Wednesday, April 22, 2009

From Our International News Desk

A big post on Friday, but I'm still waiting for responses to trickle in, so stay tuned. In the meantime, here's some information from the MBR International News Desk (aka, "Google News"):

Item 1: From We all know that we, American taxpayers, have paid billions of dollars to banks to bring them on solid footing. We also know that the brewing industry is one of the very few industries that is managing any growth at all, let alone actually doing pretty well. Well, combine the two and what do you get? You get seven banks going in to fund a "private equity firm" (in the 80s we called them "Junk Bond Traders" and "Hostile Takeover Specialists"), KKR, to purchase the Korean brewery Oriental Brewery. The brewery is currently owned by AB-InBev and produces the most popular beers in Korea: OB, Cass and Cafri lagers. You want to know what "the Industry" thinks of the rapidly growing, but still small, craft beer segment? Let's ask Gerard Rijk, an analyst for ING in Amsterdam: "Oriental makes sense for KKR because this is a cash-flow generating business in a duopolistic market." It's hard to know here whether the "market" he speaks of is "Korea" or "Asia" or "Global", but the point is still valid: there's two players (for those a little slow on the draw: AB-InBev and SABMiller). Which only begs the question - if it's a duopoly and KKR's purchase spins off to a third, what do you think the two duopolists are going to do? "Crush the third guy" is a valid answer to the rhetorical question.***

Item 2: From Reuters UK: African breweries are doing alright. Despite war-ravaged nations and a global economic downturn, beer in Sub-Saharan and Eastern Africa is doing well. This is causing even more money to come in from global brewery holding companies like Heineken, Diageo and SABMiller.
Higher consumption of nearer 60 litres per year in wealthier African countries such as South Africa and Gabon demonstrates the potential for growth as average incomes in Africa rise.

Brewers are also moving into the low-cost end of the market, hoping to pick up some of an informal alcohol market which SABMiller reckons could be worth $3 billion a year.
Moreover, "Innovations include substituting local barley, sorghum and cassava for imported barley to make European-style lager more cheaply, as well as more traditional cloudy brews to compete with local artisanal brews at 30 percent or more below the $1 average price of a lager, SABMiller said." Which is interesting, local breweries are using imported European barley, but the European breweries will be using local ingredients. It's kind of hard to tell who the "bad guy" is here.

Item 3: From BoingBoing: In a not-so-surprising leap, it appears European wine retailers have finally jumped the proverbial shark. "Tesco and its rival Marks & Spencer, which sell about a third of all wine drunk in Britain, now invite critics to taste their ranges only at times when the biodynamic calendar suggests they will show at their best." So, let me get this right. Wine taste better on certain days, or even at certain times of the day, because of a biodynamic calendar or lunar cycle? To be fair, even many in the wine industry think this stuff is nuts. But, still, one has to wonder whether retailers are more concerned with educating or confusing consumers. It is my theory that confused consumers are better customers - confusion results from a discrepancy in knowledge, an attempt to bridge this knowledge gap breeds curiosity, curiosity results in sales. Thus, by keeping consumers confused, retailers set themselves and their knowledge as the bar that the consumer must reach to "fully understand" wine; to obtain this knowledge the customer must seek out the retailer who can then, conveniently, suggest the appropriate product to try. But it's a fine line between keeping customers curious and turning them off because of the sheer complexity of it all. And then there's whole batshit crazy thing ...

***Some Wisconsin related trivia: KKR, Kohlberg Kravis & Roberts, now a private equity firm, was a major player in the private equity blow-up in the early 1980s and was the firm that completely bungled the RJR Nabisco takeover that put the final nail in the coffin of corporate raiding - they are the subject of the movie/book "Barbarians at the Gate." KKR got much of its "financing" for the RJR deal from Drexel Burnham Lambert, the undisputed kings of the 1980s junk bond market, and subject of the movie "Wall Street". DBL would later bring the entire bond (and stock for that matter) market down with it when its primary investor, Michael Milken, was arrested for securities fraud. DBL was dissolved in 1991 and one of its traders, Mr. Mark Attanasio, left to start Crescent Mezzanine, a Dallas-based junk bond firm. After selling Crescent Mezzanine in 2001, Mr. Attanasio purchased the Milwaukee Brewers in 2005. What will Lehman Brothers traders do with their ill-gotten trading cash and bonuses do you think?


  1. Ad 1: Duopoly is in South Korea (Hite + OB = 96.8% in 2008). A sale of Oriental would simply change the owner of the one, no the market dynamics; duopoly would persist.

    Ad 2: Barley does not grow in Africa North (save South Africa). Everyone who wants to brew beer with malting barley imports the barley (or malt), typically from Europe. This is true regardless of whether they are European or locally owned.

  2. Assuming Anonymous is correct then:

    1) Correct - you can ignore the "get crushed" statement as it applies locally, but it still applies globally where a duopoly (or at the very least a tri-opoly, with Diageo/Heineken); will be interested to see if this is a "buy and hold" strategy for KKR (which, the article makes it sound as if this is an income-stabilization asset for them, so I would assume that they don't intend aggressive growth strategies) or if this ends up a "grow" - in which case - given the market dynamics (the aforemention tri-opoly) - "grow" could only be outside of Korea (except to get new beer drinkers inside of Korea, I guess) and the "get crushed" comment rings a little truer.

    2) Which I find interesting in that this does not result in stronger ties to the local agriculture from local breweries. The article made it sound as if the local breweries were, as a general rule, importing barley/malt - which results in "truer" beer, even if it ignores the interesting results (not to mention global market differentiation) that can come from brewing with the unique local ingredients. So, my comment is more directed to your "everyone who wants to brew beer with malted barley" comment, wherein I find it interesting that the local breweries are, in fact, interested in brewing with malted barley, but the malted barley experts (the global breweries) are not.

    I have the sneaking suspicion my entire comment makes zero sense.

  3. Ad 2: Which begs the question: who are the "locals" in Africa? Most of the African countries have a dominant brewery, and only real competition in a few countries. And behind the dominant breweries, even if they have exotic company names, are either SABMiller, Groupe Castel, Heineken, Carlsberg or Diageo. S-A-B-Miller is a bit local, you could argue...


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