Bitter battles in what looks to be an ailing market
Mass brewers are reviving old beers and marketing to the tribal drinkers of a past generation. Facing them are craft beers and the supermarkets, writes Adele Ferguson.
WHEN the marketing department of beer maker Lion workshopped the idea of buying an island, re-naming it XXXX 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 a shot."
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 biggest 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 all designed for the ideal mates getaway.
The decision by rival Carlton & United Breweries (CUB) to restore to Victoria Bitter 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 its current 12 per cent - has been the subject of intense debate.
Speaking from his office in Hong Kong, CUB boss Ari Mervis says per-capita consumption may have fallen and consumer tastes may be changing, but big core traditional beer brands still command the lion's share of sales and that means they will remain a key focus.
But while some applaud the initiatives of Lion in regard to using an island to promote its top selling brand, and CUB to rebuild its top selling brand VB, it hasn't impressed everyone.
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 who are wanting to brew and brand their own beer.
Other challenges include the rising power of the supermarket chains, which together control more than 60 per cent of the packaged liquor market through chains including Dan Murphys, First 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 Coles' case, private label accounts for 20 per cent of total sales and is growing strongly as a result of an ever expanding range. Coles recently launched an exclusive brand of beer called Steamrail Ale made by Independent Distillers in Laverton, which 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 for Coles said the supermarket giant 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 the retailers. For the beer companies it could result in some uncomfortable discussions with the supermarket chains on price.
According to a report by Merrill Lynch retail analyst David Errington, the major 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 argues that over the past five years the liquor retailers have benefited from wine producers' adverse industry position, including a wine glut, a high currency and Treasury Wine Estates having seen "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," Errington's report, released in October, says.
At the same time CUB - under its previous ownership structure - was offering its own discounts to the supermarkets to move volume. 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 to explaining why some independent liquor outlets said they were sourcing their beer from Dan Murphy's or First Choice at a lower price than they could buy it from CUB under Foster's. It was a no-brainer, particularly if they used a credit card with frequent-flyer points.
Jos de Bruin at Master Grocers Australia says everybody is looking for a competitive edge. "The independents are competitive on price by biting into their own margins," he said. But some are joining banner groups such as Porters, and building fighting funds to help them remain competitive without losing on product, de Bruin said.
Another change in the beer industry is Coca-Cola Amatil, which entered an agreement with Australian Beer Company last April to lend it $46 million to complete a 500,000 hectolitre brewery in New South Wales, which is 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 Amatil sold a big chunk of its alcohol business to SABMiller and part of the deal was to keep out of the market until December 2013.
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 in 2012 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 into perspective, Australia's beer duopoly generates margins of more than 30 per cent a year, which is far greater than the supermarkets, which operate on a margin below 10 per cent.
For this reason, Australia's beer duopoly aren't about to give up on their brands. Lion is owned by Japan's Kirin and CUB is owned by 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 keep their margins. One former industry executive says strategies such as leasing an island, sending publicans VB vending machines (which dispense icy-cold VBs while playing the VB jingle) or beach cricket, will just increase over time as they are aimed at going directly to consumers and independent retailers to try to put a dent in the power of the supermarkets.
Most recently, at least one of the beer giants and 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 trade industry that there are rewards for being a valued customer.
CUB's Mervis said when SAB first bought CUB and he took the job, he spent his first 100 days visiting 90 per cent of customers by volume. The company's first strategic decision was to restore VB to its former glory.
He 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 said.
Mervis said he didn't agree with all the doom and gloom in the beer industry. "There is every reason beer will return to its historical levels," he said.
Overall per-capita consumption in beer has declined in the past decade, while value has risen. The beer industry is worth an estimated $6.6 billion, compared with $4.5 billion in 2002. While 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.
One 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 - it's actually hard to make anything above 5.5 per cent taste good - contrast this with spirits and wine 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.
According to Lion's Brindley, the company has spent a lot of time rebalancing its portfolio to take advantage of the opportunities a changing market presents. Lion is well positioned in growth segments such as mid-strength, international premium, contemporary and craft beers.
"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. 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 been really important in attracting women to beer. There's this idea that women will only drink lighter beers, 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 key focus might be on big 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, Abbots Lager, Brisbane Bitter, Bulimba Gold Top and Resch's.
It is also looking at bringing back some historical brands. CUB was created from six breweries in 1907, including McCracken's City Brewery, Victoria Brewery, Carlton Brewery, Castlemaine Brewery, Shamrock Brewing and Malting and Foster's Brewery, all with numerous brands.
But some of SABMiller's portfolio of 200 brands are being looked at for possible introduction to the Australian market. Some of SAB's brands are already here, including Peroni.
And it isn't just the beer giants who are trying to cater to consumer needs.
Woolworths Liquor general manager of buying Steve Donohue said the group was constantly monitoring trends. He said the Dan Murphys chain gave the group 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 in the US craft beer had exploded in the past few years. "Australia is lagging the US," he said. During a recent trip to the US he said the popularity of craft beer had 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."
For Toby Ralph, the shifting demand in beer will continue and the challenge for the beer duopoly is how to retain share in a market that places less value on mass tribal association.
"If you've shoved $10 billion 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
Average retail price for a case of VB - $42
Retailer profit margin - $1.50
GST - $3.80
Alcohol excise - $15
Producer profit margin - $7.70
Cost of VB production - $14