Is the End of the German Beer Industry Near?Published: January 02, 2013 in Knowledge@Wharton
Germany is inextricably associated with beer. Indeed, one is prompted to envision pictures of Oktoberfest, where high-quality beer is served in steins by waitresses wearing the traditional dirndl. However, the beer industry, one of Germany's oldest, is under threat. Germans, for whom beer is a part of tradition, are now drinking less beer than ever -- a development which coincides with a centuries-old, self-imposed reinheitsgebot ("purity law") which dissuades breweries from experimenting with new types of beer to cater to 21st century beer aficionados. Breweries in Germany also have not expanded abroad -- the result of a preference among promoters to remain small, family-owned businesses.
According to Walter Koenig, managing director of the Bavarian Brewers Federation, more than 41 large- and 182 medium-sized breweries have closed since 2000, resulting in job losses. According to the online magazine slate.com, Berlin, which sustained some 700 breweries in the early 19th century, now counts only about a dozen firms. An Ernst & Young report states that 27,570 people were employed in German breweries in 2010, with another 414,000 hospitality jobs and 17,400 retail sector jobs attributed to the sale of beer. This represents a decline of 11,000 jobs, compared to 2008. A further decline in this industry can have significant consequences for the German economy.
Furthermore, beer is no longer the core business for many of the surviving breweries. Promoters are building golf courses, renovating castles and opening beer gardens to sustain and, in some cases, even subsidize the brewing business. Despite the decline, this industry remains highly competitive, with more than 1,300 breweries nationwide catering to a population of just over 80 million. Consolidation, which has already occurred globally, has slowly begun in Germany, as foreign players acquire German breweries. Today, five out of the six producers in Munich are owned by global majors. Looking ahead, changes in demographics, more serious penalties for drinking and driving, and a focus on better health are expected to contribute further to the decline in consumption.
Beer-brewing is perhaps one of the oldest industries in the world. Originally produced by monks as a religious drink, beer was actually preferred to wine because it tasted less sour and was easy to store in barrels. It was also cleaner than water and helped prevent illness. The philosopher Plato once allegedly said, "He was a wise man who invented beer."
Beer gradually became the drink of the masses, with microbreweries present in each town. According to Koenig, in the 1970s Germans consumed 150 liters per capita annually. Current consumption is 106 liters per capita, a 30% decline. (The world leader is the Czech Republic, which reported 159.3 liters per capita in 2009.) "This number is still declining," Koenig adds. Today, as in the U.S., the trend of microbreweries and craft beer is catching on, putting the larger producers in jeopardy.
Oktoberfest and the Reinheitsgebot
According to official statistics from the City of Munich, Oktoberfest is Germany's premier tourist attraction, with more than six million attendees and more than seven million liters of beer sold each year. It is a celebration of beer and an important part of the country's culture, with nearly 75% of the attendees being Bavarian.
The first Oktoberfest occurred on October 12, 1810, to mark the marriage of Crown Prince Ludwig to Theresa of Bavaria. All the citizens of Munich were invited. The event was so successful that it was decided the celebration should occur every year. Of the 600 breweries in Bavaria, only six local Munich breweries are allowed to sell beer at Oktoberfest, preventing smaller brewers from leveraging the festival's brand equity.
Two hundred years after the creation of Oktoberfest, Germany does not have a globally recognized beer brand, and it is still difficult to grab a pint of German beer in most parts of the world. In addition, Oktoberfest is now being viewed by some as not very classy. According to Anna Breitsameter, a lecturer at Munich's JYM Institute, "The image of drunken people every year does not leave a favorable impression on the locals." While promoting the fun aspect of beer to a certain segment of the population (tourists and younger people), this has also promoted wine as a more sophisticated option.
As for the Reinheitsgebot ("purity law"), it is the world's oldest consumer legislation. Enacted in 1516, it stipulated that beer must contain only malted barley, hops and water (wheat and yeast were added later). All German breweries adhered to this law until 1987, when it was overturned as an impediment to European free trade in favor of the Vorläufiges Deutsches Biergesetz ("provisional German beer law"). Bavaria has abided by the Reinheitsgebot since the 15th century, an entire century earlier than the rest of the country. According to Koenig, "German brewers are proud of their adherence to this law."
Although the Reinheitsgebot has been replaced, it may have dissuaded German breweries from experimenting and innovating. This was a gold standard for the taste and quality of beer, and brewers followed it to the letter; additions of any type were strictly prohibited. German tastes also began to conform to this law. While demand was growing, the breweries did little to invest in innovation. As a result, today there are only about 20 common styles used for brewing in Germany, whereas craft brewers in the U.S. are working on at least 100, according to slate.com.
Challenges Facing the Industry
The reality is that Germany's beer industry is shrinking -- for a multitude of reasons.
The country is undergoing significant demographic changes. Like most of Europe, its population is aging rapidly, with a fertility rate of just 1.4 births per woman. Thus, the core beer-drinking population in the 18-34 age group is declining. Moreover, the frequency of beer consumption is also falling. In the past, Germans would not think twice about having a beer for breakfast. Today, such behavior is frowned upon. The concept of "Das bier ist gesund, zu jeder Stund" ("beer is healthy at any hour") might now be an anachronism.
In addition to these demographic changes, "preferences of the youth are evolving," says Johannes Elsner, a partner at McKinsey's Munich office. Today's youth do not think of beer as fashionable. The trend is moving more toward alco-pops, or alcoholic mixed drinks. According to Walter Bitsch, a wine trader, "beer is perceived to be low end, compared to wine." An official at the Bavarian Economic Ministry adds that, "the youth of today wants to create its own trends." In fact, according to Koenig, Germans spend more from the household alcohol budget on wine than on beer.
Experts such as Koenig suggest that the German market might be saturated. "With 1,341 breweries, over-capacity is an issue." This could result in oversupply and, indeed, average prices of beer have been falling since 2008. In the EU, most countries have less than 100 mid- to large-sized breweries. This is combined with the fact that the majority of the German breweries are subscale, conservative family businesses. Small scale means less money to invest in global brand building and exports. As Josef Kronast, the brew master at Maxlrainer Brewery (winner of the Best Beer Germany 2012), notes, "when we receive an order from Russia or China, we fulfill it as a one-off. We do not actively seek new business in these markets." At the same time, demand for German beer is growing rapidly in those countries. Germany exports about 15% of the beer it produces, less than its neighbor, Holland. In fact, Maxlrainer sells its beer within just 70 km of the brewery. It cannot even be found in Munich, the beer capital of Germany, just a two-hour drive away.
Over the past two decades, government intervention has not been overtly supportive. By spreading the message of a healthy lifestyle, Germans have been drinking more water than beer since 2002 and exercising more. Mariam Yunis, a physician at the Backnang Hospital in southern Germany, is more direct: "Among all alcohols, beer contains the highest calorie intake." However, Kronast insists that "this is a misperception; beer itself is not fattening. Rather, it makes you hungrier." Furthermore, lower alcohol-tolerance limits for drivers and an increase in the use of private cars have dissuaded people from drinking copious amounts of beer. Some states are also considering banning the consumption of alcohol in public places and on public transportation. Koenig considers this "extreme" and spends a considerable amount of time speaking with politicians about his cause.
German Beer's Loyal Fans
Cultural and commercial reasons have shaped the German brewing industry, which now contributes about 1.5% of the GDP of Europe's largest economy. The Reinheitsgebot influenced the creation of high-quality beer, something Germans prefer even today. Therefore, international players have not been able to make a dent in the German market and have had to acquire local brands to gain entry.
Second to loyalty, quality also drives beer sales. Since German breweries are family-owned, they have ensured high-quality standards by maintaining end-to-end control. Richard von Weizsaecker, former president of the German Federal Republic, once said, "We could be happy if the air was as pure as beer."
Breweries have other competitive advantages as well. For instance, distribution is based on close and exclusive relationships between the brewing family and the promoters of a bar or beer garden, and lasts for generations. This guarantees a steady cash flow for the brewery. According to Kronast, "The bars which sell our beer have been with us for more than 60 years; we find it difficult to compete for new bars as the large players and global majors price us out and offer other benefits." Often breweries also own priceless real estate, including bars and guest houses, that retail their products exclusively. Some even inherit castles and hotels which are now being spruced up to attract weekend visitors.
Thus, the industry has many things in its favor, and, if a proper strategy is crafted, there could be a renaissance. Koenig and the brewery associations have begun to step in -- by educating management through conferences and attending expos and exhibitions in foreign countries, for example. There is a realization that the industry can survive, but certainly not in its current form.
What Lies Ahead for the German Brewing Industry?
The German brewing industry is at a crossroads. According to the Baarth-Haas Group Beer Production report of 2011, Germany is now only the fifth-largest producer, down from second place in 1990. Local demand will continue to decline, making it nearly impossible for all 1,341 breweries to survive. According to Kronast, "Germany will eventually follow global trends, which will result in the creation of three to five dominating brands and a few local beers." Unless something is done, the industry will continue to suffer.
Is there another option for the industry? Perhaps. Just across the border, French champagne producers are giving German brewers some inspiration. Today, France boasts 1,600 champagne manufacturers with global brands, such as Veuve-Clicquot and Moet et Chandon. The industry is thriving as a result of a few large manufacturers that have invested in building champagne's image as a luxury drink. At the same time, some smaller companies have long survived on this aura alone. It is not uncommon to see Moet or Dom Perignon hosting exclusive events in Shanghai, Moscow and Mumbai. In addition, these products are easily available at high-end supermarkets and at duty-free shops around the world.
Unfortunately, no German brand has been able to cultivate a global following; there is no German beer among the world's top 20. Much of this stems from limited marketing, supply constraints and the small size of the breweries. This is slowly changing. Paulaner (an InBev company) is opening restaurant franchises in key cities, such as Shanghai, where connoisseurs can enjoy their beer straight from the tap. In addition, Maxlrainer acknowledges it is unable to keep up with the one-off export demand from Russia and China. The company cites prohibitive logistics and marketing costs as constraints.
Looking to the future, German breweries need to invest in a few critical areas. Classic marketing analysis suggests that these breweries should capitalize on the purity and quality of their beer to increase prices. Unfortunately, this strategy might not work because German consumers are price sensitive. However, in emerging economies such as Russia and China, the nouveau riche are willing to pay for quality; this niche should be exploited in a more formal way. One strategy is for groups of brewers to collaborate and open representative offices in Asia, which can drive sales and supply in this region.
Strong brands are also critical. The Bavarian Brewers Federation, for instance, is attempting to brand Bavarian beer with the "Made in Bavaria" tag and is now seeking exclusivity for the word "'Bavarian." "We recently discovered that there is a brewery in the Netherlands that sells a beer called Bavarian beer," says Koenig. "We are doing everything possible to get them to change their brand, [because] it is clearly not Bavarian." Established brands such as Paulaner need to take responsibility not just for branding themselves, but also for serving as global ambassadors for the industry, experts say. In addition, breweries need to quickly counter the notion that beer is a low-end drink, compared to wine, to retain younger drinkers.
Limited access to German beer is also a common complaint. For instance, the Mexican beer Corona is available worldwide, whereas Bavarian beers may not even be available in Berlin. When brewers are asked about exports, a sense of conservatism remains. "Exports are expensive -- we need to transport the beer in temperate conditions so that they do not perish. Creating such a logistics system is neither cheap nor easy," suggests Kronast. Unless the brewing industry invests in building exports, this cottage industry, so intertwined with German culture, may not exist within the next few decades.
Brewers know that their "traditional" Germantargetmarket is shrinking. Therefore, they do not necessarily need to be reinheitsgebot-compliant; they could look to other models, such as the highly successful flavored Belgian beer. Innovation and product diversification are critical if German breweries want to continue to exclude foreign players.
The German government must step in to support its traditional industries, say experts, adding that the government needs to develop a long-term marketing and branding campaign for this industry. These experts suggest that the pros and cons of rules against drinking in public spaces, on mass transit and so forth should be weighed carefully before being promulgated. Jobs are also at stake, and state support during this critical phase is a necessity. However, as a government official noted, "We are not sure whether breweries need a subsidy. The City of Munich already spends a lot of money on Oktoberfest." This might be true for direct subsidies, but support in other forms is clearly needed, industry observers note.
When confronted with these challenges, Koenig admits, "This will be a slow process."
This article was written by Helay Fazel, Xavier Torras Flaquer and Venkatesh Saha, members of the Lauder class of 2014.