Brewing a plan to lure a nation falling out of love with beer

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Byline:Nick Toscano

The country's biggest beer makers are pushing hard to keep up with changing consumer tastes in a multibillion-

dollar industry, writes Nick Toscano.

It's the last day of summer and a cracking day for a beer.Peter Filipovic is standing behind the bar at Carlton Brewhouse, a spacious brick building in an industrial area of Abbotsford in inner Melbourne. Filipovic, the new boss of Australia's biggest brewer, pulls at the beer tap with one hand and tilts a schooner with the other.

"The first is always too frothy,"he says, shaking his head, tipping out the contents.The look of concentration is unmistakable as he finishes pouring a new one."There,"he declares."Perfect."

Beer doesn't come fresher than this, says Filipovic, who was appointed as chief executive of Carlton&United Breweries in January, and who is better known in the business as"Flip".

The beer he's pouring is made right next door, at the Abbotsford manufacturing plant-home of VB,Carlton

Draught,Pure Blonde and Crown Lager-which has been brewing since 1904.

Set above the banks of the Yarra, the brewery is the oldest in the city and among the largest in the country.Every afternoon, smells of barley and malt hang heavy in the air.Every day,2.7 million bottles of beer are produced here.

But Filipovic has a problem.It's a problem not unique to CUB, but one that is troubling big brewers everywhere, causing nervousness among their factory workers, uncertainty across supply chains, and headaches for executives.

Simply put, people aren't drinking beer like they used to.

According to the latest available data,Australians beer consumption has been falling 2.4 per cent a year for the past 10 years, pushing national per-person alcohol consumption to the lowest level since the 1960s.And it's the classic, mass-market beer brands that are driving the steepest decline.

VB and Carlton Draught are still the cornerstones of our portfolio and very iconic brands within the Victorian and

Australian landscapes,"says Filipovic, who describes the challenge facing the industry as multi-pronged.

But tastes are changing.Consumers are wanting more.Moderation is a big trend and we have got to adapt."

Inside the big breweries of the world, the effects of these changes are filtering through.Industry analysts estimate

that revenue in the Australian beer making sector has contracted by an annualised 1.1 per cent over the past five

years and margins have shrunk.

There's still money there.The most recent accounts for global beer colossus Anheuser-Busch InBev's Australian operations, which includes CUB, show it pulled in$2.87 billion in revenue here in the period from October 2016 to the end of last year.From that, it was able to generate a profit after tax of $331 million as it sold roughly half of the beer drunk in Australia.

But consumers' rising health consciousness, preferences for more complex craft beers and take-up of other drinks

like cider and spirits, analysts say, are all to blame for the beer industry's"constrained"performance.

The impact of our dwindling love affair with traditional beer is being felt already.Last October,CUB's biggest competitor, Lion, was forced to retrench dozens of employees at its XXXX brewery in Queensland and its West End brewery in South Australia, citing falling sales.

The decline in per-capita alcohol consumption and the move away from traditional beer is still a problem for the

Industry, and especially the larger companies like Lion and CUB,"says Matthew Reeves, a senior industry analyst

with IBISWorld."However these companies have certainly begun addressing these issues and have seen positive

results."

With Lion boasting 40 per cent market share, the two companies sell nine out of every 10 beers in the country, this

is a big business moment.

For companies such as CUB and Lion, it's an adapt-or-die proposition.The solution, Filipovic insists, is to innovate

and keep up with the societal changes he has seen sweep the industry over his career.Before becoming CEO, he had worked for CUB for more than 20 years, starting out as a tax graduate when the brewer was owned by Foster's Group.

Later, when it was owned by SABMiller, he was made sales director and Australian business unit president.Now,

under the ownership of the world's biggest brewery Anheuser-Busch InBev, whose best-known beer is Budweiser,

he has been in the top job since January.

Back when I started...most people had one or two beers in their repertoire, now we have three to seven, which is quite a big increase,"he says.

I don't know what's going to happen in three years,"he goes on,"but our role in society is to continue to adapt to what consumers want."

IBISWorld notes the industry has found commercial success in new product lines targeting changing preferences for easier-drinking lagers and the alcohol"moderation"trend, including CUB's mid-strength Great Northern Super Crisp Lager.That beer shot to prominence as one of the most popular beers in Australia, accounting for up to 5.7 percent of beer sales in 2016-17.

Lion, meanwhile, has invested heavily in the hugely successful Furphy and lron Jack beers-sales of which grew 125 percent and 86 percent respectively in the 2018 financial year, according to Lion's parent company Kirin Holdings.

Last month,Lion launched its first gluten-free beer,Hahn Ultra Crisp, made from rice, which Lion brand manager Amy Darvill says will ensure Hahn continues evolving to meet"the needs of the modern Australian consumer

Across CUB's parent AB InBev, about 8 per cent of global beer volumes is now from low and no-alcohol beers.One of its newest products, the no-alcohol Carlton Zero, hit supermarket shelves in Australia in August.

The Australian Bureau of Statistics' latest figures show alcohol consumption among people over 15 has continued

on a downward trend that began in 2010 and ,in 2016-17, reached a 55-year low.

Per person alcohol consumption for the year was equivalent to 9.4 litres of pure alcohol, or 224 stubbies, down from more than 500 stubbies in 1974-75, with beer driving the bulk of the decline.

According to Filipovic, the industry's move towards low and no-alcohol beer is both driven by the company's promotion of responsible drinking, in addition to catering to what consumers want.

We have done a lot to promote responsible drinking, as well as adapt to the consumer trend," he says pointing out

that CUB is the single biggest contributor to an industry-funded responsible drinking group DrinkWise."Carlton Zero

has been incredible."

Public health advocate, the Foundation for Alcohol Research and Education, have welcomed the increase in low and no-alcohol beers, but has been critical of CUB for offering the products for sale on supermarket shelves, where it is visible to children alongside grocery items such as water and Easter eggs."

Trish Hepworth ,the foundation's policy director, rejects the argument that brewers like CUB are doing enough to drive down alcohol consumption, accusing them of prioritising their responsibilities to shareholders,"irrespective of the harm" alcohol causes.

Alcohol companies, supported by alcohol industry bodies, sell alcohol for profit,"says Hepworth."Alcohol is a harmful commodity that confers no health benefit and leads to detrimental health outcomes, which is in direct conflict with the public interest and public health objectives."

Hepworth says there is a general trend of improving health consciousness among Australians.

However, this does not translate across all population groups,"she says."Older Australians are drinking more than

ever before."

As drinking rates among younger generations keeps dropping, industry analysts point to another interesting trend coming into view.Millennials appear to be increasingly favouring" quality over quantity",gravitating towards smaller, more natural and more locally produced food and drink products.

In the beer sphere, what this means is a move away from classic, mass-produced lagers like Carlton or VB, and a

move towards craft and microbreweries instead.In the US, craft beer has experienced double-digit growth in market share over the past several years.In Australia there are more than 400 craft or boutique breweries.

Millennials, being the information generation, like to know the story about what they are buying, especially when it

comes to food and beverage purchases, says Reeves. Millennials prefer to buy locally produced products, so in

buying craft beer, they know they are buying a local brew and not an import."

Craft brewers-much smaller operations than major beer companies-have focused on European and American

styles that were previously under-represented in the Australian market, such as pilsners, pale ales, porters, amber

ales, dark ales and wheat beer.

Mass-market brewers, too, have been steadily increasing their"craft beer offerings in response.CUB has long owned the Matilda Bay Brewing Company, best known for its Yak ale range, while Lion snapped up Little Creatures in 2012. Both brewers have also embarked on a run of further acquisitions in the fast-growing craft beer sector.In2017, CUB parent AB InBev bought out Sydney-based Four Pines and Adelaide's Pirate Life.

For his part, Filipovic says he is a classic lager drinker:VB in the fridge at home,Carlton on tap at the pub."But what the craft category has been able to do for us is provide romance the wine category has led that for many years,"he says. "Having people talk about beer again is actually the positive attribute.

Adding to big beer's challenges are their largest customers, retail chains Woolworths ,Coles and Aldi, which have

substantially increased their own private-label beer offerings in recent years.

Products like the Woolworths-owned John Boston and the Coles-owned Steamrail are putting a dent in demand,

intensifying price competition and damaging manufacturers' profit margins.

The other major buyers of beer, of course, are the nation's pubs, bars and nightclubs.The relationships between

the two big beer giants and these venues have been the subject of scrutiny in recent years.

Independent brewers say they are being"locked out"of beer taps in many venues because of CUB and Lion contracts requiring venues to dedicate more than 80 per cent of their taps exclusively to their beers.

The national competition watchdog, following a three-year investigation, ultimately rejected the concerns.

The head of the pubs industry group in Victoria, where CUB is most prominent, says the vast majority of its members had CUB beer taps, either through exclusive contracts with CUB, contracts allowing for a mix of CUB, Lion and independent beers, or no contracts at all.

According to Australian Hotels Association state director Paddy O'Sullivan, CUB under Filipovic has gone from

being"not only a supplier to the pub industry, but a key partner, and was proving adept in responding to rapidly changing consumer demands.

The pub industry looks to CUB under the leadership of Flip to drive a lot of that customer insight and that market insight, "says O'Sullivan."They are leading the way to deal with those obvious challenges."

He says Filipovic, whom he describes as skilled and respected,"never looks to create an unfair advantage"against

competitorsbut was more interested in growing the industry as a whole.

He's got a great knowledge of the business, a great commercial background, but what's really impressive is he

spends a lot of time and effort on industry partnerships and relationships,"O'Sullivan says.

From runaway energy prices to high labour costs, much has been made in recent years of the pressures facing the

Australian manufacturing industry, making tough times even tougher.

Filipovic, however, is upbeat when he talks about the manufacturing environment, and the prospects of CUB's five

breweries nationally, stressing the company has a focus on working collaboratively with its employees' unions to

drive efficiency and sustainability.

We make and sell a lot of beer,"he says,"and we work with our employees here to be efficient for the long term."

His comments reflect a sharp turnaround in CUB's approach to unions in recent years after a long and hostile dispute in 2016 when the company sought to cut costs at its heavily unionised Abbotsford brewery to make it more competitive. CUB said conditions negotiated over the decades had resulted in an"unsustainable situation. CUB's then management stoked the ire of trade unions when it axed a long-standing maintenance contract, leaving 55 workers out of a job unless they agreed to re-sign on a new contractor on lower pay.

The laid-off fitters and electricians and their union officials protested outside the brewery gates for more than six

months, prompting sometimes ugly confrontations, while the broader labour movement launched a national boycott

campaign urging drinkers to stop drinking CUB beers.

Well-known pubs including the Tote in Collingwood, the Lincoln Hotel in Carlton and the Kent Street bar in Fitzroy

backed the union push and ditched their CUB taps.

The highly public dispute ended within two months of CUB being taken over by AB InBev, with the workers winning their jobs back.

The Construction,Forestry,Mining and Energy Union(CFMEU),since the dispute, now represents the majority of CUB Abbotsford workers.

A new workplace agreement struck earlier this year provided a 4 per cent wage rise per year for the next three years, a joint consultative committee with union representatives ,a full-time health and safety representative and a special production run of a limited-edition VB can celebrating Labour Day.

The union's assistant state secretary,Elias Spernovasilis, said the mood among the workforce was positive.

It's great to see a more consultative approach from CUB Abbotsford to industrial relations,"he says.

The other question hanging over the future of the business at its historic home is related to that other great Australian passion: property prices.

CUB's sprawling Abbotsford brewery sits on valuable real estate,10 hectares of prime inner-city river frontage

about four kilometres east of the city centre.

With an estimated value of more than$100 million, questions have arisen over the years about CUB's plans for the site, which would be a contender for future development.

It's an iconic brewery,"says Filipovic."We think it's sustainable for the near future, but we need to work together.

It's incumbent on both the company and the workforce to continue to challenge itself to continue to be more efficient

and effective."

2.7 million

The number of bottles of beer produced daily at the Abbotsford manufacturing plant-home of VB,Carlton Draught,

Pure Blonde and Crown Lager-which has been brewing since 1904.

Our role in society is to continue to adapt to what consumers want.'Peter Filipovic, CEO Carlton&United Breweries

Please provide your answers by indicating the question number being answered.

Q1. What is the business scope of this case?

Q2. What PEST factors play a role in this case?

Q3. Analyse the standard beer market in Australia using the Five Forces model. How did the proposed strategic plan intend to move Tooheys in a better place in the industry structure?

Q4. Where was/is Tooheys in the Product Life Cycle?

Q5. What insights did the strategic planners find about Tooheys' consumers?