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Friday, February 21, 2014

Parsing "Consolidation"

Goldman Sachs recently looked at merger trends in the brewing industry, finding that consolidation is up nearly 50% from just ten years ago.  There are two detailed pie charts at the link, but I've simplified them here to illustrate the point:

The ten largest beer companies controlled 43.2% of the market a decade ago, but now they have cornered nearly two-thirds (64.9%)--powered by AB InBev's 20.6% share.  The Goldman Sachs economists acknowledged that this is a big spike in consolidation.  In their patois, the "top 5 companies represent more than 50% of the global market versus 32% for the top 5 players in 2003, and the industry’s HHI has risen to 725 in 2013E from just 276 in 2003."  But here's the really weird thing: that means beer still remains well below the level of consolidation of other industries:
"HHI" stands for Herfindahl-Hirshman Index, a common measure of industry concentration.
"The U.S. Department of Justice generally considers HHI levels of 1,500-2,500 to be consistent with moderately concentrated markets, and levels above 2,500 signifying high concentration," explain the Goldman analysts.  "Global Beer measures as considerably more fragmented than the other industries in our study."
When you look at pie charts, this seems counter-intuitive, but it makes all kinds of sense when you look at tap handles or grocery-store shelves. Because it wasn't so long ago that the choice of beer styles was so poor, our minds tend to conflate choice with ownership.  But from the consumer's point of view, there is far more fragmentation both of styles and companies.  When you visit your local, you'll find several taps, including at least one or two that we'd call craft beer (though in worse pubs that slot may be occupied by Blue Moon or Shock Top).  It wasn't so long ago that "variety" meant both Bud and Miller.  It's the same in grocery stores.  Even in the most remote places unsullied by craft brewing, you'll find a bigger selection of both brands and styles that you would have a decade ago--and way, way more than a generation ago.  And this isn't just true in the US--it's happening across the globe. 

Consolidation is happening because large companies have been aggressively snatching up the biggest companies in places like Asia and Eastern Europe.  Whereas 10-20 years ago, the big national brewery in a place like Ukraine would have been locally-owned, now it's a part of the Heineken or AB InBev empires.  When you look at international numbers, the consolidation reflects those changes.  (And this is one reason why it will be hard for breweries to get too much of the global market.  In Ukraine, for example, Carlsberg, AB InBev, and SABMiller have divided the spoils.) 

In the part of the global market that's on the leading edge of change, however, fragmentation is the norm.  For customers, that ensures that choice, at least for now, is also the norm. 

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