Testing time for beer industry as pricing probe continues

Date: 15/06/2000

By Peter Chapman

WHEN the European Commission's infamous dawn-raiders decided to make a series of impromptu visits to some of the Union's biggest brewers, one thing was clear: they were not there to taste the lager.

Acting on tip-offs about alleged price fixing and the existence of an illegal cartel, competition chief Mario Monti's officials targeted units of Belgium's Interbrew, the Netherlands' Heineken, Denmark's Carlsberg and France's Danone, whose beer brands are now owned by the UK's Scottish and Newcastle.

Rumours abound that Monti may now be ready to send formal warning letters about possible breaches of EU competition rules to Interbrew, owner of the Stella Artois brand, and Alken Maes, its Belgian rival which is now part of the Scottish and Newcastle stable.

But despite the prospect that the companies concerned could be fined up to 10% of their Union's sales if found guilty of the alleged offences, the financial markets appear to be taking a relatively sober view of the threat, preferring to wait for penalties to be announced before downrating the value of the implicated stocks.

"The Commission has to prove it first. I do not think the brewers would be stupid enough to leave memos hanging around saying 'it was nice to see you Mr Interbrew, we agree to fix our prices' - although it is possible," says Roel Gooskens, an analyst with HSBC Securities.

Even if enough evidence is found to support the cartel allegations, industry experts predict that there will not be a great rush to sell beer stocks. In a business driven by high-volume sales world-wide, the effect of any fines would be watered down by the big brewers' other activities in global markets. "I think the overall impact would be far less than 10% because the companies are based in a lot of countries from Poland to the US," adds Gooskens.

The firms under the spotlight for allegedly ripping off EU beer drinkers also remain remarkably sanguine about the outcome of the investigation. "We invited the dawn raiders in to see the chairman and offered them something to drink, although it was not beer because they arrived at 10.30 am," quipped one Carlsberg source. "We do not expect them to find what they were looking for. We are competing desperately against each other in the European market."

As Monti's officials continue their work on the case, experts point to a much greater threat to the sector's business - the new EU rules governing distribution agreements (or 'vertical restraints') in all industries which entered into force this month.

The revised 'block exemption' has replaced the old rules governing immunity from Union anti-trust legislation for vertical restraints which had been granted to the brewing industry.

Under EU rules, agreements between firms are usually prohibited. But vertical restraints are seen as a way of reducing uncertainty in the market by ensuring continuity of supply to customers, and are therefore given special treatment.

The new rules state that brewers with 30% or less of the market can engage in most forms of exclusive supply agreements with bars and other beer outlets, provided that these deals do not last longer than five years. The European Commission can also grant exemptions to firms with more than 30% but, crucially, officials say they are unlikely to agree to this for brewers which enjoy a dominant position in their domestic markets.

It is this, say analysts, which will have the greatest impact on the big players - particularly Belgium's Interbrew and Amsterdam-based Heineken. The Dutch brewer has long offered so-called 'tied loans' at preferential rates of interest to bars and clubs to pay for furnishing and fittings in their premises, in exchange for exclusive agreements to buy Heineken beer.

The top brewers complain that the new rules are unfair because the big companies will be targeted for tougher treatment than their smaller rivals. They say that ending their exemption from normal competition rules will reduce investment in bars and force those in need of loans to turn instead to banks which are less interested in the success of the industry.

Why, they ask, should a small brewer with a very strong presence in, say, in a big city or region be allowed to do things which a bigger rival, weaker in the area, is forbidden to do?

However, despite such concerns, analysts claim that the new rules will not cause huge long-term damage to the makers of the most sought-after premium brands, which are sold not just in bars but also in other outlets from supermarkets to petrol stations.

"These exclusive contracts are not really necessary," says Bank Insinger's Oscar Poos. "At Heineken, it will shave off a percentage point off growth. Heineken is one of the few that is traded at high earnings multiples - there is plenty of growth in this stock."

Industry experts also argue that the new Union rules will, if anything, force companies determined to stay in the brewing sector to look beyond their domestic strangleholds - pushing the industry ever further down the road towards EU-wide consolidation and investments in foreign markets.

This trend is typified by Interbrew, which has just taken over the brewing business of the UK's Whitbread and is widely expected to launch a similar €3.3-billion raid on the UK's Bass. The two former bastions of the British industry are now opting to concentrate on their more profitable businesses running pubs and hotels - leaving brewing the beer itself to the massive Union-wide players big enough to make the huge economies of scales needed to return a profit.

"Bass Brewers has done very well, winning market share for our brands. But as a group, the beer business only accounts for 3% of profit growth, compared with 31% for our leisure retail business," says Bass EU affairs expert James Wilson.