Not a good beer year

The merits of global scale and reach are an ongoing source of debate in the International Business world (among researchers and practitioners). On one side of the coin is an argument that operating across a range of markets should allow firms to build huge economies of scale (in terms of sourcing inputs, in R&D, in production, in distribution and in marketing). The counter argument is that the world is not really one big market, and that consumers will demand such different types of products, or infrastructure will differ so considerably, that the pressures to adapt will outweigh any gains from scale. Thus, we arrive at a potential trade-off between global integration and local responsiveness.

One industry that has seen substantial international consolidation in recent years has been beer. Several very large players have emerged, predominantly via cross-border acquisitions. The big idea has been that these firms would achieve the aforementioned scale advantages, and also tap into the growth in under-serviced markets in the developing world. The high population, fast growing BRICs have been a big target.

This Wall Street Journal (WSJ) reveals the difficulty these big brewers are facing with the current economic downturn. Folks are not drinking enough of the stuff, especially in these developing nations, where beer is a luxury good. This highlights one underestimated aspect of country difference – demand elasticity. Put simply, consumers in particular countries may be more or less sensitive to shifts in their income (and/or in prices). This is a far tougher issue for the multinationals to overcome, as it isn’t about their responsiveness, but rather an error in assessing the size and growth rate of the global market.

This has left these brewers wondering what to do next. A further aspect of internationalisation is the scope to arbitrage advantages across markets. Maybe they should be looking to acquire brewers in highly profitable markets with little competition, and then use these profits to fund further international growth. US/Canadian brewer Molson Coors has taken a tentative interest in Aussie firm Fosters. That shouldn’t surprise when you look at the profit data in the WSJ article – Australia was the 8th most profitable beer market in the world in 2007 and has none of the big global players involved. Looks like the big guns might want a taste of the oligoply action.

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Tags: Australia, beer, brewing, BRICS, elasticity, Fosters, International business, Internationalisation, Molson Coors, multinationals, oligopoly