Europe's Brewers Go Global for Growth

In an increasingly global industry, beer makers like InBev and Heineken appear ready to compete for the prize of developing-world markets

Executives of two of the world's largest beer makers—Belgium's InBev and the Netherlands' Heineken—will surely be enjoying a brew or two of their own this weekend after their companies turned in double-digit profit growth figures. But while the numbers were impressive, these and other brewing giants could have a tough time making the party last.

Heineken, known for its instantly recognizable green-bottled beer, reported on Sept. 6 that its first-half operating profits rose 14% to €726 million ($920 million), on an 11.6% sales increase to €5.7 billion ($7.2 billion). It attributed the gains to strong sales of premium beers and tighter operations.

The next day, InBev, the world's largest beer maker, said second-quarter sales were up 8.3% to €3.3 billion ($4.2 billion), due mostly to strong growth in Latin America and Central Europe. The owner of Beck's, Stella Artois, and more than 200 other brands saw operating profit soar 23% to €817 million ($1.03 billion).

But the heady gains belie a much starker reality. Long gone are the days when brewers could rely solely on organic revenue growth from expanding populations. Today, beer sales are flat to down in America and Western Europe as consumers turn to wine and spirits—or scale back on alcohol consumption amid diet and health concerns.


  To find growth in stagnant Western markets, Europe's beer makers are unleashing outside-the-box innovation. InBev, for instance, introduced an orange-flavored Beck's in Germany and scored a surprise hit with consumers. In Belgium, where beer consumption is falling, the company is going in two directions at once: It brought out an extra-alcoholic (9%) version of its Leffe brew, called Leffe 9, and a low-alcohol version of Jupiler, called Jupiler Blue. "In mature markets, it's product innovation that drives growth," says Tom Pirko, president of Bevmark, a California-based food and beverage consultancy.

But the real prize lies in the developing world, where brewers are likely to see the most growth in coming years. Most are turning to acquisitions to extend their footprint. "There's still money to be made in consolidation and it's the European firms who are in control," says Bevmark's Pirko. "Anyone can make beer, but only a resource-laden and powerful global company can make a key international brand."

Of course, consolidation has already been in full swing for years: The top five beer makers today account for 45% of global sales, compared with about 20% a decade ago. But the giants are still looking for buyout targets. InBev and South African-based SABMiller, the world's No. 3 maker, both are reportedly eyeing Australia's Foster's (see, 8/30/06, "Foster's: The Bitter Truth"). Analysts say Diageo's (DEO) Guinness brand and San Miguel of the Philippines also could be in play.


  The biggest prize is China, the world's fastest-growing market. British beverage research consultancy Canadean figures the market there will grow 6% annually over the next two years and 5% per year from 2007 to 2010.

No doubt, the leader in all these trends is Leuven (Belgium)-based InBev, which was formed two years ago by the merger of Interbrew and Brazil's Ambev. Its second-quarter results, which prompted many analysts to raise their earnings targets for the company, were a direct result of its effort to keep a lid on costs and its strategy to target emerging markets.

InBev's sales in Latin America, for instance, rose 30% in the second quarter, as it increased its control in the region's biggest beer maker, Brazil's Quinsa. Indeed, of the large brewers, InBev is the one that gets the most profits from emerging markets, "They've got the best exposure, and that's hard to replicate," says Marcel Hooijmaijers, an analyst at Kepler Securities.


  Meanwhile, rival SABMiller, formerly South African Breweries, has come from nowhere since the end of apartheid to become one of the world's megabrewers. After expanding into Europe, China, and Africa over the past decade, the 110-year-old company's purchase of Miller Brewing of the U.S. in 2002 made it the No. 3 brewer after InBev and Anheuser-Busch (BUD). Last year, SAB gained majority control of Latin America's second-largest brewer, Grupo Empresarial Bavaria (see, 5/29/06, "When Beer Empires Collide").

The company's Achilles heel is Miller, though. The parent company has struggled to turn around its U.S. unit, which accounts for about 17% of profits, from the get-go. The Miller brand is seen as old-fashioned, and the company has had limited success fending off aggressive price cuts by larger domestic rival Anheuser-Busch (see, 5/29/06, "Miller Brewing: It's Norman Time"). According to ACNielsen's August data for the U.S. beer market, Miller's revenues fell 2.1% while Anheuser-Busch's were flat. "SAB has played a pretty good game of beer monopoly," globally, said Pirko. "But its problems in the U.S. are legion."

The world's No. 4 brewer, Heineken, has seen significant management changes since the death of patriarch Freddy Heineken in 2002. Still, it has enjoyed something of a turnaround recently. Its new Heineken Premium Light, introduced in the U.S. earlier this year, has taken the country by storm, helping boost sales there 20% in the first half. Heineken is also boosting marketing—it rose 10% in the first half from a year earlier, to €746 million ($947 million)—to ensure it remains one of the world's most recognizable brands.


  At the same time, the Amsterdam-based company is taking an axe to expenses, aiming to slash supply-chain and other fixed costs by €200 million by 2008. It's also belatedly getting more into acquisitions. Last year, it snapped up five Russian breweries, becoming the No. 3 player there. But analysts caution that there are few large-scale buyout opportunities—and only about 10 to 15 small- to mid-size targets—left for Heineken to grab.

Still, the Europeans are way ahead of Anheuser-Busch when it comes to going global. The American giant still gets 76% of its revenues in the U.S. True, Anheuser-Busch can claim some overseas successes: It beat SABMiller in the contest to acquire China's No. 4 brewer in 2004, for example, and has a stake in China's largest brewer, Tsingtao. But some of its efforts have fallen flat. A major sponsorship at the World Cup this summer in Germany resulted in a storm of negative publicity when Germans rejected the beer as tasteless.

So far, European brewers have avoided embarrassments such as that. But as they continue extending into developing markets and rolling out novel concoctions at home, they can only hope that their efforts to promote growth are easier for their customers to swallow.

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