GLOBALIZATION

among individual companies into a contest about the key elements of the industry in which they compete. Instead of deploying assets broadly, companies start to focus on a few, often intangible elements, such as brands, relationships, and technology that allow them to achieve much higher returns on equity and much higher market caps. Strategies based on inuencing the evolution of industries begin to eclipse strategies based on actually owning all the assets. The exact timing of this transformation turns on the moment when a few companies in an industry develop the courage and insight needed to specialize and to gain advantages of scale by capitalizing on deregulation, declining costs of interaction, and increasing access to markets. As these companies build world class capabilities in one piece of the value chain, they shed the rest. The value they create is so overwhelming that the rest of the industry reaggregates on the same model. For such industries as computers and soft drinks, this new form of globalization has already struck. For others, such as telecom and electric power, it is only beginning. The following industry articles are intended to show how companies are weaving access, specialization, and scale into strategies that exploit the increasing integration of national economies with one another. In most industries it will take at least a decade before a single global supply-and-demand curve develops. But that is not the main point. In fact, as much money stands to be made in the mid game as in the end game, if not more. It is the pace and peculiarities of the transition that are most critical to strategists.

T SOME POINT globalization turns from a game of cross-border competition for market share

GLOBAL BEER: WHATS ON TAP?

Richard Benson-Armer, Joshua Leibowitz, and Deepak Ramachandran
The brewers, if not the beer, wont all be alike; they are beginning to consolidate around segments of the business

consumer product industries around the world: the top four players in sot drinks, for example, share almost 80 percent of the market, and Coca-Cola alone commands nearly 50 percent (Exhibit 1). It might be reasonable to think that the beer industry would tell a similar story. Reasonable, perhaps, but wrong.
ONSOLIDATION IS SWEEPING

Josh Leibowitz is a consultant in McKinseys New York office; Richard Benson-Armer and Deepak Ramachandran are consultants in the Toronto office. Copyright 1999 McKinsey & Company. All rights reserved.

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Global consolidation in consumer goods

In fact, beer is surprisingly local. Until the middle of this century, the short shelf life and diculty of World market share of top four players, 1996 Percent transporting beer meant that it could 100% be sold only locally. Things have changed, but history has let its 78 75 legacy. Research suggests that 60 consumers may be getting somewhat more adventurous, but even where 44 imports are readily available, most Top four 20 consumers in most countries players continue to buy local brands Soft Household Tobacco Spirits Beer drinks goods produced by local brewers and sold through local stores, pubs, and restaurants at prices that vary widely in localities around the globe. As a result, the beer industry is a collection of tiny players. The top four command just a 20 percent share of the world market, and the largest the US brewer Anheuser-Busch makes more than 85 percent of its sales in its home market.
Exhibit 1

Although no brewer comes close to dominating the world, national markets are oligopolies. In most countries, the top two or three brewers share more than 80 percent of the market (Exhibit 2). Two prominent exceptions, Germany and China, are themselves highly concentrated, but at the city or provincial rather than the national level. Consumers may prefer local brands, in part, because they are much more readily available. In almost every country, the big national brewers own or
Exhibit 2

Oligopolies in national markets

Market share of top one, two, or three brewers, 1997 Percent of market Argentina Australia Brazil Bulgaria Canada China Colombia Czech Republic France Germany Hungary India
3 2 3 3 2 3 9 2 3 3 3 3 3 x Number of brewers

90 96 92 55 92

Ireland Japan South Korea Mexico Netherlands New Zealand

3 3 3 2 3 2 2 2 1 3 3

97 81 98 99 80 95 100 100 98 70 77

92 51 86 23 68 75

Peru Philippines South Africa United Kingdom United States

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dominate the wholesale distribution network, and new entrants must obtain licenses from local authorities and make heavy investments before starting to compete. Thus in South Africa, for instance, such major players as Heineken and Guinness have chosen to license their local production, distribution, and marketing to South African Breweries, the dominant local player, rather than try to do business on their own. A marketplace of small players with Price differences among countries strong local positions is typical of Example: Heineken six-pack, industries such as perishable foods US$ at purchasing power parity, 1998 and professional services, including 7.90 United States law and accounting that are slow to globalize. For industries like these, the United Kingdom 7.80 world market actually comprises a Hong Kong 6.30 large number of small, separate marBrazil 4.20 kets. One hallmark of industries of this sort is striking price diferences Netherlands 3.50 from country to country for the same or similar products (Exhibit 3).
Exhibit 3

Globalization is coming
Despite its long heritage as a local industry, beer is slowly going global. The pace of globalization in a given industry can be judged by four key factors:
Access by global companies to consumers, and vice versa Convergence in consumer choice Intangible scale the ability to leverage such intellectual assets as brands,

people, skills, and relationships

Specialization by players in single high-value aspects of industries that used to be vertically integrated

An examination of each of these factors shows that the beer industry is gradually becoming global Consumers and corporations have more access to each other. An industrys globalization rst becomes apparent when consumers and corporations across the globe can get together in the marketplace. Many brands of beer are now very widely available: Heineken is sold in 170 countries, Corona and Carlsberg in 140. Innovative partnerships between global brands and local brewers explain some of this, but lower tarifs have helped, as well. Brazil, for example, cut duties on beer to 12 percent, from 87 percent, in 1991.

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Exhibit 4

Beer consumption and affluence

Growth in real GDP and beer consumption CAGR 1992 97, percent 10 China

5 Beer consumption growth

Asia Middle East Latin America & Africa World Japan Western Europe* North America 2 4 6 Real GDP growth 8 10 12

5 0

* Real GDP figure for Western Europe is for all EU member countries Real GDP figure is for the commodity-based economies of Asia, including Indonesia, Malaysia, the Philippines, and Thailand Figures for the growth of real GDP are calculated in 1995 US$ Source: Canadean 1997 World Beer Report; DRI/McGraw-Hill World Economic Outlook, first quarter 1998; McKinsey analysis

Brewers around the world have also enjoyed relatively free access to capital markets to fund expansion and acquisitions. South African Breweries has used its presence in the American Depository Receipt market to raise sucient capital to expand into 11 new countries over the past ve years. So many tiny local brewers have gone public that Germanys VereinsBank has launched a mutual fund dedicated exclusively to these companies in emerging markets. Such globally oriented players as the Belgian beer company Interbrew seek access to the growing number of consumers in the developing world who now, for the rst time, can aford beer as they become more auent. Indeed, auence goes hand in hand with beer consumption; when we plotted the latter against real per capita GDP growth over the past ve years, we found a 93 percent correlation (Exhibit 4). Current nancial crises notwithstanding, higher standards of living are likely to go on promoting beer consumption in emerging markets. Brewers will vie for the attention of these newly auent consumers, giving them more options for the kind of beer they consume (lager, ale, or stout), how they consume it (bottles, glasses, or cans), and where (in pubs or at home). From this broad array of choices, consumer preferences will start to emerge. As in other consumer industries, they will in turn shape the strategies brewers attempt to follow. Consumer choice is converging across countries. Industries cross another milestone of globalization when consumers around the world, prompted by advertising to sample new products, begin to demand similar features from the products they buy regularly. In beer, consumer preferences in avor and packaging are slowly becoming more homogeneous across borders. Every

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market in the world is moving not only from ales to lagers but also from bottles to cans; in Latin America, where canning facilities were until recently scarce, brewers had to import empty cans from the United States. Despite the emergence of global patterns in consumption, it is unlikely that a single world beer (on the model of Coke, the single world sot drink) will appear in the near future. Rather, the basic attributes of successful beers taste, packaging, and delivery channels will start to follow a common pattern around the world as consumer preferences converge. Intangible scale is becoming more and more valuable. Traditionally, brewers sought to dominate national markets by achieving cost advantages through physical scale. In the United States, for example, Anheuser-Busch led the way in building vast low-cost facilities, thus forcing out smaller brewers and consolidating the market. Brewers in almost every country have pursued similar strategies. But physical scale in brewing no longer ofers a basis for sustainable competitive advantage. Even relatively small facilities can achieve economies of scale if they produce more than 500,000 hectoliters a year. Brewers producing 1 million hectoliters of beer annually enough to supply a city of 1.5 million people at US rates of consumption achieve sucient economies of scale to compete cost-efectively with the huge new 6 millionhectoliter breweries built by Anheuser-Busch and by Brazils Brahma. As the benets of physical scale fade, those of intangible scale grow. The best brewers leverage such intangible assets as brands and market knowledge to gain competitive advantage around the world. Heineken draws on the lessons it has learned from advertising and marketing in developed countries to strengthen its position in developing ones. Guinness deploys a consistent worldwide brand image that permits it to spread its advertising development costs over its entire output of 26 million hectoliters. Specialization is beginning to take hold. The nal indicator of a globalizing industry specialization starts in earnest when brewers gain deep expertise in a single part of the business system and thereby achieve a decisive advantage, usually of know-how or technology, over less focused competitors. A global market of more than six billion consumers gives rms enormous opportunities to specialize. Since the beer industry is still chiey local, the few existing examples of specialization have emerged at the national level. In the United States, the Boston Beer Company focuses on developing recipes and on marketing its Samuel Adams brand, outsourcing the rest of the value chain (brewing, packaging, and distribution) to low-cost suppliers that are themselves

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Exhibit 5

Rising profits
US $ billion, estimated Total profits 1998: $17.5 billion 2010: $28.0 billion 7.0 5.0 5.5 0.5 2.0 4.5 2.5 1.0 North America Latin America 1.5 0.5 Western Europe 0.5 Eastern Europe 4.0 2.0 1.5 Asia 2.0
1998 2010

8.5 1.5 6.0

Africa

specialists. One such is the Strohs Brewery Company, which has converted its excess capacity into a contract brewing operation. As the beer industry globalizes, brewers will discover new opportunities to specialize in a portion of the business and thus to dominate a global rather than national segment.

The mid game: Prots rise

Clearly, the beer business has entered the early stages of globalization, a process that will create extraordinary economic value. As demand from consumers in the developing world rises and best practices in brewing, marketing, and distribution spread globally, the international prot pool in beer measured by earnings before interest, taxes, depreciation, and allowances (EBITDA) could grow from less than $18 billion today to $28 billion by 2010 (Exhibit 5). The bulk of this growth will come in Asia, Latin America, and, to a lesser extent, Eastern Europe, as consumption and prices rise and productivity improves. Less predictably, Western Europe will also present a considerable opportunity as the European Union continues to integrate. Such growth could add $1.5 billion to the prot pool through productivity improvements, at least if price wars dont pass on this extra value to consumers. One critical assumption of our forecast is the idea that prices will rise everywhere but in the mature markets of North America and Western Europe. In the developing world, it will be important for companies to raise real beer prices per hectoliter by, for example, introducing premium brands and new packaging concepts. In the developed world, maintaining average prices and avoiding price competition will be crucial. The 1997 price war in the United States reduced that years industry EBITDA by $150 million. Any repeat of this mishap on a global scale, or even in a number of regions, could shrink the 2010 prot pool to just $21 billion.

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Our second key assumption is that productivity and margins will improve. Labor productivity in developing countries can be as little as one-third that in developed countries. Although the technology that brewers need to attain productivity benchmarks is expensive, there are many ways to create economic value by applying best practices and taking advantage of low labor costs where they prevail. Players who position themselves well in the mid game will probably capture a disproportionate share of rising prots in this slow transition to a global industry. We believe that it is now becoming clear what the winners of the end game will look like. Ultimately, a handful of giant players beers equivalent of P&G and Nike will dominate the industry and capture most of the available prot.

The end game: Global giants

Which players are in the best position to assume this dominant role? One way to nd out is to use a strategic-control map, which plots the market-tobook ratio of companies (an indicator of their performance) against book value (an indicator of sheer size). A rms position on the map shows how its market capitalization compares with that of competitors: the lower its market cap, the more vulnerable it is to takeovers and the fewer resources it has for expansion. Even todays most global brewers are relatively small and vulnerable to takeovers, perhaps by other packaged goods companies aiming to extend their food brands or distribution (Exhibit 6).
Exhibit 6

Strategic control map of consumer goods companies

30 5 10 20 40 60 80 100 120 140

25

Market-to-book ratio

20

WarnerLambert Scottish & Newcastle BestFoods Danone Sara Lee Colgate

Coca-Cola

Brewers* Other packaged goods companies

15

Hershey 10 Ralston Gillette Heinz AnheuserPurina Wrigley AHP Pepsico Busch Heineken Dial Fosters Coca-Cola Ent Cadbury 5 SAB ConAgra FEMSA Allied Domecq Nabisco Bass LVMH Coors Asahi Fortune Lion Nathan Seagram Kirin Brands Molson 2.0 Bavaria4.0 6.0 8.0 10.0 Brahma Antarctica Grupo Modelo Book equity, $billion Carlsberg Note: Market values as of October 30, 1998; book values as of midyear 1998 * Includes diversified corporations with significant brewing interests Source: Bloomberg; Compustat; Datastream; Global Vantage; McKinsey analysis

Procter & Gamble Philip Morris Unilever Diageo Nestl

12.0

14.0

16.0

18.0

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will have to take a couple of important steps to raise their market capitalization

Another way of identifying the likely winners is to look for the characteristics that set them apart. The eventual global giants will have to take a couple of important steps to raise their market capitalization to a size that could protect them from takeovers. First, to achieve economies of scale (especially in marketing) and to gain bargaining clout with potential partners, these giants will have to develop either a global brand or excellence in the global marketing of local ones. To capture the bulk of the prot pool that premium imported brands cannot reach, the most successful global brands will achieve mainThe eventual global giants stream status in all markets. Moreover, these global giants will have to nd ways to extend their inuence without expending capital up front. Most of the biggest markets in Europe, North America, and Asia already or will soon have excess capacity. Finding an asset-light approach to entering these markets is the key to boosting market capitalization without destroying value. Last, the successful brands will probably have to make creative cross-category moves, as Heineken did when it joined local Coke bottlers in Brazil to create a brewer Kaiser that challenged Brahma and Antarctica in that countrys market. Heineken provided brewing expertise, the Coke bottlers a distribution system. Together, they managed to win a 15 percent market share in just a few years. Such cross-category moves may eventually let a few beverage companies reshape local distribution and indeed the industrys structure by eliminating surplus costs and redundant assets. Judged by these criteria, Heineken now has the single best prospect of ranking among the global giants of the future. It has a global brand; a widespread presence, both in its own right and through alliances; and strong skills in such areas as marketing and production. As the company expands, these skills will help it create value for instance, by improving the operations it acquires. Anheuser-Busch too is in good shape; Belgiums Interbrew and South African Breweries are not far behind; and Carlsberg shows signs of regaining its position in the global running. Yet all of these companies, Heineken included, are years away from replicating the global success of Coke or Nike.

Roles for the mid game

Over the next decade, as the market for beer slowly evolves, players will prepare for the era of global dominance by adopting one of three strategies: geographic integration, specialization, or dress up for sale. (We focus here on mid-game strategies because the end game is still too distant to devise appropriate strategies for it.) The rst two will be exploited to build the high

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market cap needed for global dominance; the third will appeal to companies that recognize their inability to become global giants. Geographic integration entails taking a holistic approach to the beer business and replicating that approach in country ater country. This is how any industry has traditionally moved toward globalization, and it has worked well in beer. Successful integrators use their knowledge and assets to achieve global best practices with low cost structures. Some brewers have sent old production equipment from their home markets to less developed countries. A couple of brewers have also successfully transferred rst-world production methods and discipline to third-world environments. Since 1990, Interbrew has expanded to 19 countries, from 4, quadrupling its volume. Although Interbrew focuses on local brands in each country, it employs global best practices in production and marketing. South African Breweries has invested in a training institute to raise all the companys national brewers to the same standard. As for specialization focusing on one link in the value chain to excel in more than one market perhaps the best example is Guinness, which produces, in Ireland, a avor concentrate that the company exports to its license partners around the world as the basis of its famous stout. Partners must buy the concentrate from Guinness at a set price, just as Coke bottlers buy syrup from Coca-Cola. This strategy gives Guinness twice the license margins of other brewers, as well as a superpremium niche position in most markets, The dress-up-for-sale while keeping investment in xed brewing approach acknowledges that assets to a minimum. Despite the achievement of Guinness, its long-term prospects may be limited by the unique nature of its stout, which apparently appeals to only a limited number of customer segments outside Ireland. A more widely applicable model may be that of the Boston Beer Company, which contracts out production and distribution, so that it can focus exclusively on product development and marketing activities that yield a disproportionate share of the prot though they require very little capital investment. As a result, Boston Beer enjoys a much higher ROE than other US brewers have. These are not the only areas for specialization. Strohs, with relatively weak brands but strong production facilities, has made a business of brewing beer for others. Whitbreads recent success rests in part on its skill in importing, distributing, and marketing such foreign beers as Stella Artois in the United Kingdom. None of these players has yet achieved dominance even in one or

some brewers cannot succeed globally on their own

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two regions of the world, let alone all of them. But their more limited successes represent the seeds of an idea whose time has come. The dress-up-for-sale approach acknowledges that some brewers cannot succeed globally on their own, either as geographic integrators or as specialists, and would be better of joining global brewers at a premium through acquisition or joint ventures. Over the years, marketplace rumors have consigned to this category several strong local brewers, including Miller (United States), San Miguel (the Philippines), Molson (Canada), and Kronenbourg (owned by Danone, France). In Asia, strong domestic brewers have decided to sell signicant equity stakes to larger international players rather than International brewers that soldier on alone. The companies most likely to achieve premiums for their shareholders are those with powerful global or regional brands (such as San Miguel) or particularly powerful local distribution networks (such as Danone). Positioned appropriately, with cash and a strong executive talent pool, these companies may even be able to pull of reverse takeovers of prominent larger competitors. Thanks to superior skills, they may achieve a high premium for their shares and gain efective management control of the new combined entities.

succeed in partnering with locally dominant companies will be in the best position to win the mid game

What all brewers should do

No matter which of these strategies a brewer decides to pursue, it will have to follow three basic rules: Focus on the few remaining real targets. In every market, the leading players are the most protable and exert the strongest hold over local distribution. This makes these companies, which are relatively few in number, disproportionately attractive but also disproportionately expensive. We believe that the best prospects will be locked into partnerships during the next three years. International brewers that succeed in partnering with many of these locally dominant companies will be in the best position to win the mid game. Outright acquisition may not be the best approach. Anheuser-Busch took a minority stake in the Mexican brewer Modelo in 1993 and increased that stake to 51 percent in July 1997. It has also entered into a deal with Antarctica (Brazils second-largest brewer) that locks up an option for future increases in equity, without consuming excessive amounts of cash up front.

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Identify and develop intangible assets. Global brands, distinctive production capabilities, and other intangible assets represent terric currency in the contest for partners and are the keys to success in any version of the end game. No brewer has yet developed intangible assets as strong as those of a Citibank or a Microsot. The process takes years, so it is vital to start immediately. Build global talent. Beer companies compete relatively unsuccessfully at present with every other industry for the top 2 percent of talented people. Over the next ten years, globalization and the aging population of developed countries will make the scarcity of talent all the more acute. Two kinds of senior managers are in particularly short supply. As the industry consolidates and aspiring global brewers forge partnerships, people with world-class deal-making skills will be indispensable. Even more so will be senior managers with deep expertise in brewing operations and distribution, as well as a willingness to relocate to developing countries. Such globally mobile managers are much more common in other consumer product industries than they are in beer. Indeed, people of the right caliber are in such short supply that some brewers have had to take employees out of retirement to ll key posts. Brewers that develop a strong talent base and a culture prizing international placements as the fast track to the top will have a tremendous advantage as the industry globalizes.

Slowly but inexorably, the beer industry is changing. Companies that act now to position themselves appropriately will win handsome prots in the near term, as well as a role in shaping the end game. Success breeds success. The best players will enter a virtuous cycle in which skills and assets are the keys to unlocking powerful partnerships that in turn provide new opportunities to build yet stronger skills and assets.

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