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Oligopoly Watch

The latest maneuvers of the new oligopolies and what they mean

Friday, October 17, 2003

Beer: Can the small survive?

Beer is one of our favorite oligopoly subjects. This worldwide commodity is sold in justabout country and brewed in most. Once a very localized industry with characteristiclocal recipes, it has evolved over the last twenty years into a multinational business inwhich light lager and pilsner styles (such as Bud, Heineken, Stella Artois) are nowdominant. We've discussed the issue ofpseudo variety, and we've show how theSABMiller conglomerate has grown across the world, along with Budweiser, Heineken,Interbrew, and a few other companies.

The most notable exception to this homogenization of tastes has been Belgium. That

country's artisanal brewers, spread through the country, have supported over twentydistinct varieties, from brown ales to fruit beers to wheat beers. One of the outstandingbrews, beloved of connoisseurs, is Duvel, a cellar-aged, smooth ale that is generallyagreed to be one of the best beers in the world. There's really nothing quite like it(disclaimer-I love this stuff).

But as a Wall Street Journal article ("Beer goes upscale," 9/25/03) notes, Duvel (the namemeans "devil") may be in trouble. It owner, a small company called Duvel Moortgats isfeeling pressure from its richer, more powerful competitors and a changing market.

The company's stock, having been offered originally in 2000, is down, as the articlenotes. "Dependent on larger brewers for distribution, analysts fear Duvel will struggle forshelf space and predict its generous margins could narrow."

Although brewing long has been a consummate local industry in Europe -- most citieshad their own brewery -- the industry is in the midst of a wave of consolidation in Europe,as beer-makers scramble to acquire strong local brands and the distribution networksthat go with them. Earlier this year, SABMiller PLC took over Italy's Peroni and HeinekenNVdrank up Austria's BBAG. Last week, giant Interbrew SA, which is based in Belgium,took over German family-owned brewery Spaten, maker of Loewenbrau. Holdouts suchas Duvel will struggle to get the store shelf they need to prosper.

As in other industries, a once complex distribution chain is being dominated by thebigger players. That means that the family-owned, local brewers can't really get theleverage to make sure their beers get into the stores and the taverns. As it is, Duvel is

dependent on competitors Heineken and Interbrew to get its brews delivered outside ofcentral Belgium.

"[T]he small family-owned brewers can't compete with the big players on the distributionand retail side," says Mike Benner of the British-based campaign for real ale, or CAMRA.In the U.K., he says, the top four brewers now have 80% of the market, while family-owned brewers have just 15%. Only 14 years ago, a U.K. government report showedfamily breweries controlling just under a quarter of the market.

Much the same thing is going on in Belgium, in Germany, and in other beer-drinkingcountries.

Duvel Moortgats itself has tried to become multinational in a small way. It recentlypurchased New York State brewery Ommegang and Czech brewery Bernard. But theseare even smaller players. The story writes that pressures from stockholders will

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eventually cause the family to sell out to a big competitor The likely suitors includeHeineken, Scottish & Newcastle PLC (from the UK), SABMiller and Anheuser-Busch Co, allof which are building their own specialty brews. Belgium-based Interbrew is consideredunlikely, as the company owns competing Belgian specialties.

Can the small survive? That's getting harder and harder in every industry. It's likely thatDuvel, like so many others, will be just another brand in some multinational's diverseportfolio.

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