Sector Insight: Lager - Premium goes flat

sales, they risk devaluing premium lagers, opening the door to more
niche brands. Despite trailing wine and spirits in the take-home market,
further growth is predicted for the sector and brewers are investing
heavily in brand support to ensure they are best-placed to
capitalise.

British consumers' desire to drink lager has risen steadily at the
expense of the traditional beer market. Last year, nine of the top 10
beer brands in the take-home category were lagers, according to Mintel.
In 2005, sales of lager are expected to rise yet further to £11.3bn, an increase of 17% on 2000, accounting for about 70% of the
entire beer market in volume terms.

With the range of lagers on offer continuing to expand across the
premium, standard, flavoured and light categories, this demand seems
certain to remain over the next few years.

Lager has become an integral part of many British social events,
especially sporting or music occasions. Whether chilling at Glastonbury
or watching the FA Cup Final at home, a can of lager has become the
alcoholic accompaniment of choice.

Premium and imported lagers have become particularly popular, helped by
retail price cuts. But while falling prices have boosted sales, they
also bring the risk of brand erosion. If premium brands drop their
prices, how will consumers recognise their benefits over standard
lagers?

In many cases, the price of lager brands in the off-trade is now lower
in real terms than it was five years ago. This devaluing of premium
lagers has brought about a rise in the number of niche or speciality
brands entering the market, effectively creating a second premium
category.

Concentration of power

The sector has undergone major consolidation in recent years, with the
majority of lager brands now produced by just four brewers:
Anheuser-Busch, SABMiller, InBev and Heineken. All have a wide portfolio
covering the spectrum of lager drinkers globally.

The world's biggest brewer by volume, InBev, was created in spring last
year through Interbrew's merger with Brazilian group AmBev. The company
now accounts for about 14% of the world's beer volume, with a brand
portfolio that includes Stella Artois, Staropramen and Castlemaine
XXXX.

Stella Artois is by far InBev's leading brand. Last year its value was
nearly double that of its nearest rival in the premium lager market.
However, its volume sales declined by 3.9% globally in the second
quarter of the year, which the brewer blamed on the weak UK market. Part
of the problem has been Stella's adherence to its 'Reassuringly
expensive' strapline, in an attempt to stand firm, while rivals have cut
prices. Its stablemate Beck's, meanwhile, reported a sales rise of 11.6%
in the same period.

Other Stella activity has seen it continue its association with the
movie industry, most recently investing £1m in a high-profile
press campaign for its Live Film promotion.

InBev's other brands include key Belgian beers Hoegaarden and Leffe,
which have enabled it to enter the imported speciality beers
category.

US brewer Anheuser-Busch was knocked into second place in the market
last year after the formation of InBev, and it has fared little better
in 2005. Poor sales in the US market mean the company is predicting
lower earnings per share than in 2004. In the UK, however, its Budweiser
brand remains the bestselling premium bottled lager. New product
development at the company has focused on its Michelob brand. Michelob
Ultra, a low-carbohydrate, low-calorie lager, was launched in the UK in
2003. A similarly low-calorie variant of Budweiser - Bud Light - was
withdrawn due to poor sales in 2001.

SABMiller's brands include Peroni, Pilsner Urquell, Miller Genuine Draft
and Castle Lager. Last month it announced the formation of Miller Brands
UK, a local subsidiary which will invest £30m in its brands in the
next two years.

'This will allow us to firm up relationships with customers, explore new
opportunities and expand marketing initiatives,' says a spokesman for
SABMiller. 'The UK market is quite saturated, populated by a lot of
niche brands, and our market share is small. Under Miller Brands UK we
want to increase our share of the premium segment.'

In light of the shift in preference toward more premium lager in the UK,
in 2003 Heineken took the bold step of ditching its standard beer and
relaunching it as a 5% ABV premium import. It has also announced that it
will spend an extra £70m on marketing globally to support the
brand.

In this high-stakes market, all the leading players are investing
heavily in supporting their brands, with budgets in excess of £30m
regularly allocated to the leading brands. The majority of spend is
focused on core lager drinkers: young men with a penchant for sport and
music. While just over half of the UK population drinks lager, according
to Mintel, two-thirds are men, across a broad socio-economic group.

Limited growth

While the industry is confident that lager will continue to eat into the
traditional beer market, the sector's strength is less clear-cut.

Mintel predicts the market will be worth £12.9bn by 2010, an
increase of 14% on 2005. But taking inflation into account, this is only
a 1% rise, showing that lager is a mature market. Volume growth will
also be higher than value growth, due to price deflations arising from
supermarket competition.

While there are clear occasions where lager is the beverage of choice,
it still cannot compete with wine when it comes to consumption alongside
food. In addition, as the British population ages, so more people will
drink at home, where a preference for wine and spirits prevails.

TOP UK LAGER BRANDS BY VALUE

Brand Brewer 2004 2002 2002-04
pounds m pounds m % change
1 Carling Coors 1970 1722 14.4
2 Foster's Scottish Courage 1621 1500 8.1
3 Stella Artois InBev 1597 1275 25.3
4 Carlsberg Carlsberg 1010 791 27.7
5 Budweiser Anheuser-Busch 508 631 -19.5
6 Kronenbourg 1664 Scottish Courage 505 515 -1.9
7 Heineken** Heineken n/a 488 n/a
8 Tennent's InBev 395 387 2.1
9 Beck's Scottish Courage 298 298 0
10 Carlsberg Export Carlsberg 254 245 3.7
11 Grolsch Coors 343 n/a n/a
Others* 2434 2570 -5.3
Total 10,935 10,422 4.9

Source: Mintel *includes own-label **previously brewed by InBev



UK LAGER BRANDS BY ADSPEND

Brand 2004 2002 2002-04
£000 £000 % change
1 Carling Premier/Extra Cold 6392 11,550 -44.7
2 Budweiser 7868 11,455 -31.3
3 Stella Artois 10,414 8848 17.7
4 Grolsch 6262 7672 -18.4
5 Foster's 10,977 6631 65.5
6 Carlsberg Export 4462 4936 -9.6
7 Carlsberg 4421 4308 2.6
8 Beck's n/a 4105 n/a
9 Kronenbourg 1664 2976 3800 -21.7
10 Tennent's n/a 1614 n/a
11 Heineken 4569 n/a n/a
12 San Miguel 3600 n/a n/a
Others 10,335 7556 36.8
Total 72,276 72,475 -0.3

Source: Nielsen Media Research/Mintel

ANALYST COMMENT - JOHN BAND CONSUMER MARKETS ANALYST, DATAMONITOR

British beer tastes have shifted from traditional ales, bitters and
stouts toward European-style lagers. More recently, weaker-strength
standard lagers, such as Carling, have lost ground to full- or
export-strength brands such as Stella Artois and Kronenbourg.

But while premium brands grow market share, off-trade prices have been
falling in real terms since 2000. Brands have been engaged in price
wars, as their margins have been squeezed by the supermarkets, which
account for more than half of off-trade beer sales.

Even among premium brands, non-stop discounting means many consumers
still perceive take-home lager as a budget product.

The on-trade has problems too. Prices are rising ahead of inflation, but
volumes are in steep decline. Last year, for example, Stella Artois
sales fell after InBev ignored pressure from pub companies to cut its
price.

According to the Campaign for Real Ale, 26 pubs close every month, as
consumers shift toward drinking at home, where they favour wine and
spirits.

The underlying problem is that as traditionally premium lagers have
become mass-market, they have lost their cachet. Prestigious beers such
as Peroni, Staropramen and Leffe are now marketed as an accompaniment to
food as much as a night on the town. Even British real ale producers
have taken advantage of the trend, launching beers such as Greene King's
Beer To Dine For.

SABMiller's decision to create a UK operation is a good example of a
lager-focused company benefiting from the changes in the market. It is
looking to grow sales of Miller Genuine Draft, Pilsner Urquell, Castle
and Peroni - all prestigious and drinkable if slightly dull.