Brewing a giant
By Daniel Tencer
The recently announced purchase of Austria-based brewer BBAG by Heineken has set the stage for the domination of the Polish beer market by two major players - a development causing consternation among small domestic brewers, who fear that the ever-growing large players, coupled with high excise taxes, will run them out of business.
As a result of Heineken's €1.9-billion purchase of BBAG - the largest takeover of its kind in the Dutch brewery's 130-year history - it will now control Brau Union Polska, the owner of Browary Warszawskie, which produces the Królewskie brand, and Van Pura, maker of the Kujawiak brand. The deal could potentially be a fresh start for Brau Union, which saw its sales fall 10% in 2002 despite an overall increase in beer sales during that period.
After growing some 9% annually from 1993 to 2000, the domestic beer market stagnated in 2001, only to register 8% growth in 2002. Results for the first quarter of 2003 indicate a 3% year-on-year decline in sales.
With Brau Union's 5% market share added to Heineken's own holdings in Poland - consisting primarily of Grupa Żywiec, producer of the Warka, Leżajsk and Żywiec beer brands, among others - the company is now expected to become the domestic market leader, accounting for more than 37% of total market share. This exceeds the 32% market share held by SABMiller-owned Kompania Piwowarska. With SABMiller and Heineken accounting for more than two-thirds of beer consumption in Poland, only Carlsberg Okocim, with its 16% market share, can hope to stand up to the new giants of the beer business.
According to Anthony Ruys, Heineken's general director, the newly fused operations of Heineken and Brau Union will have market-leading positions in eight of the 13 central and eastern European countries where they operate. Ruys also said that all central European operations would now wear the Brau Union label, although officials at Heineken-owned Grupa Żywiec would not confirm this, saying that the local consequences of the Heineken-BBAG merger would not be known for some time.
"The structure of the deal won't be known for another six weeks," said Eliza Panek, public relations director at Żywiec. "Also, it will take at least two months for government regulatory agencies to approve the merger."
But Andrzej Olkowski, president of the Association of Small and Medium-sized Breweries, believes he can already predict some of the results of the merger, saying that market consolidation will lead to many small brewers losing access to their markets.
"We have learned from the experience of other countries where this sort of consolidation has happened, and in those places we saw beer distribution networks taken over by the large players, effectively pushing out the small ones," he said. "Beer is a very elastic, very sensitive branch of the alcohol industry. It would be relatively easy (for the large brewers) to push the small ones out of the market."
Andrzej Długosz, president of Cross Media and a former representative for the beer industry, disagrees.
"It would not make sense for the large brewers to deny the smaller ones access to their distribution networks," he said. "These small brewers do not pose a major threat to the market shares of the large brewers; and besides, the large brewers make money off distributing the small brands."
Eliza Panek of Grupa Żywiec echoes his assessment.
"There were similar concerns in 1998 when Żywiec bought El Brewery, and the regulators obligated Żywiec to give small breweries access to its distribution network," she said. "We would not stop this practice, because in this way we make money off our competition."
There does not appear to be much alarm over the merger at the Office for Competition and Consumer Protection (UOKiK), one of the government agencies whose stamp of approval will be necessary for Brau Union and Heineken to merge their domestic operations.
"As a rule of thumb, a monopoly is defined as having control of 40% of a given market, and (a merged Heineken and Brau Union) comes very close to this," said the UOKiK's Alina Urban. "But there are many factors involved in determining whether a company has a monopoly. The influence it will have on the competition is the main thing we consider."
Urban said it would be approximately two months before the UOKiK would be able to make a decision on the Heineken-Brau Union merger.
Another concern voiced by industry insiders is the possibility of price increases as the number of players on the market decreases. Olkowski does not see competition among the dominant brewers extending to the realm of pricing.
"There will definitely be competition among the new major players, but it will not be in terms of price," he said. "Competition will be focused on marketing and distribution channels."
Cross Media's Długosz envisions the opposite. "The new situation on the market is that there will be two large players who will be competing directly against each other," he said. "As a result, beer prices will not go up; quite the contrary, they may go down."
At Grupa Żywiec, the view is that the country's high excise taxes are a much larger factor in determining beer prices than the number of competitors.
Polish brewers pay €22.50 in excise taxes per 100 liters of beer, compared to €9 per 100 liters in Germany and €9.60 in the Czech Republic, Poland's two neighbors known for their successful beer industries. Additionally, the VAT on beer here is 22%, compared to 16% in Germany.
"The problem with beer prices is the excise tax, not the level of competition," Panek said. "Little will change after the merger, in terms of price."
In this respect, Panek and Olkowski see eye to eye.
"We see a threat (to our business) from the European Union, if countries like Germany and the Czech Republic can bring beer into Poland on the open market (after May 2004)," Olkowski said. "The best solution to the problem would be an act in the Sejm that would limit the state treasury's ability to slap excise taxes on beer."
Panek believes that further mergers are likely, given the country's imminent entry into the EU.
"Consolidation in the market will be necessary to compete in the European Union, especially to compete against beer brewers in Germany and the Czech Republic," she said.
Then there is also the question of brewery closures as Heineken and Brau Union consolidate their operations. While Heineken's local representatives would not comment on the likelihood of brewery shutdowns, Andrzej Olkowski said that the possibility exists.
"There is a risk of brewery closures (as a result of this merger)," he said. "This is natural, this is economic thinking. I would not be angry at Heineken if it did this, because if you have one or two breweries that can fulfill the demand currently being fulfilled by 10 brewers, for example, then why not close them?"
