The global beer industry 2001 review: Toto, we're not in Kansas anymore

Modern Brewery Age, March 25, 2002 by Harry Schumacher

The following is an abstract of a soon-to-be released report by independent industry analyst Harry Schuhmacher on the current strategies of the world's top brewers, and the impact of those strategies on the future of beer marketing in the United States and abroad.

The beer industry in 2001 roved beyond a doubt Galileo's theory that the world is, indeed, not flat. Where we begin, so we end, and the thin threads that connect each brewery in each dark corner of the world are getting thicker by the day, and those threads are even reaching to beer marketers who have been traditionally insulated in the United States.

The beer industry, while going through massive changes through consolidations, is still governed by strict economic rules. As an industry, we are like the mattress business in that the product is bulky and heavy, and as such it is cheaper to brew it regionally rather than ship it Beer is also relatively cheap to make, but difficult to make consistently in beer-clean conditions. It is universal in its appeal, it is healthful in moderation, and it is still quit fragmented compared to other industries like the soft drink business.

So given these Beer Truths, top executives of breweries around the world are now compelled to make an important decision, perhaps the most important decision of all in the history of the beer business: do we create and market a global brand like Coke and Pepsi, or do we acquire and market local brands? Therein lies the two main global beer industry strategies. But because of the economic rules mentioned above, one common denominator underscores both strategies: acquisition.

TWO GLOBAL STRATEGIES

As we slipped into the millennium and international brewers started generating positive cash from their regional acquisitions in the 80s and 90s, the real consolidation was primed to begin, and two basic strategies emerged, which are embodied by the contrast between Interbrew and Heineken: The former buys local and regional beer brands and markets them better while sometimes introducing its own brands where appropriate-we'll call this the Interbrew strategy; and the latter either acquires breweries or contracts with them, and then brews and markets its own global brand there and runs it through their distribution network-we'll call this the Heineken strategy.

It appears that Anheuser-Busch takes the "Heineken" strategy, brewing Budweiser all over the world, Coors takes the "Interbrew" strategy, marketing British brands to the British, and Miller takes no strategy, or rather the only strategy left by default, and that is to bid up its value by selling or merging during times of intense consolidation, when money is abundant and cheap (by virtue of low interest rates and investment bankers who are left with idle hands after the tech crash).

In this abstract of a yearly report (which will be published in March), let us consider just two top global breweries.

INTERBREW, S.A.: THE WORLD'S LOCAL BREWER

The year 2001 started and ended with bold moves by Interbrew: the acquisition of Bass Brewers, and the $1.7 billion sale of Bass Brewers U.K. to Adolph Coors, two very tidy transactions that unlocked Interbrew's true value on the stock market and now allows it to continue its acquisition strategy. And in between we saw the surprise purchase of Beck's for $1.6 billion.

I like Interbrew because it is only a brewer: not a food or bottled water or cigarette or pub operator, but a pure brewer, and this long term intense focus will serve it well. And they have been around in some form or another for hundreds of years, and their strategy assumes that they will be around for hundreds more. The peerage that controls Interbrew, or should I say the beerage, has the long ranging vision that they are merely stewards of the brands for their offspring, and of course public shareholders. This beerage is actually a voting trust of Interbrew's founding families that owns 63% of the company. When I tactlessly asked one of them whether they paid too much for Beck's (at 13.5 times EBITDA), he gently replied that 100 years from now, nobody will remember or care what they paid for Beck's, but what remains is that Interbrew owns one of the world's greatest beer brands. Not exactly the type of thing you hear on Wall Street every day, and maybe that's what's wrong with Wall Street. (Enron comes to mind).

Interbrew's short term strategy is to surpass Anheuser-Busch and become the largest brewer in the world. In the past, that has meant solely through acquisitions. However, with the appointment of former Bass exec Jerry Fowden as COO in charge of "internal" operations, it is becoming clear that the "World's Local Brewer" is ready to start focusing on organic growth, with CEO Hugo Powell continuing their impressive acquisition strategy (while building his colossal house in Canada). The now-infamous Zulu Papers show that SAB could be a target, or some other emerging market brewer in China, Eastern Europe, or South/Central America, as the U.K. seems off limits due to antitrust elements.