Peter Dawkins:
Welcome to the Industries in Motion podcast from RBC Capital Markets, where we take the time to explore what's new and what's next in today's fast moving industries to help you stay ahead of the curb. My name is Peter Dawkins and I'm the product manager here in London for RBC Capital Markets. And I'm delighted today to be joined by James Edward Jones.
James Edward Jones:
Hello.
Peter Dawkins:
And Emma Letheren.
Emma Letheren:
Hello.
Peter Dawkins:
Who head up our consumer staples team here in the UK. And I'm really excited to have them on today because they've done a really interesting piece of analysis that looks at the brewing industry and really it tells the story of an industry in change. And what we have known historically over the past five to 10 years may very well be quite different from what we know in the future. And so, before we hop into it, James, maybe you can just give a bit of a brief on the analysis that you've done and what's so unique about it?
James Edward Jones:
Yeah. Absolutely. Thank you, Peter. One thing I would pick you up on is you referred to brewing industry, we've actually tried to look at the wider alcoholic beverages industry, so beer, yes, but also spirits, also wine, which I think is very important to the whole competitive dynamic of the industry, which we've really tried to look at through the mechanism of game theory.
Peter Dawkins:
And you know I'm going to ask game theory. Can we hear a little bit more on that and really how we should think about it in a traditional financial analysis sense?
Emma Letheren:
Yes. So game theory basically demonstrates how individuals interact in a dynamic environment. And when we say dynamic, what we basically mean is your decisions impact how the other person acts and vice versa. And we basically look particularly at prisoner's dilemma, which we won't go completely into detail right now, but it's all over the internet if you want to get a bit more information. But basically it says that the optimal outcome happens when all individuals work together, but actually because individuals are incentivized by their own self-interest, you often don't get to that optimal outcome.
And so, how it relates to this topic of global beverages is that companies are the same. So the optimal outcome would be if everyone didn't do marketing, for example, because then no one gains or loses market share and you save money on not having to invest in marketing. But actually what happens in reality is that companies do invest in marketing out of their own self-interest, and you get to actually a sub-optimal outcome collectively.
Peter Dawkins:
Well, can we walk through that a bit more and maybe go beyond just the theory of it? Can we tie that directly back to the brewers and talk a bit about how you've seen that play out historically?
James Edward Jones:
Yeah. Well, the interesting thing is that for the last 20 years, it sort of hasn't played out. What I mean by that is that really for most of that time, the brewing industry has been focused on consolidation. You've seen huge numbers of mergers and acquisitions happening in the brewing industry. So particularly, the big three global brewers, Anheuser-Busch InBev, Heineken and Carlsberg have taken a greater, greater, greater and greater share of the global brewing industry. But at the same time, they've slightly taken their eye off the ball in terms of organic ongoing competition.
So the prisoner's dilemma, as Emma described, it sort of hasn't been working in the brewing industry for the last decade or so anyway, because that's not really been the folks' attention for the management of these big brewing companies.
Peter Dawkins:
And I think that ties back to what you said at the beginning, which is that this is not a brewing industry. This is a brewers of spirits and alcohol industry. So I guess is it fair to say that the brewers perhaps lost sight of their spirits competitors or they haven't been competitive enough or are really, how do you see that environment changing now that we've kind of seen the play out of not paying attention to the spirits companies, and them potentially taking share from the brewers?
Emma Letheren:
So it's hard to tell what the brewers expected back then when they were consolidating, but what we can say, it very much has played out that in the prisoner's dilemma, it says that if one person acts in not marketing and the other person markets, the person that is doing the marketing will massively win. And we've definitely seen that with the brewers and spirits. The spirits companies have globally taken nearly 250 bits of market share while the brewers have actually been losing share, because they've been cutting marketing whilst the spirits have been investing in marketing.
Peter Dawkins:
So this all seems so obvious now that there's been negative impacts, but when we say the tides of change are happening now, what have you actually seen that's leading you to think that this change is coming? And perhaps, what gives you confidence that change actually will happen?
James Edward Jones:
I suppose what gives us confidence is partly to Emma's point, marketing really works. We all like to think as consumers that we're immune to advertising, it doesn't really have any effect on us. I promise you it does or at least it has enough effect on enough of the population to make it worth his company spending billions of dollars on it every year.
Now, in terms of the time is changing. We've had comments from Anheuser-Busch InBev, from Heineken, effectively admitting what we're talking about, that they've been over fixated on consolidating the industry, and by implication they've been less conscious of competition for market share, but also actually competition for the beer category as a whole.
And one statistically ridiculous way of thinking about this, but we think it's quite interesting, is that a recent investor day with Heineken, they talked about the category, the beer category, about three times more than they did at a similar event in 2018. And we've seen something similar from AB InBev as well. The category is getting much greater attention now, and we think that's symptomatic of the brewers collectively deciding that they need to compete again.
Peter Dawkins:
And do you think we've entered the stage where they've actually beginning to action that or is it more rhetoric at this stage, or I guess it's just have we seen any follow through on that yet in terms of more marketing or more competition, or is that yet to play out in the coming years?
Emma Letheren:
So with ABI, we've seen them a little bit of a step ahead. So they've actually, they're still cutting marketing, but a little bit less than the other beer players, and they have been gaining market share as well. However, Heineken who are talking a good game about increasing marketing, we've not actually seen that in the numbers yet.
James Edward Jones:
What we have seen from Heineken though is we've been told that bonuses paid to senior management now are not going to be paid out if that senior management achieves the desired profit results, but does so by cutting marketing, which to us feels like a pretty firm statement of intent that not only do they have to get to their desired financial results in the short term, but they have to do it in such a way that promotes this greater spend, greater investment, greater competitiveness over the long term as well.
Peter Dawkins:
I think that does make it seem like the next few years will be really important from a competitive perspective. And you may see quite a bit of change, but I guess we've focused a lot on the brewers, but coming back to the spirits a bit, playing devil's advocate, clearly they've done a lot right and they've taken a lot of share. What did they do in this environment if they see the brewers starting to compete more? And they also have other levers like premium spirits, tequila, mezcal, so how does that play into how we see this unfolding? Prisoners' dilemma, they'll probably reply in their own way too.
Emma Letheren:
Yeah. Definitely. And that has been one of the big pushbacks to our thesis that actually it's not just the fact that the brewers weren't investing in the spirits world, but there's other consumer trends that are helping the spirits companies. A few that they've mentioned has been health and wellness, people drinking less but drinking better. So they're premiumizing that.
So going from beer to spirits, but also the love of at home cocktail making during COVID, the spirits companies have also said that that's helped them. But what we feel is that although that's true, because the brewers weren't doing anything for such a long time, there's no way of knowing if the spirits would have been as dynamic as they have been had the brewers been investing all the way through that time.
So there's a real opportunity there for the brewers to make the alcohol market a more level playing field than it has been for a while. And we're not saying that everything's going to go wrong for the spirits players, but it's definitely been easier than the norm for them up till now. And so, things are going to get a little bit tougher for them to compete.
James Edward Jones:
I think I would say as well that the way we're talking might imply that the brewers have been completely so horrific. That's not the case. So you've got a couple of good examples of an Anheuser-Busch InBev brand, Michelob Ultra or Heineken Silver. These are brands that are meant to tap into some of the health concerns that the spirits companies have been exploiting. They're low calorie, low carb and so on. And actually have been very successful. So it's not that the brewers have been completely asleep at the wheel, but they haven't really been following through in the same way that spirits companies have.
Peter Dawkins:
It is clear that we think their focus is definitely going to shift, and I think that just reinforces that the next few years really will be quite interesting from a competitive dynamics perspective. So I just want to pause here and say thank you very much to James and Emma for joining us today. I really think this is quite an important and interesting piece of analysis, and I really do look forward to seeing what the companies are doing and how the competitive environment changes. So thank you very much for your time today.
James Edward Jones:
Thank you.
Emma Letheren:
Thank you.
Speaker 4:
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