World beer industry must cure its profits hangover

"HERE'S to alcohol," said famous market analyst Homer Simpson, "the cause of, and solution to, all of life's problems." The sage of Springfield could easily have been describing the global beer industry.

The problem, broadly, is this: beer markets in Europe and the US are saturated and growth is flat. There are three possible solutions.

First, drinks companies could try to sell more expensive beer to drinkers, a tactic that is sometimes unfortunately called "premiumisation". It works, up to a point, but has limits.

One is that, according to a recent study by the Stockholm School of Economics, drinkers cannot tell different types of lager apart. The researchers concluded that brand loyalty in the beer industry was driven by marketing and packaging rather than taste. This means that any attempt to raise revenues by selling more expensive beers needs to be driven by a huge advertising spend (which may or may not work). In other words, it is risky.

The second solution is to seek out new markets. Again, this is not easy. On the one hand, the inroads that SABMiller has made in Africa are eyed with envy - roughly 65 million more Africans will reach legal drinking age over the next decade.

On the other hand, Carlsberg's travails in Russia, one of the main reasons that it trades at significantly lower multiples to most of its rivals, are a cursory warning about the fickle nature of emerging markets.

The third way is to buy rivals and take costs out of the combined business. This, too, is easier said than done, but is a well-trodden route to profits. It is also why expectation of yet more deals among the world's largest drinks companies have been brewing (sorry) for so long.

The share price of SABMiller surged on Monday because it represents all three possible solutions for any rival that manages to buy it. The UK company of South African heritage made a surprise bid for Heineken, the Dutch brewer, over the weekend, but, when this was quickly rebuffed, SABMiller was judged to be "in play".

Why is SABMiller such a juicy-looking target? First, there is its portfolio of premium brands such as Grolsch and Peroni. Then, there is that tempting African business.

Finally, there are its dreadful margins in the US, which could be improved by the likes of Anheuser-Busch InBev - its mighty Budweiser business in the US enjoys industry-beating margins in what is still the world's largest beer market by value (the Chinese already drink more pints than Americans but they pay less for them).

And, as in the US, SABMiller tends to be weak where AB InBev is strong and vice versa. This would mean that a potential deal is less likely to arouse the interest of antitrust authorities. Certainly, it is less problematic than a tie-up between Heineken and SABMiller, as the two companies are number one and two in many European countries.

Carlsberg, which looks cheap because of that Russian exposure, could also play a role in any industry consolidation, as could Diageo, which owns Guinness.

Beer mega-deals work and many interested parties have a good track record in this regard. It is, after all, the reason the industry has consolidated into so few players. But will shareholders and regulators agree there is time for one more round? - ©The Daily Telegraph, London