Over the coming weeks I intend to reacquaint you folks with what I’m been up to in terms of research over the past couple of years (yes, the blog had been moribund for that long!).
One project I commenced while overseas earlier this year looks at the nature of collaboration in the global craft beer scene. Here’s a blog post over at a beer site where I talk through our initial findings.
I was in the process of drafting a post about the recently announced Lion Nathan/Kirin takeover of Little World (the folks who brew Little Creatures and White Rabbit), but my little brother meet me to it. So head to his always entertaining and insightful blog and read about it: It’s a Little World after all…
… OK, now that you’re back, I would add that this was a nice “long play” by Lion Nathan/Kirin given they had a ‘blocking’ shareholding in this growing firm from the outset (20% on formation, 35% since the IPO in 2005). This meant no rival brewer (i.e. Fosters, Coca Cola Amatil or Coopers) was going to get hold of this prospect without Lion getting a ‘right of reply’.
It was a very sensible ‘option’ to have taken on what has turned out to the most successful craftbrewer in Australia in terms of growth and brand awareness (Little World pitched themselves as the 5th biggest Aussie brewer in this document).
Lion does have a history with acquisitions of microbrewers, taking over Hahn back in 1993 (see here for a decent description of that move), which has evolved into James Squire.
And, Lion Nathan failed in a bid for Coopers a few years ago.
I agree with Leon that the biggest ‘kick’ that’ll come from this acquisition will be much greater reach for Little Creatures beers. I would not be surprised to see the brand become a real challenger to Coopers in the medium-term (and wallop SAB Miller’s/Matilda Bay’s Fat Yak along the way).
And, meanwhile,the Casella/Yellowtail beer (that I mentioned back here) is finally on the shelves, and the winemakers are talking very ambitiously (their brewery reportedly has the capacity to service 7% of the Aussie market – that’s more than Coopers!).
Maybe even macro-brewing might get interesting in Australia in the coming couple of years.
Melbourne is about to celebrate Good Beer Week – a festival of beer-related events showcasing the output of Australia’s burgeoning microbrewing industry (plus some folks across the from NZ, the US, Japan etc).
Microbrewing startups are popping up across Australia in startling numbers, introducing a much welcomed diversity of flavours, styles and business models to our decidedly bland duopolistic beer market (I find myself uttering that duop_ word far too often around here).
One considerable barrier to even more entrants (and their subsequent growth) has been some nasty excise (i.e. taxation especially reserved for such vices as alcohol) imposts that impact most severely on small brewers. Here’s a pretty comprehensive explanation of the problems faced (courtesy of RMIT student TV – head to about the 3 min point for the specifics):
Put simply, small brewers pay a huge whack of tax (in the vicinity of 25% of value) at the point of production (indeed, within 7 days of brewing) rather than sale. This is a huge cashflow constraint on these businesses. The very small brewers have had some minor relief whereby up to $10,000 per annum would be refunded (but only to a production threshold of 30,000 litres).
Last night’s Federal Budget finally saw a move in the right direction, with that refund increased to $30,000 per annum and the eligibility threshold removed. This will make some small difference in terms of the capacity of such craft breweries to expand and achieve something like minimum efficient scale.
You may have noted that the RMIT vid is from 2007. The battle has been a long one for these guys, and the concessions relatively minor. Last November, a national industry association was finally formed, and perhaps this helped get some movement in Canberra (it’s worth noting this change costs a paltry $2.5m per annum in government revenue).
I’d love to see the Aussie Craft Beer Industry Association become as wide-reaching and influential as their US counterpart (especially because they gather some excellent data on sales growth and relative scale that is sadly missing in Australia). This small win speaks to the import role of lobbying (case in point: small wine-makers in Australia have had much more appealing rebates for years – perhaps it helps to be in rural seats and to have no shortage of owners from the legal community?).
Most importantly, I hope this excise shift fuels even more growth in the diversity (and success) of local brewers… so this Spectapular can be even larger next year.
I’m not sure which is less surprising: (a) the announcement that the Foster’s Board are now supporting SABMiller’s takeover offer; or (b) the ill-informed hysteria in the tabloid press about the ‘loss of an Aussie icon’.
But 
let’s have a look at The Hysteria. The grounds for concern are shaky at best. The three main complaints are: (i) jobs may be lost; (ii) iconic brands might be neglected, and (iii) profits will head offshore.
Let’s take each complaint. First, will jobs be lost?
I can’t see massive changes to the location of manufacturing . Beer is one of the least international-trade-worthy products due to its high weight-to-value ratio and perishability. That’s why we see so much licensing of brands across borders, contract brewing, and takeovers just like this one. So brewing jobs won’t be heading offshore (nor packaging, labelling, distribution, engineering). Likewise, technology-wise there are no real gains or innovations that are likely to change labour-capital ratios in this extremely mature industry. So, the brewery jobs should stay. In anything, if SABMiller can successfully launch and market their deep suite of brands (which will inevitably be brewed locally), then we could actually see some upswing in manufacturing. Any job losses that might occur are most likely to be in the (old) head-office, with some scope to reduce duplication of tasks. Even then, I’d predict more turnover than simple shedding of positions, as SABMiller attempts to rejuvenate a pretty moribund mob.
So, will these Anglo-South African-Yankee newcomers tear down long-adored Aussie beer brands?
This is a really curious set of concerns, and based on a number of falsehoods. Foster’s (and it’s various previous incarnations) has itself been pretty free-willing and cannibalistic in its stewardship of brands for decades. One time icons like Abbotsford Lager/Stout have been demoted, labels have been dramatically altered, sleepy bit-players have been promoted (including VB and Crown Lager) and pushed beyond their Victorian homeland, and even the headline ‘brand’ of Fosters’ holds little-to-no local market relevance (as every Aussie traveller finds themselves having to explain to befuddled foreigners). Indeed, Foster’s has been making much higher margins on licensed foreign brands such as Corona in recent years than on these supposed national treasures. Yet local ‘Aussie battlers’ haven’t been hitting the airwaves to protest that ‘treachery’.
It is in SABMiller’s interests to maintain and perhaps even revitalise the fortunes of many/all of the aforementioned product lines. Given Foster’s retreat from foreign beer markets in the past decade, SABMiller taking ownership of these Aussie brands might indeed be the best chance of seeing more than a token blue and white can of Australian ale on overseas shelves. My personal hope: that SABMiller promotes the much tastier Fat Yak as a higher end export (and maybe also Blue Tongue which I’m guessing comes with the suite of CCAmatil/Pacific Beverages assets that appear to be part of this deal). 
That would be doing a lot more to improve Australia’s beer reputation than the currently bland product licensing.
Of course, SABMiller will presumably also increase the availability of its broader range of international brands. That will test the ‘loyalty’ of died-in-the-wool Aussie drinkers. But that isn’t SABMiller’s problem or fault.
Finally, won’t profits head offshore?
Firstly, it’s not clear how the average Australia benefitted from Foster’s profits up to now. Sure, the firm paid taxes, but so will SABMiller. Shareholders got returns (although pretty paltry ones in recent years given the wine debacle), but they are also getting a decent premium in the takeover. And if they want to keep getting a piece of the action, SABMiller is listed on the London stock exchange (and in Johannesburg). Again, SABMiller is likely to be making more generous investments in revitalising the Foster’s business in the coming years than the incumbent management have been, so it remains unclear that this is a case where the business is going to be ‘taken offshore’.
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So, in conclusion, I’m arguing that this particular foreign takeover is likely to be one the least harmful we see in Australia in the near future. The nature of the industry is one that doesn’t lend itself to offshoring of key functions, and we should be more interested in what it might do to resurrect a dull duopoly market.
The Aussie news headlines have been buzzing in recent days with the competing cries of our embattled brewers and the ‘on the side of the consumer’ supermarket giants, over an alleged effort by the latter to sell the majors’ beers as ‘loss leaders’. See here and here for a reasonable summary.
This is the latest staple product to get this sort of a run (after milk and petrol) as Woolworths and the revitalised Coles (as part of Wesfarmers) engage in some much-missed competition. Of course, it isn’t competition via ‘across the board’ price cuts, but, rather, through trying to switch buying preferences from one chain to the other (utilising the grocer’s associated liquor chains).
And poor old Foster’s (and presumably the much quieter Lion Nathan) are worried that this (alleged) predatory pricing will hurt their margins, and those of independent liquor retailers.
The reality of all this is that we’re talking about two pairs of behemoths locking horns, and competition here is a very different beast to that envisaged in perfect markets. Look at the numbers:
– Foster’s (48% market share) and Lion Nathan (44%) amount to 92 percent of the Aussie beer market
– Woolworths and Coles/Wesfarmers amount to roughly 50% of the Aussie liquor retailing market (with most other sales through small, independent retailers)
– Woolworths (around 40%) and Coles/Wesfarmers (around 35%) amount to roughly 75% of the Aussie grocery market
Those are the sort of market shares we called oligopolistic, or indeed duopolistic, with competition often reaching a calm equilibrium through effective price signalling and/or maintenance of market share.
Foster’s are kicking and screaming, however, due to concerns about the buying power of the two retail giants. Now, if Foster’s had a significant retail arm it might be able to curb such a threat (and earn more of those nice rents from the duopoly power).
But back in 2003 the brewer sold off Australian Liquor and Hospitality Group (ALH), which operated 131 hotels and 109 bottle shops. ALH now runs 285 licensed venues and over 450 retail liquor outlets. And guess who now owns 75% ALH… Woolworths. It seems Foster’s handed Woolworths the stick it is now being beaten with.
There’s talk that this behaviour will all come under the scrutiny of some eagle-eyed politicians in Canberra in the coming weeks. Now, we’d hope they know a lot about duopolies (i.e. systems with two powerful parties)…
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