Brewing Industry Analysis

Team 4

SCH-MGMT 689

Brewing Industry Analysis

SCH-MGMT 689

Spring 2012

Aleksandra Goljovic

Christopher Naso

Jennifer Rautine

Michael Repasy

Rodika Ponici

Seth Moye
Executive Summary

Industry Overview

Beer is one of the most popular beverages in the world and its consumption is on the rise. While its origins are debated, the highly sought after fermented elixir represents a mature industry controlled by a few major manufacturers, but with countless small competitors all biding for global popularity. The key competitors in the industry are Anheuser-Busch InBev, SABMiller plc, Heineken N.V. and Carlsberg A/S and they account for 18.8%, 18.5%, 9.2%, and 5.8% market share in 2011 respectively. The remaining 47.7% is segmented into smaller firms who primarily operate domestically. The industry generated $152.8 billion in revenues in 2011 and manufactured 1.8 billion hectoliters of product.

Porters Five Forces

Force / Summary / Influence
Buyer Bargaining Power / Competitive pressure from the primary purchasers distributors/wholesalers and retailers/restaurants is moderate, but is amplified by the fact that consumer tastes which can change can influence profitability. / High
Supplier Bargaining Power / Competitive pressure from supplier bargaining power is considered to be generally low with respect to the industry as a whole, however, rising prices from raw materials significantly influence profitability. / Medium
Rivalry Amongst Sellers / Competition among sellers in the Beer Industry is based primarily on brand, quality, and packaging with price not embodying the most important factor. / Medium Increasing
Pressure from Sellers of Substitute Products / The pressure from sellers of substitute products is considered medium to increasing. Recent data suggests both the wine and spirits industry are gaining share at the expense of beer. / Medium Increasing
Threat of New Entrants / The pressure from new entrants is moderate as smaller breweries have grown, the barriers to entry in a global positon still remain fairly high. / Medium

Industry Attractiveness

The brewing industry is a highly competitive industry, but there is opportunity for return on investment. The three largest market leaders, Anheuser-Busch InBev, SABMiller, and Heineken N.V., offer stable revenues and profits and will continue to operate successfully leveraging economies of scale and grow. Smaller firms and craft breweries offer the potential for higher margins with higher risk. Emerging markets are a key area of growth for the industry as a whole. The brewing industry earns revenues equivalent to the sum its key industry rivals, the wine and spirits industries, and will continue to do so.

Key Factors

Maintaining a broad product variety ensures stable growth and income due to varied consumer tastes.

Rising per capita disposable income drives revenue growth in emerging markets and increases sales of premium beers, wine and spirits in developed nations.

Regulation is a key factor in the distribution of alcoholic beverages.

Brand name establishment can increase repeat consumption.

Investment Recommendations

Investors seeking stable returns should invest in the top three blue chip firms such as Anheuser-Busch InBev, SABMiller, and Heineken N.V.

Investors seeking moderate to high returns should invest in or purchase a brewing operation in a emerging markets.

OIndustry Overview

Beer is one of the most popular beverages in the world and its consumption is on the rise. While its origins are debated, the highly sought after fermented elixir represents a significant industry controlled by a few major manufacturers, but with countless small competitors all biding for global popularity.

The beer industry is measured by two metrics: market value by revenue and market volume. In the global beer industry, the market value for 20101 was $494152.8 billion, which revealed a growth of approximately 0.51.9% from the previous year, refer to Table I. In terms of volume, the industry grew to reach roughly 168.51.83 million hectoliters which represents a growth of around 12.3%, refer to Table I. The market is comprised of various types of beers including premium and standard lager, ales, stouts & bitters, non-alcoholic beers and specialty beers. Standard lager accounted for the largest segment with over 57approximately 73% of the market value with premium lagedark beer comprising the next largest demand at 26.412%, refer to Figure 14.

There are four general geographic regions which define the global market segment for the industry: Europe, Asia-Pacific, Africa and the Middle East, and finally the Americas. When looking at these regions, Europe accounted for the highest percent of the market at 44.339.4%, followed by the Americas with 32.2% and closely trailed by Asia-Pacific with 27.326.4%, then closely trailed by the Americas with 26.7%. Africa and the Middle East only accounted for 1.72%. Of the four global regions, Asia-Pacific showed the highest growth with a 5% compound annual growth rate, significant higher than the global compound annual growth rate of 1.91% in 2011.

The three companies positioned at the top control a combined 41.146.5% of the total market volume. Theses industry leaders are Anheuser-Busch InBev which holds approximately 2018.9% of the market share by volume, followed by SABMiller with slightly over 13approximately 18.5%, then Heineken N.V. with about 7.59.2% of the market. All three companies are consolidated breweries with operations across the globe.

Anheuser-Busch InBev

·  ABInBev owns over 200 brands of beer and offers such popular labels like Bud Light, Budweiser, Stella Artois and Beck’s.

·  ABInBev is the world’s largest brewery operating in over 23 countries with 152 beverage plants.

·  Market leader ranked in first or second position in 19 countries.

·  Generated revenue of $36.339 billion for FY20101, an increase of slight decrease of 1.37.1% from previous year.

SABMiller

·  SABMiller offers brands such as Pilsner Urquell, Miller Genuine Draft, Miller Lite, Grolsch, Coors Light, Foster’s and Killian’s.

·  SABMiller operates in over 75 countries and markets over 200 brands.

·  Operates a joint venture (50% voting rights) with Molson Coors known as MillerCoors.

·  Most recent acquisition of Foster’s Group in December 2011.

·  Generated revenue of $1928.43 billion for FY2011, an increase of 26.17.4% over FY2010.

Heineken N.V.

·  Third largest global brewer with over 200 labels such as Heineken, Amstel Light, Newcastle Brown Ale, and Dos Equis.

·  Operations in over 70 countries with breweries and distributors.

·  Leads the Western European market ranking in first or second positions in 10 countries and 9 countries in Central Europe.

·  Generated revenue of $21.423.7 billion for FY2010, an increase of 9.76.1% over FY2009FY2010.

While the beer industry is fiercely dominated by big brand breweries, there are other types of breweries that are worth mentioning due to their relatively high growth rate and positive trend forecasts in comparison to the rest of the industry. Craft breweries, which include microbreweries, brewpubs and regional craft breweries, are primarily defined by production volume and ownership. Each of these classifications has production and other limitations which identify their particular classification.

For example, to be considered a microbrewery, a company must produce less than 15,000 barrels of beer per year and sell at least 75% of its products through distribution to off-site vendors. By contrast, brewpubs sell at least 25% of its production on-site, usually in a restaurant or pub setting, and distribute less than 75% of their production. In general, craft breweries must have a limited production which does not exceed 6 million barrels per year. Additionally, ownership restrictions are limited as well, such that no more than 25% of the company may be owned by a large alcoholic beverage company.

There are few barriers of entry, allowing small companies to start-up and successfully compete as craft brewers. There are over 1,900 craft breweries in the United States and are generally enjoying a healthy growth rate far above the major brewers. According to the Brewers Association, craft brewers provide over 103,000 jobs in the United States and have enjoyed 15% growth per year for both 2010 and 2011. Craft brewers run the full gamut in size, from single owner-operated brew pub to publicly traded companies, such as the Boston Beer Company which manufactures Sam Adams Lager. Even still, the market is clearly dominated by the major brewers as craft brewers as a whole only commanded 5.7% of the U.S. market by volume and reaped 9.1% of the revenues in 2011.

The global beer industry is forecasted to demonstrate a steady increase in both market value and volume. The compound revenue is expected to grow by annual growth rate of 1.1approximately 2.4% is predicted which represents a 5.8% increase from 20101 with a value of $523156.4.6 billion. With regards to market volume, it has been forecasted to grow 8.72.3% from 20110 with 183to approximately 1.88.0 million hectoliters.

Porter’s Five Forces Model for Analysis

Survival in the Beer Industry is tied to staying innovative, costs, investing money in marketing, and developing new strategies. The demand in this market is dependent on the demographic trends and customer’s alcohol preferences. This is the reason why it’s crucial to maintain low operating costs and concentrate on sales.

The five competitive forces jointly determine the intensity of industry competition and profitability. The five forces narrow in on why the brewing industry became more concentrated and key features defining industry success.

Pressure from Buyer Bargaining Power—--High

The three components that make up the “buyers” of beer are made up of distributors/wholesales, retailers/restaurants, and consumers. Distributor/wholesalers embody an essential link in the market channel for breweries here in the US given regulations prohibiting the sale of beer directly to both retailers and consumers. Thus, distributors/wholesalers have quite a bit of bargaining power and can impact market share by way of their support, marketing, and promotions depending on the incentives offered by the manufacturer.

Retailers and restaurants are another cog of the buyer channel. The main goal of the retailer is to drive traffic through their stores in order to improve sales and, coincidentally, balancing profit margins. As a result, retailers are looking to stock their shelves or bars with the beer products that are selling with a recent focus on more sub-premium brands due to the recent economic situation, as well as supporting their growth of craft beers which have been outgrowing the industry and offer higher average selling prices as well as higher margins.

Lastly, consumers ultimately drive the preferences of both the distributor and the retailer channel as they are the end “user” of the beer beverage. With the plethora of beverage choices in the market, both alcoholic and non-alcoholic, along with the consumer becoming increasingly knowledgeable, buyers have a high bargaining power due to the ease and low costs of switching brands. Several themes have played out impacting the industry: As noted above, consumers are trading up to craft beers given consumers are drinking less as a whole and looking for more flavor when they do. Thus, the newness, interest in experimentation with unusual flavors, and, often, the desire to support local business is driving a shift to the smaller brewers. At the same time, the beer consumer is also economically sensitive so a trade down to less expensive sub-premium beers is occurring—thus, squeezing the middle tier brands/players. Notable here is beer prices have grown ahead of inflation over the last 5-6 years and increasing excise taxes are also impacting the affordability of beer. Health and wellness (believe it or not) is also a theme playing out in the beer industry with strong consumer appeal for lower calorie, ultra-light beer.

Pressure from Supplier Bargaining Power—--Medium

Competitive pressure from supplier bargaining power is considered to be generally low with respect to the industry as a whole. However, due to the high commodity raw material exposure—around 58% of industry cost of goods sold—which include packaging (glass/aluminum/cardboard), barley, sugar, malt, corn, rice, wheat, hops and preservatives--uncertainty regarding cost swings is high. Suppliers of these materials would include hops and grains suppliers, wheat and barley farmers, flour millers, corn/wheat/soybean wholesalers, sugar processors, wood pallet suppliers, cardboard box/container manufactures, and glass product manufacturers. Thus, when recent “shocks” hit the commodities market, i.e. Russia placing an export ban on wheat, brewers see their costs rise in accordance. To combat rising costs, some companies, like Coors, reduced these costs by starting can recycling programs to decrease their dependence on new raw materials.

Rivalry amongst Sellers—Medium/Increasing

Competition among sellers in the Beer Industry is based primarily on brand, quality, and packaging with price not embodying the most important factor. In recent years, the industry has also consolidated quite notably with the top four brewers—AB Inbev, MillerCoors, Heineken, and CarlsbergCarlsberg A/S--controlling 50% of the global share and AB Inbev and MillerCoors alone making up 80% of the US market share. With this consolidation and the resulting stronghold over the market, competition is increasing within the Beer Industry for distribution, raw material access, and customer loyalty.

The rise of the craft-brewing sector is another notable competitive development. The smaller brewer segment has gone from only 50 in 1983 to 1,828 in 2010. This segment continues to grow/gain share and has outperformed the overall beer category for 6 straight years as consumers are looking for newness, experimentation, and supporting smaller local brewers. Retail support has also been strong for this segment given its relatively higher margins as well as the four straight years of double digit growth the segment has seen in the supermarket venue. However, while the share of craft brewers has grown to 5% in 2010 from 3% in 2000, it is still dwarfed by the top four and often seen as a breeding ground for potential acquisitions for the large breweries as they look to find growth.

Lastly, import brand is another competitive set in the Beer Industry. Recent data shows imports are perceived as a higher-end product which appeals to the consumer—import share in the US was up 1.9% in 2010 vs. domestic down 2.6%.

Pressure from Sellers of Substitute Products—Medium/Increasing

The pressure from sellers of substitute products is considered medium to increasing. Recent data suggests both the wine and spirits industry are gaining share at the expense of beer. A 2011 Gallup Poll noted 36% of those surveyed preferred beer to wind and liquor—down from 41% in 2010. Within that, the all important 18-34 year old group saw its beer preference fall from 51% to 39%. Also notable, the per capital consumption of malt beverages has been steadily declining—from 24.6 gallons in 1981 to 20.6 gallons in 2010. The drivers to this include both the wine and spirits industries have increased both their promotions and pricing more aggressively versus beer, the growing perception of beer being less healthy and exotic than wine and spirits, demographics, and both increased alcoholic and non-alcoholic beverage competition.