A view from an independent consultant
While the current economic conditions present real challenges that must be managed, several underlying dynamics still favour global brewers. Within that environment, the companies that can best balance great day-to-day execution with disciplined investment in brands and capability will create important long-term competitive advantages for themselves.
Five dynamics are asserting strong influence over the global beer market
- The inherent challenges of slowing economies
Economic conditions vary greatly from market to market. The relative tailwinds of recent years have faded in some key markets. Other markets are just now beginning to show the strain of increased commodity costs. At the consumer level, this has tempered, but not derailed, the well-established trend of consumers trading up to higher-end products. At a structural level, this has significantly tightened the access to capital, providing meaningful advantage to players with strong balance sheets.
- The rise of a global middle class
According to a World Bank report published in late 2006, approximately 800 million people around the world are expected to join the middle class by the year 2030. These people are not only gaining the resources needed to purchase world-class consumer products, but they also view those products, such as professionally produced and marketed beer, as important benefits and indicators of their improved lifestyle.
- The accelerated evolution of emerging markets
Emerging economies that previously featured traditional beer markets are now quickly developing many commercial characteristics once associated exclusively with developed economies. In addition to the rise of the global middle class, emerging markets are also being reshaped by ongoing urbanisation.The United Nations predicts that more than 650 million people will migrate to urban centres over the next decade. Urbanisation enables global brewers and other fast moving consumer goods companies to reach additional consumers more effectively and efficiently.
- The intensification of consumer fragmentation
The growing consumer demand for variety has prompted brewers and other alcoholic beverage players to expand their portfolios with new offerings. That, in turn, has stimulated additional consumer interest in new choices, creating a reinforcing loop that shows no signs of slowing. That growing interest in choice has also made it far more attractive than ever before for competitors to expand into new local markets, exerting growing pressure on established, massive brands.
- The intensification of retail consolidation
While consumer preference continues to fragment, the retail environment continues to consolidate. Some of that is driven by actual structural consolidation among retailers, as major chains expand or combine. But most is driven simply by large retailers capturing a larger percentage of consumer transactions, as increasingly wealthy consumers continue to gravitate to more advanced retail outlets.
Consequently, three critical implications exist for global brewers
- Efficiency and execution will be more important than ever
While beer has always been an asset-intensive business in which scale advantages are critical, the strong surge in commodity costs in recent years is forcing brewers to become even more efficient. Marketplace execution will be challenged by the increased complexity inherently associated with managing more diverse brand portfolios, as well as by the demand from the large retailers for increasingly sophisticated service.
- The key variable will be the development of strong brands and marketing capability
Strong efficiency and execution will increasingly function as simply ‘table stakes’ in the global beer industry. As developed markets fragment and emerging markets evolve, the key competitive differentiators will be the ability to create brands with strong consumer pull, and the ability to manage diverse local portfolios that fully address the new desires of consumers.
- Discipline will be rewarded
While effective cost-management will be critical in achieving short-term targets, long-term advantage will go to those companies that also continue to invest with discipline. Such discipline will be particularly important in building brands and customer-service capability, both of which typically require sustained, consistent investment over time to deliver meaningful competitive advantage.
Charlie Frenette is an independent consultant with extensive experience in the global beverage industry. He served as a non-executive director of the Miller Brewing Company from 2004-2008.