Seeking new beer drinkers in the high Andes

Jul 20th 2005
From The Economist Global Agenda

SABMiller is set to become the world’s second-largest brewer after its proposed takeover of Bavaria, a Colombian firm with strong sales across the Andean region. It is the latest in a string of deals in which big brewers have sought new beer-drinkers in emerging markets to replace those being lost in rich countries. But takeover targets are set to become rarer—and pricier

FOR seasoned beer drinkers, it is often hard to resist just one more glass. But that is just what is happening in the main markets of the world’s big brewers. Beer drinking in western Europe and America is growing negligibly or is in decline. The response of the world’s leading brewers has been to buy up firms in fast-growing new markets in a bid to boost sales and prop up profits as increasingly affluent drinkers in mature markets chose to imbibe wine and spirits instead of ales.

SABMiller, currently the world’s third-largest brewer, said on Tuesday July 19th that it would follow the footsteps of InBev, the world’s largest, into the South American market. Almost a year after InBev was created, with the purchase by Belgium’s Interbrew of Brazil’s AmBev for $11.2 billion, SABMiller said that it would acquire Colombia’s Grupo Empresarial Bavaria in a deal valuing the target firm at some $7.8 billion. Bavaria, South America’s second-largest brewer, is the dominant beer firm in Peru, Ecuador and Panama as well as in its home market and enjoyed revenues of $1.9 billion in 2004. The deal means SABMiller will overtake America’s Anheuser-Busch to become the world’s second-largest seller of beer.

It is not just in South America that brewers have expanded in an effort to combat the stagnation of growth and profits in their mature home markets: breweries in China and Eastern Europe have also been swallowed up. Last year, Anheuser-Busch, best known for its top-selling brand, Budweiser, bought Harbin, China’s fourth-largest brewery, for $720m, after outbidding SABMiller. And earlier this year the American company upped its stake in Tsingtao, another Chinese brewer, to 27%. Recently, InBev said it was buying Russia’s Tinkoff for €167m ($201m). Heineken of the Netherlands, which lost out to SABMiller in the quest to acquire Bavaria, has recently bought two Russian brewers. And consolidation is set to continue. The world’s top five brewers accounted for 17% of world beer sales 15 years ago. Now they sell 40% of the total and that figure is likely to hit 50% by 2010.

The world’s brewing giants, having been instrumental in the consolidation of brewing in Western Europe and America, can only hope to gain extra market share from rivals in these established markets through costly marketing campaigns. So acquisitions are, on the face of it, a sensible way to achieve decent growth—especially in emerging markets where the numbers with the disposable income to afford beer are rising.

By some estimates China’s beer market, now the world’s largest, is growing by 6-8% a year. Beer consumption in Latin America is set to expand at around 4% a year for the next five years, twice the global average, according to SABMiller. And in both regions, beer consumption per head is far below European and American levels, suggesting plenty of scope for more sales. Beer drinking in Eastern Europe is also burgeoning. Russia is expected to out-consume even famously beer-loving Germany, becoming the world’s third-largest consumer market, towards the end of this decade.

There is some evidence that the strategy of emerging-market takeovers is working. InBev reported that net profits for 2004 had jumped by 23% compared with the year before, to €621m. Its Latin American operations more than made up for declining sales in Britain, Germany and elsewhere. South America, like other markets that the brewers are tapping is big and, broadly speaking, increasingly stable and prosperous, with the sort of youthful populations that tend to drink beer. But it is unlike other markets. Bavaria enjoys a near monopoly in Colombia, Ecuador and Peru and is dominant in Panama. Consequently it makes decent profits.
China, despite its position as the world’s largest beer market, is the world’s least profitable. Price wars between the country’s 400-odd breweries have squeezed profits. Anheuser-Busch’s purchase of Harbin, and other forays into China by western brewing giants, have been criticised as expensive exercises in building market share in the hope of future profits when consolidation someday comes.

There are other ways that these deals can boost the coffers of the big brewers. Some scope exists for savings, through economies of scale in purchasing raw materials and by cutting administration costs. SABMiller has promised savings of $120m a year by 2010 through its takeover of Bavaria, though this is quite a modest sum in the overall context of the deal. The multinational brewers also get distribution and marketing expertise in the countries where their acquisitions operate. This means that, besides growing the local brands they have bought, they can in time introduce their more profitable, premium-priced global brands. As consumers become better-off they tend to move up the value chain from cheaper local beers to these premium products, enhancing the brewers’ margins.

SABMiller, formed by the combination of South African Breweries and America’s Miller in 2002, believes that it has the expertise to exploit emerging markets. Its pre-tax profits in its latest financial year of $2.2 billion were driven by handy growth at its South African business where consumers are switching to its premium brands such as Miller Genuine Draft and Pilsner Urquell. InBev has successfully launched Stella Artois in Brazil and Becks in Poland. And eventually more brands could travel in the other direction to enliven the jaded palates of Western European and American drinkers. This year InBev, launched Brahma, Brazil’s leading beer, in 15 countries including Britain, France and America, to compete against the premium beers offered by rivals.

The big brewers are sure to continue to eye assets in fast-growing markets. All four of the world’s top brewers were said to have considered a bid for Bavaria. And speculation has abounded that other big European brewers, such as Carlsberg or Scottish & Newcastle could also prove tempting targets for the global giants looking to get bigger still. Though there may still be a number of countries ripe for consolidation, the number of brewers with a worthwhile market share in emerging markets is finite. If the rich world’s brewers all start chasing the same assets, they will be forced to pay ever-higher prices in their efforts to keep their businesses growing—making the logic of such moves increasingly less obvious.

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