Lion has half of the craft beer market and wants more, writes Eli Greenblat.
Lion chief executive Stuart Irvine must be among the business world's biggest optimists: he has just spent $60 million of his Japanese owners' money on a new brewery at a time when the beer market is in its third year of stagnant growth and consumer confidence remains in the doldrums.
Throw into the deal that Lion's new Little Creatures brewery is in the Victorian regional city of Geelong, which faces some economic shocks including the closure of the Ford car plant in 2016, and that Coca-Cola Amatil is set to re-enter the craft beer market with a mission to steal market share, and one could ask why Irvine is smiling so much.
But Irvine - whose Lion is the nation's biggest brewer with a sizeable dairy arm as well that has its own challenges, believes craft beer has veered into a premium growth groove that will underwrite capital expenditure plans.
"We believe in craft beer," he said on Monday as he unveiled the new Little Creatures brewery, which has capacity to pour out 10 million litres a year, or 80 kegs an hour, of Little Creatures Pale Ale, the country's third most popular craft beer.
"We are seeing more and more people taking craft beer up. People in Australia are increasingly liking the flavour of craft beer." The $60 million investment also makes perfect business sense as craft beer sales are booming along the east coast at a time when Little Creatures has outgrown its original brew house in Fremantle, WA.
"We are seeing a lot of the centre of gravity of craft beer over on the east coast, so we were looking for ways to give ourselves the capacity to build [there] and this was an ideal opportunity to do that," Irvine says.
The brewery will supply east coast markets, cutting down on the transport and energy costs of hauling beer from Fremantle across the Nullarbor.
Although beer as a category is losing customers to wine, spirits and cider, craft beer is growing at 13 per cent a year, albeit from a small base as it accounts for only 3.2 per cent of the total beer sector.
"It makes commercial sense as well because craft beer is typically high value per litre. It makes sense for everyone - the consumer likes it, we like it and that's why it makes sense to invest in a place like this," Irvine says.
Lion, owned by Japanese beverage giant Kirin, has 50 per cent of the craft beer market. Its pole position is driven by its James Squire brand, the leading craft beer in Australia with a one-third market share, and its Little Creatures beers, which have 13 per cent. Lion bought out Little Creatures' parent, Little World Beverages, for $256 million last year after using a long-held minority stake in the group for a full takeover.
Irvine says he is not worried about the re-entry of CC Amatil into the craft and premium beer market after a two-year absence, or being dragged into a price and promotion war as the soft-drink bottler tries to trumpet its beer credentials.
"We reckon if we concentrate on what we do well, we will continue to grow," he says.
Lion is licensed to make and distribute in Australia some popular beer brands, including best sellers such as Corona, Heineken and Beck's, all of which CC-Amatil would love to snatch away to give greater bulk to its own beer business of smaller US brands.
Irvine won't comment on the contracts that tie the international brewers to Lion but says they have a great relationship.
"If we have a mutually satisfactory relationship why would they want to go anywhere else?"
Lion, which is also the single biggest supplier to supermarket giants Woolworths and Coles, is not interested in extending a recent food and grocery suppliers code of conduct to cover its brewing arm.
The code covers Lion's dairy division but Irvine says a code covering beer is unnecessary.
"Right now, the relationship we have with our customers are really constructive and I don't see any need for doing that," he says.