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Consolidation of the alcohol industry

Perhaps the most significant trend in the alcohol industry in recent decades is its consolidation: in various ways, fewer companies are accounting for an ever-increasing share of industry activity and revenue.

Mergers & Acquisitions

The most visible indication of the consolidation in the alcohol industry is the rate of high profile mergers and acquisitions (M&A), which has accelerated in recent years. The present form of each of the major global brewers has been substantially shaped by recent M&A:

  • AB InBev is the product of a 2004 merger between American brewer Anheuser-Busch and InBev, itself formed from the merger of the Belgian producer Interbrew and Brazilian producer AmBev
  • SABMiller was established in 1999 following the acquisition of the US Miller Brewing Company by South African Breweries
  • Heineken has strengthened its presence in a number of markets through the part purchase of British brewer Scottish & Newcastle in 2008, the Mexican FEMSA Cerveza in 2010 and gaining full control of Singapore-based Asia Pacific Breweries
  • Carlsberg Breweries A/S was formed by a merger between Carlsberg and Norwegian conglomerate Orkla’s brewing activities; in 2008 Carlsberg acquired a share of Scottish & Newcastle’s assets

In 2015, AB InBev agreed a £71bn takeover of SABMiller to form the world’s largest beer company. The deal represents the biggest ever deal in the alcohol industry, and is the third largest acquisition in corporate history.[1] The newly created firm will account for around 30% of the global beer market.[2]

A similar process has occurred among the leading spirits manufacturers. Diageo was formed in 1997 from the merger of Guinness and Grand Metropolitan. Thereafter, it has sought to expand into middle and lower income countries through the acquisition of local drinks manufacturers such as Mey Icki in Turkey, Ypioca in Brazil, and most prominently a majority share of Indian-based United Spirits (the world’s largest alcohol producer by volume).[3] Its main competitor, Pernod Ricard bought Allied Domecq in 2005 and the former Swedish government-monopoly producer V&S Group in 2008.

By contrast, as noted previously, the wine market has remained relatively fragmented, with even the largest producers failing to achieve sufficient scale to consolidate the market. Constellation Brands, the global leader, has made the most concerted effort to develop a broad portfolio, with its acquisitions of BRL Hardy (Australia) and Nobilo (New Zealand) in 2003, Robert Mondavi (US) in 2004, Vincor International (Canada) in 2006 and Beam Wine Estates in 2008. However, it has subsequently refocused towards buying up smaller premium brands, and still represents less than 3% of the global wine market.[4]

Global expansion

Another force driving the consolidation of the alcohol industry is globalisation: the world’s leading producers have increasingly focused their efforts on selling their products to fast-growing developing countries. As described previously, this has partly been achieved by acquiring local producers, but it has also been facilitated by increased marketing, cheaper distribution costs and lowered trade barriers. This trend is illustrated by figure 10, which shows how the geographical distribution of Diageo sales have changed over time. In 2000, its traditional markets in Europe and North America accounted for 83% of all sales: today they represent just 42%.

Diversification across categories

It should be clear by this point that the markets for beer, wine and spirits are relatively specialised, with most major producers generating the majority of their sales from one of those categories. Nevertheless, there has been a slight trend towards companies diversifying their portfolios to cover multiple types of drinks. The most prominent example is Diageo, which, as well as being the global leader in spirits, also manages a number of prominent beer brands (including Guinness, Red Stripe and Windhoek) and wine brands (including Dom Perignon and Moet & Chandon). Similarly, Constellation Brands, the number one wine producer in the world, purchased Spirits Marque One (owners of the SVEDKA vodka brand) in 2007, and in 2013 bought the US rights to beers including Corona and Modelo.

Vertical integration

A final way in which the alcohol industry has consolidated in recent years is through ‘vertical integration’. This occurs when a company takes over responsibility for additional stages of the value chain. For example, if a winery were to start growing its own grapes or distributing its own products to retailers that would represent vertical integration.

‘Backward integration’, which involves producers taking control of their supply chain, is relatively unusual in the alcohol industry. One exception is the wine industry, where producers often source some of their grapes from owned or leased vineyards. For example, Treasury Wine Estates generates 30% of its Australian grapes, 16% of New Zealand and 13% of its Californian grapes from its owned vineyards.[5]

In the US, there has historically been significant resistance to ‘forward integration’: merging of the production, distribution and retail of alcohol. The ‘three tier system’ in most states prohibits the same company from performing more than one of these functions. However, in recent years, the three-tier system has come under pressure. Despite the efforts of regulators, in a number of states AB InBev is the largest distributor of beer in the US, as well as the largest producer.[6] Moreover, retailers have also sought to circumvent distributors – for example, in 2011, Costco contributed $22m to a referendum campaign in Washington state which allowed it to purchase alcohol directly from producers.[7]

The UK distribution system is somewhat different, with less of a taboo on producers distributing the products directly to retailers. In particular, British breweries have traditionally owned the pubs that sold their beers. The Government’s 1989 Beer Orders relaxed this control by stipulating that no brewer would be allowed to own more than 2,000 licenced establishments. Reluctant to sell pubs to their competitors, this led to the development of a new business model: specialist ‘pub companies’, commonly known as ‘Pubcos’ such as Enterprise Inns, who control a large number of pubs, which they either manage themselves or lease to tenants. Nevertheless, breweries still own a fifth of all pubs in the UK and continue to dominate the distribution market to pubs.

In recent years, the ‘beer tie’ has been a source of significant controversy. Under this system, pub companies rent their premises to managers at subsidised below-market rates, on the condition that they purchase certain drinks and supplies from the pub company, typically at a significant premium to the market price.[8] Recent legislation, set to come into force in May 2016, challenges this system by requiring a ‘market-rent only’ (MRO) option for pub tenants, who will be able to request a free of tie rent when their rent is reviewed or the lease is due for renewal.[9]

In summary, though still closely bound, the relaxation of the links between breweries and pubs represents one of the few areas where the industry has become less consolidated. Indeed, independent pubs represent a larger proportion of all pubs today than in 1991.

 

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[1] Croucher, S. (2015), SABMiller and AB InBev deal: ‘Megabrew’ enters top five biggest mergers in corporate history, International Business Times [Online]. 13 October. [Accessed 17 December 2015].

[2] BBC News, (2015), Beer giants AB InBev and SABMiller agree mega-merger [Online]. 11 November. [Accessed 17 December 2015].

[3] United Spirits Website, USL at a Glance. [Accessed 17 December 2015].

[4] Global wine market size in 2014 $198m, Constellation revenue in 2014 was $5.4bn, not all of which is from wine. Statista (2015), Value of global wine consumption in 2010 and 2014 (in billion US dollars). [Accessed 17 December 2015]. Available from: <http://www.statista.com/statistics/232948/value-of-global-wine-consumption/>; Constellation Brands (2015), 2015 Summary Annual Report

[5] Treasury Wine Estates (2015), Annual Report 2015

[6] Heffernan, T. (2012), Last Call, Washington Monthly. November/December

[7] Celock, J. (2011), Initiative 1183: Washington State Voters To Decide Fate of Privatizing Liquor Sales, Huffington Post. [Online]. 13 October. [Accessed 17 December 2015].

[8] Hope, K. (2014), Q&A: Calling time on the beer tie. BBC News [Online]. 19 November. [Accessed 17 December 2015].

[9] Clarke, S. (2015), Q&A: Pubs code and MRO option, The Publican’s Morning Advertiser [Online]. 14 April. [Accessed 17 December 2015].