Insights Industry Insights Struggling with Consolidation and Declining Market Share

       

Brewing: Struggling with Consolidation and Declining Market Share

The brewing industry, both domestically and globally, has changed dramatically over the last year with the announcement of major mergers and the creation of “mega” brewers. This consolidation impacts every level of the market and related segments – brewers, wholesalers, distributors, regional breweries, micro/craft brewers, original equipment manufacturers and used machinery dealers and brokers. Coupled with beer’s market share decline to alternative adult beverages, the future appears mixed with major changes shaking out over the course of the next year and beyond as companies struggle to gain increased leverage in the market.

SUPPLY

Industry consolidation creates “mega” brewers segment

The recent trend of consolidation has created a new segment of so called “mega” brewers with the mergers of Anheuser InBev and MillerCoors. As reported by the Wall Street Journal, the recent consolidation is an effort by the brewers to gain leverage with suppliers, distributors and retailers in an increasingly difficult global market. Growth within the industry has slowed due to increased competition from the wine and distilled spirits segments and the increasingly high cost of capital and commodities. Merged companies hope to utilize increased market share to control costs, increase profit margin and gain competitive advantage in a mature market. Secondary market participants such as used machinery dealers and brokers report limited market activity, increased inventories and reduced sale proceeds due to recent consolidation and anticipation of future mergers.

Foreign output increasing

China and other emerging economies, like those in Eastern Europe, Latin America and Africa, have been experiencing significant growth within the mature beer industry. For example, beer output in China increased 14.6% in 2006, far outpacing its neighbors to the West. China, the world leader in output primarily due to its sizable population, experienced 11% output growth for 2007 but was outpaced by Ukraine (19%) and Russia (16%) with worldwide production up only 5%. Other markets experiencing similar growth during this period were Vietnam, Thailand, Brazil, Peru and Romania. Brewers have increased their investment in these and other emerging economies to offset potential declines domestically.

Impact of increasing commodity prices yet to be seen

Past increases in the cost of commodities, especially glass, grain and aluminum, had increased strain on profit margins over the first part of 2008, a condition that has improved as a result of falling prices since the middle of the summer. The extremely high cost of capital and required capital investment still makes it difficult for middle tier producers to operate in an ever competitive market. Regional brewers often feel the pinch more than their larger counterparts struggling to contain costs while producing a quality product. Large brewers negotiate commodities contracts years in advance in an attempt to lessen the impact of volatile pricing of certain commodities or shortages of key ingredients such as malt and hops. Craft brewers, like the regional brewers, lack the purchasing power of the large brewers and are most severely impacted commodity fluctuations.

DEMAND

Increased competition from wine and distilled spirits

Over the past several years the popularity of beer has not risen at rates realized by other adult beverage categories such as wine and distilled spirits. Data compiled by IRI Infoscan through March 2008, shows beer dollar sales grew at approximately 3% compared to just over 6% for wine and spirits. Beer still exceeds both categories in the total sales for the edible grocery supermarket category, ranking 4th compared to 9th for wine and 26th for spirits. Another IRI study shows the top 10 new products in the market were dominated by malt beverage alternatives, dubbed “malternatives”, such as Smirnoff and Mike’s Hard Lemonade. These items often appeal to younger demographics or females but, more importantly, the products have infiltrated a market once dominated by beer.

Demand decreasing globally

Markets outside the United States are experiencing the same trends in market consolidation and decreased demand due in part to a global economic downturn. Russia, the third largest beer market behind China and the United States, has experienced a decline of 4% in beer shipments in the four months ending September 2008 and production grew at only 2.1% over the first half of the year, which is the lowest rate realized in the last four years. SABMiller PLC reports declining consumer demand worldwide due to the global economic crisis. C&C, an Irish drinks group, saw sales of its flagship cider beverages decline 12% over the first half of 2008. Emerging markets for beer, especially those with significant populations such as China, may help to offset these declines worldwide but gains may be tempered due to an extended global economic downturn.

Craft brew markets continue growth

One segment of the market that is currently bucking the beer trend is the craft beer market with significant growth over the last few years. In 2007 and the first quarter of 2008, craft brews grew 12% by volume and 16% by dollars. These brewers focus on high-end beers and sales to discerning customers and are led by the Boston Beer Company. In 2004, craft brews grew 7% by volume compared to 0.06% for domestic brewers, 3.1% for spirits and 2.7% for wine. The trend continued in 2005 with craft brewers up 9%. Through February 2008, craft brews grew at a rate of 12% compared to 1.4% for imports and 1.4% for non-craft domestics. While numbers such as these represent a buck in the trend, they are a small percentage (3.8% by volume, 5.9% by dollars in 2007) of the marketplace dominated by the large scale brewers.