Protz: How big breweries will crush the craft revolution

It’s an exhilarating time for beer. There are 1,500 breweries in the UK... and growing. There are 4,000 breweries in the United States... and growing. Old styles such as IPA and porter have been revived to worldwide acclaim, while new styles abound.

But — and it’s a great big lumbering beast of a but — storm clouds are gathering. In a few years time, the picture may not be so rosy and the choice not so good for drinkers.

The concern comes from the merger of the world’s two biggest brewers, AB InBev and SABMiller. It’s the third biggest takeover in commercial history. It will cost AB InBev an eye-popping $106bn (£73.1bn) and the merged group will control 30% of the world’s beer production.

SAB

John Colley, a professor at Warwick University’s Business School, has made a study of the way global corporations operate and snuff out competition. He believes the merger has been driven mainly by the fact that AB InBev — which includes Anheuser-Busch in the US, Stella Artois in Belgium and AmBev in Brazil — is weak in Africa while SABMiller has a big stake there, the result of South African Breweries’ historic presence in that continent.

With sales of global brands stagnating in such established markets as Europe, the UK and US, AB InBev will push for improved market share in Africa, Asia and Latin America. But

Professor Colley thinks the group is also taking a hard look at the fast-growing craft-beer sector in the UK. It has already snapped up Camden Town Brewery for more than £80m and is likely to be crunching the numbers of other potential victims.

America

In the US, where AB InBev accounts for a frightening 70% of the beer market, it has bought Goose Island and several other craft breweries.

“High concentration means less choice,” says Colley. “And AB will buy more breweries if it’s allowed to.”

He points to the enormous power of giant companies to manipulate the market as a result of their ability to produce cheaper goods and dominate distribution.

“The new AB InBev is a bad deal for craft breweries,” he adds. “They will find it harder to get access to the market when AB ties up distribution.

“Big brewers have 40% lower costs than smaller breweries — there’s a huge difference between the big producers and even medium-sized brewers as a result of global brewers’ ability to buy raw materials, such as malt and hops, in vast bulk. As a result, they have lower costs and lower prices. They can afford to promote their beers on TV, while craft brewers have to rely on word of mouth or social media.”

Professor Colley underscores the way in which global corporations can dominate markets as a result of their lower costs of production: “When AB InBev bought Modelo in Mexico, it stripped 20% of costs out of the company. With Beck’s in Germany, it took 15% out.”

Russia

He estimates that the merger with SABMiller will generate cost savings of $1.4bn (£966m). That amounts to 70% of revenue.

Looking ahead, Professor Colley doesn’t think AB InBev will attempt to build its trade in Russia — “a most difficult country to do business with” — or in China, where it currently accounts for 40% of beer sales. The Chinese beer market has been saturated and it’s the wine market that is now growing.

He thinks Africa and Latin America will be the key targets. There has been much speculation about the drinks group Diageo selling off Guinness, which is massively popular in Africa.

More acquisitions

But Colley is not certain AB InBev would want to buy Guinness because it has, he feels, too much of an old-fashioned image.

In the west, he’s convinced the group will chase after more craft breweries that offer the modern image younger drinkers approve of. In London, with its eight million population and tourist appeal, he thinks AB InBev will attempt to flood the market with Camden Town’s beers.

And Professor Colley doesn’t rule out the possibility of the beer giant diversifying into soft drinks. Coca-Cola could be a key target for the future, he thinks. As well as beer and Coke sharing distribution costs, a merger would open up fresh sales potential for AB InBev: Coca-Cola became an international brand as a result of it following American troops around the globe during World War Two.

Bears

A few days after my interview with John Colley came the news that the second-biggest brewer in the Netherlands, Bavaria, had bought the Palm brewery in neighbouring Belgium. Bavaria isn’t a global company but it’s big, with annual revenue of €531m (£420m).

It concentrates on what are called “label beers” — beer for supermarkets — and buys 245,000 tons of malt a year.

Family-owned Palm enjoys a good reputation for the quality of its traditional beers, including Palm Speciale, the best-selling ale in Belgium. On a smaller scale, the merger underlines all the points Professor Colley made.

In short, the bears are circling and they are very hungry.