United States Beer Consumption, 2008-2018 (litres per capita)
2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 75
77.5 80
f = BMI forecast. Source: Beer Institute, Trade press, BMI
Consolidation In The Global Alcohol Industry
The new chief executive of drinks firm SABMiller, Alan Clark, said in September 2013 that the consolidation wave that has been a key feature in the global beer market over the past 15 or so years has some legs left in it yet. In our view, there are still opportunities for bolt-on acquisitions in alcohol, particularly in China, where there is room for consolidation in both the beer and spirits sectors (though spirits might be more difficult).
China is also at the cornerstone of Carlsberg's Asia strategy, and it was announced in December 2013 that it had increased its stake in Chongqing Brewery to 60%. Carlsberg is among the top five beer companies by volume in China, behind multinationals such as SABMiller and Anheuser-Busch InBev and some domestic companies. Carlsberg is particularly strong in western China, where beer consumption remains relatively low. Carlsberg has carved out a promising niche for itself as part of its wider business in Asia, which is set to include greater investment into Myanmar and India.
We believe that there are still opportunities for consolidation in global alcohol, even if the vast majority of the main deals have already taken place. We see most of this consolidation focused on Asia, with China probably remaining the main centre of inbound mergers and acquisition investment. Asia accounts for about 20% of Carlsberg's annual sales, and the company will very likely look to push this contribution to more than 30% to compensate for the ongoing weakness of beer markets across Europe. On the acquisition front, Carlsberg could target Chinese companies such as Beijing Yanjing Brewery or Tsingtao Brewery.
Governments Taxing Alcohol
The increase in alcohol taxes is a core dynamic in the food and drink industry. Turkey's alcoholic drinks sector suffered another setback in January following the decision by Prime Minister Recep Tayyip Erdogan's government to impose a 10% tax rise on sales of all forms of alcohol. Such a move will further damage the sector, which is still reeling from the introduction of strict anti-alcohol laws in May 2013.
Under the new legislation, all alcoholic drink sales in Turkey will now be subject to a 10% tax increase, along with tax hikes for cigarettes, cars and mobile phones. The broad-sweeping hike is an attempt to curb rising inflation in the country and the ongoing depreciation of the Turkish lira. As opposed to the changes announced in May 2013, such a tax hike does not appear to be wholly targeted at alcohol consumption, and the industry will be hoping that a U-turn may be taken by government later on in 2014. Nevertheless, such a move will severely damage alcoholic drink sales in the country, which have already been hurt by a Turkish economic slowdown and policy changes announced in the middle of 2013.
In May 2013, Erdogan's government implemented an anti-alcohol bill that prohibits the sale of alcohol between 10pm and 6am, bans sponsorship from alcohol companies, and places other restrictions on companies' marketing. Anadolu Group, which owns the country's most popular beer brand through Efes
Beverage Group, has seen its share price stuck in a downward spiral since the announcement. Sales of Efes
account for 90% of total beer sales in Turkey, and only Turk Tuborg, which predominantly imports foreign beer for domestic sale, is another notable Turkish brewer.
Major Western European Food Retailers Trying To Fix Business At Home
If the era leading up to the global financial crisis in 2008 was characterised by international expansion, with
Tesco playing a particularly prominent role under former CEO Sir Terry Leahy, the past two or three years
in particular have necessitated a major shift in strategy for both Tesco and France's Carrefour, the second and third biggest food retailers globally.
Tesco has been under pressure from shareholders to address structural shortcomings exposed by the landmark profit warning it announced in January 2012. This was the moment it became clear that the retailer had to focus a lot more attention on its domestic operations. The inevitable fall guy would be part of the international business, with the failed US Fresh & Easy business the obvious target.
Resurrecting its UK business and ultimately clawing back some of the market share that it has ceded to rivals in the ultra-competitive UK retailing landscape is going to take longer for Tesco than some observers might have hoped.
However, despite the issues Tesco is facing at home, it still needs to capitalise on growth opportunities abroad when it can identify them. Indeed, the retailer has been first out of the blocks in India after the retail sector was opened up to foreign companies; Tesco announced in December 2013 that it was awaiting the go-ahead to invest US$110mn in a joint venture with the Tata Group conglomerate. India is ultimately going to be an enormous opportunity, and even if the UK is the short-term priority, India's potential cannot be ignored. Tesco will be joining forces with multinational Tata, which has a strong track record working with foreign multinationals in joint ventures, with recent examples including Starbucks.
The big three global food retailers Walmart (until recently), Carrefour and Tesco have traditionally operated wholesale businesses in India. In the aftermath of the 2012 reform announcement, they have mainly focused on trying to get a better grip on the unique requirements of operating in India, while likely also trying to lobby the government to make the proposition more attractive.
India is fundamentally an attractive market given the current dominance of mom-and-pop-type stores and the fact that retail sales are growing from a reasonably low base. Over the past few months, India made some small concessions that it hopes will make its food retail sector more attractive.
Recent amendments include stipulating that half of the first US$100mn invested in the first three years has to be directed to back-end infrastructure. Restrictions on what type of local suppliers can be used have also been relaxed, allowing retailers to maintain suppliers that generate more than US$2mn in assets, which was not permitted in the original stipulations. These small suppliers must account for about 30% of overall supplies. Previously, once a supplier grew past US$1mn in assets, it could not be retained. By comparison, single-brand retailers such as IKEA do not face the vast majority of these hurdles, meaning there is still a major and perhaps unique distinction made by India between single- and multi-brand retailers.
Potential Impact Of Government Legislation
We reported in December 2013 that a recently published research paper has put the spotlight back onto the risks associated with energy drinks, causing Monster Beverages, the largest public energy drinks company in the world, to issue a statement defending its practices.
A team from the University of Bonn in Germany argued that energy drinks can change the way the heart beats. As such, it recommends that children and people with certain health conditions should avoid such drinks altogether. The report is the most recent development in a long battle between energy drinks companies and their detractors, with the controversy coming to a head in the middle of 2012 following the death of a 14-year-old girl. The related lawsuit against Monster attributed no responsibility to the energy drinks manufacturer; however, investor confidence was seriously dented, causing the company's share price to fall considerably at the time. Rumblings still persist over the health implications of energy drink
consumption, with UK retailer Morrisons banning the sale of such drinks to consumers younger than 16.
Monster, which is the market leader for energy drinks in the US, has called the university's report 'alarmist and misleading'. The company goes on to argue that the conclusion reached by the scientists is not wholly accurate, and that mistakes are made in the report. Though this report will add fuel to the ongoing controversy, we doubt that the public will have any significant response in terms of energy drink consumption. Indeed, we believe the functional drinks segment, which includes energy drinks, will outperform in terms of global soft drinks consumption.
Premium Whisky An Outperformer
A new long-term view introduced in this overview relates to premium whisky, which has been one of global alcohol's best performing areas over the past few years. Investment into Irish and Scottish distilleries in particular has been picking up, driven in large part by booming demand for luxury spirits in emerging markets, most notably China. It is no surprise that global spirits behemoths Diageo and Pernod Ricard are ramping up investment into whisky. Premium blends of Scotch whisky are particularly popular in countries such as China and India.
Another key growth area for whisky is the US, where Irish whiskey is performing particularly well. Irish whiskey's growth in the US comes at a time when spirit sales in general are growing strongly, with younger consumers in particular increasingly opting for spirits over beer. Irish whiskey is particularly well suited to this target market, with its smooth and light taste (in comparison with Scotch) making it more suitable as a
mixer in cocktails. This is a trait it shares with US bourbons, but Irish whiskey is generally less sweet, marking a clear point of difference and preventing it from simply being seen as a bourbon alternative. In addition, the country's large American-Irish population of more than 35mn offers a great impetus to Irish whiskey sales.
Table: Food And Drink Core Views
Short-Term Outlook
Grain prices are expected to remain steady over the first quarter of 2014.
Consumer sentiment in Western Europe and the US expected to continue improving through 2014. Discount retailing will continue to outperform supermarkets and hypermarkets across Europe in 2014.
Long-Term Outlook
Companies with strong emerging market exposure will largely continue to outperform in sales growth, although the best opportunities may now be beyond the BRIC countries of Brazil, Russia, India and China.
Multinationals will increasingly pursue opportunities in frontier markets.
Provenance will become increasingly important, particularly in Western Europe following the 2013 horsemeat scandal. Emerging-market-based firms will increasingly pursue developed-market investments for the purposes of diversification and access to stellar brands.
Private equity interest in food and drink companies in frontier regions such as Sub-Saharan Africa will increase. Hypermarkets will underperform in developed markets, where convenience, discount and online retailing are the strongest opportunities.
Conversely, hypermarkets remain a great opportunity in less developed retail markets, particularly adjacent to shopping centres/malls.
Investment in innovation will increase as producers seek differentiation; emphasis will be placed on protecting innovations.
Bottled water, juices and energy drinks will be outperformers in global soft drinks.
Government legislation will play an increasing role in marginalising unhealthy food and beverage products. Governments will increasingly pursue alcohol as an effective means of raising revenue through higher taxes. Whisky, particularly Scotch whisky, will be an outperformer in global premium spirits.
Functional foods and energy drinks will provide considerable opportunities globally.