A recent M&A wave in brewing means that ‘global giants’ AB InBev, SAB Miller, Heineken, Carlsberg and CR Snow are piling the pressure on local players, particularly in markets such as China.
Rabobank analyst Francois Sonneville makes this point in his firm’s new report Battling the Brewing Giants: The Changing Face of Competition for Local Brewers, noting that that the ‘global giants’ listed above now account for just over half of global beer volumes, compared to just 16% in 2001.
Most acquisitions had taken place in China, Sonneville said (around one in four transactions), but M&A activity had occurred across all continents, confronting smaller local firms with new challenges.
Steps by giants to improve efficiency and a premiumization path meant increased profits, especially in emerging markets such as China, the analyst explained, where the profitability difference between premium and discount beers was large.
“In China, premium beer generally costs more than RMB 25/liter and is very profitable, while discount beer costs less than RMB 5/liter and generates virtually no profit per hectoliter,” Sonneville said.
“As the giants have most global premium beers in their portfolio, they are well positioned to benefit from the premiumization trends in those markets, provided they obtain a distribution platform.”
Diageo pursues diversification strategy
One important rationale for the M&A drive among major players over the last decade was to cut production costs per hectoliter, which had duly fallen, via economies of scale, Sonneville said.
Over the last decade, the average rate of volume growth for the giants was 13% per year, as opposed to 4% for local brewers, he added.
As a result of pursuing global cost leadership, four of the giants (accepting that SAB owns a 49% stake in CR Snow) were the only brewers selling significant volumes beyond their home markets, he said.
Key M&A moves by giants had added strong brands and new markets to their portfolios, Sonneville said, citing InBev’s takeover of Anheuser-Busch (2008) whereby the former seized US market leadership and snapped up Budweiser.
Kirin, Asahi, Molson Coors and Anadolu Efes (owned by SAB) were copying the global growth blueprint laid down by the giants, Sonneville noted, growing through M&A rather than organically.
“A different strategy is being pursued by Diageo, which is also globally active, but follows a differentiation strategy, achieving around half of its sales in stout,” the analyst said.
Differentiate or compete on cost
By contrast, local players survived by either producing a differentiated product – using specific ingredients, say – or adopting unique product positioning, Sonneville said.
“This group includes most craft brewers, which have only a limited audience, but sell at a premium price and attain above-average margins, and other brewers with products that have a strong connection with a country or region,” he said.
Where differentiation was less apparent, local brewers followed a focused cost strategy, he said, but added that local brewers now faced competition in their markets from giants under both heads.
Rabobank data showed that locals have not lost significant market share to giants, the former accounted for 53% of global beer volumes or 100bn liters in 2011, a mere 3% fall from 2001, but the giants had boosted their market share by 31% in this period through M&A activity.
But greater economies of scale for the giants had allowed them to improve margins at a faster, Sonneville said, with Rabobank estimates apportioning the giants 75% of a $30bn profit pool in 2011, with circa. 25% of profits going to local players, compared to around 45% in 2002.
Giants could make value/volume switch
Organic growth in the profit pool for giants did not automatically mean local brewers had suffered, Sonneville said, since absolute profit growth meant the latter had also boosted profits.
But if domestic beer consumption fell further, especially in mature markets, local players could face pressure from the giants due to the latter’s lower operating margins, the analyst added, notably if the latter suddenly chose to focus on volume rather than, as in recent years, profitability.
“Focusing on costs is important in some markets, and initiatives that might help local brewers to increase efficiency, such as co-manufacturing or joint purchasing, should also be investigated,” Sonneville said.