The Global Brewery The Global Brewery IndustryIndustry

Presented by Sobithan Sekar

ObjectiveObjective Formulation of International Business Strategy by the Beer Companies

with the perspective of reconciling the twin issue of

IBSLocalisation:To achieve market share

Standardisation:To achieve economies of scale to stay competitive.

Why Brewery Industry is Why Brewery Industry is Unique?Unique? Case 1: There is no Global Beer only Local.

Reasons:

1.Beer is bulky and too expensive to export, it is brewed domestically

2. Foreign producers will license their brand name products to local producers to gain a local market presence.

3. In addition, imports of alcoholic beverages are traditionally heavily taxed

4. Rival domestic producers usually tie up local distribution channels.

5. Government also product domestic breweries , such as in Germany where the Reinheitsgebot purity rules have protected indigenous beer for over 400 years.

Top Ten Brewers Worldwide 2006 Top Ten Brewers Worldwide 2006 Millions of Barrels, HectolitresMillions of Barrels, Hectolitres

Source: ASource: Anheuser- Busch (2007) via via http://www.anheuserbusch.com/mediakits/08/08%20Top%2010%20Brewers%20Worldwide%20-%20Oct%2007.pdf

ABInbev Brand PortfolioABInbev Brand Portfolio

Budweiser brand is sold in North American Zone. The Budweiser family of brands had 11.6% share of the U.S. market and remained the number one brand in Canada. Budweiser is the number one beer in North America.

Stella Artois Brand is the number one International beer brand in Argentina.

Beck is the number one German beer in the world; Germany is the largest market grew in both volume and share.

SABMiller Brand PortfolioSABMiller Brand Portfolio SABMiller has an attractive brand portfolio that meets customer needs in different markets. The

premium international beer includes Pilsner Urquell, Peroni Nastro Azzurro, Miller Genuine Draft and Grolsch along with market leading local brands such as Aguila, Castle, Miller Lite, Snow and Tyskie.

Carlsberg Brand Portfolio:Carlsberg Brand Portfolio:

Case 2: Imports of Alcoholic beverages are heavily taxed. Scenario in UK

Source: Alcohol: Tax, price and Public health (2008) Assessed via www. ias.org.uk

Taxation of Alcohol is a effective mechanism for reducing alcohol problems. Government should deliberately adopt a policy of taxing alcoholic drinks so as to reduce consumption (British medical Association, Faculty of public health, royal medical college of psychiatrist and All party MPs, 2006)

Excise Duties in United Kingdom for Beer in Pence( 1973-2008)Excise Duties in United Kingdom for Beer in Pence( 1973-2008)

Source: Alcohol: Tax, price and Public health (2008) Assessed via www. ias.org.uk

Overview of Brewery Overview of Brewery IndustryIndustry

Top Ten Global Brewers Top Ten Global Brewers (1998-2004)(1998-2004)

Source: Ebneth and Theuvsen (2005)Source: Ebneth and Theuvsen (2005)

It is an unprecedented drive for consolidation primarily effected through a series of high profile mergers and It is an unprecedented drive for consolidation primarily effected through a series of high profile mergers and acquisitions. The aggregate volume of the world top ten brewers has grown at more than the four times the pace of acquisitions. The aggregate volume of the world top ten brewers has grown at more than the four times the pace of total industry volume since the mid 1990stotal industry volume since the mid 1990s

Top ten brewers= 914(1,475 mhl); Others =563 ;563*4= 952

Transaction multiples of major Merging and Acquisitions in the Brewing Industry 2000-2005Transaction multiples of major Merging and Acquisitions in the Brewing Industry 2000-2005

Source: Ebneth and Theuvsen (2005)Source: Ebneth and Theuvsen (2005)

Trends of Cross Country Acquisition and MergingTrends of Cross Country Acquisition and Merging

Year Activity1999 Merging between Brazilian Brahma and Companhia cervejeira

Antarctica in 1999 which led to the creation of Ambev the largest brewing company in South America.

2000 Merging of Carlsberg (Denmark)and orkla (Norway) to form Carlsberg breweries; Carlsberg ( Denmark) acquired Kronenbourg (France) .

2002 Acquisition of Hart wall (Finland) by the Scottish & Newcastle (United Kingdom). The acquisition of Miller (USA) brewing by South African Breweries(SAB)

2003 Acquisition of Brau AG (Germany) by Heineken (Netherlands)2004 Belgium Interbrew and Brazilian Ambev merged to create the largest

brewer in the world Im-bev2005 Anheuser-Busch,(USA) the industry leader, took over Harbin, the biggest

brewer in northeast China, for $718m2006 SABMiller(South Africa) has agreed to buy the Foster’s beer brand in

India in a $120m deal as it seeks to build a stronger foothold in the subcontinent.

2007 On 19 November 2007, the board of Royal Grolsch NV accepted a €816 million offer for the company by SABMiller. The takeover was completed with the delisting of Grolsch's shares on 20 March 2008.

2008 Kohlberg Kravis Roberts provided a rare fillip for the private equity industry after confirming its maiden acquisition in South Korea in a deal worth $1.8bn.

2009 Kirin Holdings, one of Japan’s leading beer and beverage companies, has won exclusive negotiating rights to buy up to 43.25 per cent of San Miguel Brewery (dominant beer in the Philippines) in a deal that could be worth more than $1bn.

Motives Behind the Merging and AcquisitionMotives Behind the Merging and Acquisition

For the Brewing groups M&As seem to be the fastest and most efficient approach to capturing the benefits with access to new markets and, at the same time, to being prepared for the competition in the world beer market ( Bleakley et al, 2004). For example : SABMiller acquisition of Miller brewing company in USA in 2002 and Joint venture with Coors brewing company in 2008.

More specifically the M&A-Motives are thought to be good for shareholders:

Economies of scale: The combined company can often reduce duplicative departments or operations , lowering the company’s costs relative to theoretically the same ( Rall, 2002)

Increased revenue (due to lack of competition): this motive assumes that the company will be getting rid of a major competitor and increasing its power to set prices.

Synergies: better use of complementary resources (Kutschker and Schmidt, 2004).

Taxes: A profitable company can buy a loss maker to exploit the target's tax shield.

Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smooths the stock price of a company, giving conservative investors more confidence in investing in the company. (Glaum et al, 2003).

Process to understand the phenomena in a better wayProcess to understand the phenomena in a better way

Analysis of the External environment?

Industry is attractive or Unattractive for globalisation.

Insights on emerging and industrialised economies?

Why there is more number of Acquisitions and Joint venture in the Brewery Industry?

Analysis of Brewery Company: ABInbev, SABMiller, Carlsberg and Heineken

1.Whether they have realised the need to solve the twin issue of national responsiveness and standardisation?

2. If so how they do it?

External Environment- Meta level development in the world economyExternal Environment- Meta level development in the world economy

Increase in number of regional trade agreements notified to GATT/WTO 1950-2008

Source: Author (2009) compiled from WTO (2008)

2 1030

50

75

150

200

250

421

0

50

100

150

200

250

300

350

400

450

1950 1960 1970 1980 1990 2000 2001 2002 2008

Number of Regional Tradeagreements

The upsurge in the number of regional trade agreements has lead to the collective platform for globalisation . Most of the nation belongs to at least one regional groupings on the trade agreement. It can be argued as the deepening of economic integration which represents successive step towards globalisation.

For Example Impact of NAFTA on Brewery Industry.For Example Impact of NAFTA on Brewery Industry.

Impact of Trade liberalisation in Europe 1993Impact of Trade liberalisation in Europe 1993Export and Import flows of Beer in the EU Countries in 1993 Export and Import flows of Beer in the EU Countries in 1993

1. Market liberalisation across Europe has allowed firms to invest equity to acquire the full ownership of established breweries across Europe rather than minority holdings.

Impact of Trade LiberalisationImpact of Trade Liberalisation

2. In 1989 when communalism collapsed Hungary was found to have a better climate for foreign investment than the other countries in the region. For example: German brewer Brau and Brunnen Ag, Interbrew, SABMiller and Heineken made a investment in Hungary.

3. In 17 September 2001 China has agreed to undertake a series of important commitments to open and liberalize its regime in order to better integrate in the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules (WTO, 2001). Followed by the liberalisation of Chinese market the 600 breweries in china registered an export value of beers worth around 39,601,291 USD in 2005 (Polku, 2005). SABMiller and Carlsberg ventured in to china following the market reform in 2001 .

Rise of Input costsRise of Input costs

1. The rising input costs of Barley and Hops which are the key ingredients for beer has affected many breweries. For example : ABInbev, the brewer of Beck’s and Stella Artois beers , was hit by rising prices for malting barley. As a result the cost of sales per hectolitre rose 10 per cent in the quarter and it had been unable to recover the full increase simply by raising prices. (Financial times, 2008)

2. Rising costs of Glass and aluminium for packaging encourages firms to achieve high volume sales in order to spread total costs and thereby reduce costs per unit. Under these circumstances encouragement to globalisation reflects the need to achieve the necessary volume sales in order to gain scale economies

Social life style changesSocial life style changesSocial Life style changes:1.Anti smoking measures in New York and France had tended to reduce the social activity that has made the decline in the sales volume of beer (Stone, 2003).

2. Changing lifestyles, competing leisure activities, bootlegging (the importation of duty-free beer), and reduction in leisure time spent in pubs and a rise in drinking at home as key factors contributing to the decline of beer sales in UK (Stone. 2003). Beer consumption per capita fell by 33 per cent from 1979 to 2008 in UK (Mintel, 2009).

Evolution of Emerging Evolution of Emerging markets:markets: Around 800 million people in the world are expected to join the middle class by the year

2030 (World Bank, 2006) People are gaining the resources needed to purchase world class consumer products and they view professionally produced and imported beers as indicators of their life style.

Emerging economies that previously featured traditional beer markets are now quickly developing many commercial characteristics which are once associated exclusively with developed economies. In addition to the rise of the global middle class, emerging markets are also being reshaped by ongoing urbanisation.

United Nations (2008) predict that more than 650 million people will migrate to urban centres over the next decade. enables brewers to reach additional customers more efficiently and effectively.

Rising incomes, demographics shift towards urbanisation and increasing westernization of tastes among younger generations are the major reasons for the internationalisation of Carlsberg in the emerging markets of Eastern Europe and Asia pacific (Carlsberg Annual report, 2008).

Beer Markets in four emerging economies:Beer Markets in four emerging economies:

Relation between PEST ad Meta level Trends in the Brewery Industry:Relation between PEST ad Meta level Trends in the Brewery Industry:

Source: Author (2009)Source: Author (2009)

The five forces of Brewery Industry competitivenessThe five forces of Brewery Industry competitiveness

Insights on emerging and industrialised economies.

Product life cycle theory for brewery Industry:Product life cycle theory for brewery Industry:

It can be argued from the Figure 4.6 that the markets in the early stage of the product life cycle (Africa, China and Central and Eastern Europe) is characterised by rapid growth, explosive proliferation of firms and low barriers to entry and later when the market becomes mature (Latin America, USA, UK and France) the customers become more knowledgeable and markets in this stage are characterised by competitive nature where growth rates are expected to be flat or slightly declining.

Overview of Different markets in Brewery Industry:Overview of Different markets in Brewery Industry:

Promising Growth in Emerging EconomiesPromising Growth in Emerging Economies

Chief operating officer of the Asia division of Australia’s foster Brewing group (2005) predicts that China’s market for beer will grew at a rate between 10 and 25 percent per annum. The segment of foreign beer is expected to grow 15-30 percent per year. Global consumption, by comparison, is growing at 1.2 percent per year.

Consumption Characteristics of different beer markets:Consumption Characteristics of different beer markets:

Source: Author (2009) compiled from Carlsberg Annual report (2008)

Consumption Characteristics of different beer markets:Consumption Characteristics of different beer markets:

Source: Author (2009) compiled from Carlsberg Annual report (2008)

Carlsberg Strategy in ChinaCarlsberg Strategy in China

In 1998 Carlsberg opened a US$80m Greenfield brewery near Shanghai to produce premium beer. However, following losses over several years, Carlsberg sold its equity stake to Tsingdao, a leading brewery in the north of China, at a loss. Apparently Carlsberg overestimated the growth of the premium segment and underestimated the pace of upgrading of local brands and the marketing drive of international competitors such as Sapporo in Japan.

Xinjiang Xinjiang

Guangxi

Hunan

Hubei

Hainan

Gansu

Qinghai

Ningxia

Shaanxi

Jiangxi

Anhui

Fujian

Neimongu

ShanxiShandong

Xizang

Sichuan

Yunan

Guizhou

Henan

Heilongjiang

Jilin

Liaoning

Zhejiang

Jiangsu

Hebei

Beijing

Shanghai

Guangdong

Gansu

Jiangsu Province74 million inhabitantsMarket Position: #2Breweries: 2

Jiangsu Province74 million inhabitantsMarket Position: #2Breweries: 2

Zhejiang47 million inhabitantsMarket Position: #1Breweries: 7 + 1 bottling center

Zhejiang47 million inhabitantsMarket Position: #1Breweries: 7 + 1 bottling center

Guangdong86 million inhabitantsMarket Position: #1Brewery: 3+ 6 bottling centers

Guangdong86 million inhabitantsMarket Position: #1Brewery: 3+ 6 bottling centers

Hunan90 million inhabitantsMarket Position: #1Breweries: 2

Hunan90 million inhabitantsMarket Position: #1Breweries: 2

Hubei67 million inhabitantsMarket Position: #1Breweries: 5

Hubei67 million inhabitantsMarket Position: #1Breweries: 5

InBev China:InBev China: 30 plants in eight provinces 30 plants in eight provinces**

Hebei Province67 million inhabitantsMarket Position: smallBreweries: 1

Hebei Province67 million inhabitantsMarket Position: smallBreweries: 1

*including 10 sites of Zhujiang brewery

Jiangxi43 million inhabitantsMarket Position: significantBreweries: 1

Jiangxi43 million inhabitantsMarket Position: significantBreweries: 1

Fujian35 million inhabitantsMarket Position: #1Breweries: 2

Fujian35 million inhabitantsMarket Position: #1Breweries: 2

Number of FDI in Central and Eastern Europe:Number of FDI in Central and Eastern Europe:

There are total of 161 FDI investments in the CEE market alone.

Local Nature of the Industry:Local Nature of the Industry:Baltic states Vol %

BBH 46Danish 18 Brewery Olvi 13

Russia Vol%

BBH 27Interbrew 15Ochakoyo (L) 9KransnyVostok (L) 6Stepan Razin (L) 5

Poland Vol%

Zweig/Heineken 32SAB Miller 31Okocim(carlsberg) 15

Croatia Vol%

Interbrew (Zagrebacka 42Pivovara)

Karlovacka Pivovara(L) 21

Pivovara Osijek(L) 11

Daruvarska Pivovara(L) 10

Carlsberg(panonska 7 Pivovara)

Slovak Republic Vol%

Heineken 42SAB 23Topvar (L) 10Steiger 9Urpin (L) 4

Hungary vol%

Interbrew 28SAB 21Brau AG 20Heineken 7Ottakringer 5

Ukraine Vol%

BBH 34Obolon(L) 20Interbrew 7Sarmat 7Rogan 4

Bulgaria Vol%

InterBrew 29Brewinvest 20Pirinsko Pivo(L) 15Velikotarnovsko Pivo(L) 9Shumensko Pivo(L) 9

Czech Rep. Vol%

SAB/Pilsner 27Urquell

SAB/Radegast 17Interbrew/PrazskePivovary 16

SAB/VeikopopovickyKozel 8

Jihoceske Pivovary 3

Romania Vol%

Brau AG 40SAB 14Interbrew 9Aurora 6URB(Tuborg) 5

Source: Author (2009) Compiled from Larimo et al (1990).

Local Brands dominate:Local Brands dominate:

Local nature of the Local nature of the IndustryIndustry

The previous table clearly illustrated that there is a limited demand for the foreign Beer brands due to the local nature of the industry and the consumer preference for local brands. For example: In Czech Republic beer is a part of Czech cultural phenomenon in itself and undisputedly beer belongs to the life in Czech Republic. Table 4.11 indicates the major beer holder’s which are occupied by the local brand owners. The decline of beer consumption is due to the shift in the consumer consumption pattern from beer to wine.

Cultural FactorsCultural Factors The psychological level, which focuses on the internalised norms, attitudes and behaviours of individuals from a

particular culture, influences the business culture (Rugman and Collinson, 2006). The psychic distance can be measured by means of using Hofstede’s power distance for every country. (

Hofstede’s power distance against individualism

Source: Author (2009) compiled from Table 4.12 and Rugman and Collinson (2006)

Strategic Factors:Strategic Factors: The Nordic breweries investment was mainly motivated by defensive moves. For example, BBH

,the Finnish brewers wanted to benefit from the first mover advantage through investment in the Baltic countries and St Petersburg’s area to counteract investment moves of large brewers. These investments also created entry barriers for low costs exports from Baltic and Russian production bases to Finland thus protecting the domestic market from cheaper imports.

Timeline of BBH Breweries in CEE:

First Mover First Mover AdvantageAdvantage

CEE markets are characterised by the constant increase in beer consumption. This large beer market will create good opportunities for market penetration of established brewing companies and will strengthen the brewing industry. Some of the largest brewers like Carlsberg are interested in exploiting the profitable growth potential of the Russian market as well as number of other markets in CEE (Carlsberg Annual report, 2008).

Import taxes:Import taxes: Restrictive import taxes in some CEE countries e.g. Lithuania, Russia and Ukraine have also

predetermined the choice of modes of market entry ( Larimo et al, 2006). Figure 4.11 shows the tax rates as one of the problematic factors in doing business in the corresponding countries. One of the main reasons for FDI as the main market entry mode is the low production costs in CEE. For example: the production costs and taxation in Finland and Sweden are much higher than in CEE countries thus discouraging exports.

Note: The bars in the Figure shows the responses weighted according to the ranking of the problematic factors in doing business in the corresponding countries. Source: Author (2009) compiled from Porter et al (2007)

AB- Inbev’s Route to Global Leadership

InBev in 1990

Fully owned operations and minority stakes

InBev Today

Operations agreements

Operation in thirty countries over the world.

Timeline of InBev’s History

1366 Den Hoorn brewery begins brewing

1987 Creation of Interbrew• Merger of Artois and Piedboeuf breweries in Belgium

(Increasing international pressure in the brewery sector (BCG, 1989)

1991 First foreign acquisition• Hungary: Borsodi brewery

(Decreasing consumption in the Belgian market )

1995 Entered North America•Canada: Labatt Brewing Co.

1999 Opened up the Russian market •Joint-venture with Sun Interbrew

2000 Initial Public Offering

Established InBev in the U.K.•Acquisition of Whitbread and Bass

2001 Entered Germany• Beck & Co. and Diebels acquisitions

2002 Built a beachhead in China• Acquired stakes in KK and Zhujiang breweries

2003 Strengthening positions in China (Lion Group breweries) and Germany (Spaten)

2004 Combining Interbrew with AmBev to establish InBev

2006 InBev acquires Fujian Sedrin Brewery in China, becoming one of the largest brewers in China.

2008 Combination with Anheuser Busch , creating AB-Inbev

Timeline of InBev’s History

ABInbev Brand PortfolioABInbev Brand Portfolio

Budweiser brand is sold in North American Zone. The Budweiser family of brands had 11.6% share of the U.S. market and remained the number one brand in Canada. Budweiser is the number one beer in north America.

Stella Artois Brand is the number one International beer brand in Argentina.

Beck is the number one German beer in the world; Germany is the largest market grew in both volume and share.

Reasons for the Aggressive market leadership strategies:Reasons for the Aggressive market leadership strategies:

Interbrew prefers the acquisition technique,

1. Provides rapid growth potential on foreign markets.

2. A green field and building brands from Zero is regarded as too expensive to start up in this industry .

3. However it is important to mention that Interbrew, if it cannot have full ownership , always requires a majority participation in any of its acquisition, or at least a contractual assurance this will be the case over time. The reason fort his statement is to have full decision control and to avoid other companies buying into the subsidiary. For the same reason, Interbrew is not eager to engage in Joint ventures.

4. Joint Venture can result in deadlocks if Partners have not created equitable mechanism for resolving day-to-day deadlocks in decision making.

Source: Harrigan, R. (1989), “Joint ventures and global strategies”, in Seth, J. and Eshghi, G. (Eds), Global Strategic Management Perspectives, South-Western Publishing Co., Cincinnati, OH.

SABMiller route to Globalisation

SABMiller: Internationalisation path of SABMillerSABMiller: Internationalisation path of SABMiller

Source: Author (2009) adopted from SABMiller Annual Report (2008)

Reason for Aggressive market strategies: Reason for Aggressive market strategies: Improve the nation’s competitive advantage of SABMiller.Improve the nation’s competitive advantage of SABMiller.

Source: Author (2009) compiled from SABMiller Annual report (2008) and Porter (1990)

Reasons for Aggressive Market strategies:Reasons for Aggressive Market strategies:

In order to gain high equity control mode on the local resources. For example: Acquisition of Royal Grolsch in 2008 and Acquisition of beer companies improved the firm specific resources of SABMiller. And joint venture with Coors brewing company improved the Firm specific resource of SABMiller.

AB Interbrew and SABMiller way of reconciling the twin issue of national AB Interbrew and SABMiller way of reconciling the twin issue of national responsiveness and Integration responsiveness and Integration

In order to sustain growth o an international level, Interbrew and SABMiller builds its business on four strategy pillars

First: build a strong local operating platform and then leverage over its time to drive profitable growth through the right brands and distribution structure to supply a local national market. Improve or relaunch an already strongly positioned local brand, and let it grow to the point where it is the market leader or runner up

Broaden the Portfolio to include international brands to give access to the 10% not supported by the local brands and to leverage global insights to help optimize both the local brands and global brands. After this , SABMiller and Interbrew will try to establish its own brand (Pilsner Urquell or Stella Artois ) in the segment of premium beers. When the market is ready for it, depending upon the purchasing power of the local customers. For example: SABMiller renovates local brewers like St. Louis in Botswana, Panama in South America, Peroni in UK (SABMiller Annual Report, 2008). And ABInbev renovates Borsodi brewery in Hungary.

Balance portfolio of countries between mature and growing markets to achieve Margin and Volume

Market consolidation will help secure positions ad create shareholder value. Interbrew and SABMiller strives to be number one or two in each operational markets.

Anheuser-Anheuser-BuschBuschHeinekenHeineken

MillerMiller

FostersFosters

KirinKirin

CoorsCoors

BrahmaBrahma

Groupe BSNGroupe BSN

SABSAB

CarlsbergCarlsberg

InterbrewInterbrew

19921992

BrewerBrewer RankRank VolumeVolume ( (MhlMhl))

1

9

2

3

4

5

6

7

8

10

17

0 50 100 150

InBevInBev

Anheuser-BuschAnheuser-Busch

SABMillerSABMiller

HeinekenHeineken

CarlsbergCarlsberg

BBHBBH

ModeloModelo

Scottish & NewcastleScottish & Newcastle

20020055

BrewerBrewer RankRank

1

8

2

4

5

6

7

0 50 100 150VolumeVolume ( (MhlMhl))

3

200

InBev’s Strong Track Record of Growth

250

9

10

TsingtaoTsingtao

Molson CoorsMolson Coors

Source: AbInbev Impact / internal data

Carlsberg route to globalisation

Internationalisation Path of Carlsberg:Internationalisation Path of Carlsberg:

Brand Portfolio of Carlsberg:Brand Portfolio of Carlsberg:

As a part of the premiumisation strategy Carlsberg has developed a local mainstream brand as a local power brand in corresponding countries. And Carlsberg ambition is to use the strong platform of the local power brands to offer and introduce its premium brands such as Carlsberg, Tuborg, 1664, Grimberen and Jacobsen (Carlsberg Annual report, 2008). But at the same time Carlsberg sees it as strength to have a broad portfolio that covers all segments including premium, mainstream and economy segments.

Improvement of Resources:Improvement of Resources:

A mile stone in the strategic repositioning of Carlsberg was the merger with the brewing operations of Norwegian Conglomerate Orkla in 2000. Orkla held a 50 % stake in BBH, which had developed specific competences to acquire, restructure and reposition local brands in countries of the former Soviet Union. By acquiring Orkla, Carlsberg developed human and financial resources (firm specific advantages). Improvement in the FSA resulted in the movement of Carlsberg from Quadrant 1 to Quadrant 3 (refer Figure 4.22). Carlsberg thus achieved strong market positions, including a 33 percent market share in Russia.

Carlsberg Strategy in ChinaCarlsberg Strategy in China

Analysis of HeinekenAnalysis of Heineken

Integration and National Responsiveness matrix:Integration and National Responsiveness matrix:

Thank you Thank you Questions ?