Big beer brands top up as competition turns bitter
Changing consumer tastes and the growth of private labels have forced a more direct approach, writes Adele Ferguson.
When the marketing department of the beer giant Lion workshopped the idea of buying an island, renaming it XXXX Gold Island and populating it with "mates" handpicked from competitions, it caused a stir.
When the idea was put to Lion's Australian managing director, James Brindley, "yes, and here's the cheque" was not the first thing that came to his mind. "The instinct would be to say you can't do it, but marketing had pulled off beach cricket, and so I said let's give it
Two years later, after assessing 87 islands, the list was whittled down to a small island at the southern end of the Great Barrier Reef shaped much like an X. The next step was to create a nirvana for its predominantly male drinkers. A bar stocking XXXX Gold - the country's highest selling beer - was built smack in the middle of XXXX Gold Island; a one-hole golf course, fishing, hammocks and huts equipped with tool sheds, an Xbox room, a pool table, darts and other entertainment facilities were all designed for the ideal mates getaway.
The decision by rival Carlton & United Breweries (CUB) to restore its popular Victoria Bitter back to its original higher alcohol content was a similarly novel - and expensive - marketing decision. The higher alcohol content will cost the company an extra $20 million in excise tax.
Like Lion's three-year lease of an island, the relaunch of VB - which fell from a market share of 30 per cent in 2004 to 12 per cent now - has been the subject of intense debate.
Speaking from his office in Hong Kong, the CUB chief executive, Ari Mervis, said per capita consumption might have fallen and consumer tastes might be changing, but big core traditional beer brands still commanded the lion's share of sales and that meant they would continue to be the main focus.
But while some applaud the initiatives of Lion in regard to using an island to promote its top-selling brand, and CUB in rebuilding VB, everyone is not impressed.
The highly respected marketing strategist Toby Ralph sees it as a misdirected attempt to recreate the brand fervour of last century. "Beer drinkers are no longer brand or category devotionalists. Wine and shots are growing, cider is going nuts and beer is shrinking despite premium and craft beers growing. Beer sales are dwindling; soon it will be only 40 per cent of alcohol on offer," he said.
For Ralph, a Proustian desire for things past is not the way forward.
"Ironically, they are creating their own fantasy of the old brand-loyal blokey world they must yearn for - but that stereotype has become a whole lot more complex in the real marketplace."
The debate about the future structure of the beer industry is premised on the various challenges facing it, including more competition from hotels and pubs, which want to brew and brand their
Other big challenges include the rising power of supermarket chains, which together control more than 60 per cent of the packaged liquor market through stores such as Dan Murphy's, 1st Choice, BWS, Liquorland and Vintage Cellars; the strong Australian dollar, which has created a robust parallel importing market; fragmentation of the beer market through shifting consumer tastes; the move by Woolworths into beer, with a 25 per cent stake in the West Australian brewer Gage Roads; and retailers offering private label beer brands.
In the case of Coles, private labels account for 20 per cent of total sales and are growing strongly as a result of an ever expanding range. Coles recently launched an exclusive brand of beer called Steamrail made by Independent Distillers in Laverton, that is outselling branded competitors.
Coles, which has a 21 per cent share of the packaged liquor retail market, has called an end to unsustainable discounting. A spokesman said it had "stopped unprofitable bulk and corporate sales and reduced unsustainable price discounting [especially on beer]".
He said comparative store sales in high-margin categories were growing well, especially wine.
For many in the alcohol industry, this means the end of excessive beer discounting among retailers. For the beer companies, that could result in some uncomfortable price discussions with supermarket chains.
According to a report by the Merrill Lynch retail analyst David Errington, big liquor retailers are losing money selling beer after allocating the relevant cost of doing business. "On a case of VB sold [not on promotion], we estimate the gross margin for the retailers is under 5 per cent, which is well below the cost of doing business on our estimates of 15 per cent."
Errington says over the past five years, the liquor retailers have benefited from adverse conditions in the wine industry, including a glut, the high currency and Treasury Wine Estates (TWE) having had a "compromised performance" by being attached to Foster's beer business.
TWE has split from Foster's and so the shackles are off. "As the wine cycle recovers, and TWE does not have to subsidise a beer business, the outlook for TWE looks positive with liquor retailers under pressure"' the Merrill Lynch report, released in October, says.
At the same time, CUB - under its previous ownership structure - was offering its own discounts to supermarkets to increase volumes. Mervis said the old days of CUB focusing on market share as a measure of
success were also over. "CUB was focused on market share as a measure of success, so lots of deep discounts," he said.
It goes a long way in explaining why some independent liquor outlets said they were sourcing their beer from Dan Murphy's or 1st Choice at a lower price than they could from CUB under Foster's. It was a no-brainer, particularly if they used a credit card with frequent flyer points.
Jos de Bruin, of Master Grocers Australia, said everybody was looking for a competitive edge. "The independents are competitive on price by biting into their own margins," he said. But some were joining banner groups such as Porters, and building fighting funds to help them remain competitive without losing on product, he added.
Another changing dynamic in the beer industry is Coca-Cola Amatil, which signed an agreement with Australian Beer Company last April. This involved lending Australian Beer $46 million to complete a 500,000 hectolitre brewery in NSW, equivalent to 15 per cent of the premium beer market in Australia. The loan will convert to a joint venture when Coca-Cola is allowed to re-enter the beer market at the end of the year. Coca-Cola sold a big chunk of its alcohol business to SABMiller and as part of the deal, it had to keep out of the market until December this year.
Rumours are rife that it is mapping out a new three-year alcohol strategy that includes looking at ways to work with Coopers Brewery, signing up some international beer brands for distribution, doing private label beer for customers and working with pubs to offer micro-beer on tap.
Whatever the case, beer is still one of the most branded products around and while it has been declining on a consumption per capita basis for the past decade - falling last year to its lowest per capita consumption levels in 65 years - big brands such as VB, Carlton Draught, XXXX Gold and Toohey's still command a lot of dollars.
To put it in perspective, Australia's beer duopoly generates margins of more than 30 per cent a year, far greater than the supermarkets, which operate on a margin of less than 10 per cent.
For this reason, the two are not about to give up on their brands. Lion is owned by Japan's Kirin and CUB is owned by the London-based SABMiller, which is keen to extract value after spending more than $10 billion buying CUB in 2011.
They also will fight tooth and nail to maintain their margins. A former industry executive says strategies such as leasing an island, sending publicans VB vending machines (that dispense cold VBs while playing the VB jingle) or beach cricket will increase over time as they are aimed at going directly to consumers and independent retailers to try to dent the power of the supermarkets.
More recently, at least one of the beer giants and the poker machine group Aristocrat invited a group of publicans to New Orleans for the Super Bowl and a drink fest to send a message to the rest of the industry that there were rewards for being a valued customer.
Mervis said when SABMiller first bought CUB and he took the job, he spent his first 100 days visiting 90 per cent of the customers based on volume. The first strategic decision was to restore VB to its former glory.
Mervis said the company was looking at other core brands with a view to revamping or restoring them. "I don't want to say which ones, but we are doing a lot of work looking for efficiencies and improvements in quality."
He disagreed with the opinions of doom and gloom in the beer industry. "There is every reason beer will return to its historical levels," he said.
The per capita consumption of beer has declined in the past decade, while value has risen. The industry is worth an estimated $6.6 billion, compared with $4.5 billion in 2002. Although consumers are buying less beer, they are drinking more craft and premium beers, which are more expensive. Not surprisingly, CUB and Lion have made sure they have a solid presence in these categories.
An industry expert said: "It's fashionable to see the beer industry as flat in volume terms but the true story is that the trading up means value growth has been very solid. Most new products [are] between 3.5 per cent and 4.5 per cent alcohol by volume, which means the beer market is well placed in the regulatory world. Essentially all beer is low alcohol as it's actually hard to make anything above 5.5 per cent taste good - contrast this with spirits and wine innovation at 15 per cent plus and you would have to think beer is well placed.
"This trend also reflects the demands of work and home life and an ageing population," he said.
Lion's Brindley said the company had spent a lot of time rebalancing its portfolio to take advantage of the opportunities the changing market presented. It was well positioned in growth segments such as mid-strength, international premium, contemporary and craft.
"James Squire is the very clear market leader in craft and Little Creatures is a great brand with a lot of room for further growth," he said. "Growth in craft is great for the entire category; it generates new interest in beer by highlighting
its versatility and championing its flavour.
"It's actually been really important in attracting women to beer. There's this misnomer that women will only drink lighter styles of beer but the reality is if you offer something with a bit of flavour that's marketed as something to savour, women get that, try it, and it changes their misperceptions," he said.
For CUB, the main focus might be on core brands such as Carlton Draught, Crown and VB. The company is trying to get closer to its trade customers, hotels and pubs. Mervis said this included recreating original beers and selling them to certain regions and people, including Ballarat Bitter and Reschs.
It is also looking at bringing back some historical brands. CUB was created from six breweries in 1907, including McCracken City Brewery, Victoria brewery, Carlton brewery, Castlemaine brewery, Shamrock Brewing and Malting and Foster's brewery, all with numerous brands.
But some of the 200 brands in SABMiller's portfolio are being looked at for possible introduction to the Australian market. A few, such as Peroni, are already here.
It isn't just the beer giants who are trying to cater to the needs of consumers.
The Woolworths Liquor general manager of buying, Steve Donohue, said the group was constantly monitoring trends, and the Dan Murphy's chain gave it great insights into consumer tastes.
"There is a big drive by consumers for international beer brands and the other two important ones are cider and craft beer," he said.
Donohue said the US craft beer market had exploded in the past few years. "Australia is lagging the US."
During a recent trip there, he said he noticed the popularity of craft beer had made it become a feature of store layouts. "Stores in the US, from the east to west coast, were chock-full of six-packs of local craft beer. Bud was at the back corner of the store. Consumers are getting excited about the locally made stuff."
Ralph said the shifting sands in beer would continue and the challenge for the duopoly was how to retain share in a market that placed less value on mass tribal association.
"If you've shoved ten billion dollars of shareholders' funds into buying a brand house like SABMiller did, you need to be a whole lot smarter than just trying to rebuild high-share brands as they are trying to do with VB.
"That may be a mid-term cash cow, but it's not the future; the future's always about fitting with changing consumer demand," he said.
"Then there are issues around the costs of manufacturing locally against importing, and the market share trade-offs to drinkers that are becoming less parochial. The SAB board must be doing the hard sums on that."
BEHIND THE PRICE TAG
Avg retail price ($/case) $42
GST - $3.80
Retailer profit margin $1.50
Alcohol excise $15
Producer profit margin $7.70
Cost of VB production ($/case) $14