Beer Market in UK

Beer in the United Kingdom

 

Dissertation Writing Help in Beer Market in UK

Headlines

·         In 2008 beer faces a total volume decline of 5% and current value decline of 4%

·         The takeover of Scottish & Newcastle by Heineken and Carlsberg the biggest story in 2008

·         Imported standard lager once again the best performing category with total volume growth of 56%

·         Raw material price inflation, duty increases and fuel costs all push unit prices upwards

·         Carling remains the number one brand in 2007, accounting for a 15% share of total volume

·         The Olympics in 2012, along with an upturn in the economy in the latter part of the forecast, predicted to leave beer volumes flat over the next five years in CAGR terms

Trends

·         2008 began with the completion of the protracted takeover of Scottish & Newcastle by Carlsberg and Heineken for a total consideration of £7.8 billion. The takeover was formalised on 29 April 2008 and, under the terms of the deal, Carlsberg gained the remaining 50% of Baltic Beverages Holding (BBH) as well as Scottish & Newcastle’s interests in France, Greece and other smaller European markets. Of more significance to the UK beer sector was Heineken’s acquisition of Scottish & Newcastle’s entire UK business, including the number one ale brand John Smith’s, the number two lager brand Foster’s and the leading cider brand Strongbow, among a whole host of other strong ales and niche lagers.

·         The impact of the Scottish & Newcastle deal reverberated around the industry and dramatically altered the competitive environment. Heineken immediately strengthened its distribution network through the 2,000- strong Scottish & Newcastle pub estate and the number one wholesaler in the UK, Waverley TBS, all of which allowed the company to increase the penetration of its flagship brands Heineken and Amstel.

·         The Scottish & Newcastle takeover heralded further massive consolidation in the global brewing industry in 2008. InBev and Anheuser-Busch agreed a US$52 billion merger in July 2008 to create the world’s largest brewing company in revenue terms, with the full effects of this deal yet to be felt in the UK.

·         Beer volumes fell 5% in 2008, a faster rate of decline than in 2007 and much faster than the 2% CAGR volume decline over the review period. Beer volumes fell steeply in 2008 on a more prosaic level due to the combined effects of poor weather during the summer. Added to this, England, Wales and Scotland’s failure to reach the European Football Championships kept people away from the pubs, which were already reeling from the smoking ban and competition from the off-trade. More worryingly, beer volumes suffered as a result of structural problems in the UK economy, with rising prices and growing economic uncertainty turning off consumers on the one hand and accelerating pub closures on the other.

·         Imported standard lager was the fastest growing beer category in 2008 with total volume growth of 56%. Imported standard lager has benefited greatly from new product development over the last few years as brewers have noted the growing trend for high-quality continental lagers with a lower alcohol content. ‘Session’ drinks such as Beck’s Vier and Amstel at 4% abv, backed by huge advertising campaigns, have grown this small category to the point where much of the industry buzz and focus now rests upon it, indeed directing tastes towards 4% and lower over stronger abv options.

·         One of the key stories affecting the UK beer sector was overall price inflation in the economy which filtered through to on-trade and off-trade beer prices. Rising fuel bills and raw material costs led to warnings of prices increases from the major brewers, such as Coors, Carlsberg and Scottish & Newcastle, the last of which said input costs rose by 8.5% in 2007. All the major brewers implemented price increases in 2008, in some cases more than once, to deal with spiralling costs. Inbev raised its prices by 4% on 29 April and then again on 31 July by a further 3%, on both occasions blaming rises in energy, transportation and packaging costs.

·         The tougher economic climate of 2008 resulted in standard ale falling 11% in volume, with stout volumes down 10% in 2008. Long-term trends of shifting tastes and competition from lager, wine and cider, on top of institutional neglect from the major brewers, were accentuated over the course of 2008 by a worsening UK economy, forcing closures of rural and traditional pubs, leading to big falls in distribution.

·         Discounting continues to be the key off-trade trend. Supermarkets continued to use beer as a loss-leading footfall driver. Despite vociferous protests from a wide range of interested groups, including publicans, the breweries, off-licensees, health groups and the police, the UK Competition Commission ruled in April 2008 that supermarkets were allowed to continue to sell alcohol below cost as the health aspects of discounting were outside its remit. Supermarket discounting continues to be controversial and Labour MP Sally Keeble introduced an Early Day Motion into Parliament to ban such practices in July 2008.

·         The key trend in the on-trade continues to be the move towards food and a family-friendly environment following the smoking ban. This has impacted beer sales in some instances, as many people preferred drinking wine with their meals, and the increase in the number of children meant soft drink sales increased, again at the expense of beer at the taps and in the cellars, where the move towards other drinks put pressure on space given to beer.

Production, Imports and Exports

·         UK production of beer continues to suffer at the mainstream end as the sector faces a number of challenges from rising raw material costs, and other alcoholic drinks, such as wine and cider. The larger brewers are continuing the trend towards contract brewing. Inbev has closed its Manchester facility and contracted Hydes to produce Boddingtons and Flowers. Conversely, the production of ale by the smaller regional and family breweries continues to grow, despite an overall fall in category sales. Brewers such as Shepherd Neame, Greene King and Wolverhampton & Dudley have all invested in their production side, with new cheaper, faster and more efficient facilities increasing capacity.

·         2008 saw a marked slowdown in the growth of imported lager volumes to 7%, down from the 16% volume CAGR of the review period. The slowdown of the UK economy and the expected recession for the next few years has stymied the growth of imported lager for a number of reasons. Rising fuel costs have made foreign travel more expensive for British consumers and concurrently the taste for the exotic. The availability of exotic imported beers has also been hit by the closure of many bars and restaurants that cater for more expensive and exotic tastes, as these establishments struggled to find custom in the downturn. The lack of British representation at the European Football Championship was also detrimental as pub companies such as JD Wetherspoon, which runs special country-themed beer offers, found consumers were less enthusiastic than they were during the 2006 World Cup. Perhaps the key to the slowdown was the reversal in immigration patterns experienced in 2008. With the economy worsening, many Eastern European migrants, particularly from Poland, moved back home to find work, thus hitting sales of ‘ethnic’ food and drink from Eastern Europe.

Competitive Landscape

·         Scottish Courage, the operating name of Scottish & Newcastle plc, was the leading UK beer company in 2007 with a 24% share of total volume sales in its last year of independence. Scottish & Newcastle’s strength in 2007, and what attracted Heineken, was its three national brands: Foster’s (the number two brand, with an 10% volume share), John Smith’s (fifth leading brand with 6%) and Kronenbourg 1664 (sixth leading brand, with 4%).

·         Inbev UK was the fourth largest brewer in 2007 with an 11% share of total volume. Inbev UK’s major brand Stella Artois (ranked third with an 8% volume share) continued to struggle with a confused and constantly changing advertising campaign, as well as the inability to shake off a negative image among consumers. Coors remained in second place in 2007, commanding 20% of total volumes. Coors’ Carling brand remains the UK’s number one beer brand, with a healthy 15% sector volume share. Also in the top four was Carlsberg-Tetley, which increased its share slightly to account for 13% of total volume sales.

·         The success of imported premium and standard lagers helped them steal a march on their domestic beer rivals. Brands such as Amstel and Beck’s Vier helped imported standard lager to be the best performing beer category, but this success was based on cannibalising sales from domestic beers rather than bringing new drinkers to the category.

·         The biggest and most significant launch of 2008 was Inbev’s attempt to enter the fast growing standard imported lager category. Inbev launched Stella Artois 4% in late June 2008, initially in the off-trade with a wider launch spread throughout the rest of the year. Stella Artois 4% was an important launch for three reasons. Firstly, Stella Artois 4% was an admission on the part of Inbev at the phenomenal success of Beck’s Vier and Amstel, and there was certainly a need for Inbev to capture some of that category while still in its relative infancy.

·         Secondly, the launch of Stella Artois 4% was yet another shake-up and image revamp for the Stella Artois brand. Inbev’s attempts to halt declining sales of Stella Artois and crucially regain some of its premium cachet lost to discounting were mixed at best for much of 2007 and 2008, with two distinct advertising campaigns attempted and quickly dumped. The Brasserie Artois concept of a family of premium Artois beers including Artois Bock and Peeterman, both spearheaded by Stella, also met with confusion from consumers and derision from publicans forced to install new elaborate fonts and use specifically designed glassware. Both Artois Bock and Peeterman are widely predicted to be dropped by the end of 2008. Inbev hopes Stella Artois 4% will be the missing ingredient to revitalise the behemoth that is the Stella Artois brand.

·         Thirdly, the initial off-trade only launch of Stella Artois 4% was yet another indication of where Inbev is focusing its energies and more pointedly how Inbev positions itself. Inbev UK chief Stuart McFarlane has gone on record many times describing his company as an FMCG company, much like Nestlé and Coca-Cola, interested in growing value and less the traditional brewer concerned primarily with volume.

·         Aside from the mega deals between the global brewers, 2008 was a relatively quiet year for merger and acquisition activity. The profligate days of 2006 and 2007, driven by the private equity bubble, abated with the tightening credit markets. Of note, Cobra-owner Lord Bilimoria intimated that his company was open to a listing or merger or takeover at the beginning of 2008, the onset of recession has no doubt put such plans on the backburner. Among the pub companies, the overriding theme of 2008 was cost-cutting. Orchid pubs went into receivership with all the other major pub companies like Punch and Admiral closing or selling hundreds of loss-making pubs as the recession began to bite.

Prospects

·         The deteriorating economic climate in the UK will be the key story over the forecast period. Total beer volumes for the forecast period are predicted to be flat in CAGR terms, with an expected fillip from the Olympics in 2012 and the associated uplift in tourism, economic confidence and public spending masking many of the problems inherent within the industry and the continued decline of beer. Beer is predicted to decline by 3% in total volume in 2009, with on-trade volume falling by a worrying 6%. With a raft of pub closures, tightening budgets for leisure activities and the continued deep discounting from the major supermarkets, the on-trade took a battering in 2008 and is set to see a record year of closures in 2009, according to the BBPA. The larger brewers are already looking to shift volume to the off-trade, which is still holding up despite a difficult trading environment. Launches such as Stella Artois 4%, which began life in the off-trade, will increasingly become a common sight.

·         The forecast volume CAGR for 2008-2013 is slightly more optimistic than previous forecasts of a 1% CAGR decline for the 2007-2012 period. A significant factor behind this slightly more favourable outlook is the predicted recovery of the UK economy in 2013, with many economists believing that the first shoots of growth will begin in 2012. Furthermore, the after-effects of the Olympics in the UK, with its associated millions of tourists and countless millions of pounds spent, will continue to reverberate around the consumer foodservice sector, helping alcoholic drinks and beer in particular.

·         Rising raw material, packaging and fuel costs will continue to be serious threats to growth. Barley and hops prices have increased steadily since 2005 and almost tripled in 2008 in some cases. High oil and gas prices in the summer of 2008 also markedly increased brewers’ production and transportation costs and further increased the price of packaging.

·         Imported standard lager will once again be the star category in the UK beer sector over the forecast period with an impressive total volume CAGR of 17%. Brewers will continue to focus on this category, with much new product development and brand launches pushing the category towards maturity. The biggest loser in growth terms is predicted to be domestic economy lager, posting a total volume CAGR of -7% over the next five years as it continues to lose out due to supermarket discounting. More tellingly, the big three traditional and domestic categories - stout, ale and domestic standard lager - are all predicted to post a 1% CAGR volume decline over the forecast period, continuing the slide of the review period as these heavyweights struggle with narrowing distribution, rising costs, changing consumer tastes and outdated images.

·         Unit prices in the on-trade are predicted to increase as the cost of producing draught beer continues to rise. 2008 saw the first occurrences of the symbolic £4 pint in some pubs in London and the South East of England, according to CAMRA and the BBPA. In light of continued manufacturer declarations of price increases as well continued duty increases by the government, industry experts fully expect on-trade prices to hit £4 a pint nationally over 2009-2010. The off-trade discount culture will continue to depress the price of beer in the supermarkets. The results in favour of supermarkets from the Competition Commission probe strengthens the hand of the likes of Tesco and Asda, which continue to rely on beer as a loss-leading footfall driver. Only direct government intervention to stop discounting is likely to lead to ‘real’ prices in the off-trade, although current indications are that the Labour government is not so inclined to legislate directly.

·         The biggest launch of 2008, Stella Artois 4%, will have a significant impact on the sector. Stella Artois 4% will provide further evidence and give strength to the rapidly growing imported standard lager category. Strong growth in this category is likely to push other manufacturers such as Coors and Carlsberg to introduce their own imported standard offerings to capitalise on the popularity of the category. The success or failure of Stella Artois 4% will also have wider significance for the Stella Artois brand and its long-term health as the leading premium brand in the UK.

·         With the mergers of Heineken and Scottish & Newcastle and also InBev and Anheuser-Busch’s UK operations, the next few years are likely to be awash with activity. The two new combined UK brewing giants are likely to rationalise their enlarged portfolios and already there is talk of selling or discontinuing some major brands. Inbev may look to offload massively underperforming ale brands such as Boddingtons. Heineken may look to purge the tens of smaller ale brands that Scottish & Newcastle neglected for a number of years. Of greater interest and speculation is the future of Coors UK, with many analysts predicting that it may succumb to a larger player as global brewers race to increase economies of scale.

Sector Background

Lager Price Band Methodology

Lager

·         Price promotional activity continued in 2008. Of 15 grocers interviewed for a Competition Commission inquiry in 2007, 10 told the commission they sold products below cost: Aldi, Asda, the Co-op, Lidl, Morrisons, Netto, Sainsbury, Somerfield, Tesco and Waitrose. Most said they did this because they did not want to be beaten on price. They also admitted products were used as loss leaders to tempt customers into their stores during events such as Euro 2008. Discounting was especially extreme over the Christmas period, with one leading supermarket offering even premium lagers at heavily discounted prices, with Stella bottles being sold at the equivalent of £0.67 a pint, Carling at £0.53 a pint and Foster’s at £0.47 a pint. Industry sources agree that consumers are now so used to discount prices that they are often not prepared to pay non-discounted prices.

·         Price promotions have meant a narrowing of price bands, with little difference between the different types of lager. Price promotions for premium lager brands mean that the prices of the leading brands, such as Stella Artois and Kronenbourg 1664, are around £1.60 a litre for multipacks, compared with the average price of £1.80-2.00 a litre for single cans of lager. Promotions on standard lager saw prices drop to as low as £1.19 a litre, which is the typical price of standard economy brands, such as Skol. A more normal price for standard lager is around £1.60 a litre.

·         Economy lager has not seen much price elasticity, simply because prices are already as low as they can go. There is, however, a difference in price between standard economy lager and super-strength economy lager. Super-strength economy lager is a lot more expensive, as the duty is significantly higher. The very top pricing level of economy lager is represented by Carlsberg, offering a 275ml glass bottle variant of its Carlsberg Special Brew brand at £1.68, in an attempt to enhance its image.

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