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.
While Australia’s largest brewer slowly tears apart its less than successful attempt to also run a wine empire, one of our most internationally competitive (and innovative) winemakers is stepping into the beer business.
Casella Wines, who have grown extremely fast off the back of the game-changing Yellowtail wines (see this short case study for a sense of this success story), are advertising for a head brewer (see the ad here), and intend to brew “probably a few million litres a year” from a new facility at the Griffith, NSW winery site.
The firm’s wine brand has been lauded as a classic example of a Blue Ocean Strategy. The central contention of Kim & Maurborgne is that:
“Casella created a social drink accessible to everyone. By looking at the alternatives of beer and ready-to-drink cocktails, Casella Wines created three new factors in the US wine industry – easy drinking, easy to select, and fun and adventure. It eliminated or reduced everything else. [Yellow tail] was a completely new combination of characteristics that produced an uncomplicated wine structure that was instantly appealing to the mass of alcohol drinkers.
The result was an easy drinking wine that did not require years to develop an appreciation for. This allowed the company to dramatically reduce or eliminate all the factors the wine industry had long competed on – tannins, complexity and aging. With the need for aging reduced, the working capital required was also reduced…
In July 2001, Australia’s Casella Winery introduced [yellow tail] into this highly competitive US market. Small and unknown, they had expected to sell 25,000 cases in their first year. In fact, they had sold nine times that amount. By the end of 2005, [yellow tail]’s cumulative sales were tracking at 25 million cases. [yellow tail] soon emerged as the overall best selling 750ml red wine, outstripping Californian, French and Italian brands.”
While the winery has made no claims that it is adopting such a strategy in its entry into beer production, it does raise some challenging questions:
What characteristics of beer are holding back new customers? Could Casella remove some?
The taste? The big name brews (think Bud, Miller, VB, Stella etc) tend towards the bland, but there is a lot of variety in the second tier (think wheat beers, stouts etc). Certainly there are gains to be made in explaining such options in clearer language to neophytes, but a simply “this is beer message” doesn’t necessarily seem the best option. I will be very surprised if Casella if can stumble upon a clearly communicable alternative taste that is an inoffensive entrée into beer-drinking. Bitterness (i.e. ‘hopping heavy’) has become a big fave of craftbrewers, but that tends to play towards those already enamoured with beer’s dominant characteristic. Casella could perhaps go down the sweeter, more malted path… or, more courageously, the fruity flavoured path (e.g. radler, kriek etc).
The fizz? Certainly the big name brews (think Bud, Miller, VB, Stella etc) have been reluctant to make non-gaseous product. Reductions in bubbles would match up with exploration of less typical styles of beer.
The overtly male/working class associations? Now, this might well be a possible target market. Brewers have really struggled to ‘feminise’ their product (not helped by an obsession with perpetuating some other-beers-makes-you-fat-but-ours-doesn’t myth). De-rednecking has been the effective message in both the ‘imported’ and ‘craft’ segments, but that tends to have just pushed beer down wine’s snobbery path. Targeting a more youthful market might require soft-drink/spirits type marketing (and, again, perhaps a sweeter/fruitier palate).
Is beer as confusing as wine? As snobby?
Again, there is some bifurcation here. Major beer brands are typically presented as simply ‘beer’. Meanwhile, craft-brews tend to play up nuance and complexity, although to varying degrees. I guess if some of the current associations of non-beer drinkers can be overturned then confusion might decline.
What are the big element along which beers and brewers compete?
The Blue Ocean idea is that there are big gains to be made in making the normal battlegrounds less relevant and/or alleviating your firm of the ‘burdens’ of your competitors.
Despite all the discussions above of what’s in the bottle, most folks in the beer business will tell you it’s about access to drinkers (i.e. distribution), and finding a cost-effective production method to suit your intended price-point. Beer’s core ingredients (malt/sugar, hops, yeast, water) are costlier when chasing more exotic/substantial flavours. Currently the big cost-savings come from large scale in bottling, packaging, trucking, marketing etc Getting product on shelf and on taps is tough in the face of existing brand loyalties. Finding alternative delivery mechanisms that don’t cost much more is very, very hard (and even tougher given the legal constraints in multiple domains).
Might this just be diversification?
It is possible this is just old-school diversification, and Casella will ‘simply’ aim to leverage some of their current capabilities (in brand management, packaging, distribution, etc). They’re far from the first Aussie winery to go down this path (precedents include Moorilla, De Bertoli and Knappstein), but they’ll be the first with real international muscle.
What Blue Ocean opportunities (if any) can you see here?
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