No small beer

Beer still dominates the UK market, with over 100 litres drunk per capita each year – but rivalry between the brands is getting fiercer.  Joanne Hart profiles the major players

BEER IS BIG business.  Last year, almost 150 billion litres of beer were consumed worldwide.  In the UK, 28 million pints are poured down the British throat every day, and the Government receives a hefty £5.5 billion a year from the brewing industry in excise duty and VAT.  Beer is the alcoholic drink of choice for most of the adult world.

In Britain, for instance, 100 litres of beer are consumed per head annually, compared to just 20 litres of wine.  The ratios may be different in countries such as France, Spain and Italy but by and large, the grain is significantly more popular than the grape.

The market is also one of the most dynamic in the corporate world, having been through a spate of mergers, acquisitions and disposals over the past five years.  Rather like the wine and spirits industries, there has been a growing realisation of the importance of scale and a commensurate enthusiasm for consolidation.

Going global

There are now four global giants, Anheuser-Busch, Heineken, Interbrew and SABMiller. Each is differently regarded by the financial markets, whose views are formed not just by looking at respective managements and brands, but also geographical positioning.

"There are much better dynamics and volume growth potential in the US because the demographics are better for beer," says Ian Stapleton of the leading American investment bank, CSFB.

"A quarter of the US population is between 20 and 30 years of age and they are responsible for half the beer consumption. In Western Europe, the numbers of young people are declining and, since they are the ones who drink the most beer, this has a direct impact on volume growth," he adds.

Anheuser-Busch, who make Budweiser, has scarcely set foot outside the US, where it has a massive 50% market share.  It has not participated in the acquisition spree undertaken by rival brewers, perhaps because it has not had to.

"Anheuser-Busch is run in an extremely focused way with a rigorous attention to return on capital," says Sandy Soames of UK stockbroking house Cazenove.  "The security of Bud’s growth and its cast iron capital discipline, provide a rare combination in the consolidating global brewing industry," he adds.

Anheuser is thought to have been put off the consolidation game by the increasingly high prices some of its rivals have paid to catch their various prizes.  This caution has paid off in terms of superior profitability but it does mean the group is under-represented in Europe.

Nor does this position seem likely to change, at least in the near future.  At a recent conference in New York, the company emphasised its focus on growth markets and stated:  "The European beer markets do not fit that description."

Going down the acquisition route

Interbrew, Heineken and SABMiller have adopted a markedly different approach.  Heineken made a series of acquisitions in the early 1990s, kicking off the consolidation process and managing to make some interesting, well-priced purchases as a result.

According to one leading City analyst: "Heineken has the best global brand in the world, beating even Budweiser."  The company is respected by most financially orientated beer-watchers but even so, managed to increase sales by just 1% last year, thanks largely to the sluggishness of European markets.

Interbrew’s volumes rose 5%, reflecting the company’s investment in emerging markets such as Eastern Europe and Russia. 

The group, which began life as an old-fashioned Belgian brewer, went on a buying spree over the past few years, acquiring such names as Labatts and Bass to add to its core Stella Artois brand.

"It has a strongly branded portfolio and a good geographic reach but questions remain over its capital discipline," says Stuart Price of investment bank WestLB.  In other words, the City is worried that Interbrew may have been spending too much money.

A new chief executive, John Brock, arrived at the end of last year and a new finance director was put in place in September but concerns persist about the group’s strategy.  London Stock Exchange-listed SABMiller is even more of a worry.

The South African-based brewer owns Carling and Peroni as well as Miller but analysts are sceptical about the company’s performance and future prospects.  "It transformed itself with the Miller deal but the transaction was one of the worst in the brewing industry.

Miller’s profits have been sliding since it was bought," says one leading analyst. "SAB has moved into f a s t – g r o w i n g , emerging markets but it has overpaid for businesses elsewhere, such as the Miller and Peroni brands," says Stuart Price.

SABMiller may not be universally well-regarded but it is undoubtedly in the top tier of brewers, which puts it in a position of relative power.  "Everyone below Anheuser, Interbrew, Heineken and SAB is in the middle tier or below.

They will either consolidate among themselves or get taken out of the market by a bigger player," says a brewing expert at one top German stockbroker.  Such comments leave Britain’s biggest brewer, Scottish & Newcastle, in an unenviable position.

The company recently sold its managed estate to the independent pubs group Spirit, but even the £2.5 billion price tag is not thought to have given it enormous bargaining power at the consolidation table.

"Scottish & Newcastle’s top-line growth was sluggish last year. Right now, Europe is a very subdued market and there is continual pressure on the brewers to do deals," says CSFB’s Stapleton.  The problem in Europe is two-fold.

First the relative dearth of young people means volume growth is not as robust as it used to be; second, there is a constant shift from the on-trade to the off-trade. 

Pricing pressure for all More than 15m people drink in a pub at least once a week in the UK, but they are still buying far more cans and bottles in the supermarket than they ever did.

This shift has created intense pricing pressure as the major food multiples try to squeeze prices as low as they can.  "There are strict limits on pricing.  Some price increases are more likely to go through in pubs and restaurants.

However, the more expensive a pint is out, the more consumers are likely to turn to the supermarkets," says Price.  Even pubs are becoming increasingly canny on pricing. Independents such as Punch and Spirit are rigorous on costs, driving beer prices down and drawing up new, less generous contracts whenever they acquire businesses.

 Indeed, when Spirit bought the S&N pubs earlier this autumn, it immediately cut the price it was prepared to pay for S&N beers by £14m a year.

Such conditions suggest that the middle ground will not be a comfortable place for brewers to be.  "Europe is probably going to go the way of the States. There will be one or two large players – such as Anheuser and Coors – and then there will be niche players, like the American microbreweries," says Price.

In Europe, niche players are likely to focus on the premium end of the market, benefiting from the growing popularity of such highly-priced beers as the wheatbeer brand Hoegaarden or even Cobra, the speciality Indian beer, among certain well-heeled youths.

Outside this small, specialised sector, the market looks ruthless.  Consolidation seems to be the main game in town and businesses that are not big enough to swallow their competitors are likely to find themselves gobbled up by the giants of the trade.