Market share strength boosts brewer margins, beer demand trends remain in force

Posted by Daniel Palmer on 2nd October 2009

In the beer industry, superior market share leads to superior margins, according to a new Rabobank report on the largest global brewers. In the next five years, market share will become increasingly important for all the major brewers, so it is no suprise to see continued consolidation in the sector.

Margins and lower consumption
Major brewers’ operating margins have not suffered from the economic downturn. On the contrary, restructuring, better pricing and lower production costs have helped margins and cash flows, explains Rabobank beverage analyst Cyrille Filott.

“The downturn has lead to lower beer consumption, both at home and in restaurants and bars,” Filott said. “This decline in consumption volumes has been mostly offset by an increase in prices. Most brewers raised prices last year and have not felt the urge to drive volumes higher in the current downturn by lowering prices.”

Australia is a rare case of a country where volumes have risen despite the global economic storm.

Beer prices not likely to drop
In the near future, Rabobank does not expect brewers to lower prices in order to increase volumes. All four of the major brewers have a broad portfolio of beer offerings from premium to cheaper brands.

“Brewers would rather accept a switch by the consumer to a cheaper brand, also owned by the brewer, than to lower the price of their premium brand,” Filott suggested. “Possible price reductions by premium brands are likely to hurt the brand image, and therefore potential long-term sales and margin opportunities.”

Global consumption trends
No immediate global volume recovery is expected due to the prolonged economic downturn. However, regional volume trends are likely to continue, meaning Australia’s market should remain strong.

“In the second quarter of 2009, Eastern Europe performed poorly with a volume decline of nearly 10 percent compared to last year. Africa and some parts of Asia did relatively well during the same period, a trend that is likely to continue in the second half of 2009,” Filott advised.

Market share determining margins
The report also highlights that a high market share for a brewer in a region often provides a high margin for the brewer.

“Given the focus on margins by the brewers, further consolidation to achieve better market share is very likely,” Filott said. “However, first the major brewers have to repay some of the debt that was raised for the recent wave of consolidation.”

The largest deals in the sector to date (since 2008) include the purchase of Scottish & Newcastle by Heineken and Carlsberg, the North American combination of SABMiller and Molson Coors, InBev’s US$52b purchase of Anheuser Busch, Kirin’s acquisition of Australia’s second largest brewer Lion Nathan and an anticipated tie-up of Kirin and Suntory.