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Brewers worth their malt are investing in the developing BRIC markets – Brazil, Russia, India and China – as ageing demographics in the West favour wines and spirits, says Rosie Murray-West

The brewing industry may have been around since Stone Age man first indulged in  mind-bending experiments with hawthorn berries, but that doesn’t give the world’s brewers the right to stay stuck in the past.

As any savvy businessman will have worked out, they are facing some of their biggest challenges for years. Throughout Europe and the US the lager lout is swapping his pint for a shot of spirits, and older drinkers are turning to wine.

In the US, the beer drinking market has been declining since the mid-1990s, and according to research consultancy, Information Resources Inc (IRI), beer lost a full percentage point of market share in grocery stores last year to wines and spirits. The UK story is similar.

That decline may well be an insoluble problem, but the industry has another issue on its plate. More and more beer is being sold through supermarkets and it is getting cheaper for consumers. That’s not actually good news for brewers, though as it hits both them, and the retailer, in the bottom line.

Desperate times call for desperate measures, but not every company has risen to the occasion. Those that have are worth raising a glass to, but others still need to face up to the changing climate.

The sector’s unexpected success story has been SAB Miller, once struggling at the bottom of the brewing table, but now seen as a template for others to follow. Formed by a merger between South African Breweries, a UK-listed business, and Miller of the US in July 2002, the business has gained value by concentrating on markets that initially sound unpromising.

BRIC works

The company has businesses in India, China, El Salvador and Honduras – as well as its heartland of South Africa. These are scarcely the blue chip economies of the world, but as investment bank Goldman Sachs points out, they are now some of the most important for the global brewing industry.

With demographics against them in the developed world (the older people get, the more likely they are to drink wine rather than beer), the brewers need to look to other countries where a traditional night on the town involves a pint or two. China, Goldman points out, has a beer drinking culture, as do Brazil, Russia and India.

Companies doing business in these countries are likely to outperform the rest of the market. Molson Coors and Anheuser are the other two the analysts have tipped for the top, because of their developing country interests. As the Goldman report points out, these areas are the best hope for many brewers.

“The environment in developed markets is increasingly challenging. The pricing pendulum has swung markedly to the side of the consumer,” the analysts says. “Competition has stiffened. Demographic trends of ageing population are shifting consumer preferences towards wine and spirits. With this backdrop, having a presence in the emerging economies that offer volume growth, fragmented markets and better return opportunities is critical.”

It has certainly done wonders for SAB’s share price and profits. Six-month figures last November showed a 10% increase in revenue and a 15% increase in adjusted pre-tax profit. The company acknowledged that the developing markets had offset difficult conditions in North America, Miller’s heartland.

Other companies have been slower on the uptake when it comes to emerging markets, but finally seem to be getting the point.

InBev’s December purchase of a Chinese brewer, combined with job cuts in European markets neatly encapsulated the entire mood in the industry.

Carlsberg’s horrible figures in the first half of this year – beer sales in Western Europe, excluding acquisitions, fell 5% – have led the company to a new strategy. The business now wants to shut half of its 29 breweries throughout Europe. Meanwhile, its Russian and Chinese businesses are still going strong.

Fight for the pint

The company has also released cash by selling part of its stake in Hite, but Alexandra Oldroyd, at Morgan Stanley, believes that isn’t enough. “We do not believe that the structural issues facing the company’s core markets are easily addressed,” she says, adding that Carlsberg hasn’t invested enough in its brand and will be hit in the UK by the acquisition of Spirit by Punch. The consolidated group is likely to take more beer from Scottish & Newcastle, she believes.

That doesn’t mean that S&N is in the best possible shape either, of course. Even though its November trading update showed growth in all four of its big brands – Foster’s, Kronenbourg 1664, John Smith’s and Strongbow – it warned of weak consumer confidence in the UK market (see finance news on page 80), and said that conditions in France were “soft” as tougher drink driving laws mean fewer beer drinkers.

The company’s focus in declining Western markets means that it trades below Latin-focused giant InBev, SAB Miller and Carlsberg, prompting persistent rumours that it could be a tasty bite for a predator. Nigel Popham, brewing analyst at Teather & Greenwood, says that the group “may be waiting for an acquisition”.

Anheuser Busch, the American brewing giant, is trying a different tactic to deal with declining beer sales. In November it decided that if you can’t beat them you might as well join them, and its subsidiary, Long Tail Libations, is now working on producing a spirit called Jekyll and Hyde. The company is currently engaged in a vicious ongoing price war with other mass-market beer brands.

In October, Anheuser warned that its full-year earnings would be 10-11% lower than last year as it delivered a third consecutive quarter of lower profits because of pricing discounts. Pat Stokes, Anheuser chief executive, said recently that the brewer was “fighting the battle for share of alcohol”.

Like many other brewers it is trying to launch niche products, including Tilt, which contains ginseng, in an attempt to stem the flow in traditional markets. Like the rest of the market, Anheuser has learnt it is simply no longer enough to brew beer and find somebody to drink it.

The difficulties faced in the market are not going to go away – and unless there is a sudden renaissance in beer drinking in the Western world, only the most innovative and well-placed companies are going to survive.

© db January 2006

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