Can the world’s biggest breweries beat their crafty rivals?

The global beer industry is undergoing huge change with premium drinks, international beers, and low or no alcohol content beverages all growing in demand. But for the world’s biggest breweries the biggest challenge is the rise of craft beers, which stand for everything that they are not.

Beer
Source: Bloomberg

‘That's the problem with drinking, I thought, as I poured myself a drink. If something bad happens you drink in an attempt to forget; if something good happens you drink in order to celebrate; and if nothing happens you drink to make something happen,’ – Charles Bukowski, author of ‘Women’.

Beer is firmly ingrained in cultures around the world, with its origins stretching back over 6000 years. We have had an ever-more eclectic array of tipples to try to tantalise our taste buds over time but beer has remained the staple drink of society throughout. Lagers, ales, stouts, pilsners and bitters are just the start of what seems an endless list of options for people to choose from and, like everything else, our palette for beer moves with the times.

With such a variety of beer being brewed, the market has traditionally been fragmented, with small independent brewers specialising in what was often the beverage of choice of the local communities in the surrounding area. This is why there are so many types of beer, with many attached to national identities (like Guinness, which acts as an ambassador for Ireland across the world), and why drinking habits can vary on a regional level. In the UK for example, John Smith’s bitter was founded in Yorkshire and is to this day still the region’s favourite booze, while Scotland’s number one pint, Tennent’s, is also home-grown.

The industry has been under a lengthy period of consolidation, creating what are now international breweries equipped with bulging portfolios of brands that are sold around the world. As these growing companies looked to scale-up production and expand into new markets they concentrated on developing flagship brands that could hold universal appeal across the world.

Lager, as the most popular type of beer around the world, has been the focus for many of what are now the world’s largest breweries, such as Heineken and Carlsberg. Although the industry had long been devoted to creating affordable brands that would bring working men together down their local pub, concentrating on pushing high volumes of a select few brands to grow margins, economies have evolved and the growing middle classes are increasingly looking for a tipple that not only wets their thirst but also shows off their social status.

Consumer tastes are changing rapidly, and the globalised brewery market (championed by internationally recognisable brands that has evolved over the past two decades) is now being reversed as people look for more higher quality beers that have a story behind them and can be traced back locally, demonstrated by the rise of craft beers. As consumers increasingly focus on quality over price, do the global breweries have what it takes to fend off their crafty rivals?

Growth in global beer sales has remained subdued since financial crisis

Beer accounts for 75% of the global alcohol market and, compiling various statistics and estimates, the global market has seen its value rise from around $530 billion in 2016 to $593 billion in 2017, with estimates that could rise at a compound annual growth rate (CAGR) of anywhere between 2% and 6% out to the middle of the next decade, when estimates suggest the sector’s valuation could be as high as $750 billion. While estimations concerning the industry’s future are wide-ranging, there is consensus that growth will continue going forward.

In terms of volumes, the industry was seeing sales growth strengthen after entering the new millennia, with annual growth peaking at 6% in 2007 before collapsing as the financial crash took its toll. Still volumes continued to grow, albeit marginally, throughout the crisis and despite rebounding fairly quickly the industry suffered a rare fall in volumes in 2015. With annual growth struggling to hit 1% in 2017, estimates imply that growth will accelerate over the short and medium term.

Beer volumes chart
Source: GlobalData, May 2018

The US is the world’s biggest beer market in terms of both production and consumption, but in second place China is expected to overtake its Western rival in the not so distant future after becoming one of the biggest players over the past two decades. Other top consumers of alcohol include India, Brazil, Mexico, Russia and European nations Germany, the Czech Republic, Estonia, Austria, Poland and the UK. 

Big breweries cement their control of the beer market through consolidation

One presentation on the global beer industry from as recently as 2010 boldly stated that there was ‘no global beer, only local’. As more brands have fallen under the control of fewer companies, the world’s largest breweries have been growing their market share.

The world’s top ten brewers held a combined market share of just over 50% in 2004 but now the five biggest companies – ABInbev, Heineken, Carlsberg, China Resources and Molson Coors - control about the same amount. Almost all of these have grown by buying up rivals and peers.

World’s biggest beer brands and breweries reshaped by M&A consolidation

(Volume: Hls, millions)

 Top 10 brewers in the world Top 10 international beer brands
1998 2017 (Est) 1999 2017
Anheuser-Busch 118.8 ABInbev 553.4 Heineken 15.5 Heineken 31.7
Heineken 59.2 Heineken 200.7 Amstel 8.1 Budweiser 30.1
Miller Brewing 51.9 Carlsberg 118.3 Budweiser 7.7 Corona 18.5
SAB 42.2 China Resources 117.3 Guinness 7.1 Tuborg 14.8
Interbrew 35.7 Molson-Coors 91.6 Carlsberg 7.0

Carlsberg 11.8

Ambev 34.8 Tsingtao 79.8 Corona 6.7

Stella Artois 10.3

Modelo 34.1 Asahi 60.6 Fosters 6.1 Guinness 9.5
Asahi 29.1 Yanjing 45.1 Stella Artois 5.1

Modelo 9.4

Coors 28.8 Castel 28.9 Coors 2.9 Tiger 9
Kirin 27.5 Kirin 26.9 Tuborg 2.7 Amstel 7.7

Source: GlobalData, May 2018

A brief history of how modern-day ABInBev was formed

Modern-day ABInbev has been created through a string of major mergers. After Brazilian brewer Ambev (which in turn was the creation by the combination of Brahma and Antarctica in 2000) and Belgian counterpart Interbrew joined forces in 2004, InBev was born and later went on to merge with Anheuser-Busch four years later.

It is comfortably the largest brewer in the world, with a market share of about 30%, having cemented its position with the industry’s biggest ever mergers and acquisition (M&A) deal after buying SAB Miller in 2016 for over $100 billion. In turn, SAB Miller had also purchased other companies including Miller Brewing and Bavaria, before being acquired itself.

Heineken retains top international brand through expansion

With ABInBev way ahead in terms of overall size, Dutch firm Heineken likes to flash the title of the ‘world’s most international brewer’, having managed to retain the most popular international beer brand over the last two decades.

Between 2002 and 2010 Heineken strengthened its position in numerous global markets through M&A and joint ventures, including in Russia and China. It also bought Austrian-based Getranke-Beteiligungs in 2003 to extend its leading position in Europe.

In 2006 the company snapped up a number of breweries from Asia Pacific Breweries, as well as Fosters brewing assets in Vietnam, followed by a string of Eastern European breweries in 2008 and the beer business of Mexican firm FEMSA in 2010.

Last year, Heineken became the second-largest brewer in Brazil (with ABInBev once again the leader) after buying a venture of Japanese firm Kirin, which had struggled to make the business work since it had bought it in 2011.

Molson Coors: a US giant built on a partnership ‘of equals’

The American brewery has grown exponentially since Molson and Coors combined in 2005 before immediately going on to buy Creemore Springs Brewery in Canada. The company formed a partnership with the then-independent SAB Miller in 2008, MillerCoors, combining businesses in the US and Puerto Rico. Molson Coors eventually acquired the venture in full in 2016.

Molson Coors also bought StarBev in 2012 before changing the name of the business to Molson Coors Central Europe. The firm has also previously purchased Granville Island Brewery in British Columbia in 2009, Franciscan Well Brewery in Ireland in 2013, Sharp’s Brewery in England in 2012 and the Mt Shivalik Brewery in India in 2015.

The rise of Chinese breweries disrupts big international players

The combination of M&A and the rise of the Chinese market and other developing economies has significantly disrupted the market. Four of the top ten largest brands in the world are now Chinese brands – Snow (China Resources), Tsingtao (Fosun), Harbin (ABInBev), and Yanjing (Beijing Yanjing Beer Group).

Top ten largest beer brands disrupted by Chinese breweries

(Domestic and international sales, total)

1999 Volume (Hls, millions) 2017 Volume (Hls, millions)
Budweiser 50 Snow

101.2

Bud Light 33.5 Budweiser 49.2
Kirin 27 Tsingtao 49.1
Asahi 24.1 Bud Light 44.8
Coors 22.8 Corona 41.7
Corona 22.6 Skol 39.1
Skol 21.8 Heineken 34.3
Brahma 21.6 Harbin 29.9
Miller Lite 20.2 Yanjing 29.7
Heineken 19.3 Coors 26.5
Total share of top ten    19.6% Total share of top ten    22.8%

 

Snow Breweries had originally been a joint venture set up by SAB Miller to enter the Chinese market in partnership with China Resources. But in order for the ABInbev-SAB Miller merger to get clearance, SAB had to sell off its holding in Snow, offloading its stake off to its Chinese partner in order to give China Resources full control of the business.

As this flurry of M&A activity has continued the market share held by the top ten brands has risen, having gained 3.4% over the past 18 years, demonstrating the impact of consolidation in the market.

For most industries the Chinese market can pose a problem, as entering can be difficult without partnering up with a national company. Data from Euromonitor suggests ABInBev is the only western firm to have obtained a material chunk of the Chinese market (around 16%, whereas Heineken is thought to hold just 0.5%).

However, Heineken has recently announced it will buy 40% of CR Beer – part of China Resources. The $3.1 billion investment will hopefully allow Heineken to catch up with ABInBev, which is also growing at three times the rate of its Dutch rival in China. Heinken will end up with about 21% of CR Beer, which will also be given a license to sell Heineken in the country.

Global breweries reshaping portfolios as consumers demand quality

Despite its wobbles, beer consumption has continued to trend upward over the years as populations continue to grow, particularly the middle classes in countries like India, China and in Latin America. Some of these countries have seen their youth population, as well as their disposable incomes, surge in recent decades, providing fresh markets for the breweries to target. There has also been a rise in the number of female drinkers of beer in numerous markets, changing the dynamics of what has traditionally been a business geared toward men.

Although globalisation has allowed brands to build their reputation on an international scale, allowing foreign beers to infiltrate far flung markets, consumer tastes are evidently changing. Lager and ale are still the two most consumed types of beer at present but both have seen growth underperform relative to the 2% average CAGR for beer as a whole over the last 18 years. In fact, they were the only two main types of beer to do so. 

Global beer growth by segments, CAGR over 1999 to 2017

By type of beer By price segment By geography, including craft
Wheat beer 4.5% Discount 1.6% Domestic beer 1.7%
Stout 1.7% Mainstream 1.6% International beer 4.3%
Others 4.3% Premium 3.1% Craft beer 8.2%
Other top fermented 2.1%
Lager 1.9%
Flavoured beer 11.9%
Dark beer 4.3%
Beer mixes 8.6%
Ale 0.9%

Source: GlobalData, May 2018

In addition, consumers are increasingly looking to drink less, but better quality beer. This has seen discount and the most popular ‘mainstream’ beers also underperform the overall market since 1999, with more expensive premium drinks growing at least double the rate over the same period.

The globalised nature of the beer market has also dampened the mood for domestic beers, which refers to the performance of the big brands at home (for example brands like Bud Light and Coors Light perform well overseas, but have previously struggled in their home markets). While craft beer has been one of the strongest growing segments of the industry, suggesting that consumers are focusing on more locally-produced beers, sales of international beers has continued to remain solid as people are still enticed to try something new and more exotic. It could be argued that the focus on making brands appeal to foreign customers has taken the shine off the brand back at home. Regardless, the sector’s focus on international beers is detrimental to domestic beers by nature.

Demand for better quality drives breweries to focus on ‘premiumisation’

‘The natural dynamic is to drink less, but drink better,’ – English beer writer Michael Jackson.

The trend for premium drinks has been gradually gaining momentum for several years and is not contained to the beer industry. Spirit makers like Diageo have been upgrading their products to cater for the explosion in demand for premium gin and tonics, for example. ‘Premiumisation’, as it is called, is currently most prevalent in the US, Europe and Australia.

Read more about whether you should take a shot on spirits or bet on beer

However, in some countries such as Spain, where the economy has not been too great for a while, consumers are still showing demand for ‘value for money’ beers, showing that breweries still have to cater to a wide range of customers in different regions around the world.

Non-alcoholic and low-alcoholic drinks opens up market to more disruption

Another rising trend occurring on a global scale, driven by a more health-conscious younger generation, is the desire for alcoholic beverages with low or zero alcohol content. In what were rather niche areas catered more towards women or as a way of discouraging drink driving, this is a growing area for breweries to react to but one that also opens the door for more disruption in the market. In the UK, one in five adults is teetotal, but the rate is even higher among 16 to 24 year olds, with one in four avoiding booze altogether – 8% higher than a decade ago, according to the Office for National Statistics.

This begins to blur the line between those companies that produce the soft drinks, mostly mixers used to blend with spirits, and those that make the beers stocked in the pub fridges. These mixers, to match the premium spirits they now partner, have also gone up-market, led by companies like Fevertree Drinks. Diageo stirred up activity when it made a minor investment in a zero-alcohol botanical spirit company named Seedlip, which demands a price not too far off its alcohol-filled rivals.

Read more about the CO2 shortage and how it impacted the food and drink sectors

For a long time, the battle to supply mixers such as tonic water, orange juice and ginger beer to the likes of pubs and restaurants was being battled out by firms like Britvic and Schweppes, who were in turn having to take-on syrup alternatives like Coca-Cola or Pepsi (Schweppes is now part of Coca-Cola, having formerly been part of Cadbury). But the rise of premium mixer firms like Fevertree have left them bruised. However, the message of Britvic’s marketing campaign for its new product – ‘adult squash’ - hits the nail on the head as to what the market is aiming for: a classy adult soft drinks market. While this latest product is targeting those in supermarkets, it does point to the wider trend that is occurring, and it builds on other attempts by the industry like Shloer.

The demand for low or no alcohol beers and beverages opens up the market to those that have made soft drinks their staple, meaning that further disruption is on the horizon. They have good reason to do so too, with the soft drinks category undergoing its own overhaul as fizzy, sugar-laden drinks are being ditched for natural, high-quality ingredient alternatives.

Read more about the UK Soft Drinks Levy and the impact of the 2018 ‘sugar tax’

Even Coca-Cola, the long undisputed champion of soft drinks, is feeling the pressure. It has religiously avoided the alcoholic beverage market and, with its own range of premium soft drinks already developing, it has now made its first tentative move into the low-alcohol market as it searches for new opportunities for growth to compensate as its core brands come under pressure. The drink, a fruit-flavoured alcopop, is the first alcoholic beverage to be made in its 125-year history, and is an attempt to capture the trend in Japan, especially amongst women, for fruity beverages.

Learn more about the history of Coca-Cola

Interestingly, while low and no alcohol drinks are expected to experience stronger growth over the coming years than those in the middle of the range, those at the other end of the scale – the stronger than average varieties – are also expected to see strong growth. Coca-Cola’s new range looks to capture both ends of that scale, with its new drinks varying from an alcohol content of 3% to 8%.

While the big breweries have reacted with products like Heineken 0.0, Budweiser Prohibition and Guinness Open Gate Pure Brew Lager, this new market pushes the focus more onto flavours and sourcing high-quality ingredients from century-old brewing processes. However, their expertise will still be fundamental in creating alcohol-free beer (which is not as easy to do without ruining the flavour as you would think).

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Overall, 32% of consumers around the world check the content of their beer before buying it, the amount of alcohol, sugar or calories for example. This is particularly in common in Asia-Pacific where 42% of consumers check content, Latin America where the rate is 36% and in North America where the rate matches the global average at 33%. However, this is less of a concern for consumers in Europe and Africa, where just over one-quarter of all consumers are inquisitive about the content of their beer.

Craft beer and the globalised breweries: a double-ended sword

Clearly, there is a swathe of change rippling through the beer industry at present but none represent more of a threat to the big international breweries than the rise of craft beer.

The definition of ‘craft beer’ is debated. It may be too obvious a place to start, but the definition of ‘craft’ in the Oxford English Dictionary is ‘an activity involving skill in making things by hand’ and, in relation to food and drink, something ‘made in a traditional or non-mechanized way by an individual or small company’. The US Brewers Association defines craft beer as one made by a ‘small, independent and traditional’ brewer, and the UK Brewers Association is an organisation designed for ‘small and independent craft brewers’.

This more intimate and personal approach to brewing, which comes with a story on how it was founded or why it is special, has fed into the rise of craft beers. The perception of craft beer has centred on higher quality ingredients, a more hands-on approach to brewing, and strong modern brands that highly engage with their customers, like UK firm BrewDog which sums up how many of these firms have approached marketing. Its latest funding round is being marketed to its customers under the campaign ‘Equity for Punks’, encouraging them to not only buy their beers but to invest in the business. Over £60 million has been raised from 84,727 investors under the campaign overall, over £20 million of which has come from the latest funding round which remains open. BrewDog, which boasts colourfully named drinks including Dead Pony Club, 5AM Saint and Jet Black Heart, has been rumoured to be considering a public listing as soon as 2020.

But, when you start to talk about tens-of-millions being raised and possible public listings, twinned with the fact it has grown from producing just 1050 hl in 2007 to 343,253 hl in 2017 (equivalent to over 60 million pints using basic conversion methods), the question of size and when craft beer becomes just plain old beer, on paper anyway, becomes harder to answer.

With some of the craft breweries growing into substantial businesses on their own, this all poses an even bigger conundrum for the massive international breweries that have become accustomed to manufacturing their drinks on a factory-style scale. By definition, a business selling the most widely consumed beers on the planet that are brewed in the biggest breweries in the world can’t produce craft beer.

But they have. All of the big international brewers can’t simply overlook the growth occurring in the sector, especially when it is taking custom away from their own beers. All of them are in the craft beer game one way or another. In order to avoid the awkward questions about big business buying small independent companies that thrive off their size, the trend has been for the big brewers to invest and take a minority stake in craft brewers in order to gain exposure without stepping on anyone’s toes. But even this has been met with disdain by customers of some craft beers, who choose the brand because it isn’t owned by ABInBev, Heineken, Carlsberg or any of the other corporate giants.

The situation presents a double-ended sword. The biggest players represent the biggest threat to craft breweries, which are fighting to retain independence, and craft breweries are the most material problem for their larger counterparts, which find themselves unable to enter a market without destroying the whole concept.

But at the bottom line: they have, and they’ve shown that they’re not always satisfied with a small slice of the pie. Heineken bought half of California-based Lagunitas Brewing Company in 2015 and then bought the entire business a year later. More recently it invested about £40 million into London’s Beavertown Brewery, which said Heinkeken was taking a ‘minority stake’, meaning it is to ‘retain total control and freedom to do our own thing’.

Big breweries struggle to find a solution to the rise of craft beer

‘But no matter how good the beer, how many honours or awards, how innovative Goose Island would ever be again, someone deep in the crowd would always boo,’ – Barrel-Aged Stout and Selling Out: Goose Island, Anheuser-Busch, and How Craft Beer Became Big Business’ by Josh Noel.

One of the best examples of how unwelcome big brewing is in the craft beer space is ABInBev and Goose Island, a Chicago craft brewer the giant bought back in 2011. The shock buy of the locally-owned brewery caused an uproar that still rumbles on to this day and reveals why the craft beer industry, and those that drink its products, should be nervous. Not only did ABInBev purchase the whole business but within a year it had practically swallowed it up, pumping out its formerly limited and exclusive brands on a mass-scale out of its own huge facilities that were in a different state altogether. The brand’s attachment to the local community, the attribution of the beer’s taste to the short distance it had to travel and the personal and handmade approach to craft brewing was dismantled.

But this raises why many craft brewers feel like their entire identity is under attack. Goose Island is still marketed and sold as a craft beer even though many would argue it no longer is, and the independent brewers left feel like their industry is being undermined by big breweries masquerading as something they’re not. Goose Island does not even feature in ABInBev’s latest annual report.

But, based on the fact that ABInBev went on to buy London’s Camden Town Brewery in 2015 and that others have also continued to buy small breweries suggests the displeasure is spawning from a minority and that, actually, craft beer is just a marketing message that carries a very vague and subjective definition, like the way natural or premium is slapped willy-nilly on food packaging.

Does Brexit provide an opportunity for the craft beer market?

Craft brewers and smaller, UK-based breweries could see benefits from the UK leaving the European Union (EU). With the possibility that many of the drinks currently stocked in pubs and restaurants up and down the country could become unavailable or more expensive to get hold of there are signs that many will look for homebrewed beverages to take their place.

JD Wetherspoons, led by fierce Brexiteer Tim Martin, has said it plans to replace French champagnes with others from the UK and other non-EU countries, while German beers (specifically wheat beers) will be dropped for ones made in the UK and the US, as two of the most prominent makers of craft beer alongside the likes of Australia and New Zealand.

Still, the overall UK pub market is still struggling, with over 2300 pubs having shutdown since the start of 2012. This has been the result of numerous factors, including the consolidation within the pub sector that has seen pub networks streamlined and cut-down, the failure of some to keep up with the premium-end of the market (some call this gentrification), and because there is more competition from others like supermarkets which offer alcoholic beverages at prices the pubs could never compete with. Heineken recently announced it would be investing £44 million into 500 of its 2900 pub network in the UK, operated under its Stars Pubs & Bar unit, showing that those breweries that have diversified are having to take action at all ends of the supply chain amid the tough environment.

World’s biggest breweries and small craft beer makers pose a problem for one another

While controversy over the relationship between big breweries and craft beers will continue, the fact that consumers are still purchasing small brands despite the involvement of the larger players shows the strategy is working, and therefore it’s worth considering the positives. What big breweries have done to craft beer goes against the entire point, but apparently craft beer is nothing but a label.

These giants are simply using economies of scale, buying a popular brand with good taste and churning as much out of the stuff as possible. If they haven’t already, they will make craft beer as high margin and as profitable as the lager they have built their businesses on, but then isn’t it back to square one?

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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