Want a Woollies Ale?

The strategic manoeuvring in the Australian beer market continues. Our most successful supermarket chain, Woolworths, just bought 25 percent of listed Western Australian micro-brewer Gage Roads.

Woollies own the most successful big-box alcohol retail chain in the country – Dan Murphy’s – plus several other liquor chains, and a very large pub business. Shoring up some supply in the fastest growing segment of the beer market – boutique beers – certainly makes some sense.

Owning (or at least having a very strong say in the operations of) one growing brand may give Woolworths even more bargaining power versus any other brands that establish strong recognition in this market (i.e. “look, if you won’t drop your prices to us, we’ll just stock more Gage Roads”…).

The announcement to the market about the purchase indicated that Gage Roads would “contract brew” 350,000 cases a year for Woolworths. That equates to 6.3m litres. The brewery’s website claims they currently have the capacity for “3.5 million litres per annum, scalable to 7 million”. Clearly Woolworths are buying pretty much the whole lot.

This is virtual backward integration by Woolworths. Might we consider the Gage Roads brands simply as a private label now? Will Wesfarmers reply with a similar move for Coles?  And will Woollies do the same on the East Coast (shipping all that beer across the country might cost them a bit)?

Stretching an advantage further

Low cost is a common option in the business strategy literature. Often we assume that a firm that dominates market share, has substantial economies of scale, and offers a very price competitive product relative to its main rivals most be pursuing such a strategy to a greater extent than differentiation. The recent acquisition of Anheuser-Busch by InBev demonstrates that such assumptions should be tested.

As reported in the Wall Street Journal, the Brazilian-run, Belgian-headquartered InBev has certainly made some sweeping changes in taking over the US brewing rival.

The new owner has cut jobs, revamped the compensation system and dropped perks that had made Anheuser-Busch workers the envy of others in St. Louis. Managers accustomed to flying first class or on company planes now fly coach. Freebies like tickets to St. Louis Cardinals games are suddenly scarce.

InBev eschews fancy offices and company cars, and groups of its executives share a single secretary. It uses zero-based budgeting — meaning all expenses must be justified each year, not just increases. The company says it saved €250,000 ($325,000) by telling employees in the U.K. to use double-sided black-and-white printing, spending the money to hire more salespeople.

The story also reports extensions in payment terms to suppliers and cuts in advertising spend and format.

InBev clearly saw a lot of fat in this business despite (or perhaps because of) its 48.9% domestic market share. And it seems to be working thus far, with retail share up almost another 1% in the last quarter. Presumably margins are increasing even more.

I guess this could also be dropped in the benefits of multinationality box, with an MNE prepared to make the tougher decisions and to transfer capabilities into a new environment.

More froth in Aussie beer market

It’s been pretty quiet around here (and out there in the real world) on the beer business discussions. You might remember the excitement earlier this year about a possible shake-up on the Australian scene. Lion Nathan were chasing Coca Cola Amatil, and Japanese brewer and soft drink maker Asahi was about to take over Schweppes. The latter did happen, while the former deal was scuppered.

Now it seems Lion Nathan’s major shareholder, Japan’s other big brewer Kirin, has had enough of minor shareholder status, and is seeking to take complete control of Australia’s second largest brewer. A cashed Kirin-run Lion Nathan could make for interesting times down under and hopefully even open warfare with Fosters. Unfortunately the Kirin stable of beers isn’t extensive, but they may at least get more aggressive in their pursuit of new consumers. It is also possible they will treat Australian/NZ as a cash cow as the pursue more faster growing markets in the Asian region (i.e. China).

Irrespective it’s nice to see some movement around the bar…