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German Beer Market: "The most fragmented market in Europe"

(beveragemanager.net) - The decreasing sales trend in the German beer market stabilized somewhat in 2011. The brewers still do not have much to be happy about because the pricing war has grown fiercer. Right now more than two-thirds of the overall volume, and therefore more than twice as much as 10 years ago, were sold by way of price campaigns. It has not been possible to pass cost increases in the areas of raw materials, energy, and personnel to the consumer and/or the marketing intermediaries.

In addition, the advertising and promotional expenses continue to increase in many places. The consequences are obvious: The yields achieved in the German brewing industry are low compared to other European countries, and many brewers are increasingly facing financial challenges.

Hope for better times in the near future is futile. It is certain that beer consumption will continue to decrease due to a steadily decreasing and aging population as well as changed consumer behavior. To what extent it will decrease is still unclear: If consumption were to decrease over the next five years, however, by 2% per year, the industry would lose more than an additional 8 million hectoliters and the surplus, which is currently estimated at 30 million, would increase at the same rate. Those figures are not encouraging!

The volume pressure for German brewers is accordingly high. Overcapacity is expensive and has a strong negative impact on returns in an industry that is so capital intensive. In such a situation, the temptation to sell additional volume at a lower margin and/or barely above cost is tempting. If everyone were to take the same approach, however, no additional volume or revenue would be generated, but the earnings would simply be less for the same or even less volume. To explain: If the average price per 20x0.5 liter is EUR 1, the industry would be destroying a value of more than EUR 400 million based on the annual volume. What industry can afford such destruction of value in the long run?

Brewers have invested hundreds of millions of euros into advertising, sales promotion and individualized bottles. In spite of all that, significant discounts are necessary to slow down the decrease, or, in the best case scenario, stabilize the decrease in volume. Apparently, the industry is not able to create added value compared to low-cost or store brands in spite of massive investments in the brand. Or did the German consumer get used to the low beer prices and simply refuse to pay an 80-100% higher price for a premium beer?

The situation looks somewhat better for wheat beer brewers. The price hammer has not yet hit as hard here, and non-alcoholic wheat bear is very successful. The volume temptation is beckoning and some Pilsner brewers have discovered a new opportunity for growth in this category. The central question is whether the traditional Bavarian wheat beer brands have enough authenticity strength to justify an added value in the long run.

The German beer market is the biggest, but also the most fragmented market in Europe. The three biggest brewery groups only have 30% of the market share, while in other European countries, the top two/three together have a market share of 70-99%. The food retail industry is strongly concentrated and the number of discounters is high. In addition, German brewers have very little legal leeway to differentiate themselves from the competition. The German beer market is struggling with a massive overcapacity, which is increasingly difficult to decrease with an emotional product such as beer, and which bears the risk of a negative consumer reaction to the brand. Together with the decreasing consumption, these aspects make it difficult to break the downward price spiral.

More Exports

German beer seems to be popular in other countries. With an export volume of 15 million hectoliters and a growth of 4%, Germany is an increasingly important beer exporter. The global market is big and tempting for the volume-hungry brewers. A successful and sustainable export business model means more than selling over capacity abroad for dumping prices.

A professional export organization, long-term investments into the development of the brand and global trade marketing are important prerequisites for finding the right niche in the global beer market and to remain successful in the long run. Companies have no chance without a very flexible production and logistic organization that can deliver small and varying volumes for acceptable costs. Countries have different legal requirements and consumer behavior is different than in Germany. Conclusion: Exports can be an attractive option to create additional volume and revenue. It is not, however, a short-term solution. It took Heineken more than 50 years to develop the global position of the Heineken brand.

The forecast for the German beer market is difficult. Many brewers do not have any viable chances for long-term survival. But there is also some good news. Those who are courageous enough to creatively forge ahead, and not just use special offer prices as a short-term volume generator, can build a sustainably profitable business. (ay/bmg)