How the Lion Nathan-Heineken premium beer deal strangles any chance for competition in Australasian markets.
Here’s a question or two for all those beer-loving finance folk who
cover the Australian liquor industry. Who are the players in
Australasia?

And, which one has just gained a foothold in Australia, significantly lessening the prospects of any real competition?

Well, there’s Fosters, there’s Lion Nathan, and down in Tasmania is the
Philippines-owned giant, San Miguel with the James Boag brands. But its
a tiddler and in no position to challenge.

And there’s Heineken. “So what?” some analysts ask. Well, Heineken is
only small in Australia and has just signed a joint venture here for
Australia with Lion. In premium beers.

And who is Lion’s only competitor in New Zealand? DB Breweries, right.
And who owns DB? Why Heineken. And who owns breweries in Papua New
Guinea? Heineken. And another in New Caledonia? Why, Heineken.

It also puts paid to a classic “Did I say that”
candidate too. In the past years, in both the Sydney Morning Herald and
then The Australian, a former leading finance journalist – Okay, Mark
Westfield – fearlessly forecast that Heineken would bid for Fosters
(and Crikey thought cans, bottles and cartons were the only things
recycled in brewing).

So that one is out the window. With its links with Lion, a bid is off the agenda.

The irony is that far from buying an Australian brewer, Heineken has
been admitted to the Australian brewing club. It is one of the boys now
thanks to the joint venture with Lion.

And what does that joint venture cover? Not the so-called regional low
margin big volume brands like Toohey’s New and Fourex, but the
so-called premium beers, Lion Nathan’s Hahn and James Squire and
Heineken’s classic green bottled stuff. Heineken also makes and markets
Amstel a mid-market beer. Here it’s sold as another imported premium
beer a bit cheaper than Heineken and Carlsberg and Becks, for example.

The segment is growing at 13% per cent a year according to both
companies and totals some 9.7% of all beer volumes. Bulk beer is
growing at less than inflation and population, with only the occasional
price rise and cost discipline the only way to drive margins. In short,
bulk beer is boring, premium is growth. And just the thing to
control with a fellow duopolist New Zealand.

No margin destroying competition in the premium end of the market.
You’d have to wonder why Fosters new boy, Trevor O’Hoy didn’t think of
the deal. It’s not going to make his premium beer business any better.
But it won’t destroy it.

And you also have to wonder why the ACCC and the New Zealand Commerce Commission have allowed it to happen.

Lion is the dominant brewer in New Zealand. DB has 34 per cent as a
distant number two to Lion. Just like Australia really, where Fosters
CUB is the leader, with Lion the other duopolist.

That makes a nice cosy and profitable set of markets. No trans-Tasman
competition except for the odd container of Fosters sent to Kiwi Land.
Together they are two mature, cash flow rich markets so long as no one
rocks the boat.

Heineken was the only possible contender to upset the Australian boat.
From its breweries in NZ , Papua New Guinea or New Caledonia, it could
have launched a market share grabbing raid, if it had truly wanted to.

Not any longer. It’s a nice, comfortable and rich life without too many
disruptions and a few million Australian and Kiwi beer drinkers to
relieve of their money in the least strenuous and margin-destroying way.

There’s now the highly unusual situation of New Zealand’s two major
brewers co-operating in a third, larger and geographically adjacent
market. Highly unusual. Will Lion ship its premium Australian brands to
New Zealand to compete with DB and Heineken? No, of course not.
So isn’t that restricting competition?

And while the focus for Lion and retiring CEO Gordon Cairns has been on
the failures, such as the $34 million lost in Victorian hotels, a
sluggish wine business and a China brewing operation that chews more
cash as it brews more beer, the Heineken joint venture could end up the
most important deal Cairns has done.

At one stroke the only market disrupting competitor has been removed.
Fosters should also be thankful and should raise a glass or two at CUB
to Gordon Cairns. He’s made life easier for everyone in beer in
Australasia, except drinkers.

Now for a deal with Heineken in China. Despite the presence of
Interbrew, SAB Miller and Anheuser-Busch, Heineken stands out as the
buyer of preference. All that remains is the negotiations.

And while Cairns told Business Sunday that Heineken is one of the
companies in discussion with Lion in China, it is the one that’s been
blessed by Lion’s major shareholder, Kirin of Japan.

The Australian deal between Lion and Heineken would have been signed
off by Kirin. In China, Kirin is a much smaller player, if there is to
be a deal, look for Kirin to be involved somewhere. The Lion brewery is
set up to make the German beer, Becks, so that group would have to be
involved somewhere.

But back home and the Australasian beer market has been nicely wrapped
up by Lion and Heineken, with Fosters looking on and approving.

If only Trevor O’Hoy could engineer something for his wine division when he reveals the new strategy next month.

Peter Fray

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