this is no way to run a business for the long-term.
Amid the gloom, so-called craft beer brands are doing rather well. US Brewers Association figures show that, in the first half of 2011, craft beer sales rose by 15% in value and 14% in volume, with Boston Beer at the head of the pack. Big brewers have dived further into the craft beer movement in 2011. A-B InBev acquired Goose Island for $38.8m, while, in Europe, SABMiller launched a small-scale Belgian abbey beer in the UK, named St Stefanus. What remains to be seen is how far such moves can contribute meaningfully to multinational brewers' results. Currently, they do not move the dial. The changing nature of western markets, however, does raise questions about how beer is distributed for, and targeted at, a new generation of consumers. In a back-to-the-future moment, Heineken UK decided to get serious about pubs this month, agreeing to become one of the largest on-trade operators in the UK by acquiring the Galaxy pub estate from Royal Bank of Scotland.
This year will be remembered by many for one event; the earthquake - and subsequent tsunami - that devastated swathes of the Japanese seaboard on 11 March. A review of its effects on the beer sector seems a little churlish in light of the tens of thousands of lives lost. But, it is starting to look as though the effects for big brewers are not as bad as initally feared. Of the major brewers in Japan, only Sapporo - the smallest of the big four - saw earthquake costs damage its overall profits.
As a whole, 2011 was a year of mixed emotions for brewers. While there is excitement at the prospects in emerging markets, a whole manner of structural and environmental challenges have come further to the fore. Over the next 12 months, we will watch with interest how brewers seek to tackle these challenges, such as the profits lag in Asia and Africa and overweight operations in Europe, amid volatile economic and cost conditions.
Such conditions could well accelerate the trend for consolidation in the sector, potentially with more link-ups between global players. Right at the top of the tree, we have continued to see talk of a tie-up between SABMiller and A-B InBev. Enthralling as this would be, I'd be surprised to see it taking place in 2012. Right now, M&A activity looks more likely at the regional level. Grupo Modelo and A-B InBev remain ones to watch, while brewers will continue to seek stronger platforms in emerging markets. In the western world, restructuring looks set to be the order of the day.
