I guess this makes it a Good Beer Year

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.

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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.

Spreading like Wildfire – Wal-Mart on the move

I stumbled across this very neat graphical representation of the growth of the world’s largest firm, Wal-Mart (Click on the picture below to see the video play through).

It is a wonderful illustration of the “oil stain”-style expansion that has been identified for other retail players such as Zara and Westfield.

The Zara approach is to open a flagship store in a city/state and then follow it up with saturation of the local market with smaller stores (and other brands from the Inditex stable like Bershka, Pull and Bear and Massimo Dutti). The firm argues that this allows them to build sufficient economies of scale in distribution, marketing etc.

For Westfield, it meant tackling the US as a series of much smaller markets and building their brand and market knowledge in each location.

Wal-Mart appear to have taken a similar approach to Westfield, but obviously on a much larger scale in the pursuit of what Thomas Holmes has called “economies of density“.

Again, it is a huge shame that the Wal-mart data is only presented for the US. It would be great to see their expansion into Canada, Mexico, Germany, Japan, the UK etc. Presumably this oversight springs from the data source.

Little white rabbits – the logic of multiple brands

Western Australian craft/micro brewer Little World Beverages (LWB) has announced that its adding another line of beers to its stable. The listed firm, which currently brews several beers under the Little Creatures label, is opening a new brewery just outside Melbourne, and the beers out of this new location will be called White Rabbit. This raises a few strategic management questions:

Scale: Is there a maximum efficient scale for microbrew brands? To clarify, Little Creatures is a very successful boutique beer, priced above the mainstream Aussie faves and around the same as imports. It gets reasonable shelf (or tap) space in most decent pubs and bottle shops. There are currently a few different variations in the Little Creatures range (Pale Ale, Pilsner, Bright Ale and lower alcohol Rogers), all of which maintain consistent branding, with the usual shifts in label colours.

It appears White Rabbit will be run as a distinct brand (hopefully looking much niftier than my effort to the left). Presumably this an attempt by LWB to achieve more shelf (or tap) space, i.e. they can have two pale ales on the shelf (for example), thus doubling their chance of grabbing consumer attention. Had the firm hit diminishing returns from the Little Creatures marque?

Segments: Traditionally craft or micro-brewing has been seen as a bit of an “us against them” situation. The bad guys were the big brewers (i.e. Fosters and Lion Nathan), and beer aficionados have often bemoaned the instrusions into the craft segment by pseudo-brands such as James Squire (a Lion Nathan effort), Matilda Bay and Redback (both from Fosters’).

The legitimacy of such brands is questioned, in particular if they are seen as simply copy-cat or as shutting out more honourable or real microbrewers. The strategic question is has this segment matured (or segmented further) such that this effort by Little Creatures is not seen as selling out? Or alternatively, is the choice to run multiple brands a deliberate attempt to dodge such a bullet (i.e. stay legitimate in this fussy segment)?

Photo by: avlxyz

The Value Chain: This aspect is a bit more complex. LWB has traditionally shipped beer in bottles and kegs over 3000 kilometres from Perth to Melbourne (and beyond). It appears they are going to continue to do so, while scaling up the White Rabbit operations over time.

It is unclear how any economies of scope advantage can be developed here, as the firm presumably will need to bottle, label, package etc on site in Victoria (i.e. away from the Perth operations). Any gains in terms of delivery costs would seem pretty marginal as it may necessitate more movement to end up with centralised warehousing… but then the current delivery truck (see photo above) doesn’t seem overly cutting edge either 🙂

All in all, it is a very interesting move. Taking my strategic management hat off, I am, of course, excited by some more beer choices and wish White Rabbit many happy years to come…

Oh Harvey, Oh Harvey

It was somewhat disheartening to see the always candid Gerry Harvey (Australia’s richest retail tycoon) lamenting the poor performance of his firm, Harvey Norman, in Ireland.  A big box retailer of home electronics, furniture and white goods, Harvey Norman is one of the few Australian retailers to venture off shore in recent years (see my discussion of the few in a chapter I wrote last year for a book called The Internationalisation Strategies of Small-Country Firms: The Australian Experience of Globalisation).

The firm has chosen an odd mix of locations – Singapore, Malaysia, Ireland and Slovenia (along with the obligatory NZ). The international adventure now makes up 24 percent of the business on a simple store count basis.  As these stores are all company owned, whereas 98 percent of the Australian stores are franchised, they represent (potentially) a more significant source of revenue. The simple reason for the dramas is that the Irish economy is faring a lot worse than Australia.  However, there are still question marks over Harvey Norman’s ability to build sufficient competitive advantage in its international operations.

In Australia the firm benefits from enormous economies of scale in both purchasing and marketing (the firm is one of the biggest media spenders in the country).  Also, it utilises a distinct within store franchising system. A given store might include a furniture franchisee, a white goods franchisee, an electrical goods franchisee and a computer products franchisee. This allows appropriate specialisation from sales (and purchasing) staff and offers the usual motivation benefits of entrepreneurial franchisees.  The Australia operations also has a nice side-business in property management and leasing.

It looks like very few of these competencies have been transferred offshore, with all stores company owned, and limited scale in a given country (beyond NZ).  With troubles in the retail market at home, and Harvey Norman much more exposed to consumer timidity than their upstart competitor JB Hi-Fi (who sell a lot more software such as DVDs, video games and CDs rather than big-ticket hardware like TVs), it is hard to see Gerry and co diving into more international expansion any time soon. Looks like the paucity of Aussie internationalisers may continue, at least in the retail domain.