The beer and malt manufacturing industry is highly concentrated, with Foster’s Group and Kirin Brewery owned Lion Nathan National Foods dominating the industry. Despite volume growth being flat, double-digit growth in premium and low-carbohydrate beer sales drove revenue growth over the past five years.
While the big two have seen sales of their flagship beers affected by consumers shifting from beer to ready-to-drink spirits (RTDs) and an influx of foreign-label beer over the past five years, beer manufacturers have benefited from growing demand for higher value premium beers. Foster’s and Lion Nathan National Foods invested in boutique brands to capitalise on this.
At the same time, greater health awareness witnessed soaring demand for low-carbohydrate beers, with Foster’s in particular marketing Pure Blonde to great success. IBISWorld estimates industry revenue increased by 1.9% in 2010-11, rising at an average annualised rate of 1.5% over the five years through 2010-11 to reach $5.02 billion.
The strong performance of Foster’s and Lion Nathan in recent years encouraged several new entrants to the industry. In 2009, Japanese food and beverages giant, Kirin, acquired Lion Nathan, with plans to aggressively attack Foster’s’ market leading position in the years ahead. Coca-Cola Amatil and SABMiller’s joint venture, Pacific Breweries, also appears primed for a tussle. Having acquired Bluetongue in 2007, the company’s new Bluetongue Brewery will act as the focal point in its assault on the existing duopoly. The company has plans to manufacture a number of brands from SABMiller’s portfolio of international beers in Australia.
Gage Roads Brewers looks to be another likely contender for market share in the industry. In 2009, Woolworths took a 25% stake in the Western Australian brewer, contracting the company to manufacture over one million cases of beer for distribution in its dominant Dan Murphy retail chain. At the same time, Coopers and a host of smaller boutique brewers have grown in popularity in recent years. This trend looks likely to continue as the economic outlook improves and consumers continue to seek variety.
Acutely aware of the challenge brewing in the industry, Foster’s announced plans to demerge its beer and wine assets in May 2010. While the demerger will likely help Foster’s focus better on its core beer assets and regain market share lost in recent years, it also puts Foster’s firmly on the takeover horizons of the major international beer giants.
IBISWorld expects Foster’s and Lion Nathan will continue to lose market share over the five years through 2015-16, as competition intensifies from both within and outside of the industry. Traditional brands such as VB and XXXX will increasingly be displaced as the market becomes more fragmented. Premium beers will continue to gain their share of the market, with flavoured beers, international brands and craft beers all benefiting from drinkers’ ongoing demand for variety and quality.
Declining domestic beer consumption should lead some brewers to target export markets in the United States and Asia for growth. Imports are forecast to decline as more international brands are brewed under licence in Australia.
Rising environmental concerns are expected to drive innovation in products, packaging and branding. Industry revenue is forecast to grow by an average annualised rate of 2.3% over the five years through 2015-16 to reach $5.63 billion.
Conditions in the industry should improve over 2011-12 with a stronger consumer environment and rising demand for premium beers supporting sales. However, revenue and profit growth are expected to be limited as producer’s fight for market share. This trend will continue for the remainder of the five years through 2015-16 as competition in the industry intensifies and the market becomes more fragmented. Traditional brands will continue to lose market share to premium beers including flavoured, dry, foreign-label and craft brands. IBISWorld estimates industry revenue will increase at an average annualised rate of 2.3% over the five years through 2015-16.
Conditions in the industry should improve over 2011-12, with a buoyant consumer environment and demand for premium beer supporting sales volumes and revenue growth. The economy is expected to return to above trend growth over 2011-12, as a new mining boom underpins business investment and wage growth. While rising interest rates and a strong currency will provide some restraint, consumer sentiment is expected to improve over the year, boosting consumer spending on beer in both the on and off-trade.
Competition is expected to remain fierce over the year, with Foster’s and Lion Nathan investing heavily in marketing and promotions as they battle for market share and fight off challenges coming from Pacific Beverages, the supermarkets and smaller brewers. Prices and revenue growth will be limited as a result. Traditional brands like VB and XXXX will continue to lose share over the year.
The premium segment will significantly outperform the bulk segment, with fruit-infused and flavoured beer expected to demonstrate the strongest growth. Foreign brands will also continue to make inroads in the market, with Pacific Beverages manufacturing more of SABMiller’s international beer portfolio locally and increasing their exposure through CCA’s distribution chain. Craft beers should also demonstrate solid growth as consumer demand for quality and variety grows.
Beer producers will continue to face competition from other alcoholic beverages, with cider, light wine varieties including rose and pinot gris and more sophisticated ready-to-drink spirits (RTDs) and cocktail products competing for the same drinkers. Private label beer is also expected to increase its share of the market. Industry revenue is forecast to grow by 2.8% over the 2011-12.
Later in the next five-year period, revenue growth is expected to slow as the market becomes saturated. Beer volumes should remain relatively steady, but per capita consumption of beer is forecast to decline. The market is expected to become more fragmented, with premium and craft beers gaining in popularity. Heavy investment by Foster’s and Lion Nathan in their mainstay brands will stem or even regain some of the decline in VB, Carlton Draught, XXXX and Tooheys share of the beer market, but these brands will remain well short of their halcyon days.
The trend towards premiumisation will continue as consumers continue to demand higher quality beers and a wider variety of flavours and styles. The craft, international and new segments (dry, flavoured and low-carbohydrate) should continue to grow their shares of the market. Brands with shorter life spans are expected to be introduced to the market, with boutique brewers releasing limited edition craft beers and bigger producers trying to capitalise on short-term trends. Rising community concern at the health and social costs of drinking also poses a threat to future growth.
Competition in the industry is expected to intensify over the five years through 2015-16. This will weigh on revenue and profit growth. At the top of the tree, Foster’s and Lion Nathan will continue to battle for market share. Foster’s has seen its share of the beer market slip from 55% to 49% during the past five years, with Lion Nathan increasing its share from 37% to 41% over the same period. Both will continue investing heavily in marketing and promotional activities. Lion Nathan will continue its assault on Foster’s Victorian homeland through its Boag’s and James Squire brands. The company is also expected to increase exposure of its parent company Kirin Brewing Company’s Kirin and San Miguel brands in the on and off-trade.
Fosters should benefit from the impending separation of its beer and wine assets, allowing the company to better focus on beer. The company is expected to continue spending heavily to support its ailing VB brand, while trying to boost sales of its Matilda Bay craft beers and new low-carbohydrate and flavoured brands. When it is listed separately in 2011, Foster’s Carlton and United Breweries business is likely to appeal as a takeover target for a number of global brewers. North American brewer In November 2010, Molson Coors announced it was partway through selling its 5.0% share in Fosters, probably ruling it out as a contender. Other potential suitors include SABMiller, Heineken and Asahi.
Behind the big two, SABMiller and Coca-Cola Amatil’s (CCA) joint venture, Pacific Beverages, will provide fierce competition to the existing duopoly in the industry. Pacific Beverages will produce international brands from SABMilller’s portfolio such as Grolsch, Miller and Peroni, and flagship Bluetongue beers. The company already has a 10% share of the premium beer market and a 2.0% share of the wider beer market. Combining such leading premium brands with CCA’s extensive distribution network, Pacific Beverages is expected to demonstrate strong growth over the next five years and is likely to realise its stated ambition of becoming the third-largest player in the industry.
Supermarkets are also expected to continue their push into private label beer during the next five years. Woolworths and Coles have exploited their growing dominance in the liquor-retailing sector to strike favourable distribution agreements with beer producers and introduce their own private label beer brands, often sold at significant discounts to branded products. IBISWorld forecasts private label beer will grow to 5.0% of market by 2015-16. Western Australian boutique brewer Gage Roads – which Woolworths acquired a 25% stake in May 2009 – will produce much of the beer for Woolworth’s push into beer. The company recently expanded its Palmyra brewery to produce 1.2 million cases of beer a year. The brewery will produce private and control label beer and other beverages for the supermarket giant. The company aims to become Australia’s fifth largest brewer during the next five years.
At the other end of the market, many smaller brewers are also expected to continue to grow their share of retail sales during the next five years. This segment enjoyed robust growth in recent years; however, craft beer accounts for less than 2.0% of the overall beer market, compared with almost 6.0% in the United States. IBISWorld forecasts this segment will grow to about 4.0% of the industry over the next five years, driven by rising disposable income and consumer’s growing demand for quality and variety.
Profitability in the industry is forecast to come under pressure over the next five years as competition intensifies and producers increase marketing and promotional expenditure as they battle for market share. This will be partially offset by a shift towards higher value premium beers, which attract higher prices and offer fatter margins for producers. More international brands being produced under contract in Australia will also boost margins. However, the effects of competition and rising costs should prove stronger, resulting in profit growth slowing over the five years through 2015-16.
Industry employment is forecast to decline over the next five years as increased investment in capital equipment and technological developments will increase capital intensity. Wages should demonstrate strong growth as the mining boom reverberates through the economy and producers invest in sales and distribution. The number of enterprises and establishments will also grow as new craft brewers enter the industry.
Although international brands are expected to increase in popularity over the next five years, imports are forecast to decline as a greater number of international brands are brewed under license in Australia. CCA and SABMiller’s joint venture, Pacific Beverages, will increase production of SABMiller’s wide portfolio of brands (such as Grolsch, Miller and Peroni) at the company’s new Bluetongue brewery located in Warnervale, NSW. Other producers are expected to follow this trend. Fosters and Lion Nathan already produce Heineken, Becks, Stella Artois, Carlsberg and Kronenbourg between them under licence. The relatively high profit margins and increased exposure of internal brands is expected to see more of these agreements being struck with global brewers.
Exports are forecast to demonstrate steady growth over the next five years. Declining domestic beer consumption and falling profits should lead Australian producers to look to new markets in the Asia-Pacific region and beyond. The United States is becoming an important market for exports of craft beers. Despite weak economic conditions there, US demand for craft beers has grown in recent years, with producers like Coopers and Baron Brewing taking advantage of this. Australia’s largest independent craft brewer, Sydney-based Barons Brewing, has enjoyed enormous success in the United States and other markets by creating unique beers brewed with native Australian ingredients like black wattle seed and lemon myrtle. In November 2010, the company signed a $60 million export deal to sell their beer in the United States and Russia.
IBISWorld expects other producers will follow this trend, emphasising the Australian characteristics of their brands both in marketing and flavours.
Strong export growth is also expected to drive sales in the malt sector over the next five years. Export growth prospects for the Australian malting industry are favourable, due partly to the development of improved barley crops allowing Australian maltsters to produce top-quality malt. The cooperation of the Australian barley, malt and brewing industries in barley research is unique and will be a source of competitive advantage. South-East Asia, particularly Vietnam, will be a primary source of malt export growth. However, exports of raw malting barley will remain higher than processed malt during the next five years.
Robert Bryant is the general manager of business information firm IBISWorld.
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