Brewing, Beer and Pubs

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Brewing, Beer and Pubs
A Global Perspective

Edited by

Ignazio Cabras

David Higgins
and

David Preece
BREWING , BEER AND PUBS: A GLOBAL PERSPECTIVE
Selection and editorial content © Ignazio Cabras, David Higgins and
David Preece 2016
Individual chapters © Respective authors 2016
Softcover reprint of the hardcover 1st edition 2016 978-1-137-46617-4
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Library of Congress Cataloging-in-Publication Data
Names: Cabras, Ignazio, editor. | Higgins, David Minden, 1974– editor. |
Preece, David, 1948– editor.
Title: Brewing, beer and pubs : a global perspective / Ignazio Cabras,
David Higgins, David Preece.
Description: Houndmills, Basingstoke, Hampshire; New York, NY : Palgrave
Macmillan, 2016. | Includes index.
Identifiers: LCCN 2015039313
Subjects: LCSH: Brewing industry. | Beer industry. | Bars (drinking establishments)
Classification: LCC HD9397.A2 B74 2016 | DDC 338.4/766342 – dc23
LC record available at [Link]
A catalog record for this book is available from the Library of Congress
A catalogue record for this book is available from the British Library
Contents

List of Figures viii

List of Tables x

Acknowledgements xii

Notes on Contributors xiv

Introduction and Overview 1

Ignazio Cabras, David Higgins, and David Preece

Part I Globalization, Marketing and

Trade in the Brewing Industry
1 Interesting Times: Changes for Brewing 15
Charles W. Bamforth and Ignazio Cabras

2 Marketing and Globalization of the Brewing Industry 34

Erik Strøjer Madsen and Yanqing Wu

3 Path Dependency, Behavioral Lock-in and the

International Market for Beer 54
Martin Stack, Myles Gartland, and Tim Keane

4 Intra-industry Trade in the Beer Industry within the

Enlarged European Union 74
Imre Fertő and Szilárd Podruzsik

5 “When Helping the Small Hurts the Middle”:

Beer Excise Duties and Market Concentration 97
Simon Loretz and Harald Oberhofer

v
vi Contents

Part II Developments in Regional Brewing

and Beer Markets
6 The Lack of Market Integration in the Chinese Beer
and Wine Markets: Evidence from Stationarity Test 123
Chi Keung Marco Lau, Zhibin Lin, David Boansi,
and Jie (Kitt) Ma

7 The History and Development of Brewing and the

Beer Industry in Africa 145
Richard B. Nyuur and Pauline Sobiesuo

8 South of the Border: The Beer and Brewing Industry in

South America 162
Luis Alfonso Rivera Mena, Katia Beatriz Villafán Vidales,
and José Odón García García

9 The Locational Determinants of Micro-breweries and

Brewpubs in the United States 182
Michael S. Moore, Neil Reid, and Ralph B. McLaughlin

10 Beer, the Preferred Alcoholic Drink of All? Changes

in the Global and National Beer Consumption
Since 1960 and Convergence and Trends
Since the 1990s 205
Elena Piron and Eline Poelmans

Part III Pubs, People and Places

11 Tied Houses: Why They Are So Common and
Why Breweries Charge Them High Prices for Their Beer 231
Koen Deconinck and Johan Swinnen

12 Turbulence in UK Public House Retailing: Ramifications

and Responses 247
David Preece

13 The Village Pub in the Twenty-First Century:

Embeddedness and the “Local” 266
Claire Markham and Gary Bosworth
 Contents vii

14 “Pillars of the Community”: Pubs and Publicans

in Rural Ireland 282
Ignazio Cabras

15 Beer and the Boro – A Perfect Match! 303

Alex Gillett, Kevin Tennent, and Fred Hutchinson

Index 321
List of Figures

1.1 Number of breweries in the US and UK 19

2.1 Concentration ratios in the global brewing industry 38
2.2 Different media’s share of the global expenses
on advertising 43
2.3 Regression plot of marketing share to world market
share for seven large breweries 46
2.4 The within-breweries correlation between the share
of marketing and sales costs and the world market
share for seven large breweries 49
4.1 The beer trade in the EU 80
4.2 The mean values of beer exports and imports in the
EU by Member States 81
4.3 Correlation indices based on a report and partner
EU Member State as report Member State 83
4.4 Development of beer IIT in the EU-27 85
4.5 Beer IIT types in EU-27 by Member States 86
4.6 Baseline Helpman (models 1 and 2) 87
4.7 Cieślik model 89
4.8 Sensitivity analysis 90
5.1 Beer excise tax burden in EU-28 for a typical beer
with 4.8% of alcohol 101
5.2 Illustration of the progressivity measure (Austria,
Germany, maximum allowance) 103
5.3 Number of breweries in Austria 1984–2010 108
5.4 Number of breweries in Germany 1994–2010 109
6.1 Prices and price differences for wine and beer 131
6.2 Mean and standard deviation of price difference for
wine and beer 135
7.1 Recorded alcohol consumption by type, 2010 155
8.1 South America’s beer production (tons) and value
(US$ millions) 1961–2013 168
8.2 South America’s beer trade 1961–2011 (US$ million) 169
8.3 South America’s beer exports (millions of current US$)
2001 and 2011, by country 170
8.4 South America’s beer imports (millions of US current $)
2001–2011, by country 171

viii
 List of Figures ix

8.5 Beer market composition in Argentina, Brazil,

Colombia, Chile and Mexico 2014 173
9.1 Growth of brewpubs and micro-breweries in the US,
1994–2013 183
9.2 Spatial distribution of micro-breweries in the US, 2013 188
9.3 Spatial distribution of brewpubs in the US, 2013 188
9.4 Frequency distribution of micro-breweries (a) and
brewpubs (a) across US metropolitan areas, 2013 195
10.1 Beer-drinking nations, 1960 208
10.2 Beer-drinking nations, 2007 209
10.3 Absolute and per capita consumption of beer,
wine and spirits, 1960–2007 210
10.4 Beer consumption per region, 1960 211
10.5 Beer consumption per region, 2007 211
10.6 World consumer expenditure on alcoholic beverages,
1990–2011 215
10.7 Off-trade consumption as a proportion of total
consumption, 1997–2007 217
11.1 Importance of tied houses for smaller brewers in the
Netherlands 238
14.1 Number of pubs (a) and level of employment in
Irish pubs (b) 284
14.2 Selected pubs and parishes 288
14.3 Proportions of local/non-local purchasing by types
of suppliers 290
14.4 Patterns of local procurement 291
List of Tables

1.1 Alcoholic drinks consumption, per capita, 2012 18

1.2 Rates of excise duty and value-added tax in the
European Union 24
1.3 Health benefits from beer drinking 28
2.1 Import share of beer in percentages 37
2.2 Beer prices for different types of beer on the
global market 39
2.3 Price premiums for branded beer using an index
with standard lager set at 100 40
2.4 Global consumption of different types of beer, 2013 44
2.5 Descriptive statistics 45
2.6 World market shares and cost shares for the
breweries in 2013 47
2.7 Fixed effect estimation of the size effects in marketing
and distribution costs 48
3.1 Top ten beer-consuming countries 61
3.2 Regional beer consumption 61
3.3 Top 20 world beer brands, 2003 65
3.4 Regional distribution of the top 20 beer brands, 2004 66
3.5 Top world brands, 2011 and home sales vs international
sales, global prospects for beer companies, 2012 66
3.6 Top breweries by geography, 2011 percentage of volume
share by region 67
4.1 Numerical example of IIT 78
4.2 Description of independent variables 79
4.3 Markov transition probability matrix for classification
of trade types 84
4.4 Panel unit root tests 93
5.1 Beer excise tax systems in EU-28 Member States, 2013 104
5.2 Beer market characteristics in EU-28 Member
States, 2013 106
5.3 Determinants of M&A, 1997–2011 113
5.4 Determinants of market concentration, 2002–2011 115
6.1 Univariate unit root test of relative price 137
6.2 Panel unit root tests of relative price series for
China’s 105 cities 138

x
 List of Tables xi

7.1 Proportion of current drinkers among all 15+ years 154

7.2 Beer consumption levels in sub-Sahara African
countries, 2010 155
8.1 South America’s beer production value (US$ million)
and regional share, by country, 2001–2011 169
8.2 Mergers and acquisitions in the brewing industry
in Argentina, Brazil, Colombia, Chile and Mexico 172
9.1 Top 10 MSAs for micro-breweries and brewpubs, 2013 189
9.2 Descriptive statistics 196
9.3 Regression results predicting number of micro-breweries
and brewpubs 198
10.1 Proportions of consumer expenditure, 1990–2011 214
10.2 Off-trade consumption of different beer categories
by region, 1997–2015 (in percentage of total off-trade
consumption of that region) 219
12.1 Ownership of UK public houses by type of operator 255
14.1 Average turnover and costs by business type (in euros) 289
14.2 Pubs’ weekly local expenditure per supplier group
(thousands euros) 291
14.3 Correlation table 292
Acknowledgements

We first thought about writing this book in the immediate aftermath

of the third Beeronomics Conference held at the University of York,
UK, in September 2013. The event was attended by many academics
and beer lovers from all over the world, who triggered many discus-
sions and stimulating debates around the production, consumption and
distribution of beer. The conference also featured several social events,
including beer tastings and visits to breweries such as Hambleton
Ales and York Brewery, where guests had the opportunity to meet and
discuss with local brewers. Moreover, the conference had an official
beer, Wallop, brewed by Brasscastle Brewery and kindly donated to all
the invited keynote speakers. This fervent environment provided the
editors with the impetus to embark on this project; it also provided us
with the opportunity to engage with many friends and colleagues –
from different continents and backgrounds – in a shared passion for this
sublime drink.
Editing this book has been an honour and a pleasure. However, we are
fully aware that this task would not have been accomplished without
the support of those who helped organize the Beeronomics Conference.
Particular thanks are due to Gavin Aitchison (York Press), Andrew Barker
(York Brewery), Mike Benner (Campaign for Real Ale and the Society
of Independent Brewers), Kiran Fernandes (Durham University Business
School), John Longden (The Pub Is The Hub), Guy Newsman (Muntons
Malts), Phil Saltonstall and Ian Goodall (Brasscastle Brewery), David
Smith (Brewing Services & Consultancy Ltd), Nick Stafford (Hambleton
Ales), Andrew Tighe (British Beer and Pubs Association) and Steve Toms
(Leeds University Business School). We also thank Maddie Holder of
Palgrave Macmillan for her incessant support.
Editors’ personal dedications:

Ignazio Cabras: a Nonna Chiara, ovunque tu sia non lascerai

mai i miei pensieri ...
David Higgins: To Louise, Matilda and Caleb
David Preece: To Mo, Jamie and Laura

xii
 Acknowledgements xiii

In memory of Michael Moore 1981–2015

Mike Moore was a doctoral student in the Spatially Integrated Social

Sciences (SISS) Program at the University of Toledo, US. He was in the
second year of the program, and for his doctoral dissertation was exam-
ining the spatial dynamics of the American craft beer industry. On April
8, 2015 Mike was sitting on a bar stool enjoying a beer at the Maumee
Bay Brewing Company in Toledo when he collapsed and fell to the floor.
Paramedics were called and he was rushed to a nearby hospital. Both
paramedics and doctors at the hospital worked on his heart but to no
avail and Mike was pronounced dead. His academic work on the brewing
industry was not coincidental given his love for craft beer. He was just as
comfortable diving into deep conversation at a bar as he was diving into
complex statistical analyses of the brewing industry. And oftentimes,
these two things came together. Thus, it is very fitting that Mike passed
in a local brewery. He was 34 years old.
Notes on Contributors

Charles W. Bamforth is the Anheuser-Busch Endowed Professor of

Malting and Brewing Sciences at the University of California Davis, USA.
He is a leading scholar in the science of malting and brewing.

David Boansi is a Junior Researcher and doctoral candidate at the Center

for Development Research (ZEF) of the University of Bonn, Germany.
His research interests include global development and trade, land use
and food security, environmental and climate change, and gender-
related issues.

Gary Bosworth is Reader in Enterprise and Rural Economies at Lincoln

Business School, University of Lincoln, UK. His research focuses on,
investigating the role of entrepreneurial in-migrants, farm diversi-
fication and broadband in rural areas. Currently he is exploring new
research into the role of migration and entrepreneurship in helping to
create sustainable rural communities.

Ignazio Cabras is Reader in Economics, Business and Management

at Newcastle Business School, Northumbria University, UK. He is also
an associate fellow of the York Centre for Complex Systems Analysis
at the University of York, UK. In recent years, Ignazio has led several
research projects investigating the significant role pubs play in rural
areas, contributing to measure and unveil the positive impact of these
businesses on local communities, economies and supply chains. He is
an active member of the Beeronomics Society and chaired the third
Beeronomics Conference in 2013, the first organized and host by a
British institution.

Koen Deconinck is an Affiliated Researcher at LICOS Centre for

Institutions and Economic Performance at the University of Leuven,
Belgium. He holds a PhD in Economics from KU Leuven and specializes
in agricultural economics, applied micro-economics and the economics
of alcohol.

Imre Fertӧ is a Senior Advisor at the Institute of Economics and

Head of the Agricultural Economics and Rural Development Unit of
the Hungarian Academy of Sciences in Budapest, Hungary. He is also
a Professor at the Corvinus University of Budapest and at Kaposvár

xiv
 Notes on Contributors xv

University, and a member of the Executive Board of the European

Association of Agricultural Economics. His main fields of interest are
international trade, technical efficiency, vertical coordination in food
chains and agricultural price transmission.

José Odón García García is a Research Professor at the Instituto de

Investigaciones Económicas y Empresariales (ININEE), Universidad
Michoacana de San Nicolás de Hidalgo (UMSNH), Mexico. He is also a
fellow of the Mexican National System of Researchers of the National
Council of Science and Technology (CONACYT). His research focuses
on the agriculture and tourism sectors, regional development, migration
and public policies.

Myles Gartland is the Director of Graduate Business Programs for

the Helzberg School of Management, Rockhurst University, USA. His
research interests include analytics and data mining, predictive models,
business intelligence and big data, industry evolution and globalization
specifically related to business strategy.

Alex Gillett is Lecturer in Marketing at the York Management School,

University of York, UK. His research interests include marketing, local
government, social enterprise, football, music and medical physics
experts.

David Higgins is a Professor in the Accounting and Finance Division at

Newcastle University Business School, UK. He has published articles on
Bass’ trademarks and business strategy during the nineteenth century,
and the corporate strategies of some of the UK’s leading brewers. With
Cabras, he has guest-edited a special issue on the history of the beer and
brewing industry for Business History. David’s interest in beer extends
beyond the purely academic.

Fred Hutchinson is Principal Lecturer in Accounting at Teesside

University, UK. His teaching and research interests include public
sector finance, and environmental and public interest accounting. He
has carried out research in corporate governance and environmental
and social reporting, and has presented on football finance to various
audiences.

Tim Keane is Dean of the College of Business and Economics at Regis

University, USA. Previously he was a senior sales manager at Anheurser-
Busch. His research interests include corporate social responsibility,
leadership and sustainability, and business ethics.
xvi Notes on Contributors

Chi Keung Marco Lau is Senior Lecturer in Economics and Finance

at Northumbria University, UK. His research focuses on entrepreneur-
ship and innovation, empirical international finance and macro-
econometrics. In addition, he investigates the use of panel unit root
testing under non-linearity and structural break, and its application
on international purchasing power parity and non-linear growth
dynamics in China.

Zhibin Lin is Senior Lecturer in Marketing at Northumbria University,

UK. His previous appointments were at the Universities of Keele, Bristol
and London South Bank. He has had over ten years of experience as
a marketing manager in the airline industry before pursuing a career
in academia; his work has been published extensively in the fields of
marketing, transport and business management.

Simon Loretz is a Senior Researcher at the Institute for Advanced Studies

in Vienna, Austria. He was a research fellow at the Oxford University
Centre for Business Taxation and a lecturer at the University of Bayreuth.
His research interests include taxation and public finance, with a special
focus on the analysis of administrative micro-level data.

Jie (Kitt) Ma is a Lecturer in Northumbria University, UK. He has a

broad research interest in operations and supply chain management,
with particular emphasis on lean implementation in the automotive
industry, and long-term sustainable improvements in industries such as
manufacturing and hospitality.

Erik Strøjer Madsen is an Associate Professor in the Department of

Economics and Business at the Aarhus University, Denmark. His research
interests include industrial economics, international economics and
development economics.

Claire Markham is a Lecturer and Research Assistant in the School of

Social and Political Sciences, University of Lincoln, UK. Her research
interests include rural studies, community development and engage-
ment, public house development and symbolic cultural literature.
Currently she is exploring the role of village services in sustaining rural
communities.

Ralph B. McLaughlin is an economist at the Zillow group, and conducts

research on housing market trends and real estate search patterns. He
holds a PhD in Planning, Policy, and Design from the University of
California at Irvine and is the former Director of the Certificate in Real
Estate Development program at San Jose State University. His research
 Notes on Contributors xvii

interests include housing economics, land use and housing policy, and
industrial geography.

Richard B. Nyuur is Senior Lecturer in Strategic Management and

International Business at the Newcastle Business School, Northumbria
University, UK. His research interests include foreign direct investment
(FDI), international business strategy, international human resource
management, ethics and corporate social responsibility.

Harald Oberhofer is Professor of Economics at the Vienna University

of Economics and Business, WU, Austria and a Senior Researcher at the
Austrian Institute of Economic Research (WIFO). His research interests
include empirical industrial organization, international economics and
applied econometrics. He also regularly serves as a short-term consultant
to international organizations such as the OECD and the World Bank.

Elena Piron holds a Master’s in Business Administration at the University

of Leuven and holds various degree titles achieved at several institutions
located in Denmark, Belgium and the United Kingdom. She is currently
an international management trainee for a large international tech-
nology company.

Szilárd Podruzsik is an Associate Professor in the Department of

Agricultural Economics and Rural Development, Corvinus University
of Budapest, Hungary. He holds a PhD in Agricultural Economics from
Budapest University of Economic Sciences and Public Administration.
His research interest focuses on the food and agricultural markets and
consumers.

Eline Poelmans is Assistant Professor of International Economics at the

Faculty of Economics and Business, Brussels campus of the University of
Leuven, Belgium. Her research interests include economic history, the
economics of food (with a focus on beer and chocolate), and interna-
tional economics.

David Preece is Professor Emeritus. He has worked at the universities of

Teesside, Portsmouth, Coventry, Bradford and Leeds. His research has
focused around the managerial, people, human resource management
and development issues associated with, and implications of, organiza-
tional and/or technological change. Specific projects include change and
restructuring in UK public house retailing, the education and develop-
ment of business executives, and talent management policies and prac-
tices. David is the author/editor of a number of books, book chapters
and journal papers, the former including Work, Change and Competition:
xviii Notes on Contributors

Managing for Bass (Routledge, 1999, co-authored with G. Steven and

V. Steven).

Neil Reid is Professor of Geography and Planning and Director of The

Jack Ford Urban Affairs Centre, University of Toledo, USA. He is an indus-
trial geographer and a regional scientist with interests in industrial loca-
tion and regional economic development. Part of his current research
agenda focuses on examining the spatial dimensions of the burgeoning
American craft-brewing industry. He also serves as Executive Director of
the North American Regional Science Council.

Luis Alfonso Rivera Mena is a PhD candidate in Regional Development

at the Universidad Michoacana de San Nicolás de Hidalgo (UMSNH),
Mexico. His research interests include income distributions in the pres-
ence of monopolies, tourism and local planning, and entrepreneurship
with particular emphasis on Mexican micro-brewers.

Pauline Sobiesuo is an MPhil graduate and teaching assistant in the

Department of Economics, Faculty of Social Sciences, at the Kwame
Nkrumah University of Science and Technology (KNUST), Ghana.
Her research interests span the broad areas of health economics and
development economics.

Martin Stack is Professor of Management at Rockhurst University, USA.

His articles have appeared in a number of scholarly journals, including
Business Horizons, Business History Review, Journal of Brewery History and
Journal of Economic Issues. He is currently involved in a research project
which investigates competing strategies and internationalization
processes in the beer markets.

Johan Swinnen is Professor of Economics and Director of the LICOS-

Centre for Institutions and Economic Performance at the KU Leuven,
Belgium. He is also a Senior Research Fellow at the Centre for European
Policy Studies (CEPS), a visiting scholar at the Centre for Food Security
and the Environment (FSE) at Stanford University, USA, and President
of the International Association of Agricultural Economists. He has
published widely on agricultural and food policies, political economy,
institutional reform, trade, global value chains and product standards.

Kevin Tennent is Lecturer in Management at The York Management

School at the University of York, UK. He teaches in the areas of interna-
tional management and strategy. His main research interests are in the
fields of management and business history, particularly in the areas of
international management and public management.
 Notes on Contributors xix

Katia Beatriz Villafán Vidales is a Research Professor at the Universidad

Michoacana de San Nicolás de Hidalgo (UMSNH), Mexico. She is also a
fellow of the Mexican National System of Researchers of the National
Council of Science and Technology (CONACYT). Her research inter-
ests include international trade, corporate social responsibility and
competitiveness.

Yanqing Wu is a Research Assistant in the Department of Economics

and Business at the Aarhus University, Denmark. She graduated from
the MSC program in International Economic Consulting, Aarhus
University.
Introduction and Overview
Ignazio Cabras, David Higgins, and David Preece

Beer is widely defined as the result of the brewing process, the outcome
of fermenting grains, which over time has been refined and improved
across the world. Together with wine, beer is the alcoholic beverage that
has experienced the most significant expansion in terms of historical
production, consumption and diffusion. Beer, however, presents more
versatile and flexible characteristics compared to wine, for which the
main ingredient – grape vines – requires a particular climate and subsoil
to grow productively. For this reason and others, beer has become the
drink of the masses, while wine has acquired the status of an elitist drink
in many societies, notwithstanding price convergence between the two
beverages, especially in recent times. As for spirits and liquors, the high
alcoholic content associated with these beverages makes any combina-
tion with food and meals a challenging task, although this may not hold
so true in some countries and regions, e.g. Russia and Eastern Europe.
The consumption of beer, on the other hand, most frequently tran-
scends consumers’ income, wealth, education or ethnic background –
look at customers in any pub, inn or bar in the world. But why is beer so
pervasive? What are the features of beer, bars and pubs that make them
so special?
The discovery and development of brewing represents one of the
most important technological achievements of humankind. A number
of authors (Braidwood et al., 1953; Katz and Voight, 1986; Katz and
Maytag, 1991; Joffe et al., 1998) even choose brewing as one of the main
factors which characterize the transition from hunting and gathering
societies to people living in more stable settlements. It was the appre-
ciation of the alcohol contained in beer and its associated intoxicating
effects, rather than the use of grain for other foodstuffs, that provided
a key incentive for the domestication of various types of plants and

1
2 Ignazio Cabras, David Higgins, and David Preece

animals, encouraging the emergence of agriculture (Damerow, 2012).

Rudimentary brewing technologies are thought to have made their first
appearance at the beginning of the Neolithic period, about 12,000 BC.
With the development of agriculture and more regular seeding and
harvesting cycles, it appears that brewing became a common process
for grain conservation and consumption (Damerow, 2012). This finds
corroboration in various parts of the world – in Europe as well in North
Africa and China (Nelson, 2005). In ancient times, however, there was
notable variation in the ingredients, processes and procedures used
to create beverages which resemble beer as we know it today across
the world.
The first evidence of fermented beverages was from the village of Jihau
in Northern China, where shards of pottery found during archaeological
excavation revealed traces of alcoholic liquid dated between 9,000 and
7,000 years ago (McGovern et al., 2004). Other evidence of sustained
beer brewing originates from ancient Mesopotamia, where archaeo-
logical fragments of potteries dating back to about 6,000 BC reveal the
presence of systematic brewing activities (Hardwick, 1994). This region
became the centre of Sumerian culture, with the development of large
cities and primordial forms of societal stratification. Proto-cuneiform
Sumerian texts dating from 3200 to 3000 BC document that “beer was
no longer simply an agricultural product of the rural settlements, but
rather belonged to the products subjected to the centralized economy
of Sumerian states” (Damerow, 2012, p.3). Beer, then, was a commer-
cialized product in early cities, subject to early forms of excise (firstly
introduced by King Hammurabi around 4000 BC), and with disjointed
patterns of production and consumption (Civil, 1964).
In Egypt, beer brewing became an established and common commer-
cial activity from 5000 BC, together with bread baking. As reported by
Brewer and Teeter (2007), wages were paid in grain which was used to
make two staples of the Egyptian diet: bread and beer. Egyptians made
a variety of beers of different strengths, and beer was sold in public
drinking places and exported to other ports using the main commercial
routes which started flourishing in the south Mediterranean Sea (Nelson,
2005). These routes may have first introduced and spread beer brewing
to the Greeks; evidence of sustained beer production and consumption
in ancient Greece dates back to 3600 BC Similarly, there is evidence of
sustained brewing activity in different locations across Europe dating
back to 3000 BC (Poelmans and Swinnen, 2011).
Beer brewing continued in Roman times, though wine supplanted
beer as the upper-class beverage in most of these areas. The Romans
 Introduction 3

soon started to despise beer and its drinkers, referring to the latter as
“uncivilised” or “barbarians” (Poelmans and Swinnen, 2011). With the
Roman conquest of Europe, the diffusion of wine spread over the conti-
nent. For hundreds of years, until the collapse of the Roman Empire,
wine continued to be considered a luxury item consumed only by the
“upper classes”; beer was mostly brewed and consumed by the “lower
classes.” However, beer brewing remained popular among the Germanic
and Celtic populations in the Northern and Western parts of Europe.
Evidence of sustained brewing activity is documented in the regions now
forming Germany, across the British Isles and in Scandinavia (Nelson,
2011). Widely diffused in these areas was mead, an alcoholic beverage
obtained by fermenting honey with water, sometimes with various
fruits, spices, grains or hops. Considered by many as a precursor of beer
in Northern Europe, mead continued to be brewed in Scandinavia until
the late Middle Ages.
The spread of the Holy Roman Empire from approximately AD 800
provided the impulse to build monasteries across Europe. While monas-
teries located in Southern Europe continued to grow grapes and produce
wine, many monasteries located in Northern Europe became centres
of brewing (Unger, 2004; Poelmans and Swinnen, 2011). The cooler
climate made it easier to grow barley rather than grapes, and from the
early Middle Ages there emerged “monastic brewing” which spread to
the British Isles, Germany, Scandinavia and the Low Countries (Unger,
2011). Monks brewed beer predominantly for their own consumption or
for guests and pilgrims. Later, in the thirteenth century, monks started to
supply beers to noblemen and to sell their brew in so-called “monastery
pubs,” with brewing slowly emerging as a commercial venture (Unger,
2004). In addition, as water in the Middle Ages was often polluted,
beer was healthier, giving a boost to its production and consumption
(Horsney, 2003).
The introduction of hops to the brewing process in Germanic monas-
teries represented an important innovation. Hops were used mostly
to preserve beer and to counterbalance the rather sweet flavour of the
malt, the predominant ingredient in Germanic beer (Behre, 1999). The
addition of hops to the brewing process eventually spread to other
parts of Europe, but rather slowly, due mainly to the taxes levied by
local authorities in many regions associated with its use (Poelmans and
Swinnen, 2011).
The discovery of America in 1492 and the associated voyages
of exploration, financially supported by several European crowns
between the fifteenth and eighteenth centuries helped develop
4 Ignazio Cabras, David Higgins, and David Preece

new commercial routes which benefited beer exports. Moreover, these

explorations provided evidence of brewing activities in cultures and
communities which were previously unknown. The chronicles of
explorers in South America mention the chicha, a beer brewed by the
Inca from maize which contained a slight amount of alcohol (1–3%).
Other evidence of beer brewing, although with different grains used as
ingredients, can be found in Central America, West and South Africa,
and Australasia (Nelson, 2011).
In the nineteenth century, technological innovations and develop-
ments, such as the introduction of refrigeration and the development
of pasteurization, dramatically changed beer brewing. By controlling
the brewing process, the environment, type of fermentation and yeast
culture, brewers were able to achieve a standardized product, which had
previously been impossible (Poelmans and Swinnen, 2011). In addi-
tion, the steam engine and the invention of the “chilled iron mould”
enhanced opportunities for mass production and consumption as well
as large-scale packaging and distribution. The development of transport
infrastructure accelerated the diffusion of beer. Improved packaging
and speedier transport improved the quantity and quality of distribu-
tion, enlarged markets and enhanced the importance of beer as a global
product (Gourvish and Wilson, 1994).
During the interwar period, beer production and consumption were
affected significantly. The war effort generated supply shortages for
brewers who had to cope with rising prices of grain together with a
general scarcity of raw materials. Many central governments passed laws
to limit the distribution and consumption of alcoholic drinks, which
encouraged brewers to diversify into alternative products, such as soft
drinks. Particularly in the United States, the rise of the “Temperance
Movement” and the introduction of Prohibition nearly wiped out
the entire brewing industry in the country, with surviving breweries
producing mostly alcohol-free beverages (Stack, 2009).
From post-World War II and until the early 1980s, the number of inde-
pendent brewing companies across the world decreased steadily, while
concentration in national markets resulted in the rise of major corpo-
rate players. Traditional brewhouses or brewpubs that brewed their own
beer (mostly in an on-site brewery or nearby their premises) disappeared
almost completely, either purchased by larger breweries or ceasing
activity. The effects of concentration in the market became significant
during the 1970s and 1980s. A number of global conglomerates emerged
following a series of mergers and acquisitions (M&A). In the US, the
continued expansion of Anheuser-Busch, Miller Brewing Company,
 Introduction 5

Coors Brewing Company and Pabst brought almost 75% of the US market
into the hands of these four companies in the early 1980s. In the UK,
the market was dominated by six large national brewers (see Preece, this
volume) which controlled the production and distribution of beer via
their “tied-estates.” In Europe, Heineken dominated the market together
with Guinness (later Diageo) and Carlsberg. By 1999, four global leaders
accounted for 60% of world beer production, with Anheuser-Busch
having a quarter (25%), Interbrew (13%), Heineken (12%) and AmBev
(later Inbev, 10%) in volume terms (Stone and McCall, 2004).
Consolidation continued after 2000, although more recently the
number of micro- and craft breweries has grown significantly; for
instance, the number of micro- and craft breweries in the UK was about
142 in 1980, while just over three decades later, in 2012, it had increased
to 1,113. Significant growth was registered in the US during the same
period, with the number of breweries rising from 92 to 2,751. Similar
trends occurred in many other European countries, such as Germany
and the Czech Republic, and even in traditional wine-drinking nations
such as Italy and Spain (Cabras and Bamforth, 2015; Bamforth and
Cabras, this volume).
There can be little doubt that brewers have figured prominently in
the development of branding and advertising. One of the UK’s leading
breweries, Bass, established in 1777, registered the first trademark under
the Trade Marks Act, 1875. Subsequently, the famous red triangle – an
integral feature of their mark – featured prominently in the company’s
sales promotions. Traditionally, most beer was brewed and consumed
within a limited geographical region. As rail networks expanded during
the nineteenth and early twentieth centuries, brewers recognized that
they could only expand the scale of their operations if they sought
to satisfy regional, national and international markets. Branding and
advertising were important components of the competitive strategy in
responding to growing market share because the established relation-
ship between local brewer and local consumer was weakened once beer
sales extended beyond the immediate vicinity (Wilkins, 1992).
Conversely, it is well established that brewers in many European coun-
tries, including the UK, resorted to tied estates in an effort to protect
their beer sales (see Deconinck and Swinnen, this volume). Tied houses
can be considered to have undermined the need for branding and adver-
tising; for example, prior to the Beer Orders in 1989, British brewers
had a monopoly on the sale of draught ales in their tied houses. In the
1970s, the “on-trade,” on average, accounted for approximately 90%
of beer sales (Spicer et al., 2012, p.262). Viewed from this perspective,
6 Ignazio Cabras, David Higgins, and David Preece

the brewing industry appears to contain a paradox: on the one hand,

the industry comprises brewers owning famous trademarks, but on the
other hand its vertically integrated structure – especially the dominance
of the tied estate – can be seen to have reduced the need to brand and
advertise.
From another perspective, other brewers owning famous brands –
Guinness and Newcastle Brown Ale, for example – did not own tied
estates. Moreover, although US competition policy forbade tied houses,
North America is equally famous for its own beer brands Budweiser,
Coors, and Miller. In the European context, Heineken, Stella Artois and
Kronenbourg entered commercial agreements which ensured that British
brewers sold these continental lagers. The same applied to the Australian
beer brands Fosters and Castlemaine. In other words, taken as a whole,
the global brewing industry does not permit any simple generalizations
about branding, advertising and market structure. The rapid growth of
micro-brewers has generated a comparable growth in brands, but these
brewers have marketing budgets that are infinitesimally small compared
to those of the global brewing giants.
A clue to resolving this paradox may be that the emergence of global
brewing giants, multinational in scale and scope, has altered the compet-
itive mix: less reliance is placed on plant-level scale economies, but
more attention is devoted to advertising global brands (see Madsen and
Wu, this volume). The traditional affinity between beer drinkers and
the geographical location of particular brewers (which helps determine
the characteristics of beer) has been weakened by the growth of global
brands which are ubiquitous, but which do not indicate trade origin.
For example, many global beer brands are produced “under licence” in
different countries. There are indications, though, that greater efforts are
being made to re-establish or strengthen the link between beer brands
and geographical location. Perhaps the best-known examples of this
trend are the European Union PDO (Protected Designation of Origin)
and PGI (Protected Geographical Indication) schemes, which specify the
minimum requirements linking a product to its geographical location
(using similar principles to those governing the relationship between
terroir and wine). These indicia were introduced in 1992, and include
Shepherd Neame’s Kentish Ale and Kentish Strong Ale, and Budweiser
Budvar (beer of Budweis).
Notwithstanding the importance of economic, technical and contex-
tual issues affecting beer production and markets, it is equally important
to appreciate beer distribution and consumption. Since beer is brewed
to be consumed, the “demand” side of the equation deserves careful
 Introduction 7

consideration. After all, we would not have breweries and pubs if people
were not drinking beer! There are a variety of locations where beer has
been and is consumed, including private houses, inns, alehouses, public
houses, membership clubs, restaurants, aircraft, ships and parks. These
beer-drinking venues have changed over time in particular countries and
have varied within countries. For example, in the UK, beer was originally
brewed and consumed within the home. Subsequently, certain “home
brews” gained a reputation in a local area and attracted visitors to the
“brewhouse,” resulting in signs being placed over the threshold. Inns,
taverns and alehouses followed in time (see Preece, this volume), and it
was only in the late seventeenth century that the phrase “public house”
(pub being a shortened version) came into more general use (probably
a contraction from “public alehouse”). There is a considerable overlap
of terms, and today it is sometimes difficult, if not impossible, to decide
whether a given establishment is a pub, restaurant or inn. Indeed, it is
the case that many UK pubs have survived by turning themselves into de
facto restaurants (with a bar at which one may or may not be able to sit
or stand). In recent years “micro-pubs” and “mobile pubs” have emerged
(see Markham and Bosworth, this volume). The venues in which beer is
consumed vary across different countries and have a different “feel” or
atmosphere to UK pubs. Consider the beer halls and beer gardens in
Germany, bars in the Australian bush, cafes in South America, drinking
dens in Africa (see Nyuur and Sobiesuo, this volume). As Jennings (2007,
p.15) observed: “Charting the history of the pub [then] is a complex
task. It is an institution which has always been evolving.”
Licensing and legislation regimes governing drinking establishments
have also varied over time and across countries (Jennings, 2007; Unger,
2011), with, currently for example, stricter arrangements operating
in Sweden and Norway and certain states of Australia (Queensland).
In the UK, while the hours of permitted opening have been extended in
recent years, at the same time stricter regulations have been applied to
the running of pubs and the appointment of publicans. The publican
can be the owner of the pub (a “freehouse” in UK terms), a manager,
a tenant or lessee (see Deconinck and Swinnen, this volume). Public
houses take a variety of forms, such as “community pubs,” “destina-
tion pubs” (e.g. with a garden, equipment and food for families), “real
ale boozers,” “sports” pubs and “rural pubs”. A pub is a “third place”
(Oldenburg, 1999), and

is more than just a shop that sells beer; it’s a social venue. You feel
you have a little more ownership of the space, more of a right to be
8 Ignazio Cabras, David Higgins, and David Preece

there, than you do in any other commercial establishment. The pub

is comfortable, like home, and gives you a sense of security. And yet
it’s public as well. You can regularly spend time there with people
whose company you quite enjoy over a few beers, but whom you
would never dream of letting into your own house. There is a sense of
freedom and excitement, and you don’t worry about whether you’re
making a mess as much as you would at home. (Brown, 2004, p.57)

This book addresses and develops the many diverse aspects associated
with brewing, beer and pubs. Some of the chapters included in this book
were first presented to the third Beeronomics Conference, The Economics
of Beer and Brewing, held at the University of York (United Kingdom) in
September 2013. The conference featured a wide range of contributions,
covering such contemporary matters as international approaches to
brewing, diversification in beer supply chains and distribution, different
taxation regimes, public house retailing and restructuring, and several
other themes related to beer and brewing.
The opening chapter, by Charles Bamforth and Ignazio Cabras,
discusses and illustrates the historical evolution of brewing, focusing
on changes in brewing processes and techniques, consumer behaviour
and educational issues. The authors provide a global overview of the
different actors operating in the modern brewing industry and empha-
size the dichotomy which currently exists between large multinational
companies and small craft breweries.
The first part of the book focuses on globalization, marketing, trade
and globalization related to the beer industry. Erik Madsen and Yanqing
Wu analyse the globalization process which changed the structure of
the world beer industry at the turn of the current century. The chapter
places particular emphasis on high transportation costs and economies
of scale in advertising and sales as the main determinants of global
M&A. Similarly, Martin Stack, Myles Gartland and Tim Keane investi-
gate the globalization of the brewing industry, exploring how efforts to
internationalize the beer market needed to overcome deep cultural asso-
ciations regarding the product, the producer and the consumer. Because
many beer brands never crossed national borders, the authors argue
that beer, more so than many other products, has become intertwined
with notions of national identity and pride. Their analysis, based on
a path-dependency model and consumers’ behavioural lock-in, helps
us to understand how, why and with what results the beer market
has consolidated globally over the past 20 years. The intra-industry
beer trade in Europe is explored by Imre Ferto and Szilárd Podruzsik
 Introduction 9

(such trade has become a widespread phenomenon in international

trade). A wide selection of beers, domestic and non-EU, are available
to consumers within the EU, and the chapter explains how intra-EU
trade has developed. Beer excise duty has had a significant influence
on market concentration. Simon Loretz and Harald Oberhofer show
that this is not a new phenomenon, but is among the oldest sources
of governmental revenue. Although other forms of taxation, such as
income and consumption taxes, have significantly reduced the need to
raise revenues via beer excise, the latter remain relatively high, due in
part to health concerns.
The second part of the book explores the global beer and brewing
industry by discussing issues related to economic growth and develop-
ment within regional beer markets. In their chapter Chi Keung Lau,
Zhibin Lin, David Boansi and Jie Ma assess the degree of market integra-
tion in the Chinese beer and wine markets using unit-root tests. Richard
Nyuur and Pauline Sobiesuo examine the development of the brewing
industry in Africa. With sustained economic growth across the conti-
nent, a constantly expanding population, increasing purchasing power
and disposable incomes, the African beer market is substantial, though
still largely untapped, and multinational brewing companies and local
breweries are increasing their efforts to expand their operations in this
region. The next chapter, by Luis Rivera Mena, Katia Villafán Vidales
and José García García, provides a comprehensive overview of the
South American beer industry. The authors illustrate the importance
of this region to the global beer industry by investigating how large
multinational companies acquired regional and national breweries and
how this affected market concentration. Moving northwards, Michael
Moore, Neil Reid and Ralph McLaughlin examine the rapid growth of
the North American craft beer industry. Using regression models, the
authors explain inter-metropolitan differences in the location of these
brewers across the US. Eline Poelmans and Elena Piron discuss why beer
became the most important alcoholic drink worldwide, both in volume
and value, between 1960 and 2007. They place particular weight on the
rationalization of the global beer market, the decline in the share of
alcohol to total consumer expenditure, and the patterns of off-trade and
on-trade sales.
Finally, the third part of this book focuses on those outlets where
beer is served, commonly referred to as pubs, which provide consumers
with both a physical space and a social environment in which to drink
their beverages. Jo Swinnen and Koen Deconinck focus on exclusivity
contracts and tied houses, which are common in several countries.
10 Ignazio Cabras, David Higgins, and David Preece

The authors identify credit constraints, moral hazard and risk aver-
sion as the main factors which explain why beer prices are higher in
tied houses compared to free houses. David Preece examines the key
changes and developments which have occurred in UK public house
retailing in recent years, the implications of these changes, and how
pub companies, publicans and consumer associations and pressure
groups have responded. The social role of pubs and their significance
for local communities are investigated by Claire Markham and Gary
Bosworth, and by Ignazio Cabras, in their respective chapters. Markham
and Bosworth focus on the “village pub,” a key institution for many
rural communities in Britain and a place which enables and facilitates
many communal and social initiatives at the local level. Cabras explores
the importance of pubs to community cohesion and economic develop-
ment in rural areas of the Republic of Ireland. The last chapter, by Alex
Gillett, Kevin Tennent and Fred Hutchinson, addresses the famous – or
infamous – association between beer and football. The authors present
a case study of Middlesbrough Football and Athletic Company Limited
(MFAC) to illustrate the relationships that developed and changed over
time between MFAC and Camerons and Scottish & Newcastle breweries
in the Northeast of England.

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Behre, K. 1999. The history of beer additives in Europe – a review. Vegetarian
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Brewer, D. and Teeter, E. 2007. Egypt and the Egyptians. Cambridge: Cambridge
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Brown, P., 2004. Man Walks into a Pub: A Sociable History of Beer. Basingstoke and
Oxford: Palgrave Macmillan
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tion and changing marketing: the evolution of micro-brewing in UK and US
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Cambridge: Cambridge University Press, 253–261
Hardwick, W. 1994. Handbook of Brewing New York: Marcel Dekker
Hornsey, I., 2013. A History of Beer and Brewing. London: Royal Society of
Chemistry
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Jennings, P. 2007. The Local: A History of the English Pub. Stroud: Tempus
Joffe, A. 1998. Alcohol and social complexity in ancient Western Asia. Current
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London: Routledge
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Oldenburg, R. 1999. The Great Good Place: Cafes, Coffee Shops, Bookstores,
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Marlowe & Co.
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(ed.), The Economics of Beer. New York: Oxford University Press, 3–28
Spicer, J., Thurman, C., Walters, J., and Ward, S. 2012. Intervention in the Modern
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Unger, R. 2004. Beer in the Middle Ages and the Renaissance. Philadelphia: University
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Part I
Globalization, Marketing and
Trade in the Brewing Industry
1
Interesting Times:
Changes for Brewing
Charles W. Bamforth and Ignazio Cabras

1 Introduction

“May you live in interesting times” may have no authentic Chinese

heritage, despite it being referred to as the Chinese Curse. Nonetheless
it is a very apposite descriptor of the current state of the world’s brewing
industry. At one extreme we have the mergers of major brewing concerns
to become truly global operators, led by Anheuser-Busch InBev and
SAB-Miller. At the other pole there is a multiplicity of small brewing
companies springing up, almost daily in some countries, rejoicing in the
umbrella terms “craft” or micro-breweries.
Brewers of all scales would justifiably refer to themselves as “crafts
persons,” but the term craft is not easily defined. A recent attempt in
the United States1 (US hereafter) would have it that such a brewer is
“small.” For the Brewers Association, this represents less than 6 million
US barrels (7.15 million hectolitres) – only a little less than the entire
volume brewed per annum in Ireland. Such definitions appear to be
arbitrary and politically driven.2 What cannot be denied is, while the
craft sector in many countries is the only component of the brewing
industry wherein volumes are growing, the volumes of some long-
standing brands from the large companies is in decline. These trends
focus our attention not only on the nature of volume change in the
world’s beer markets but also on the factors that are impacting the beer
business.
This chapter’s main objective is to ignite a fruitful debate about the
current state of the beer and brewing industry worldwide. By developing
their argument from an economic perspective, the authors examine
multiple issues related to consumption, perception, taxation, apprecia-
tion and education towards beer. Data and information are explored

15
16 Charles W. Bamforth and Ignazio Cabras

in the light of possible future developments at a global level, with

outcomes evaluated in relation to the type of contribution that different
stakeholders operating in the beer industry may provide.

2 Beer volumes

Table 1.1 reports data gathered from the British Beer and Pub Association
(BBPA, 2014) that describe levels of production in different countries.
Whereas there is remarkable growth in the volume of beer being sold
in counties such as China, Brazil and South Africa, the traditional beer
markets, such as the United Kingdom (UK hereafter), Germany, Belgium,
the Netherlands, Czech Republic, Ireland and Denmark, are in sharp
decline. Interestingly, most countries reporting a downturn in beer
consumption witness healthy growth in the sales of wine, although the
opposite trend exists in a few counties, e.g. Spain, where beer is gaining
the ascendancy over wine.
The data, however, disguises a shift in the dynamic within the
brewing sectors of some nations. For instance, in the US and the UK,
where beer sales are in overall decline, there is a healthy upturn in
beers belonging to the so-called craft or micro-brewing sectors (Brewers
Association, 2014; BBPA, 2014; SIBA, 2014). This positive trend in both
countries has occurred in the past 30 years. As shown by Figure 1.1, the
number of breweries in the UK was about 142 in 1980, increasing to
1,113 in 2012 (BBPA, 2014). An even larger growth was registered in the
US within the same period, with the number of breweries passing from
92 to 2,751, although this figure comprises both craft/micro-breweries
and brewpubs (1,149 and 1,155 respectively) alongside larger brewers
(Brewers Association, 2014). Notwithstanding the space left to new
entrants by the high concentration processes in the brewing industry,
several other factors which deserve some consideration contributed to
reviving micro-brewing in the two countries.
In the UK the growth occurred in three waves. The first wave, arriving
between the late 1970s and mid-1980s, was mainly due to a general dissat-
isfaction about the decline in the variety of beers available to customers,
which led to the creation of the Campaign for Real Ale (CAMRA), a
movement of beer lovers who lobbied for the revival of “real-ale,” viz.
cask-conditioned ales brewed by traditional methods. CAMRA activities
and campaigns increased awareness of traditional ales, creating a poten-
tial customer base for new breweries representing an alternative to mass
producers (Mason and McNally, 1997). The second wave, which arrived in
the early 1990s, was mainly characterized by the entrance to the industry
 Interesting Times: Changes for Brewing 17

of new founders with little or no previous connection with breweries

or brewing, such as retirees or beer lovers in search of a career change
(Knowles and Egan, 2002). Two factors characterize this period: the rapid
increase in the number of new businesses brought the development of
specialized real-ale producers which enabled many new breweries to start
with more efficient and more cost-effective brewing equipment (Mason
and McNally, 1997), and the introduction of the Beer Orders in 1989
which forced the larger brewers to either sell or free a large number of
their pubs from the tie (Preece et al., 1999; see also Preece, this volume).
The latter enabled the formation of large retailing companies or “pubcos”
purchasing the majority of pubs and selecting a very limited range of brew-
eries as their suppliers, creating fewer opportunities for new breweries to
expand their supply network (Pratten, 2007; see also Preece, this volume).
The third and most recent wave arrived early in the 2000s which saw a
further and sharper increase in the number of micro-breweries, fuelled
by cheaper and easier-to-install equipment (Mason and McNally, 1997;
Wyld et al., 2010), and by the introduction of the Progressive Beer Duty
(PBD) to support smaller brewers, granting these businesses a lower tax
levy than large brewers. The PBD boosted the growth of micro-brewing
throughout the country, shaping the size of new businesses which tended
to keep their production volumes low in order to take advantage of the tax
break. Moreover, the most recent financial crisis hit large pubcos severely,
forcing them to put large parts of their estates on the market and creating
more opportunities for small breweries to acquire their own pubs (Preece,
2008; Andrews and Turner, 2012).
In the US just 20 micro-breweries were operative in 1972, located
predominantly in the Northeast and Midwest areas (Flack, 1997). However,
in the late 1970s changes in government regulations, cuts in federal taxes
for smaller breweries, and the introduction of discounted excise rates for
brewers selling less than two million barrels per year, all had a significant
effect on the costs of small producers (Tremblay and Tremblay, 2005). In
1979, the Cranston Act legalized home-brewing for the first time since
before Prohibition; the Act opened the market to many home-brewers and
created a sharp upsurge in the number of breweries in the second part of
the 1980s, which grew from 37 in 1985 to 192 in 1994, doubling to 405 in
2000 (Tremblay and Tremblay, 2005; Brewers Association, 2014).
Between the 1980s and 1990s, a growing number of US micro-brewers
started to contract their production to larger breweries. By doing so, smaller
brewers avoided building or enlarging new facilities, while large brewers
could reduce their excess capacity (Tremblay and Tremblay, 2005; see also
chapter by Moore et al., this volume). In the 2000s, micro-breweries and
18 Charles W. Bamforth and Ignazio Cabras

brewpubs continued to rise in number, but some of the older breweries

consolidated their presence in the market by enlarging their brewing facil-
ities and acquiring new plants to increase their capacity. The Boston Beer
Company, for example, developed from serving a specific regional market
to expanding its production into other states through a series of acquisi-
tions and mergers, becoming a major national brewing company while
exporting to different markets worldwide.
The growth of micro-breweries and craft beers in the US and UK was
rapid, with fostered trajectories mainly characterized by changes in
tastes and legislation that altered the structure of the beer markets at
different stages since the late 1970s. However, a similar growth has been
registered in other countries in recent times, although with sharper and
more rapid trajectories. In the Czech Republic the number of micro-
and small breweries almost trebled from about 80 to more than 220
between 2003 and 2012 (Balach, 2013). Interestingly, this sharp growth
has also been observed in non-traditional beer-drinking countries, such
as Italy and Spain, where micro- and craft breweries grew from a few
dozen breweries operating in their markets to 650 and 430 respectively
in 2014 (Garavaglia and Pezzoni, 2013).

Table 1.1 Alcoholic drinks consumption, per capita, 2012

Country Beer Wine Spirits

Belgium 74.0 (−25.0) 26.7 (+23.0) –

Brazil 67.2 (+35.1) – 2.0
China 32.8 (+85.3) 1.3 3.1 (+93.8)
Czech Republic 148.0 (−6.9) 18.5 (+15.6) 2.3 (−32.3)
Denmark 64.0 (−37.4) 29.3 (−5.2) –
France 31.0 (−14.4) 46.1 (−17.7) 2.1 (−12.5)
Germany 107.6 (−14.3) 25.6 (+10.8) 2.1 (+10.5)
Ireland 86.0 (−32.8) 15.9 (+43.2) 1.8 (−18.2)
Japan 43.1 (−22.9) 1.9 (−13.6) 3.6 (+16.1)
Mexico 53.6 (+5.1) – –
Netherlands 72.0 (−13.0) 23.5 (+25) –
Russia 68.8 (+81.5) 6.6 (+32) 5.6 (−13.8)
South Africa 60.3 (+12.1) – –
Spain 75.1 (+4.3) 20.4 (−37.0) 1.7 (−5.0)
United Kingdom 67.4 (−23.8) 20.8 (+20.9) 1.7 (+6.3)
United States of America 77.4 (−6.1) 9.7 (+35.6) 2.3 (+15)

Source: Statistical Handbook, British Beer and Pub Association, London, 2014. Values in
brackets indicate growth or decline since 2000. Values are given as litres or, for spirits, as
litres of pure alcohol.
 Interesting Times: Changes for Brewing 19

3000

2500

2000

1500

1000

500

0
80

85

90

95

00

01

02

03

04

05

06

07

08

09

10

11

12
19

19

19

19

20

20

20

20

20

20

20

20

20

20

20

20

20
[Link] UK [Link] US
Micros US Brewpubs US

Figure 1.1 Number of breweries in the US and UK

Source: Cabras and Bamforth, 2015.

3 Drivers of beer consumption

The rise of micro-craft breweries in the US and UK, as well as in other

countries, helped to diversify the beer market, expand the variety of
beer styles and widened customer choice. However, it also generated
the belief among consumers that, simply by turning to the products
of smaller artisanal companies, especially from a nearby location,
they were buying beers categorized by higher standards (Wells, 2004).
In this way, too, wine is perceived as being “closer to the land” with
the same perceived cachet of individual superiority (Bamforth, 2008).
In contrast, the interpretation of the (often) blander beers of the
larger brewing companies is that they are industrial, mass-produced,
uninterestingly uniform and made from cheaper raw materials in
inferior ways.
The reality may be very different: many craft brewers still have much
to learn from the larger breweries regarding process control and quality
delivery. The technical brewing staffs of all brewers retain a brotherhood
and sisterhood, sharing the same goals and challenges, meeting regularly
and exchanging dialogue on pertinent issues within organizations such
as the Institute of Brewing and Distilling, the Master Brewers Association
20 Charles W. Bamforth and Ignazio Cabras

of the Americas and the American Society of Brewing Chemists. It is

really in the sales and marketing arena where battles are fought and
goodwill is at a premium.
Irrespective of the scale on which beer is brewed, there are a range
of drivers that impact the beer market. Wright et al. (2008a, b) demon-
strated that customers are influenced first and foremost by the taste of
the product. It is acknowledged that the perceived flavour is heavily
impacted by parameters such as the package and the appearance of the
liquid such as foam, colour, clarity (see Bamforth, 2000; Bamforth et al.,
1988 Clark and Bamforth, 2007). Therefore, the achievement of consist-
ency in product delivery should be a major priority for all brewers. In
addition, Wright et al. (2008a, b) place consumers’ segment/background
and the provenance of beers (including whether the brewery is within
spatial proximity) respectively in second and third place with regard to
purchasing likelihood. Other factors that may have a significant role in
the selection process, such as price and alcohol content, are not consid-
ered as important by the authors.
Equally striking is how consumers appear to be swayed least by issues
involving the impact of beer on health. Although there is burgeoning
evidence that beer is a healthier product than wine (Bamforth, 2004;
Preedy, 2008), it seems that consumers are less inclined to consider the
impact of beer on the body, but view it hedonistically or from a certain
perspective. In the collective imagination beer is associated with fishing
and mowing the lawn, and wine for culinary events.
Nevertheless, interest in beer as part of the dining experience is
growing, and indeed it can be fairly claimed that perhaps there are
even more food–beer pairing opportunities than exist for food and wine
(Oliver, 2005). To take one example, the enormous respective diversities
of cheeses and of beers surely allow for a greater chance of an “ideal”
partnership than could possibly exist for the much more limited variety
of wines (Fletcher, 2013).
The burgeoning number of breweries in many countries, with the
UK and the US being notable examples of growth in diversity, means
that there are ever-increasing purchasing opportunities for the customer
in terms of brewing company and beer range. Customers are likely to
become increasingly knowledgeable in their understanding of beer and
there are already websites dedicated to the rating of beers (for example
[Link] and [Link]). While there will natu-
rally be biases and prejudices when it comes to judging beer (e.g. the
inherent suspicion of beers produced overtly or less transparently by
the major global players) there is a growing tendency for customers to
 Interesting Times: Changes for Brewing 21

compare and contrast brews. Those products that are perceived to fall
short of preconceived ideals, including in terms of consistency, will not
survive.

4 Extremes in brewing

There is a seemingly unceasing search for newer and newer beer styles with
flavours and ingredients hitherto unexplored. These include developments
out of long-standing themes – perhaps “hybrids” in respect of marrying
characteristics from different beer types, such as the roast character of a stout
melded with the hoppiness of an India Pale Ale to yield Black IPA. Other
innovations are actually a take on historic brews, such as pumpkin ales in
the US. However, how closely latter-day products deliver the characteristics
of their predecessors is questionable. In the case of the first pumpkin ales,
for example, the pumpkin was primarily a source of fermentable carbohy-
drate as a substitute for malted barley that was either unavailable or at best
in short supply (Smith, 1998). Nowadays pumpkin ales are defined by their
aroma characteristics which in fact usually owe more to the spices associ-
ated with pumpkin pie rather than with pumpkin per se.
Some brewers seek to explore the outer limits, for example beers
incorporating Rocky Mountain Oysters3 and beers of ludicrous alcohol
contents presented in bizarre secondary packaging media such as stuffed
animals (see the case of Brewdog provided by Smith et al., 2010). Such
products derive from an urge of brewers to establish a point of differ-
ence from the perceived mainstream, to go beyond norms, almost to
offer shock value. This should be contrasted with historic driving forces
for the development of beer styles, which was more on a basis of what
materials were available and how these materials could be processed in
order to produce a palatable beverage. Harbster4 refers to ingredients
such as persimmon, molasses and Indian corn as sources of fermentable
carbohydrate and to spruce, ivy and ginger as flavourings.
While the price of a beer was not the main determinant of a purchas-
er’s decision making process (Wright et al., 2008a, b), production costs
remain an important factor for the brewer per se and will have a profound
effect on their operational decision-making. The relative contribution of
different factors to the cost dynamic differs greatly among companies
depending on their volume output. For a larger company, the cost of
packaging (especially cans and bottles) and the cost of production gener-
ally (meaning primarily the cost of labour) are major elements. There is
huge spending on sales and marketing and on taxation. On a major
brewer scale, then, the cost of raw materials is proportionately low.
22 Charles W. Bamforth and Ignazio Cabras

Of much more concern in this category (but equally for all brewers)
is the ongoing availability of those raw materials. In the US there are
painful memories of a recent crisis in the hop market.5 The beer industry
is by far the major consumer of hops, meaning that brewers have to a
large extent been able to dictate hop prices. However, the decision of
some growers to step away from the hop business coupled with a major
fire in Yakima (Washington State) in 2006 that destroyed a substantial
quantity of hops made for a shortfall in availability. Those brewers who
were “forward contracted” on hops were able to weather the storm,
although even some major brewing companies were in a position where
they traded for hops on a short-term basis and as a result encountered
challenges in satisfying their demand.
There are concerns at a global level about the future supply of good-
quality malting barley, with the 2014 barley harvest illustrating the
sensitivity of the crop to the vagaries of climate. High rainfall in North
America led to pre-harvest sprouting of grain (premature germination of
grain while still in the field), which jeopardizes the ability of the grain
to malt properly after harvest. As a consequence there has been a serious
shortfall in the availability of malt with attendant increases in the
price of grain and beer (Maverick, 2014). Even if climatic calamity had
not occurred, there is a growing reluctance of farmers to grow malting
barley, as prices for other crops are increasingly higher (United States
Department of Agriculture, 2014) and they present less risk of rejection,
which can happen when barley does not meet a myriad of criteria placed
upon it by maltsters and brewers.
For the smaller brewing companies, raw material expenditure becomes
proportionately larger, while expenditure on packaging, people, and
sales and marketing is much less than in the larger concerns. There are
also tax breaks for smaller brewing companies. In the US, the federal
tax on beer is $18 per US barrel (1.17 hectoliters), but production up to
60,000 barrels incurs $7 per barrel, but only for those companies that
cumulatively produce less than 2 million barrels (Alcohol and Tobacco
Trade Bureau, 2014). In the UK there is a Small Breweries Relief Scheme
for those producing less than 60,000 hectolitres of beer (about 51,130
US barrels; HM Revenues and Custom, 2015).

5 Issues regarding taxation and environment

Notwithstanding such incentives for smaller concerns, all brewers are

confronted by the issue of duty and this can vary enormously. It is
remarkable how in the European Union alone there is such divergence
 Interesting Times: Changes for Brewing 23

in the tax levied on alcoholic beverages (Table 1.2). Recent modest cuts
in the taxation of beer in the UK are projected to lead to enhanced sales,
although there is clearly a serious penalty on the drinker as compared
to the rate of taxation in most other countries. Arguments are invari-
ably made that relatively high taxation is an impediment to alcohol
abuse, yet it has been argued that elevating taxation does not reduce
excessive consumption of alcohol, drunk driving or consumption of
alcohol by underage persons, but rather constitutes an unfair burden
on consumers. Even in the US, where taxation on beer is rather more
modest as compared to the UK, it has been argued that the summa-
tion of all taxes on the product throughout production, distribution and
retailing amounts to more than 40% of the retail price, with a tax cull
nearly 70% higher than for the average purchase made in the nation
(Beer Institute, 2014).
Tax can be a major driving force in new product development. In
the US the possible alternatives (such as alcopops) are produced by
making a bland beer, decolourizing it and adding flavour additives
such as lemon or watermelon for the simple reason that they are
then taxed as beers rather than at the spirit rate, which would apply
if they were made from a spirit base. In Japan, tax laws that dictate
a much lower levy on products containing less than 25% malted
barley (Happoshu) or 0% malted barley (Third Category) have made
for a dramatic shift away from “traditional” beers to much cheaper
alternatives (Priest and Stewart, 2006). Another glaring example of
the impact of tax on the beer market is Russia, where beer shifted in
January 2013 from being treated by the authorities as a soft drink to
being considered as a product closer to wine and spirits, and taxed
likewise (Deconinck and Swinnen, 2009). As a consequence, the last
two years have seen a marked downturn in the sales of beer with
attendant brewery closures.
Ironically, one driving force that would make it logical to make beers
through an alternative paradigm of adding flavour and appearance
enhancers to a bland alcoholic base (Heymann et al., 2010) is environ-
mentally friendly. The carbon footprint for such ersatz products is far
less than for beer made by conventional methods (Russell et al., 2008).
Although no brewer (to the authors’ knowledge) is realistically consid-
ering such a futuristic approach, there are many producers addressing
environmental concerns, with particular emphasis on reducing water
and energy consumption (United Nations, 1996; Galitsky et al., 2003;
Bamforth, 2009). At least one brewer has published the carbon footprint
for their beer6 and another is publishing the carbon footprint for all of
24 Charles W. Bamforth and Ignazio Cabras

their production on the beer label (McCurry, 2008). It seems that good
citizenship is being turned into a marketing strategy.
The production of beer is extremely demanding in terms of unit proc-
esses occurring within the production facility, but no less so in the culti-
vation and processing of raw materials at one end and in the distribution
and retail of the beer at the other. Substantially more water is used in
the malting of barley than in brewing with the resultant malt, histori-
cally around four thousand litres per tonne of grain. In the growing of
barley, usage of water might typically be some one million litres per
hectare. Taking a figure of six tonnes yield per hectare, then the water
usage for growing barley is clearly some 40 times greater than that used
in the malting process. This should be compared with the use of water
in a brewery, with the current global best standard being around three
litres of water per litre of beer. Taking a relatively strong beer of, say, 6%
alcohol by volume, signifies that five litres of beer would come from
about one kilogram of malt. Hops, too, as well as adjunct materials
such as corn, rice, wheat, sugar cane and beet, can also be analysed in
a comparable way.

Table 1.2 Rates of excise duty and value-added tax in the European Union

Wine Spirits
Beer (pence (pence per (pounds per
per pint 75cl bottle at 70 cl bottle at
Country at 5% abv) 12% abv) 40% abv) VAT %

Austria 10.8 0 2.22 20.0

Belgium 10.0 33.9 4.71 21.0
Denmark 16.9 87.9 4.47 25.0
Finland 72.3 201.8 10.12 24.0
France 16.5 2.2 3.82 20.0
Germany 4.3 0 2.90 19.0
Greece 14.1 0 9.5 23.0
Ireland 50.8 252.9 9.46 23.0
Italy 14.6 0 2.05 22.0
Netherlands 17.1 52.6 3.75 21.0
Portugal 8.5 0 2.78 23.0
Spain 4.5 0 2.03 21.0
Sweden 43.1 147.7 12.09 25.0
UK 53.2 205.0 7.90 20.0

Source: Statistical Handbook, British Beer and Pub Association, London 2014. Data is quoted
in Pounds Sterling with exchange rates as at July 2014.
 Interesting Times: Changes for Brewing 25

6 Shouting it out!

From recent experiences it appears that brewers have much to do to

wrestle the moral high ground from vintners (Cabras and Bamforth,
2015). However, the brewing industry either directly or indirectly
projects messages at variance with beer as a responsible part of a well-
balanced lifestyle. Consider, for example, the extreme beers referred to
earlier such as the ones containing animal parts or indeed inserted into
animals.7
For instance, in the US there has been an undesirable tendency of
one mega-brewing company to market their products by rubbishing
those of the other major player (see, for instance, the Miller campaign
against Budweiser with the “I Can’t Taste my Beer” punchline broad-
cast on US TV channels). Who is the customer to trust? Equally, what
is the customer to take from the campaign of those who would have it
that the products of the major players are “yellow fizzy liquid”? These
trends of marketing beers are very different from what happens in the
wine industry, where no producer would dare to market and advertise its
wines by “rubbishing” those supplied by competitors.
In the UK, major supermarket chains use their power to force ever
lower wholesale prices on brewers, with the resultant canned beer being
sold as loss-leaders situated at the entry to the store.8 This type of behav-
iour has meant that significant amounts of this beer is purchased by
younger consumers in order to “prime the pump” or “pre-load” at home
prior to a night of increasingly loud and alcohol-fuelled (probably not
beer) behaviour in city centres. The consequences are devastating in
terms of shaping drinking attitudes and patterns of consumption, with
two major impacts recognisable on both market and society.
First, regardless of the plethora of new craft breweries producing tradi-
tional ales, there has long been a shift towards (ever colder) lagers in the
pub sector. Second, the increase of pre-loading and drinking at home,
driven by more affordable prices in the off-trade market and other factors
(e.g. lack of valid transport alternatives in remote areas), represent
worrying trends which pose considerable threats in terms of health and
well-being, e.g. individuals and families experiencing alcohol-related
issues which remain mostly unreported; symptoms of depression and
self-isolation becoming progressively more difficult to identify – even in
the smallest communities – due to reduced opportunities for socializa-
tion and engagement (Mount and Cabras, 2015).
Aside from these issues, there are other aspects that influence how
beer is perceived by consumers. For instance, too often beer features as
26 Charles W. Bamforth and Ignazio Cabras

a focus of unreasoned behaviour (as in the case of beer pong, a drinking

game in which players throw a ping-pong ball across a table with the
intent of landing the ball in a cup of beer on the other end) rather
than as an interesting, wholesome and inherently pleasurable fluid to
be consumed as part of reasoned behaviour such as a dining experi-
ence, simple relaxation or conversation (Bamforth, 2010). Part of the
problem, especially in the US, is the way beer is presented in advertising
campaigns. Very often beer is marketed with clear messages of fun and
raucous fulfilment as opposed to inherent satisfaction from the product
per se. Advertisements that claim beer is good for you when consumed
in moderation are at variance with such a portrayal of the values of the
beverage.

7 Recovering the high ground: the role of education

In light of the analysis presented in the previous sections, the interpreta-

tion and perception of beer varies significantly with regard to different
contexts and issues related to both markets and societies. In the majority
of cases, beer may not inspire the same type of appreciation and feelings
in relation to average quality standards that other types of alcoholic
drinks, wine and whiskies in particular, do. In such a context, the role
of education in addressing different stakeholders appears to be crucial
to restore beer to a position of prominence in several areas. There are
a number of points related to beer and brewing which, in our view,
deserve urgent consideration.
First, some of the issues discussed in this chapter are directly or indi-
rectly related to the education of brewers. Today, a significant number
of brewers, mostly operating in the craft and micro-brewing sector, have
little or no formal training, and enter the market without the neces-
sary knowledge to increase their chances of survival in the market, irre-
spective of the quality of their beer. It is certainly possible for talented
individuals to develop world-class operations with no formal creden-
tials.9 However, the achievement of a product with consistent character
demands a thorough understanding of the complexities of malting and
brewing allied to genuine practical experience gained “on the job.”
There is an ever-burgeoning number of universities and colleges seeking
to train brewers, to join long-standing and successful programs such
as those offered at Heriot-Watt University in Scotland and Sunderland
University in England, the Technical University of Munich (which
includes the Weihenstephan Brewery, the world’s oldest brewery still
in activity) and the VLB (Berlin) in Germany, the University of Leuven
 Interesting Times: Changes for Brewing 27

in Belgium and the University of California at Davis in the US. Training

as well as a comprehensive slate of examinations is also offered outside
academia, as in the case of the Institute of Brewing and Distilling based
in the UK (but operating globally).
Second, something should be done to educate consumers. Aside
from the glaring lack of understanding of what goes into making beer
(Smythe and Bamforth, 2009), there is a compelling necessity for beer’s
inherent values to be appreciated and respected. This requires strength-
ening and tightening the relationship between brewers and consumers:
the drinker needs to trust the brewer and have a clear appreciation of
what actually happens in companies – whether large or small – without
being distracted by the nonsense of some common beliefs. In particular,
consumers should understand what to look for in a beer and its presen-
tation, how to appreciate different beer styles, what food might be genu-
inely paired with beer and, not least, the health implications of beer
as shown in Table 1.3. Fortunately there are organizations addressing
these issues, e.g. the Beer Academy,10 but more can be done in order to
increase awareness.
Third, many retailers, both in the on-trade and off-trade markets, need
to be educated too. The types of representations of beers offered within
advertising campaigns, particularly in the US, are often deceptive and
counterproductive for the product itself. Retailers must recognize how
to optimize the way in which beer is furnished to the customer, in the
same way winemakers constantly try to do with their consumers. For
instance, more can be done in terms of highlighting and developing
a culture towards dispensation and storage of beers for enhanced shelf
life, glass cleanliness, putting beer in a receptacle with the correct name
on the glass or at least not the wrong name, stock rotation, etc. Such
reverence for beer is taught inter alia by organizations like the Beer
Academy and other initiatives such as the Cicerone program11 and the
Beer Steward program.12
Finally, educative processes must involve governments and governing
bodies at different levels. There is a clear tendency for government and
regulatory agencies to be swayed by powerful anti-alcohol lobbies and
antagonists (Chase, 2014). Despite the far-reaching assessment that
beer in moderation can be a wholesome and beneficial component of a
responsible lifestyle, it appears that those opposing this view gain greater
traction than those who would advocate for the beverage. There are
agencies addressing the merits of beer in this context, such as Beer and
Health in Europe or the Beer Institute in the US. However, more should
be done in order to increase awareness about the positive effects related
28 Charles W. Bamforth and Ignazio Cabras

to beer consumption in society. Enhancing the dialogue among govern-

ments, industry organizations and consumers’ representative bodies
might restore beer to a status where President Thomas Jefferson declared
“I wish to see this beverage become common.” Brewers and industry organi-
zations are perceived as having more than an incentive in spreading
these messages, which need to come from credible and independent
entities, notably the medical profession.

Table 1.3 Health benefits from beer drinking

Issue Discussion/Theme Reference

Atherosclerosis Beer is as effective as wine in Matsumoto et al. (2014)

countering
Beer belly There is no such thing – alcohol Wannamethee et al.
is the main calorie contributor (2005)
in any alcoholic beverage
and those calories need to be
counted.
Cancer There are many reports linking Arimoto-Kobayashi et al.
alcohol consumption to the risk (2006)
of various cancers.13 However Gunzerath et al. (2004)
there are studies registering
the opposite, demonstrating
also that beer contains anti-
mutagens.
Type 2 diabetes Moderate beer consumption Koppes et al. (2005)
protects against
Coronary/Heart Moderate beer consumption Keil et al. (1997)
Diseases protects against
Rheumatoid Moderate beer consumption Lu et al. (2014)
arthritis protects against
Kidney stones Moderate beer consumption Ferraro et al. (2013)
protects against
Parkinson’s Moderate beer consumption Liu et al. (2013)
disease protects against
Cognitive Beer improves, in the elderly Ganguli et al. (2005)
function
Nutritive value Beer is a significant source of Casey and Bamforth
silicate (counters osteoporosis), (2010), Owens et al.
folic acid, antioxidants, soluble (2007), Bourne et al.
fiber (2000), Diaz-Rubio and
Saura-Calixto (2009)
 Interesting Times: Changes for Brewing 29

8 Conclusions

This chapter has explored and analysed the current state of the beer
and brewing industry by discussing several social and economic issues
related to beer such as distribution, consumption, perception and taxa-
tion. The outcomes gathered from the investigation were then exam-
ined in relation to the type of contribution that different stakeholders
operating in the beer industry may provide.
While beer volumes are in decline in many countries, a burgeoning
“craft” sector appears to be rising almost everywhere in the world. There
is remarkable growth in the volume of beer brewed by such brewers
who are perceived as artisans and somehow as being producers of beer
from superior raw materials and using more caring, less industrialized
approaches. The elaboration provided in this chapter, however, appears
to indicate a different reality, with all brewers pursuing the same excel-
lent technical standards regardless of their size. Quality to a brewer
comprises delivering the same product with the same characteristics
time after time, rather than falling on vintage and terroir, as in wine.
Similar misleading thoughts appear to affect drivers of consumption.
The general perception presents wine as a superior choice when consid-
ered on the basis of quality, craftsmanship, pairing with food and the
impact on health. This perception tends to differ in relation to beer:
although much has to be done to convince consumers that beer should
be an accompanying beverage, it is still perceived by many as a lower-
class drink compared to wine.
The analysis proposed in this chapter identifies several issues that need
to be improved in relation to how beer is perceived and represented, indi-
cating some possible solutions with regard to marketing and education.
In particular, education seems to be the key aspect to consider in order to
elevate quality perception among consumers. Efforts made in this direction,
however, must aim to bring together a wide range of stakeholders, from
brewers to consumers, from policymakers to organizations, from medical
associations to government. Improving the way in which beer is perceived
and increasing knowledge about the positive and negative effects of this
product is likely to bring several positive economic benefits to the industry
worldwide, and to generate multiple advantages to society in general.

Acknowledgement

This work was supported by the USDA National Institute of Food and
Agriculture, Hatch project 1004485.
30 Charles W. Bamforth and Ignazio Cabras

Notes
1. As reported by the Brewers Association website: [Link]
[Link]/statistics/craft-brewer-defined.
2. One possible reason for such arbitrariness is probably due to the effort of
keeping a limited number of craft brewers (e.g. the Boston Brewing Company
in the US) that have grown very large in the sector.
3. [Link]/blog/wynkoop-releases-first-cans-of-rocky-mountain-
oyster-stout.
4. [Link]
5. For an extensive description, see: [Link]
the-bitter-end-the-great-2008-hop-shortage.
6. See the report prepared by Climate Conservancy in 2008, available at
[Link]/Files/the-carbon-footprint-of-fat-tire-amber-ale-2008
-[Link].
7. Specifically, “The End of History” brewed by Brewdog whose bottle is stuffed
into the body of a dead squirrel.
8. As claimed by Peter Brown in his blog: [Link]
com/2011/02/[Link].
9. For example, Ken Grossman and Sierra Nevada.
10. See [Link].
11. As reported by [Link].
12. See [Link]/education/beersteward.
13. See the 14th Report on Carcinogens presented by the US Department of Health
and Human Services, available at: [Link]
factsheet/Risk/alcohol.

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2
Marketing and Globalization of the
Brewing Industry
Erik Strøjer Madsen and Yanqing Wu

1 Introduction

Many analyzes have been made of globalization in the brewing industry

that occurred at the start of the 21st century in which mergers and
acquisitions (M&A) feature prominently (Euromonitor, 2010; Pedersen
et al., 2013). But the motivations of the key players behind globaliza-
tion in the beer market remain unclear. The largest breweries played the
key role in the restructuring of the industry and doubled their share of
the world beer market, but seemingly without any short-term payoffs
(Madsen et al., 2012). In this chapter we focus on the nature of the
product and discuss the methods of distribution and product branding
as important explanations why the brewing industry moved from a
regional to a global industry.
Economies of scale at the plant level have been identified as one of
the main factors driving the restructuring of national brewing indus-
tries before the turn of the last century (Tremblay et al., 2005; Nelson,
2005). However, the distribution of beer is expensive compared to
other consumer goods, and international trade in beer is quite limited
compared to the home production of beer (except for a few small coun-
tries). Due to high trade costs, the breweries could not extend economies
of scale at the plant level by adding more demand through international
trade. If the large number of cross-border M&A that made the industry
more global were motivated by synergy, one has to consider economies
of scale at the multi-plant level where management skills, advertising
and the transfer of know-how or technology are indispensable.
Marketing and sales costs have always been important in the brewing
industry and today they account for 16% of the net revenue of the
largest brewing groups. The industry is ranked among the highest for

34
 Marketing and Globalization of the Brewing Industry 35

advertising. This chapter focuses on the role of advertising in building

brand loyalty and investigates how advertising creates ‘premium brands’.
From industrial economics it is well known that the structure of adver-
tising costs translates into significant scale advantages. As observed by
Tremblay et al. (2005), the industry has passed through several stages of
development, each with its own characteristics. Currently the brewing
industry has reached a semi-global stage (Porter, 1986).
The objective of this chapter is to analyze the importance of product
branding and advertising in the global brewing industry. The next
section focuses on the high costs of beer distribution and how these
costs create a natural barrier to international trade that encouraged M&A
as a strategy for globalization. Section 3 addresses advertising behaviour
in the brewing industry, the large price premium of high-value beers
and explores economies of scale in global marketing. Section 4 presents
empirical evidence for economies of scale in marketing and distribution
among the largest brewing groups (see Stack et al., this volume). Section
5 discusses some motives behind the globalization of the beer industry,
and the last section presents conclusions.

2 The distribution of beer and globalization

The structure of the beer market has always been driven by the chal-
lenge of distribution, which remains a major barrier for new entrants
and for growth of incumbents. Beer is not a weightless commodity and
compared to other groceries it takes up considerable space in retail shops.
A large quantity of beer is consumed directly in restaurants and bars
for which a separate distribution system has evolved – often controlled
by the breweries. The exclusion of other brands from their distribution
networks represents another barrier to new entrants.
Economies of scale in distribution and the heavy investments in
new technology after the Second World War dramatically increased
the minimum efficient scale of production (m.e.s.). Plant automa-
tion increased the speed of canning and bottling and the reduc-
tion in transportation costs increased plant-level scale economics.
These developments fostered a dramatic restructuring of national
beer markets for mass-produced beer. In the US, the market share
of the four largest breweries increased from 22 to 95% in the period
between 1950 and 2000. Simultaneously, the number of independent
breweries declined from more than 350 to just 24. Anheuser-Busch’s
market share jumped from 6 to 54% in the period (Tremblay et al.,
2005; Nelson, 2005).
36 Erik Strøjer Madsen and Yanqing Wu

New communication channels made strong brands even stronger

and reduced the demand for small, local brands. This is forcefully docu-
mented by George (2009) who looked at the penetration of television in
local US markets between 1945 and 1960. She found that the number
of local breweries was negatively correlated with the fraction of the
population having access to a television signal and that the opportu-
nity for national advertising through broadcasting accounted for 27%
of the total decline in the market share of local breweries. This trend
was intensified by developments in printed media: local newspapers and
magazines also lost market share.
Developments in technology and communication in the second part
of the 20th century also increased concentration in many other national
beer markets. However, the German market lagged because of political
forces that delayed the restructuring of the industry. Best known are
the ‘purity’ rules which ban preservatives in beers. This regulation from
the guilds was first challenged by the European Court of Justice in 1987
when Germany had to open its borders to beer produced legally in other
European Union countries (see Adams, 2006).
Increasing concentration in national beer markets also reduced the
number of global competitors. However, this did not change cross-border
competition in any significant way, because cross-border ownership was
low. While the internationalization of most consumer markets increased
foreign competition, the beer market remained relatively closed with
limited competition from imports (Table 2.1).
The average import share for all countries shown in Table 2.1, is about
5%, and it does not seem to increase much over time (see Colen et al.,
2011, for a similar result). Import duties and other trade barriers may
explain the low import penetration in the developing countries; for Asia,
it is below 2%. Developed countries are more vulnerable to imports,
especially small countries where cross-border trade increases the import
share significantly (see Ferto et al., this volume). Further, one has to
recognize that these figures reflect quantities, but as imported beer is
mainly a premium product, these market shares underestimate value
shares by some margin. Export shares may vary considerably because
some of the large breweries have large production facilities in smaller
countries, e.g. Heineken and AB Inbev in the Netherlands and Belgium.
Cross-border M&A at the turn of the 21st century made some brew-
eries real world players (Pedersen et al., 2013). Figure 2.1 shows the
increased concentration in the global brewing industry between 2002
and 2013. The four largest firms (using a four-firm concentration
ratio, CR4), increased their market share from 25 to 47% in the period
Table 2.1 Import share of beer in percentages

COUNTRYS & REGIONS 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Belgium 11.88 10.36 9.06 9.40 11.93 10.64 8.83 9.57 12.46 13.97
Brazil 0.05 0.04 0.04 0.04 0.07 0.12 0.19 0.16 0.17 0.34
China 0.89 0.75 0.58 0.51 0.44 0.18 0.19 0.22 0.45 0.51
Czech Republic 0.98 1.00 0.87 0.90 0.96 1.31 1.60 2.36 4.39 3.40
Germany 3.24 2.78 3.20 4.11 5.71 5.77 6.43 6.32 7.77 8.54
Ghana 0.48 0.31 0.00 1.67 0.00 0.87 1.22 2.53 3.51 2.33
Mexico 1.37 1.45 1.38 1.55 1.65 1.76 1.81 1.60 1.60 1.55
Netherlands 5.37 8.11 13.77 13.98 13.84 14.98 11.06 10.11 8.87 10.19
Republic of Korea 1.10 1.16 1.18 1.31 1.54 1.97 2.27 2.20 2.51 2.90
South Africa 0.08 0.71 0.54 0.27 0.36 4.61 4.84 5.86 0.95 1.01
United Kingdom 11.30 10.97 12.39 13.36 14.80 16.18 17.77 17.14 17.90 18.36
USA 11.51 12.07 12.04 12.98 14.83 14.97 14.53 13.15 13.98 14.16
Americas 6.54 6.70 6.49 6.96 7.67 7.75 7.44 6.87 6.89 7.12
Europe 7.04 7.20 7.91 8.24 9.02 9.42 9.35 9.22 10.26 10.71
Asia 1.71 1.71 1.55 1.60 1.56 1.44 1.50 1.16 1.23 1.40
Oceania 2.84 3.35 4.76 4.68 5.25 6.98 2.27 8.82 2.52 8.99
World 5.18 5.26 5.30 5.56 6.00 6.14 5.94 5.64 5.70 5.93

Note: The import share is calculated as the share of the local production on the basis of the volume.
Source: Food and Agriculture Organization of the United Nations (FAO).
38 Erik Strøjer Madsen and Yanqing Wu

70%

60%

50%

40%

30%

20%

10%

0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
CR4 CR4-10 CR10-N

Figure 2.1 Concentration ratios in the global brewing industry

Note: CR4 and CR4–10 measure the market shares by volume of the four largest and the six
next largest companies in the worldwide brewing industry. CR10-N shows the market share
of the rest.
Source: Market Lines’ database: Market Data Analytics.

considered. Other large breweries (using a five- to ten-firm concentra-

tion ratio, CR5 – CR10) increased their share to control nearly 20% of the
market. Naturally, these dramatic increases in market shares for the large
breweries happened at the expense of smaller breweries whose global
market share fell to about 30%. The restructuring of the industry was
primarily led by a few large breweries. The large jump in CR4 in 2008 is
the result of InBevs’ acquisition of Anheuser-Busch. This was a mega-
takeover amounting to 57 billion euro and it made the new company
AB Inbev the industry’s global leader. It was about twice the size of the
second largest company, SAB Miller.
Distribution challenges have played an important role in the develop-
ment of the brewing industry. High transportation costs make it impos-
sible for breweries to pursue a globalization strategy based on exports.
The establishment of a distribution system in a foreign country is not an
easy task: it entails the establishment of many transportation hubs, and
because overseas investment in greenfield sites is not a viable option,
acquisition of local breweries is more attractive.
 Marketing and Globalization of the Brewing Industry 39

Although cross-border M&A may be the only feasible way to become

globalized, the question remains: why did the major brewers choose this
strategy? We argue that firm-level scale economies involving, especially,
branding and advertising, were crucial in the pursuit of globalization.

3 Globalization and the marketing of beer

Large price differences for beers are well known. Shoppers often have to
pay between two or five times more for a special beer compared to the
cheapest. Table 2.2 lists the average price for different types of beers in
regional markets according to Market Data Analytics in 2010 (they cover
96% of total world consumption of beer as reported by FAOstat, 2014).
There are no precise definitions of the different types of beers. Table 2.2
lists beer types as categorized by Market Lines. Premium lagers usually
have higher alcohol strength than standard lagers. Advertisement of the
former usually involves emphasizing superior quality. Specialty beers are
normally produced by small-scale breweries – so-called micro-breweries,
and are frequently local beers. Low-alcohol beers define themselves.
As expected, beer prices are higher in developed countries, and higher
on average in the European market compared to the Asian market. As
the beer prices are market prices, part of these differences is a result
of the higher consumption taxes in the developed countries. However,
as there is almost no international trade in beer, the price differences
between the countries can persist as a result of differences in production
costs among countries. But within these regions, large price differences

Table 2.2 Beer prices for different types of beer on the global market

World European American Asian African

market market market market market

Average price 3.14 4.61 2.94 2.44 2.22

Standard lager 2.54 3.81 2.42 2.13 2.14
Premium lager 4.83 5.84 3.84 4.58 2.61
Ales and stouts 4.30 4.75 3.11 7.03 2.20
Specialty beers 5.22 6.02 4.77 5.31 2.50
Low alcohol beers 3.46 4.17 2.75 3.15 2.27

Note: The prices are in USD per litre in 2013 and calculated as market value devided by
market volume. The European market includes Eastern Europe and Russia, American market
includes North and South America, Asian market includes the Pacific countries and African
market includes the Middle East.
Source: Market Lines’ Database: Market Data Analytics.
40 Erik Strøjer Madsen and Yanqing Wu

Table 2.3 Price premiums for branded beer using an index with standard lager
set at 100

World European American Asian African

market market market market market

Standard lager 100 100 100 100 100

Premium lager 190 153 158 215 122
Ales and stouts 169 125 129 330 103
Specialty beers 205 158 197 249 117
Low-alcohol beers 136 109 113 148 106

Note: The price-premium index is calculated from the prices in USD per litre in 2013 and is
based on the market value divided by market volume. The European market includes Eastern
Europe and Russia, American market includes North and South America, Asian market
includes the Pacific countries and African market includes the Middle East.
Source: Market Lines’ Database: Market Data Analytics.

exist among the different types of beers with special beers being the
most expensive. Table 2.3 shows these price premia within the regions
for premium and special beers using a price index = 100 for the price of
a standard lager.
The price premiums are significantly larger in Asia compared to the
European and American markets. The premia for imported ales and
stouts are probably the result of high import duties in many Asian coun-
tries, whereas the high price premiums for premium lager cannot be the
result of import duties as they are mainly produced locally. The large
price premiums across different types of beers raise the question: do they
reflect differences in quality?
Actual differences in product quality are probably lower than the
average consumer thinks. Production processes for beer are quite old
and have not developed much over time. The technology is therefore
well known and brewing only includes a few raw materials – water,
barley, hops and yeast. Most breweries brew different types of beer, such
as pilsner and lager, for which production costs do not vary signifi-
cantly. Even for ales and stouts the ingredients are the same, though the
market segment is smaller. While the breweries have their own prescrip-
tions for brewing different types of beer, they normally do not manage
and develop the technology of the brewing process; these tasks are
outsourced to special companies. Therefore technology in the industry
is available to all players and does not act as an entry barrier.
Some horizontal product differentiation does exist due to different
strains of barley and hops used in the brewing process. This is particularly
 Marketing and Globalization of the Brewing Industry 41

true for ales, stouts and specialty beers from micro-breweries. However,
within the same category of beer, differences in taste can be very
moderate and the recognition of brands is therefore often not signifi-
cant in blind tests (Alison et al., 1964; Almenberg et al., 2014). In one
study, beer drinkers were strongly inclined to their preferred brand, but
when the beers were unlabelled, the participants showed no preference
for certain beers (Valenzi [Link]., 1973). Almenberg et al. (2014) used a
triangle test: subjects are given three blind samples; two are identical
and one contains a different beer. After testing all three samples, the
test subjects are asked to point out the different one and this should
happen in more than 33% of the cases if taste differences actually exist.
They use the method to test whether the test subjects can differentiate
different brands of beer within the same category of beer. The experi-
ment used three well-known European lager beers: Czechvar from the
Czech Republic, Heineken from the Netherlands and Stella Artois from
Belgium. Their main conclusion is that beer drinkers are unable to
distinguish among different European lager brands.
While real product differences are quite small within the lager segment,
differences in perceived product quality by beer drinkers is very large.
This perception is probably copied from other consumer goods where
the consumer learns that they ‘get what they pay for’. This is particularly
true in the car market where there are huge differences in quality and
prices, and also within the furniture and consumer electronics markets.
Consumers’ price-quality perception in relation to beers is most force-
fully illustrated by McConnell (1968a, b) for the American beer market.
He made 24 home deliveries of six-packs of beer over two months to a
large sample of beer drinkers. All the beer was identical so there were no
quality differences at all, but the beer drinkers did not know this as the
regular labels were replaced by new labels with three different prices corre-
sponding to the average price of a popular, premium and super-premium
beer at that time. When assessing the quality of the beers, the panel ranked
the high-priced beer higher in quality with a large margin compared to the
low-priced beer. One drinker even said about the brand he thought was
cheap, ‘It would poison me – make me ill. I couldn’t finish the bottle’.
When consumers determine the quality of beers by price signals,
the implication for the breweries is obvious: by segmenting the
beer market into premium and standard categories by labelling
and setting a price premium for the high-quality branded beer,
and they then turn to marketing management in their business
strategy. Over time, the breweries have learned to optimize this price
premium by branding their products and by advertising and brand
42 Erik Strøjer Madsen and Yanqing Wu

promotion. Today the beer industry has one of the highest expenditures
on marketing and sales promotion. It is ranked above the fast-food and
sportswear industries.
Table 2.3 indicates premium lager as the most prominent ‘cash cow’ in
mass-produced beer with a high market share in both Europe and America
and a price premium twice that of premium ales and stouts. Along with
increasing brand promotion, the market shares of the premium brands and
special beers have increased and now account for 40% in Europe and 30%
of the American market, as shown by Table 2.4. The largest price premium
for lager is earned in the European market at USD 2.03 per litre, the total
premium amounting to USD 24.6 billion. The price premium earned in
the Asian market is now larger than on the American market with USD
16.2 billion against USD 13.3 billion. While the share of premium lager
is relatively high in the African market, the price premium is quite low so
the total premium is only USD 0.31 billion.
Specialty beers from micro-breweries that emerged in the 1990s
now account for about 5% of the world market. This segment of the
beer market seems to have matured in the US by the 1990s when
their number peaked and today they have about 10% of the American
market in value terms (see Bamforth and Cabras this volume). However,
micro-breweries do not change the concentration ratios for mass-
produced beer in any significant way. Also, the price premium for speci-
ality beers is to a large extent caused by higher production costs due
to small-scale plants. The micro-breweries therefore only earn a modest
profit as entry barriers are quite low to the local unbranded market.
New means of communication have decreased the cost of advertising,
making it more attractive. This is especially true with the emergence of
electronic media. Radio and television cover a larger audience compared
to newspapers. This results in lower costs when using the former. Even if
the price per viewer is the same for small and large firms, the latter have
advantages as they are present in more markets and therefore do not
waste advertising on viewers who cannot buy their product. This is the
case for local breweries or small national brands which are only present
in local shops or bars.
These developments have become global following the invention
of the Internet which established the infrastructure for fast individual
communication; new mobile gadgets make it easier to extract informa-
tion in all locations. This development has moved consumers’ aware-
ness from newspapers and television to the Internet and advertising
and brand promotion have followed. Figure 2.2 lists the different media
shares of advertising. There has been a dramatic increase in Internet
 Marketing and Globalization of the Brewing Industry 43

advertising after 2002 and it now amounts to USD 88 billion or 20% of

the global advertising in 2011, according to [Link]. This increase has
been at the expense of advertising in the printed media such as news-
papers and magazines that have seen their share reduced to half from
about 50% to 25%.
The Internet facilitates the streaming of movies and television on
demand; it has shifted consumers’ awareness in a global direction and
has made global branding a natural choice for the breweries. These devel-
opments enlarge the potential audience exposed to advertising via the
Internet and extend the competitive advantages of global breweries.
As young males are the heaviest beer drinkers and also engage in
sports activities, a large part of beer advertising is related to sports
and a brewery is often the main sponsor of big sports events like the
World Cup in Brazil where The Federation of International Football
Associations (FIFA) signed 20 major sponsorships amounting to USD 1.4
billion. Other examples are football clubs like Manchester United and
Real Madrid where breweries are also present.

0.45

0.4

0.35

0.3

0.25

0.2

0.15

0.1

0.05

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Newspaper Televisions Cinema
Magazines Radio Outdoor
Internet

Figure 2.2 Different media’s share of the global expenses on advertising

Note: Shares of total global spending on advertising.
Source: Warc’s database, [Link], US.
44 Erik Strøjer Madsen and Yanqing Wu

Table 2.4 Global consumption of different types of beer, 2013

World European American Asian African

market market market market market

Consumption of beer 1,728 442 519 718 53

(million hl.)
Market shares in %
Standard lager 72.2 54.3 67.8 86.4 72.4
Premium lager 16.7 27.5 18.1 9.2 12.3
Ales and stouts 3.1 6.9 2.5 0.7 11.4
Specialty beers 5.2 7.2 10.4 0.5 1.3
Low-alcohol beers 2.8 4.1 1.2 3.1 2.5

Note: European market includes Eastern Europe and Russia, American market includes North
and South America, Asian market includes the Pacific countries and African market includes
the Middle East.
Source: Market Lines’ Database: Market Data Analytics.

The globalization of beer brands facilitates the realization of econo-

mies of scale in global marketing and explains why breweries introduce
their global brands in national markets alongside national or regional
brands which they often keep when acquiring national breweries. The
breweries have even taken some highly reputed local brands to other
markets and produced them in their local brewery plants (see Stack
et al., this volume). However, some European brands are safeguarded
by Protected Designation of Origin (PDO) and Protected Geographical
Indication (PGI) legislation which limits the possibility of globalizing
the brand because of legal restrictions. This is the case for brands such as
Budweisser Budvar and Shepherd Name’s Kentish Ale.

4 Economies of scale in global brewing

Increases in marketing and sales promotion in the brewing industry

generate the question: can these scale advantages cross national borders
as a result of the globalization in electronic media? If so, scale advan-
tages could be tapped by multinational breweries and the large wave
of M&A within the brewing industry over the last 15 years could be a
response to these cost advantages. To address this question we examine
the eight largest breweries in the world in 2013. Table 2.5 shows relevant
descriptive statistics for the period 2002 to 2013.
World market shares are obtained from Market Data Analytics Database
and cost shares are collected from the breweries’ annual reports and
 Marketing and Globalization of the Brewing Industry 45

Table 2.5 Descriptive statistics

Mean Standard deviation Observations

World market share 0.0638 0.0464 92

Production cost share 0.5485 0.0718 68
Distribution cost share 0.0725 0.0394 55
Marketing cost share 0.1740 0.0603 68
EBIT share 0.2150 0.0851 56

Note: Share of marketing and sales costs of net revenue. EBIT is calculated as net revenue
minus cost of production, distribution and marketing. No information on marketing
expenses in the annual rapport from SAB Miller and for Kirin from 2006.
Source: Cost share from companies’ annual reports and world market share from Market Data
Analytics Database.

reported as share of net revenue. The costs of marketing also include sales
expenses as the different types of sales and marketing costs are collapsed
in the annual reports. However, a large part of sales expenses in the beer
industry can be considered to consist of advertising, including: expenses
for sales agents and equipment for shops and bars such as drinking
glasses. Different breweries use the same terms for the cost categories
in their annual reports, but of course, the methods of calculation could
vary. To control for heterogeneity in cost accounting, the estimations
below use a method with fixed effects. The EBIT has been calculated
as the difference between the net revenue and the three cost compo-
nents: production, distribution and marketing. EBIT thereby includes
some administrative costs not allocated to the three cost components
mentioned above.
The large breweries have many different brands and advertising
campaigns are often targeted to a specific brand. Wilcox (2001) studied
beer brand advertising and market shares in the US from 1977 to
1998. Of the 11 brands studied, the author found a significant relation
between advertising and market share for eight brands. However, even
if the total costs of advertising can be allocated to the different brands,
the individual brand effects may correlate with other brands of the same
brewery, e.g. an advertising campaign for Bud Light may also affect the
sales of Budweiser. Therefore the total cost of sales and marketing activi-
ties for a brewery is a more precise measure to validate the amounts and
effects of these activities.
In the period between 2002 and 2013, concentration in the global
market for mass-produced beer more than doubled (Figure 2.1). This was
mainly driven by high growth among the largest breweries which more
46 Erik Strøjer Madsen and Yanqing Wu

Linear Regression Fit for marsales

0.3
Marketing share

0.2

0.1

0.0
0.05 0.10 0.15 0.20
Market share
Fit 95% Confidence Limits 95% Prediction Limits

Figure 2.3 Regression plot of marketing share to world market share for seven
large breweries
Note: Share of marketing and sales costs in net turnover. No information of marketing
expenses in the annual report from SAB Miller and not until 2006 for Kirin.
Source: Cost share from companies’ annual reports.

than doubled their size. To study the size effects equation (2.1) has been
estimated where (A/R) is the share of marketing in net revenue and WS
is the world market share.

(A/R) = α + β (WS) (2.1)

Figure 2.3 shows a simple OLS regression of equation (2.1) for the
period from 2002 to 2013. Overall there is a negative correlation with
lower marketing shares (measured as the ratio between advertising and
revenues) for breweries with a high share of the world market. The esti-
mated regression coefficient is −0.3174 and significantly negative at a
level of 4%.
However, the regression plot also shows a large variation in marketing
expenses at the same level of market share, so obviously other factors
affect the share of marketing expenses. The variation is to a large extent
a result of different strategies by the breweries concerning marketing and
 Marketing and Globalization of the Brewing Industry 47

Table 2.6 World market shares and cost shares for the breweries in 2013

World Production Distribution Marketing EBIT

market costs sales costs sales costs sales Sales
Company share share share share (A/R) share

AB Inbev 0.195 0.407 0.094 0.134 0.361

SAB Miller 0.117 – – – –
Heineken 0.101 – 0.054 0.126 –
Carlsberg 0.054 0.505 0.113 0.168 0.214
Molson Coors 0.041 0.605 – 0.284 0.111
Kirin 0.032 0.583 0.031 0.114 0.272
Tsing Tao 0.038 0.599 0.047 0.155 0.199
Yanjing 0.034 0.606 0.021 0.106 0.266
Average 0.076 0.551 0.060 0.159 0.237
Observations 8 6 6 7 6

Note: Share of marketing and sales costs in net turnover. No information of marketing
expenses in the annual rapport from SAB Miller and not until 2006 for Kirin.
Source: Cost share from companies’ annual reports and world market share from Market Data
Analytics Database.

branding (Table 2.6). On average, the seven breweries that report

their marketing expenses use 16% of their net revenue on marketing
and sales, but with a high variation between breweries. For example,
Molson Coors spends close to three times more than Yanjing. The
high level of marketing and branding costs in 2013 shows how much
the leading breweries of mass-produced beers focus on branding their
products.
Table 2.6 also reveals substantial variation in production and distribu-
tion costs across the different breweries. Of course, these differences in
cost efficiency among the breweries are also reflected in their EBIT share
of net revenue and it seems that AB InBev, the brewery with the most
aggressive M&A strategy, also has the best performance in cost saving
and EBIT earnings.
The size effects can also be estimated directly by regressing the cost
components on net revenue. Equation (2.2) shows the estimated model
with a log transformation of the variables. Cj is the cost component j,
R is the net revenue, βj is the estimated scale elasticity of the cost type
j with respect to net revenue, and δi is a fixed effect for company i that
picks up differences in cost efficiency and accounting practice for the
individual brewery.

Log (Cj) = α + βj Log (R) + δi (2.2)

48 Erik Strøjer Madsen and Yanqing Wu

The parameter of interest is scale elasticity. If it is equal to 1, there is

full proportionality between costs and revenue with constant returns
to scale in the production. Only if the scale elasticity is less than 1 do
economies of scale exist in the production for this cost component, as
its increase is less than proportional to turnover.
Table 2.7 presents the results of the estimations and the estimated
scale coefficient is not statistically significant less than 1 for produc-
tion costs which therefore rise almost proportionally with the increase
in net sales. This verifies that economies of scale in production have
been exhausted and further economies of scale in this period have to be
harvested by multi-plant operations. Economies of scale in marketing
and distribution are quite large as the scale elasticity is significantly
below 1 for both cost types. The largest economies of scale are earned
in marketing, where the elasticity indicates that marketing costs only
increase by 78% for a revenue increase of 100%, whereas distribution
cost increase by 90%. As the marketing and sales costs have high cost
shares, they also return a large gain in cost savings by company growth.
If all the cost savings from the size effects are passed on to the consumer
in the form of a reduction in beer prices, the EBIT margin would not
be affected at all. However, this has not been the case as the size effect
for the EBIT is quite large with an increase of 134% when the breweries
double their size.
As the fixed effect estimation corrects for firm heterogeneity, it will
also correct for firm size and the coefficients are therefore based on
the within brewery effects of market size. Figure 2.4 presents the size
relationship for seven large breweries. For most of the breweries there
has been a fall in the share of marketing costs over the period and it is
also correlated with an increase in their world market share as indicated

Table 2.7 Fixed effect estimation of the size effects in marketing and distribu-
tion costs

Dependent Production Distribution Marketing

variable costs costs costs EBIT

Net sales 0.987 0.904** 0.782** 1.335**

(log) (0.016) (0.054) (0.028) (0.071)
R-square 0.999 0.993 0.998 0.993
Observations 68 55 68 56

Note: One and two stars indicate where the coefficients are different from one at a significant
level of 5 and 1%, respectively.
Source: Net sales and costs from the companies’ annual reports.
 Marketing and Globalization of the Brewing Industry 49

0.32
0.30
0.28
0.26
Marketing share (A/R)

0.24
0.22
0.20
0.18
0.16
0.14
0.12
0.10
0.08
0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18 0.20 0.22
Market share

Company ABInBev Carlsber Heineken Kirin

MolsonCo TsingTao Yanjing

Figure 2.4 The within-breweries correlation between the share of marketing and
sales costs and the world market share for seven large breweries

by the estimations. However, Molson Coors and Yanjing seem to be

outliers in this respect with no ‘within size’ effect on their marketing
share. Further, the regression equations only include the market share as
an explanatory variable and therefore do not correct for other correla-
tions with the marketing share in the period. One possibility is that the
breweries use M&A to move to countries with a lower level of marketing
and advertising expenses. However, as Table 2.6 reveals, there does not
seem to be any significant regional difference in the level of marketing
costs among the companies and Figure 2.4 also shows that the large
acquisition of Anheuser-Busch by InBev seems to be followed by a
significant reduction in marketing costs in subsequent years.
These estimations only pick up the size of the correlation and tell
us nothing about the causality between market share and the share of
marketing costs. Even if M&A have been the main driver behind the
increase in market share for this group of breweries, it is likely that
marketing and branding have affected their revenues as well. If this is
the case and a positive relationship exists, the estimated parameter is
50 Erik Strøjer Madsen and Yanqing Wu

not a central predictor of the causal relationship from market share to

marketing share. It may have an upward bias as the estimates also cover
the reverse causality of the relationship. However, we are not interested
in the causal relationship, but whether there exist some economies of
scale for these cost components, whatever the reason behind the growth
of the breweries may be.

5 Motivation for pursuing globalization

One of the main reasons for M&A that is often mentioned in the bid
announcement by management are the cost synergies of running a
joint business. The large economies of scale in marketing and distribu-
tion enjoyed by large multinational breweries indicate that these syner-
gies were important and explain the wave of M&A during our period.
With an average share of marketing costs at 15.9% and a size elasticity
for cost savings of 0.218 (1 − 0.782), the total cost saving as a share of
net revenue is 3.5% (0.159 × 21.8%) with an increase in net revenue.
Calculated in the same way, the saving in distribution as a share of net
revenue is 0.6% and the total cost saving in distribution and marketing
is then 4.04% point of the net revenue. This amounts to significant cost
advantages for the large breweries. Market conditions have not forced
them to hand these savings over to consumers through price reductions
because EBIT has also increased.
Another factor justifying M&A is the market power hypothesis which
states that the merger will reduce competition and benefit the remaining
companies. However, the market power effect will benefit all breweries,
and this has to some extent also been the case in the latest wave of M&A
in the brewing industry. Recent work indicates small positive effects on
the EBIT margin for smaller breweries in the industry during the wave of
M&A (Madsen et al. 2012).
However, even if price competition only changed modestly as a result
of M&A, the multinational breweries could still gain advantages by
introducing their premium brands onto local markets. This is probably
what happened as the EBIT margin increased by 7.93 (0.335 × 0.237)
percentage points of the net revenue and therefore earnings increased
a lot more than can be explained by the cost savings in marketing and
distribution. These investments in branding by the multinational brew-
eries also represent a sunk cost that creates an entry barrier as discussed
above and thereby a first-mover advantage in the world market for
beers. The rather abrupt opening up of the global beer market started a
competitive race between the large breweries during the 1990s to take
 Marketing and Globalization of the Brewing Industry 51

advantage of first-mover opportunities and that may have been a leading

motivation behind the merger and acquisition wave.
While these first-mover advantages may have led to an increasing
EBIT margin, they have not materialized in a superior return to the
shareholders of the largest breweries compared with the 100 next largest
breweries (Madsen et al., 2012). The reason for this is still unclear, but
one possible explanation is that they have had to pay a premium for
the acquired breweries during the restructuring process with most of
the synergies being paid to shareholders of the acquired brewery. The
acquirer has simply been left with larger capital costs. There is some
evidence for this as the large breweries finance their acquisition strategy
by incurring new debts and by substantially increasing their leverage.
However, in a longer perspective, the first-mover strategy in this period
can still pay off and materialize on the bottom line of the multinational
breweries in the future. First, the cost of a merger has to be paid imme-
diately and therefore it may take some time before the benefit shows.
Second and more important, the cultivation of the premium segment of
the beer market in Eastern Europe, East Asia and Africa has just begun.
If economic growth in these areas continues the trend from the last
10 years, the first movers can look forward to a large market for their
premium beers and a high price premium to cash in on in the future.
So far we have looked at the performance of the breweries and there-
fore of their owners. However, it is well known from the corporate
governance literature that the interest of managers can be different from
the interest of shareholders of publicly owned companies. This is espe-
cially true if managers are compensated according to the growth of the
company, which probably is the case for the large breweries, and that
opens up other motives for the merger and acquisition wave. Also the
managers of the acquired breweries can have self-interest in a merger, and
in addition they will often get a special remuneration package including
a top position in the new joint company. However, there is a systematic
evidence of the managers’ self-interest in the different mergers within
the brewing industry.

6 Conclusions

After the turn of the 21st century, globalization changed the structure of
the beer industry through a large wave of M&A. This chapter discusses
the nature of the beer market and points to its heavy weight per value as
a trade barrier for the internationalization process. The high transporta-
tion costs of beer compared to other consumer goods made cross-border
52 Erik Strøjer Madsen and Yanqing Wu

M&A the best option for large firms in this industry. We argue that the
motivation for M&A was predicated on high returns from globalization
of beer brands and large savings in marketing and distribution costs due
to economies of scale.
Demand for beers with different tastes has increased in recent years.
This has benefited emerging micro-breweries. However, within the same
categories of beer the difference in tastes is very moderate and the recog-
nition of brands is therefore often not significant in blind tests. On the
other hand, the blind test also shows that consumers have a strong
perception of brand differences even though they cannot taste any
differences among the brands. This consumer perception of taste for the
premium brand within mass-produced lager beer has been supported by
the breweries in their marketing campaigns and has led to a high price
premiums for these beers.
Using firm-level data from the largest breweries, the analysis verifies
significant economies of scale in marketing and distribution costs. Based
on information from the annual reports of the eight largest breweries in
the world, the estimation indicated a reduction in these costs of close to
20% when the size of the brewing groups doubles. This finding verifies
that the restructuring of the brewing industry has created significant
scale benefits to be shared among the merging partners as marketing
and distribution costs are very high in this industry.
These scale advantages in the brewery industry created a playing field
on the world market for the breweries after the opening of the new
markets in the East and Southeast where the first movers earn competi-
tive advantages. As entry barriers for mass-produced premium beers are
high in the world market and the threats from new innovation are low
due to the nature of the product, these new and dominating brewing
groups can probably look forward to a long life, as the threats of takeo-
vers are also reduced due to their large market share.

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3
Path Dependency, Behavioral
Lock-in and the International
Market for Beer
Martin Stack, Myles Gartland, and Tim Keane

“We don’t want Bud at our World Cup. I’m not anti-American.
This is just the worst beer you could imagine.” (German student
quoted in the Wall Street Journal, 2006)

“You can’t be a real country unless you have a beer and an

airline. It helps if you have some kind of a football team, or
some nuclear weapons, but at the very least you need a beer.”
(Frank Zappa)

1 Introduction

Although beer is an ancient beverage, brewing as an industry was not

historically one of the driving forces of globalization. Certainly there
are instances during the past century of specific brands being made
available in other countries, but for the most part beer brands have not
crossed national boarders. In many countries, beer, more than many
products, has become intertwined with notions of national identity and
pride. As a result, efforts to internationalize in this market have to over-
come deep cultural associations regarding the product, the producer
and the consumer. A recent Wall Street Journal article discussed how
unhappy many Germans were that Anheuser-Busch had acquired the
exclusive rights to sell beer at the 2006 World Cup. To diffuse the situa-
tion, Anheuser-Busch agreed to allow Bitburger – a German brewery – to
sell beer at some of the matches. Upon learning of this, one German fan
commented, “That’s great. Now I’ll surely stick to the country and have
a Bitburger.” This anecdote raises important questions about consumer
preferences and company expansion strategy: while Germans do not

54
 Path Dependency, Behavioral Lock-in and Beer Markets 55

have any difficulty buying many American brands, from McDonald’s to

Coco-Cola, attitudes about beer seem quite different. In 2006, Anheuser-
Busch was one of the largest breweries in the world and Germany was
the third largest beer market, so why was this brewery having such
problems in a large, potentially profitable market? From the compa-
ny’s perspective, it needed to understand what exactly it was about its
product, and how it was perceived, that generated such an uproar. The
answers to these fundamental questions about product and market play
a crucial role in helping to explain how and why the beer market has
consolidated globally over the past 20 years.
In 1990, calculating a global five- or ten-firm concentration ratio for the
global beer industry was not very meaningful: production was still split
over many breweries, and nearly all of the largest breweries focused their
energies on their domestic markets. This has changed rapidly. By 2012,
the global five-firm concentration ratio was nearly 50%, and the ten-firm
concentration ratio was 60–65%. Of these top ten firms, only the three
based in China derived the vast majority of their sales from their home
market (Ascher, 2012); the other seven large breweries relied very signifi-
cantly on diverse geographic sales. The key issue, though, is that this diver-
sification has been at the level of the brewery, not the brand, a result that is
in direct contrast to many consumer product markets, including alcoholic
spirits.1 Global consolidation in brewing is not being driven by a handful
of brands gaining larger numbers of fans in more and more markets but by
a few very large breweries converging on an integrated strategy: a) to sell
lots of unconnected beer brands in a multitude of geographic markets and
b) to develop a portfolio of brands that the brewery coordinates in each
market consisting of dominant local brands along with a global brand (or
two if lucky) that has high profit margins but not great total sales.
To help explain these developments, this paper draws upon a theo-
retical framework more commonly associated with technology and
extends it to the market for beer. The chapter begins with a discussion of
the path dependency and lock-in literature, and examines how it can be
extended, in general, to consumer behaviour. It then develops a detailed
case study that links behavioural lock-in in a specific market – the inter-
national brewing industry – to efforts by firms in this market to develop
the most effective expansion strategies.

2 Path dependency and lock-in

Paul David (1985) and Brian Arthur (1989, 1990) published several papers
that serve as the foundation of the path dependency literature: the
56 Martin Stack, Myles Gartland, and Tim Keane

basic assertion in these and related essays is that suboptimal or inef-

ficient technologies can be become locked in as industry standards and,
in instances where there are significant network effects, these inefficien-
cies may persist for extended periods of time (Garud et al., 2003; Stack
and Gartland, 2003).
David’s best-known work in this area is his discussion of the layout of
the typewriter keyboard, in which he shows how the familiar top row
“QWERTY” became the industry standard despite the fact that it is an
inefficient organization of keys (David, 1985). Arthur’s most popular
example concerns the struggle for supremacy over VCR format, and
the market’s choice of VHS over Beta (Arthur, 1990). Critics of path
dependency have attacked the validity of these two well-known cases,
and have concluded that this thesis is without merit (David, 2000).
The issue of course is not that simple: in a sense, it does not really
matter whether QWERTY was or was not a good example of path
dependency. The real issue is whether market processes can lock in
any inefficient or suboptimal technologies, production processes or
products.
Robin Cowan has published several detailed examples of suboptimal
technology path dependency (1990, 1996). In his 1990 essay, he puts
forward a detailed overview of the development of nuclear power reac-
tors in which he argues light water reactors emerged as the dominant
technology despite the fact that it was “not the best technology, either
economically or technically” (Cowan,1990, p.541). Drawing upon
Arthur, he asserts that when there are competing technologies and
strong increasing returns, “one technology will [come to] dominate the
market, and it is not possible to predict [ex ante] which of the tech-
nologies will do so. It is likely, however, that the technology which first
makes large advances along its learning curve will emerge dominant.”
(Cowan, 1990, p.566). Cowan’s work is important for showing examples
of suboptimal technology lock-in.
There is, however, another dimension to lock-in that does not depend
on technological networks, but it is not as thoroughly discussed. We
refer to this category as behavioural lock-in. Once a product has become
established as an industry standard, and once consumers or users have
invested time or money in learning a particular system or becoming
comfortable with a traditional practice, they will be less likely to try
a rival process, even if over time it proves superior. This is not neces-
sarily a new concept. In his 1985 essay, David asserts that path depend-
encies may arise “in the presence of strong technical interrelatedness,
scale economies, and irreversibilities due to learning and habituation.”
 Path Dependency, Behavioral Lock-in and Beer Markets 57

However, nearly all path dependent essays have focused on technolog-

ical lock-in; the term behavioural lock-in is meant to stress and develop
David’s concept of “irreversibility due to learning and habituation.”
Behavioural lock-in occurs when the behaviour of the agent (consumer
or producer) is “stuck” in some sort of inefficiency or suboptimality due
to habit, organizational learning or culture. Behavioural lock-in occurs
when a process, product or service is “stuck” on a suboptimal path when
an actor’s habit, organizational learning or culture is preventing the
change. While economists have not given this form of lock-in much
attention, it is important to note that political scientists, sociologists
and organizational scientists have written on this topic. Our notion of
behavioral lock-in is consistent with, but distinct from network-based
lock-in stories.
Customers switching costs can lead to “behavioral lock-in” (Stack
and Gartland, 2003). Historians and sociologists of food have argued
that people develop deep-seated roots to the foods they grow up with as
culturally defined standards of what specific foods and drinks should be
take hold over time (Hess and Hess, 1977; Levenstein, 1993). As a partic-
ular food or beverage takes root in a culture, it can become very difficult
to alter common perceptions about what this product is and what it
could or should be. This leads to high switching costs for consumers
who may not feel the need to try new products, especially when these
products look, smell and taste different from more familiar offerings
(Krugman, 1998).
Choi and Stack (2005) developed a similar argument to illustrate how
US consumers became locked into a generic style of beer despite the
prevalence of more flavourful alternatives, and they highlighted the
active role breweries played in helping to create and foster a demand
for this particular type of beer. The next step is to explain why this idea
is important to internationally minded breweries as they develop their
expansion strategies.

3 The evolution of the world brewing industry: how

national affects international

Most brewing markets have evolved over the past century from local to
regional to national markets. Although there are differences in terms of
the pace of this process, nearly every beer-producing country has seen
a handful of big breweries gain larger and larger shares of the national
market. While Germany and China are the least concentrated of the major
beer markets, consolidation is increasing in these countries as well.
58 Martin Stack, Myles Gartland, and Tim Keane

As a result, nearly every country has seen the creation of a national

culture regarding its beer style (or, in a few cases, beer styles). This differ-
entiates beer from beverages, such as soda, that did not have historic
and cultural roots across a wide range of countries, and this has contrib-
uted to the creation of unique product styles across countries and to
strong domestic beer brand loyalties in many countries.
Let us briefly consider the case of the US. Over the past century,
mass market beer in the United States evolved from a heterogenous
product with many different styles and attributes in the early 1900s
to an increasingly homogenous product by the 1980s (Choi and Stack,
2005). The net result of this process, according to F.M. Scherer (1996), is
that “Carefully structured double-blind studies ... have revealed repeat-
edly that consumers, or at least 90% of all consumers, cannot tell one
conventional lager beer from another ... ” Relating this development
to the concept of path dependency and lock-in, we see that what has
emerged in the US is a two-staged example of behavioural lock-in. At
the broad, industry level, American beer consumers have become used
to a particularly American style of beer: while they may not be able to
differentiate one mass market American brand from another, they are
able to differentiate among styles of beer.
Let us first examine the lock-in at the industry level. One way to
explain how mass market American beers differ from many craft and
foreign beers is to review how these beers differ in terms of their ingredi-
ents. Choi and Stack (2005) illustrated how the industry overall has used
progressively fewer and fewer raw materials per barrel of beer.
By steadily decreasing the amount of raw materials per barrel of beer,
mass market American breweries began to produce a steadily lighter and
less flavourful product.
Stack and Gale (2007) developed a product map for the US that organ-
izes beer styles by their colour and their level of hops. There are four prin-
cipal groupings: a) lighter colour, low hops; b) lighter colour, high hops;
c) darker colour, low hops; and d) darker colour, high hops. According
to this mapping, mass market American beers – those that define the
“American style” of beer – have very low levels of hops and very little
colour. It is this combination that F.M. Scherer is referring to when he
asserts that “the leading US premium brewers have deliberately chosen
formulas sufficiently bland to win a mass following among relatively
inexperienced consumers and (through repeat purchase) consumers
acculturated to bland beers (Scherer, 1996).
The second level of behavioural lock-in occurs at the level of the indi-
vidual brewery and concerns brand loyalty. While these consumers may
 Path Dependency, Behavioral Lock-in and Beer Markets 59

not be able to differentiate among brands in blind taste tests, they have
become very brand loyal in many circumstances through extensive and
expensive branding and advertising campaigns.
These two dimensions of behavioural lock-in have greatly influenced
the evolution of competition for American and foreign breweries. They
have made it hard for foreign brands to compete in the mainstream US
market, and they have also made it equally difficult for US breweries to
compete with their specific beer style outside of the US. While this discus-
sion has highlighted the US, it is apparent that this lock-in of national
beer brands and consumer loyalty has occurred in beer-consuming
nation after beer-consuming nation. Even as individual brewing indus-
tries continued to consolidate, consumers in these countries continued
to hold their regional and national brands and styles in the highest
esteem: this mix of culture and chauvinism continues to set beer apart from
many other markets and it shapes how the market internationalizes.

4 Why, where and how do breweries internationalize?

Having explored in general, and with reference to the specific example

of the United States, why most brewing markets have evolved along
distinct national lines, the next step is to examine how and why key
breweries have tried to internationalize.
Until 1950, brewing remained principally a national business. However,
over the next 50 years brewing began to transform from a domestic to
an international market. This development raises three fundamental
questions: why did breweries look abroad, what new markets did they
expand into, and what strategies did they implement? In answering
these questions, we draw on a path dependency and behavioural lock-in
framework to explain the converging expansion strategies of the most
prominent internationally oriented breweries.
Breweries begin overseas expansion, typically, from a desire for addi-
tional sales. Once the home market has matured and consolidated,
breweries have often concluded that it is easier to find additional sales
abroad rather than to continue to fight it out with the remaining
brewery or two at home. In addition, if total beer sales in a country
begin to stagnate or decline, this leads breweries to expand overseas.
Finally, expansion-minded breweries with smaller domestic markets
will normally go overseas earlier than breweries in larger domestic
markets since the smaller markets offer fewer opportunities for absolute
scale economies. The specific timing of these variables, however, has
affected different breweries at different dates.
60 Martin Stack, Myles Gartland, and Tim Keane

Three breweries that were early to embrace international expansion

were Guinness from Ireland, Heineken from Holland and Carlsberg from
Denmark. Not coincidentally, these breweries were from small countries
with low projections for population growth and total beer consump-
tion. After emerging as the market leaders at home, these three firms
had all realized by 1950 (if not before) that future growth depended on
some type of international expansion. By contrast, rising domestic beer
consumption and continuing market consolidation in many markets,
including the UK, the US and Canada, delayed the need for interna-
tional expansion until at least the 1980s. But by the end of the 1980s,
as total consumption growth began to slow down (if not decline), brew-
eries in many mature markets also began to realize that future growth
depended on cross-border expansion.
Once breweries determined that international expansion was
imperative, the next question was to determine where. In a series of
interviews the authors conducted with senior executives at several
of the world’s largest breweries, company officials consistently
explained that they each used a proprietary market expansion model
to rank order their geographic expansions.2 From our interviews, it
became clear that several of the leading variables were: proximity to
the company’s home market, the size of the target beer market, the
expected future growth rate of the target market, the size of a region
containing several target beer markets, and the expected growth rate
in the overall region.
Geography has long played an important role in determining a firm’s
first foray abroad. Often nearby countries will share a similar language
or culture, and, if there has been significant immigration among the
countries, this may extend to a cross-border appreciation of a “foreign”
beer (Ghemawat, 1987). Thus, Guinness first expanded into England,
Anheuser-Busch first expanded into Canada and Grupo Modelo of
Mexico first expanded into the US: in all three instances there were
large numbers of potential consumers who were very familiar with the
imported brand.
A second important variable is the size of the national beer market.
Table 3.1 details the ten largest beer-consuming markets in 2012:
together they account for nearly 70% of the world’s beer consump-
tion. These data illustrate several important trends. First, China has
quickly grown into the world’s largest beer-consuming country, and
we can expect its importance to increase in the years to come. Second,
many developed countries – led by the USA, Germany, Japan and the
 Path Dependency, Behavioral Lock-in and Beer Markets 61

Table 3.1 Top ten beer-consuming countries (Ascher, 2012)

Country 2012 (megaliters)

China 44,201
United States 24,186
Brazil 12,800
Russia 10,560
Germany 8,630
Mexico 6,890
Japan 5,547
United Kingdom 4,319
Poland 3,790
Spain 3,220

Table 3.2 Regional beer consumption (Ascher, 2012)

2012 2012 Share % Change in

Consumption of Global Consumption:
Region (megaliters) Consumption 2003–2012

Asia 62,115 33% 50%

Europe 52,301 28% 2–5%
Latin America 31,422 17% 50%
North America 26,486 14% 0%
Africa 11,362 6% 100%
Oceania 2,245 1% n.a.
Middle East 1,436 1% n.a.

UK – have stagnating if not declining overall beer markets. Third, the

fastest growth among the largest beer-consuming countries is in the
developing markets – China, Brazil, Russia, and Mexico.
While it is important to analyse the single most important markets, it
is equally important to examine more broadly which overall regions are
growing and declining, as breweries often look to expand into several
countries in a specific region. Table 3.2 details the absolute size of the
world’s beer regions.
Since the largest breweries and most famous beer brands are from
Western Europe and the US, it is often not recognized that by the late
1990s Asia was already the largest beer-consuming region. Its overall
62 Martin Stack, Myles Gartland, and Tim Keane

importance continues to grow, since its consumption rate is increasing

while sales in North America and Western Europe are either stagnating
or declining, despite pockets such as Spain where the outlook is more
positive. From 2003 to 2012, Asia, already the largest beer-consuming
region, saw its beer consumption grow by 50%. During this period,
other developing markets also grew quite rapidly: Latin America by 50%
and Africa by 100% (Ascher, 2012).
After breweries decide that they need to go abroad, and after they eval-
uate market attractivness, they then need to consider how to expand.
From 1950 to the present, companies have pursued three basic strategies:
a) to increase overseas sales of the brewery’s core brand through exports
and licensing, b) to acquire an equity position in a foreign brewery, and
c) to acquire outright or through joint ventures brands and breweries in
other countries. Together, these three strategies have greatly internation-
alized this traditionally national industry. However, while most atten-
tion has focused on the first strategy; the following analysis will show
that the real driving force behind the industry’s globalization has been
acquisitions and joint ventures; to some extent, equity investments can
be viewed as a subset of category (c) since both strategies value the impor-
tance of the local brand and brewery. We can divide the period from 1950
into two phases: 1950–1990, when the emphasis was on expansion of the
core brand, and 1990–present when firms first began to use cross-border
acquisitions and joint ventures on a significant scale.

1950–1990: global brands begin to emerge

Let us begin by reviewing the steps taken by four key national cham-
pions – Guinness, Heineken, Carlsberg, and South African Breweries –
for it was these firms (along with a few others) that were the first to
seriously look beyond their own borders. These breweries had all come
to dominate their home markets by at least the middle of the 20th
century, if not before, so they clearly had incentives to expand abroad.
Technological and transportation advances meant that beer could be
shipped greater distances and that its shelf life could be extended beyond
the very short limits permitted by earlier technologies. Clearly, the need
and means for expansion were there, so the question was how best to
pursue this growth.
Guinness Breweries opened its second overseas facility in Nigeria
in 1963, a reflection of the growing overseas popularity of its beer. It
also entered into a series of licensing agreements during the 1960s,
1970s and 1980s that further widened its global reach. It merged with
 Path Dependency, Behavioral Lock-in and Beer Markets 63

United Distillery in the 1980s in an effort by both sides to capitalize

on hoped-for synergies between spirits and beer. Yet, despite the high
profile of its brand and the range of expansion modes it had pursued,
by the mid 1980s Guinness ranked only 20th among the world’s brew-
eries (Jackson, 1989). Its performance illustrates the difficulty of a
brewery trying to realize significant international presence through a
single brand.
Heineken used international expansion to both increase the market
for its core brand and to increase the size of its overall operations. By
the 1960s, it had a strong position in parts of Africa along with foreign
direct investments and equity investments in 24 breweries across the
globe. In the 1970s and 1980s, it entered into an array of licensing and
joint venture contracts. By the late 1980s, Heineken had grown into
the world’s third-largest brewery (Jackson, 1989), largely through inter-
national sales of its two core brands – Heineken and Amstel – which it
supported through exports, licensing and joint venture agreements, and
foreign brewery operations.
Carlsberg’s path was similar to Heineken’s. First, it set out to
consolidate its home market. While high tariffs protected them from
outside competition until their removal in the 1960s, in the years
that followed Carlsberg benefited from perhaps an even more potent
force, the “parochialism and patriotism” of Danish beer drinkers who
came to identify strongly with their national brands (“Denmark,” in
Alcohol and Temperance in Modern Society, 2003). Carlsberg merged with
domestic rival Tuborg in 1970 and then very aggressively targeted
overseas sales of the Carlsberg brand. By the mid 1970s foreign sales
exceeded domestic sales and by 1990 three-quarters of their beer was
brewed outside Denmark. From the late 1960s through 1990, Carlsberg
used exports, licensing agreements and foreign overseas breweries
to grow into the world’s 13th largest brewery and one of the most
international.
South African Breweries (SAB) was a bit different from the three
preceding European firms. After centralizing control in its domestic
market in South Africa, it began to expand into other countries and to
partner with other internationally minded breweries looking to develop
new markets. It began by expanding production in neighbouring
Rhodesia in 1951–1952 and in the 1970s it established additional brew-
eries in Botswana, Angola and other southern African countries. In the
1960s Guinness licensed SAB to make its beer in South Africa, the first of
a series of licensing agreements for SAB. So, by the end of the 1980s, we
64 Martin Stack, Myles Gartland, and Tim Keane

can classify SAB as an international brewer, though all of its experience

up to this time focused on southern African countries.
By the 1980s some of the other leading breweries began making their
first tentative moves abroad. Anheuser-Busch of the US created its inter-
national division in 1981, and during this decade it undertook a series
of licensing agreements, beginning in 1980 with Labatt’s in Canada, and
continuing in 1986 with Guinness in Ireland and Oriental Brewery in
South Korea. Yet, despite these initial steps, by 1989 its international
sales accounted for less than 3% of overall output; in 1989, interna-
tional sales were 2.5 million hectolitres, out of total production of over
90 million hectolitres.
What is clear is that between 1950–1990 brewing remained much
more national than international, with only a few brands deriving more
than 10% of their sales outside of their home market. Yet, the world of
national brewing was quickly to be transformed.

1990–present: global breweries but not global brands

By 1990 brewing was more global than it had been, but it was far from
a global market: most production was still domestic and very few
breweries had significant operations abroad. The thinking at the major
breweries up to this time seems to have reflected the basic premise of
Levitt (1983) who argued that there was a large and growing world
market for standardized, branded goods. Supporters of Levitt’s position
asserted that the global firm should promote homogenous versions of
the same product in all of its markets. Levitt cited the examples of Coca-
Cola and Pepsi-Cola, “globally standardized products sold everywhere
and welcomed by everyone ... they exemplify a general drift toward the
homogenization of the world and how companies distribute, finance,
and price products” (Levitt, 1983). In his view, companies that modi-
fied their products to better fit specific local tastes would lose out to
multinationals that took advantage of the scale economies of global
brands. The key question, from this perspective, was how best to
deliver the international brand: exporting, licensing, joint venture or
foreign direct investment?
However, Levitt’s belief in globally standardized products has not been
realized. While most of the leading breweries have continued to use
exports and licensing agreements to support their core brands abroad,
the total volume of these sales relative to world consumption is very
small. In 2003, total world beer consumption was 1,444,087,000 hecto-
litres. While the top 20 world beer brands accounted for 25.6% of total
consumption, only 5.9% of these sales were international.
 Path Dependency, Behavioral Lock-in and Beer Markets 65

Table 3.3 Top 20 world beer brands, 2003

International
Brand Domestic International Total Share

Carlsberg 929 9181 10110 90.80%

Heineken 3682 18419 22101 83.30%
Guinness 1980 8381 10361 80.90%
Amstel 2141 8819 10960 80.50%
Foster’s 2061 8046 10107 79.60%
Corona 17266 11010 28276 38.90%
Castle 6958 2856 9814 29.10%
Budweiser 37322 10268 47590 21.60%
Baltika 8252 1369 9621 14.20%
Coors Light 19301 1860 21161 8.80%
Miller Lite 18094 1424 19518 7.30%
Asahi Super Dry 18567 774 19341 4.00%
Tsingtao 12909 424 13333 3.20%
Brahma Chopp 18586 575 19161 3.00%
Yanjing 14578 451 15029 3.00%
Bud Light 43185 1241 44426 2.80%
Skol 24238 245 24483 1.00%
Natural 12160 56 12216 0.50%
Busch 13243 0 13243 0.00%
Antarctica 9580 0 9580 0.00%
Total 285032 85399 370431

Source: Merrill Lynch (2004).

The vast majority of these brands continue to be consumed within

the home country’s borders. In 2003 only 5 of the top 20 brands derived
more than 50% of their sales from abroad, while 11 of them registered
less than 10% of their sales from overseas.
To get a more precise understanding of how these top 20 beers are
distributed across regions, Table 3.4 divides the world beer market into
four broad beer-consuming regions. While Table 3.3 shows that 80%
of Amstel’s sales are international, Table 3.4 shows more precisely that
70 to 75% of its sales are within Europe, with only 10% in both the
Americas and Asia.
According to Table 3.4, three-fourths of the top beer brands were sold
nearly entirely within one region. More recent data from 2011 reinforce
this message. In 2011, the world’s four largest brands (by volume) – Snow
(China Resources), Bud Light (AB InBev), Tsingtao (Tsingtao) and Skol
(AB InBev) – recorded very few sales outside their domestic markets. In
fact, only one of the top 10 brands, Heineken, had over 50% of its sales
from outside of the home country.
66 Martin Stack, Myles Gartland, and Tim Keane

Table 3.4 Regional distribution of the top 20 beer brands, 2004

Brand Americas Europe Asia Pacific Africa

Budweiser 90% 6% 4% 0%
Bud Light 100% 0% 0% 0%
Corona 100% 0% 0% 0%
Skol 100% 0% 0% 0%
Heineken 25% 50% 12% 13%
Coors Light 100% 0% 0% 0%
Miller Lite 95% 5% 0% 0%
Asahi Super Dry 0% 0% 100% 0%
Brahma Chopp 100% 0% 0% 0%
Yanjing 0% 0% 100% 0%
Tsingtao 0% 0% 100% 0%
Busch 100% 0% 0% 0%
Natural 100% 0% 0% 0%
Amstel 5% 80% 4% 11%
Guinness 20% 50% 5% 25%
Carlsberg 5% 70% 22% 3%
Foster’s 5% 60% 35% 0%
Castle 100% 0% 0% 0%
Baltika 0% 100% 0% 0%
Antarctica 100% 0% 0% 0%

Source: Merrill Lynch (2004).

Table 3.5 Top world brands, 2011 and home sales vs international sales, global
prospects for beer companies, 2012

2011 Rest of the

2011 Main Market World (million
Brand (million litres) of litres)

Snow (China Resources 9,700 0

Bud Light (AB InBev) 4,900 100
Tsingtao (Tsingtao) 4,800 50
Skol (AB InBev) 4,100 0
Budweiser (AB InBev) 2,500 1,300
Yanjing (Beijing Yanjing) 2,450 0
Brahma (AB InBev) 2,200 200
Heineken (Heineken) 300 2,000
Corona Extra (Grupo Modelo) 1,100 1,150
Coors Lights (Molson Coors) 2,100 100

Source: Merrill Lynch (2004).

 Path Dependency, Behavioral Lock-in and Beer Markets 67

Table 3.6 Top breweries by geography, 2011 percentage of volume share by

region

Brewery Americas Europe Asia Pacific Africa

AB-InBev 65% 20% 15% 0%

SABMiller 50% 20% 5% 25%
Heineken 40% 45% 5% 10%
Carlsberg 3% 77% 15% 5%
China Resources 0% 0% 100% 0%
Tsingtao Brewery 0% 0% 100% 0%
Grupo Modelo 95% 5% 0% 0%
Beijing Yanjing 0% 0% 100% 0%
Molson Coors 80% 17% 3% 0%
Kirin Holdings 45% 0% 55% 0%

Source: Global Prospects for Beer Companies (2012).

These findings led us to wonder whether brewing was in fact becoming

more international.
To help answer this, we need to step back and view the market from
a more general perspective. One key development is the very signifi-
cant increase in concentration ratios. As noted in the Introduction, in
1990 the five-firm world concentration ratio was 17%; in 2013 it was
42%. In 1996, the 10-firm ratio was 36%; in 2013 it was 64%. These
increases reflect two separate though related factors: a) increasing sales
of a few core brands, mostly at home but also abroad, and b) a dramatic
increase in cross-border mergers and joint ventures; internationalization
has occurred, but it has been at the level of the brewery, not the brand.
Table 3.6 details the geographic distribution of the 10 largest brew-
eries in 2011. While the three breweries on this list from China – China
Resources, Tsingtao and Beijing Nanjing – continue to rely almost exclu-
sively on their huge domestic market, the other seven breweries all have
diversified significant shares of their production across at least three
geographies.
The earlier path dependency and behavioural lock-in discussion of
history, culture and taste helps explain why the brewing industry has
not globalized at the level of the brand. The next step, then, is to explain
why the industry has globalized at the level of the brewery.
By 1990 it was increasingly clear to a select group of breweries that
international expansion was going to become important; the question
was what the winning expansion strategy would be. Followers of Levitt
(1983) believed that breweries should further support key global brands.
68 Martin Stack, Myles Gartland, and Tim Keane

Others argued that national and regional differences were so significant

that culture demanded more of a country-by-country approach. Still
others argued for a hybrid strategy that would combine the benefits of
both global brands and sensitivity to local brands. As we shall see, this
set of quite distinct strategies has slowly but steadily converged.
During the 1990s and early 2000s, Anheuser-Busch pursued a global
brand strategy reflected in its tagline “Budweiser: One World, One Beer.”
It entered into a series of licensing agreements and it set up foreign
production operations in 1995 in London and in Wuhan China to
produce its iconic brand. Colin Storm, the chief executive of Guinness
in the late 1990s, asserted, “there will be a continuing emergence and
gradual domination of global brands. There’s still a long, long way to
go, but increasingly we’re being exposed to global issues, and global
brands, global images and global aspirations” (Haddock, 1999). It is not
surprising that Anheuser-Busch and Guinness officials advocated the
importance of a global brand strategy, as they were associated with two
of the most important brands in the beer industry; however, as we shall
see, this strategy, by itself, was not sufficient.
During the 1990s, two additional developments emerged that, when
combined with the importance of national culture and identity, came
to support other expansion strategies. First, much of Eastern Europe
and the former Soviet Union began to privatize state-run companies
(including breweries) and to open up their economies to foreign
direct investment. Second, significant parts of Asia and Latin America
began to open up their markets to foreign investors. Together these
changes contributed to a brewery expansion strategy that emphasized
mergers and acquisitions of domestic breweries and brands; this step
provided internationally oriented breweries access to mass markets
rather than to the niche “import” market that Anheuser-Busch had
been targeting.
The strongest counter-example to Anheuser-Busch’s strategy came
from the Belgian–Brazilian brewer InBev. InBev was formed in 2004
from a merger combining Interbrew from Belgium and AmBev from
Brazil. Interbrew itself had only been formed in 1987 through a merger
of Brasseries Artois and Brasseries Piedboeuf, the second- and third-
largest breweries in Belgium. After acquiring several more small Belgian
breweries during the late 1980s and early 1990s, Interbrew faced a key
question: should it continue to gain market share in its relatively small
home market or should it begin to explore options for expanding
overseas?
 Path Dependency, Behavioral Lock-in and Beer Markets 69

Once Interbrew decided to expand beyond its national borders, it

had to choose the proper approach. Interbrew decided to expand by
acquiring breweries in select markets including Labatts from Canada
in 1995, Bass from England in 2000, and Becks and Gilde Brauerei in
2001–2002 (Dombey 2002, 10).
InBev’s internationalization strategy was considerably more compli-
cated than Anheuser-Busch’s. Rather than trying to promote one key
global brand, it chose to buy or partner with local breweries possessing
detailed knowledge of their home markets. It based this approach on
its belief that the vast majority of beer consumers would continue to
prefer local over global beer brands, a pattern that was certainly the
case through the end of the 20th century. In a statement that directly
challenges Levitt’s thesis, Hugo Powell, Interbrew’s past CEO, asserted,
“Beer is inherently a local business. Ninety percent of the world’s beer
business is in local brands. The big brands of the world – the Budweisers
and Coronas and Fosters and Heinekens – represent less than 10% of
the world’s business.” In stark contrast to Budweiser’s “One World,
One Beer” approach, InBev was seeking to become the “World’s Local
Brewer,” a phrase intended to convey the importance of local culture to
the overwhelming majority of beer sales.
Another international brewery with a similar strategy during these years
was SAB. In 1993 it acquired Dreher, Hungary’s largest brewery. Over the
next several years it undertook a series of joint ventures and acquisitions
in China, Africa, Eastern Europe, Russia, and South and Central America.
In 2002 it merged with Miller from the US to form SABMiller. According
to Gram Mackay, the head of SABMiller during this expansion spree, “It’s
a question of whether international brands will become more dominant
or whether a portfolio of unique and regionally interesting brands will
dominate. I tend toward the latter” (Haddock, 1999). By the early 2000s,
it ranked among the top three breweries in over 30 countries, and, like
InBev, it was emphasizing its local beers while also using its growing
portfolio of breweries to help promote a few key brands.
Heineken dithers from InBev and SABMiller in that it has two core
international brands, Heineken and Amstel, which have over 80% of their
sales outside the Netherlands. Yet, as important as these brands are, they
account for only 30% of its total volume. During this period, Heineken,
too, had acquired a series of local brands and breweries. It owned over
115 breweries in more than 65 countries and in 2005 it emphasized
on its web page that it wants to “maintain a strong portfolio of beer
brands, with Heineken as the leading international premium beer” and
70 Martin Stack, Myles Gartland, and Tim Keane

to “maintain strong local market positions ... by combining the sales and
distribution of the International premium brand with that of strong local
brands” ([Link] accessed July 3, 2005).
Carlsberg’s strategy seemed to parallel that of Heineken. In 2003,
its Carlsberg beer was the most international of all beer brands, with
more than 90% of its sales outside of Denmark. Yet, this well-known
brand accounted for only 25% of Carlsberg’s total sales. The rest of its
sales came from breweries that it had either acquired or partnered with
in joint ventures: “Carlsberg has a solid portfolio of global, regional,
and local brands which enables it to provide individuals around the
world with the beer that is right for them” ([Link] accessed
July 3, 2005). During the 1990s and 2000s, Carlsberg used a combina-
tion of joint ventures and acquisitions to develop a local portfolio that
complemented its distribution efforts of its core global brand.

5 Conclusion

Essentially, InBev’s acquisition of Anheuser-Busch in 2009 marked the

end of the “global brand” strategy while also highlighting some of the
weaknesses in the “world’s local brewery” strategy as well. Since 2005,
the largest breweries have converged on a common portfolio strategy
that seeks to combine the profit margins of a global brand with the
cultural nuance and stet of the local brewery. Today, with the exception
of the largest Chinese breweries, which still have the luxury of focusing
on the world’s largest domestic market (and one which continues to
grow), the other dominant breweries have all set up – with varying levels
of success – a strategy that combines one or more global brands with
local brands and a few niche, craft-oriented brands.
Given how important mergers and acquisitions have been in inter-
nationalizing this market, one may wonder why this process has not
engendered more cultural backlash? If one theme of this chapter is that
international brands face significant hurdles due to widespread public
preference for their own breweries and brands, then why have interna-
tional breweries been so successful at acquiring these national assets? It
appears that several factors are at work. First, consumers in many coun-
tries are simply are unaware that their favorite local or national brand
has been bought out. Second, the international breweries have been
most successful in their acquisitions when they have not altered the
beer or compromised on its quality or traditional taste attributes. There
have certainly been instances when acquisitions have elicited negative
press, but for the most part this process has not occasioned the backlash
 Path Dependency, Behavioral Lock-in and Beer Markets 71

some might have expected. From the acquiring firms’ perspective, this
approach has proved very successful as it allows the breweries to diver-
sify their volume and to use their new assets to help promote their core
and specialty international brands which are usually much more profit-
able on a per-unit basis.
This chapter has introduced a historical perspective to explain why
various internationalization strategies have and have not worked in the
brewing industry. The moral of this chapter is that markets in which
culture and nationality become intertwined with specific goods often
prove challenging for firms seeking to develop “international” brands.
Such brands may succeed at the margins as more expensive niche
options, but they are unlikely to win favour with the mass market which
seems all too willing to continue to support national brands. A number
of critics of Levitt’s widely read 1983 article argue that the pendulum has
swung against global brands and that greater emphasis must be given to
local sensitivities.
Finally, while the emphasis of this chapter has been on the strategies
and challenges facing the world’s largest breweries, it is necessary to
consider one other key development in the beer industry: the rise of craft
beer. Driven by a combination of consumers and producers in the US and
the UK, craft beer began to emerge as a social and industry force in the
1980s and 1990s. Reflecting the attitudes discussed earlier in this chapter,
a 2013 BBC magazine article averred that “Not so very long ago, American
beer was a joke. And a weak one at that.” However, it goes on to argue
that, during the past few years, the rise of craft breweries in the US has
transformed the market for beer in the US and the reputation of its beer
in countries such as the UK (Kelly, “US Craft Beer: How It Inspired British
Brewers,” BBC News Magazine, 2013). The craft beer movement in the US
and UK has inspired craft beer producers and consumers in many other
countries including Denmark, Australia, New Zealand, Italy, Switzerland
and Spain. In all of these countries a small but growing percentage of the
beer market has moved from more traditional, homogenous mass produc-
tion lager to more flavourful craft ales and lagers. While in many of these
countries craft beer represents less than 3% of total sales, in the US craft
sales account for more than 10% of the overall market by volume and
nearly 20% by value, and they are growing rapidly.
So, is craft beer a threat to the large international breweries? These
breweries have responded in two primary ways. First, they have tried
on several occasions to introduce their own craft-style brands. For
the most part, these efforts have not been overly successful; however,
MillerCoors, a joint venture between SABMiller and Molson Coors, has
72 Martin Stack, Myles Gartland, and Tim Keane

had better luck with their Blue Moon label beers (interestingly they have
come under some criticism for not stating explicitly on the label the link
between Blue Moon and Molson Coors), and they will undoubtedly try
to replicate this success. Second, they have acquired prominent craft
breweries: in the UK, SABMiller bought one of the earliest and most
successful London craft breweries. Meantime, while in the US, ABInBev
has bought several US craft breweries, most famously Goose Island in
Chicago.
The large international breweries of this chapter have overcome a
series of challenges, domestic and international, on their way to creating
a global oligopoly: whether craft beer represents one more factor to be
absorbed or whether it represents a distinct threat to the dominant
players is the question that will be played out in the years to come.

Notes
1. See Lopes (2007) for a detailed discussion of the role brands played for inter-
national expansion for some multinationals focusing on alcohol (beer, spirits
and wine).
2. In the summer of 2004, the authors conducted a series of in-person, telephone
and email interviews with executives and strategists at Anheuser-Busch,
Interbrew, SAB-Miller and Heineken, the four largest breweries in the world.
In the summers of 2005 and 2006, the authors met with key brewery officials
in India and China.

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4
Intra-industry Trade in the
Beer Industry within the
Enlarged European Union
Imre Fertő and Szilárd Podruzsik

1 Introduction

In recent decades intra-industry trade (IIT) has become a widespread

phenomenon, with its growing role in international trade providing
strong incentives for theoretical and empirical research. The stronger
economic ties among European countries arising from the creation and
expansion of the European Union (EU) have contributed to an increase
in IIT among EU Member States. There is a wealth of literature on IIT
between a particular Member State and its partner (Jensen and Lüthje,
2009 Milgram-Baleix and Moro-Egido, 2010). However, many of these
studies have focused on industrial products. In addition, recent studies
(Leitão, 2011; Jámbor 2014a, 2014b; Fertő and Jámbor, 2015) suggest
that the role of IIT has been increasing in agricultural trade between
European Member States.
Interestingly, there is a paucity of industry-level studies, especially
in the food industry (see Christodolou, 1992; Pieri et al., 1997; Bojnec
and Fertő, 2014; Fertő et al., 2014 as exceptions). We choose beer for
two reasons. First, IIT in the beer industry is a fact of everyday life. A
wide selection of beers, including domestic and foreign, are available
to consumers in almost all European countries. Second, beer is a differ-
entiated product which makes it particularly suited to IIT analysis.
The aim of this chapter is to examine the drivers of IIT in the beer
industry within the EU. Such an approach aims to contribute to the
literature in four ways: (1) focusing on beer trade; (2) employing a
specific theoretical model developed by Cieślik (2005) instead of the
usual eclectic approach; (3) analysing the impacts of EU enlargement

74
 Intra-industry Trade in the Beer Industry 75

focusing on the period between 2000 and 2010; (4) employing a multi-
lateral dataset instead of the bilateral framework that still predominates
in recent empirical research.

2 Theoretical framework

The traditional Chamberlin-Heckscher-Ohlin model (C-H-O) assumes

that goods are horizontally differentiated. Horizontal differentiation
implies that many varieties of a product are available when varieties
do not vary in ‘quality’. Good examples of horizontal product differ-
entiation are branded products, like beer. In many countries (Krugman,
1979; Lancaster, 1980; Helpman, 1981), IIT opens up monopolistically
competitive markets, with increasing returns to scale on the supply side
and diverse consumer preferences on the demand side. Helpman and
Krugman (1985) add factor endowment differences to a model that
explains the coexistence of intra- and inter-industry trade. Consider two
countries (A and B), two factors (labour and capital) and two goods:
a homogeneous commodity that is relatively labour intensive and a
differentiated product that is relatively capital intensive. If country A is
relatively labour abundant and country B is relatively capital abundant,
Helpman and Krugman show how country A tends to export the homo-
geneous product and both countries import the differentiated good.
This model predicts that IIT will decrease as the factor endowments of
the countries diverge. Moreover, Bergstrand (1990) expanded earlier
theoretical works by proposing a new framework that uses a gravity-like
equation to explain the relationship between the share of IIT in total
trade and factor endowments, as well as income. Important determi-
nants of the share of IIT in total bilateral trade in the Bergstrand model
are differences in income, average income and average capital–labour
ratios as well as differences therein.
However, Cieślik (2005) argues that previous empirical studies fail to
provide an exact link between the theory and the data. He shows that
the Helpman and Krugman (1985) model does not predict any unique
theoretical relationship between IIT and relative country size if we keep
differences in capital-labour ratios unchanged. Thus Cieślik (2005)
develops a formal model to eliminate this shortcoming by providing
two complementary propositions. First, the share of IIT between two
countries is larger the larger the sum of their capital–labour ratios, given
the fixed difference in their capital–labour proportions. Second, the
share of IIT between two countries is larger the smaller the difference in
their capital–labour ratios given the constant sum of their capital–labour
76 Imre Fertő and Szilárd Podruzsik

ratios. His results indicate IIT theory finds support when we control for
the sum of capital–labour ratios in the estimating equations instead of
relative country-size variables.
The earlier empirical literature on IIT has typically assumed, some-
times implicitly, that product differentiation is horizontal although it
can be vertical. Vertical differentiation implies that many varieties of
a product are available, but they vary in ‘quality’ in a meaningful and
significant way. Recent empirical studies show that vertical IIT is mark-
edly more important than horizontal IIT (Fontagné et al., 2006; Jensen
and Lüthje, 2009), highlighting the importance of respective theoretical
models for empirical analysis. These theoretical models emphasise three
factors in VIIT: the role of differences in factor endowments, the effect
of income distribution, and production size. The first strand of models
focuses on the comparative advantage explanation of VIIT, as in the
C-H-O model. Falvey (1981) assumes a perfectly competitive market
with two countries, two goods (a homogeneous product and a differ-
entiated one) and two factors (labour and capital). He introduces tech-
nological differences between countries but only in the homogeneous
product sector. In the differentiated sector it is assumed that more capital
is used in producing higher quality varieties compared to lower quality.
So, the higher income, relatively capital-abundant country specialises
in exporting relatively high-quality varieties, while the lower income,
relatively labour-abundant country specialises in exporting low-quality
varieties. Falvey’s model does not have an explicit demand side, but
Falvey and Kierzkowski (1987) also elaborate this.
On the demand side, goods are distinguished by perceived quality.
Although all consumers have the same preferences, each individual
demands only one variety of the differentiated product, which is deter-
mined by their income. Given that aggregate income is not equally
distributed, consumers with lower incomes will demand low-quality
varieties and high-income consumers will demand high quality, regard-
less of their country of origin. Thus, it is possible to establish a marginal
level of income in such a way that those consumers with higher earn-
ings will purchase the varieties produced in the relatively capital-
abundant country, while low-income consumers will purchase the
varieties produced in the relatively labour-abundant country. In this
framework, IIT exists because each variety of a differentiated good is
produced in only one country but is consumed in both countries. In this
two-country world, the country that is relatively labour abundant will
tend to export the lower-quality/labour-intensive varieties of a differ-
entiated good demanded abroad by low-income consumers and will
tend to import the higher-quality/capital-intensive varieties demanded
 Intra-industry Trade in the Beer Industry 77

by its high-income consumers. Thus, the greater IIT is, the greater the
differences in relative factor endowments (which correspond to per
capita income differences in the context of the model). The model also
suggests that VIIT is positively correlated with differences in the pattern
of income distribution between partner countries.
The second group of models turns to a more heterodox explanation in
line with the neo-Ricardian and neo-factorial models (Gabszewicz et al.,
1981; Shaked and Sutton, 1984). A similar model of IIT in vertically differ-
entiated products to Flam and Helpman (1987) is created in which North–
South trade is determined by differences in technology, income and
income distribution. The results of this model are very similar to those of
Falvey and Kierzkowski (1987). In the model of Flam and Helpman, there
are two countries: a home country (North) and a foreign country (South),
one factor (labour) and two goods. One of the goods is homogeneous and
perfectly divisible, while the other is quality differentiated and indivisible.
Both countries have the same unit labour requirements for producing the
homogeneous good. The labour input per unit of output of the quality-
differentiated products differs between the countries, where quality is
a positive function of labour input. The home country has an absolute
advantage in production of all qualities, while the foreign country may
have a comparative advantage only in low quality. Note that the source of
quality differentiation is not the amount of capital used in producing the
good (Falvey and Kierzkowski, 1987), but the technology used.
The demand for variety stems from variations in income across
consumers who buy a specific quality, reflecting their preferences and
income constraints. Consumers with higher effective labour endowments
(who are assumed to earn higher incomes) demand the higher quality,
indivisible good. Therefore, the home country specialises completely
in the differentiated good of high quality, while the foreign country
exports the homogeneous good. Assuming an overlap in income distri-
bution, IIT appears. The model predicts that higher bilateral differences
in factor endowment lead to a higher share of IIT.

3 Measuring intra-industry trade

The basis for the various measures of IIT used in the present study is the
Grubel–Lloyd (GL) index (Grubel and Lloyd, 1975), which is expressed
formally as follows:

Xi − M i
GLi = 1 − (4.1)
( Xi + M i )
78 Imre Fertő and Szilárd Podruzsik

where Xi and Mi are the values of exports and imports of product cate-
gory i in a particular country.
Over the last decade unit values have been used for assessing product
quality in trade data and they have become popular in the separation of
horizontal and vertical IIT (Greenaway et al., 1994, 1995). The under-
lying assumption is that relative prices are likely to reflect relative quali-
ties (Stiglitz, 1987). The unit value approach is usually criticised for at
least two reasons (Silver, 2007). First, unit values of two bundles may
also differ if the mix of products differs, so that one bundle may contain
a higher proportion of high unit value items than the other. Second, in
the short run, consumers may buy a more expensive product for reasons
other than quality. In spite of such criticism, the unit value approach
is widely used in the empirical IIT literature. Typically, trade flows are
defined as horizontally differentiated where the spread of the unit value
of exports (UVx) relative to the unit value of imports (UVm) is less than
15% at the highly disaggregated product group level. Where relative
unit values are outside this range, products are considered as vertically
differentiated. A formal derivation of the HIIT and the VIIT indices can
be found in Appendix 4.1. The measurement of horizontal and vertical
IIT is illustrated with a simple numerical example in Table 4.1.
We use trade data from the Eurostat COMEXT database using the HS6
system (six-digit level). The beer trade is defined as trade in product
groups coded in HS-220300. Our analysis focuses on the period 2000–
2010. In this context, the EU is defined as the Member States of the
EU-27. The final sample includes 7,702 observations.
Appendix 4.2 presents three different specifications that are used
to test the theoretical propositions of the Helpman-Krugman model
and the modified versions developed by Cieślik (2005). GDP, GDP per
capita and labour data come from the World Bank World Development
Indicators (WDI) database. From capital–labour ratios physical capital
was estimated by the perpetual inventory method using investment
and GDP variables from the Penn World Table 7.0 (Heston et al., 2011).
Distance data is obtained from the French research center in international

Table 4.1 Numerical example of IIT

UVx/ Type of
Product export Import UVx UVm UVm IIT GL

A 30 20 90 100 0.9 HIIT 0.8

B 10 40 80 50 1.6 VIIT 0.4

Source: Own composition.

 Intra-industry Trade in the Beer Industry 79

economics (CEPII). Moreover, we add a variable to extend our baseline

models to each specification. After almost a decade, the question arises
whether EU accession has had any impact on agri-food trade patterns
and especially on IIT. It is generally accepted that economic integration
increases IIT (Qasmi and Fausti, 2001, Jámbor, 2014a; Fertő and Jámbor,
2015). Moreover, we add two variables to extend our baseline models to
each specification. Previous studies (Fertő and Soós, 2009; Bojnec and
Fertő, 2012) show that the duration of trade in both manufacturing and
agri-food products differs across EU10/12 and EU15 markets: for the
majority of New Member States (NMS), the length of trade is greater in
EU10/12 markets than in EU15 markets. In other words, Old Member
States (OMS) markets have higher quality requirements, thus we can
expect that their exports and imports exceed NMS. Table 4.2 provides an
overview of the description of variables and related hypotheses.

Table 4.2 Description of independent variables

Variable Variable description Data source Sign

lnDGDPC The logarithm of per capita GDP absolute WDI −/+

difference between trading partners measured
in PPP in current international USD
lnGDPmin The logarithm of minimum GDP measured WDI +
in PPP in current international USD
lnGDPmax The logarithm of maximum GDP measured WDI −
in PPP in current international USD
lnGDPsum The logarithm of sum of GDP of trading WDI +
partners measured in PPP in current
international USD
lndispersion The logarithm of absolute difference WDI +
between trading partners capital city
measured in kilometres
lnDCAPLAB The logarithm of absolute difference of Penn World −/+
capital-labour ratios between trading Table 7.0., WDI
partners
LnsumCAPLAB The logarithm of sum of capital-labour Penn World +
ratios between trading partners Table 7.0., WDI
lnDIST The logarithm of absolute difference CEPII −
between trading partners capital city
measured in kilometres
OMS Dummy variable for Old Member States ?
EU Dummy variable for the EU enlargement +
in 2004
80 Imre Fertő and Szilárd Podruzsik

4 The nature of beer trade in the EU

4.1 The beer industry in the EU

The EU-27 beer trade has increased significantly in the internal EU
market (Figure 4.1). The value of exports and imports more than
doubled. We can also observe two important factors in this pattern.
First, a rapid growth has occurred in beer trade after EU enlargement
in 2004. Second, there was a considerable drop in 2009 due to global
economic crises.
The largest beer-exporting countries are Germany, Belgium, UK and
the Netherlands (Figure 4.2). The best performing New Member States
are the Czech Republic and Poland. On the import side, the UK, Italy,
France and Germany are the most important players. Hungary and
Slovakia are the largest importers among New Member States.
One well-known problem in any research using empirical trade anal-
ysis, including IIT, is the accuracy of the data used. Most researchers
study IIT bilaterally, that is, one country’s trade with several others,
using the data of the former. Usually this country is a member of
the OECD, which has a good reputation for reporting accuracy.
Consequently, an index measuring IIT between two countries should
remain invariant if it is calculated from trade data reported by

4.0e+06

3.0e+06
1000s $

2.0e+06

1.0e+06

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Export Import

Figure 4.1 The beer trade in the EU

Source: Own calculations based on the Eurostat database, 2014.
 Malta
Bulgaria
Cyprus
Romania
Latvia
Greece
Lithuania
Hungary
Slovak Republic
Estonia
Luxembourg
Slovenia
Finland
Sweden
Austria
Portugal
Poland
Spain
Italy
Czech Republic
France
Ireland
Denmark
Netherlands
United Kingdom
Belgium
Germany

0 200000 400000 600000 800000

1000s $
Export Import

Figure 4.2 The mean values of beer exports and imports in the EU by Member States
Source: Own calculations based on the Eurostat database, 2014.
82 Imre Fertő and Szilárd Podruzsik

a certain country or by data reported from its trade partner due to the
symmetry of the formulae. This is so obvious that articles often do not
even mention the issue. However, investigation of multilateral trade
between different combinations of OECD and non-OECD countries
reveals serious inconsistencies in the accuracy of trade data (Fertő and
Soós, 2009). Jensen and Lüthje (2009) provide some evidence that data
accuracy is less severe for trade within Europe. To check whether this
is the case, we calculated the correlations between IIT indices based on
trade data reported by an EU Member State and data reported by its
partner (Figure 4.3). The correlation indices ranged significantly across
member states from −0.02 to 0.73. In terms of high correlation index
for IIT, the best-performing Member States are Luxembourg, Latvia,
Estonia, Czech Republic and Portugal, while the worst performers
are Denmark, Malta, Hungary, Sweden and Slovakia. The correlation
indices are consistently the highest for IIT followed by VIIT and HIIT
values. Surprisingly for the HIIT some good-performing Member States
show negative correlations, including Luxembourg, Bulgaria, Czech
Republic and Netherlands. Advanced economic development does
not necessarily imply higher accuracy of trade data (see, for example,
Denmark and Sweden).
We divide the EU-27 Member States into two groups (the NMS and
OMS) to check whether there is any difference regarding data accuracy.
Further analysis on correlations indicates good performances of IIT
indices and VIIT/HIIT measures, with the mean values of correlation
indices close to each other in two groups. In addition, Kruskal-Wallis
tests confirm that the mean values of correlation indices for all IIT meas-
ures do not differ significantly from one another. In short, in line with
Fertő and Soós (2009), our analysis casts some doubt on the accuracy of
the trade data.
The second issue is stability of classification of IIT types (Nielsen and
Lüthje, 2002). The literature on the use of export/import unit values for
assessing trade types and product qualities is mixed (Bojnec and Fertő,
2010). International export/import unit values may differ and be vola-
tile due to product mix and short-run consumer preferences (e.g. Silver,
2007). On the other hand, there are no other available data to address
these questions. The use of export/import unit values is widespread in
the empirical trade literature (Greenaway et al., 1994) under the assump-
tion that, even with imperfect information, prices tend to reflect quality
(Stiglitz, 1987) and determine the direction of trade.
To verify the stability of classification in IIT types we employ the
Markov transition probability matrix. We distinguish four different
 Denmark
Malta
Hungary
Sweden
Slovakia
Cyprus
Germany
Poland
Slovenia
UK
Romania
Italy
Spain
Greece
EU-27
Ireland
Belgium
France
Netherlands
Finland
Austria
Lithuania
Portugal
Czech
Bulgaria
Estonia
Latvia
Luxembourg

0 .2 .4 .6 .8

IIT HIIT VIIT

Figure 4.3 Correlation indices based on a report and partner EU Member State as report Member State
Source: Own calculations based on the Eurostat database, 2014.
84 Imre Fertő and Szilárd Podruzsik

Table 4.3 Markov transition probability matrix for classification of trade

types

Inter- Low High

industry vertical Horizontal vertical
trade IIT IIT IIT Total

Inter-industry trade 88.19 9.83 0.65 1.33 100.00

Low vertical IIT 25.97 57.41 9.48 7.14 100.00
Horizontal IIT 4.60 45.11 32.76 17.53 100.00
High vertical IIT 6.88 30.84 10.61 51.67 100.00
Total 63.38 24.40 5.06 7.17 100.00

Source: Own calculations based on the Eurostat database, 2014.

trade types: inter-industry trade, low vertical IIT, horizontal IIT and high
vertical IIT. Table 4.3 presents the Markov transition probability matrix
for the trade types for the probability of staying or passing from one
state to another between the start year (1999) and the end year (2010).
The diagonal elements of the Markov transition probability matrix indi-
cate the probability of staying high persistently with inter-industry trade
(88%) and less persistent for horizontal IIT (33%), vertical IITs are around
52–57%. Moreover, there is the highest probability that horizontal IITs
move to low vertical IIT status (45%). In short, our estimations reinforce
the findings of Nielsen and Lüthje (2002): the IIT classification is rather
unstable.
Figure 4.4 shows that the mean values of the total IIT are low (below
0.2) with an increasing trend. The figures exhibit similar patterns inde-
pendently of the sample. Further verification confirms the evidence of IIT
in the sample. It is mainly of a vertical nature, suggesting the exchange
of products of different quality. Surprisingly, low vertical IIT plays a
dominant role, implying that IIT is concentrated on the lower-quality
segment within the EU. The dominance of vertical- over horizontal-type
trade accords with the general findings of recent empirical literature.
The distribution of IIT types varies according to different samples, but
the predominant role of low vertical IIT is confirmed in all samples. The
share of horizontal IIT is the smallest in the full and partner samples.
In particular, in the full sample the level of high vertical IIT and hori-
zontal IIT is rather low, and low vertical IIT constitutes an important
part of the beer trade at Member State level, as shown in Figure 4.5.
However, considerable differences exist between Member States: the UK,
France, Germany, Austria, Italy and Spain have the highest values of
high vertical IIT indices.
 Intra-industry Trade in the Beer Industry 85

.16

.14

.12
IIT

.1

.08

.06
2000 2002 2004 2006 2008 2010
year

Full sample Reporter Partner

Figure 4.4 Development of beer IIT in the EU-27

Source: Own calculations based on the Eurostat database, 2014.

5 Regression results

In our empirical analysis we use the full sample for the following reasons.
Taking into account the multilateral nature of our dataset, we wish to
avoid the arbitrary selection of Member States. Before estimating the
panel regression models, the main model variables are pre-tested for
unit roots. In sum, we may conclude that the panel is stationary (see
Appendix 4.3 – Table 4.4). We apply random effects to bit models to
equations (4), (5) and (7) because IIT variables are truncated at 0 and 1
and a considerable part of the observation have zero values. To check
the robustness of our results we estimate three different models for each
IIT index. In addition, we estimate augmented models with policy vari-
ables including an EU enlargement dummy and an OMS dummy.

5.1 Baseline models

Instead of a traditional presentation of the results, namely tabulating
regression coefficients, our estimations are presented using graphs,1 as
we feel these are often easier to read than tables (Jann, 2014). Figure 4.6
shows the results of the benchmark Helpman model (model 1 –
equation 4.4 in the Appendix) plotting coefficients of variables with 95%
confidence intervals. For clarity we omit the coefficients of constants.
Relative factor endowments proxied by differences in GDP per capita
do not have impact in all six models at the 5% level of significance.
 Denmark
Malta
Cyprus
Slovakia
Slovenia
Hungary
Bulgaria
Romania
Lithuania
Poland
Portugal
Netherlands
Estonia
Luxembourg
Latvia
Ireland
Greece
Sweden
Czech
Belgium
Finland
Spain
Austria
italy
Germany
France
UK

0 .1 .2 .3 .4
Horizontal IIT Low vertical IIT High vertical IIT

Figure 4.5 Beer IIT types in EU-27 by Member States

Source: Own calculations based on the Eurostat database.
 Intra-industry Trade in the Beer Industry 87

Model 1

IIT HIIT VIIT

lnDGDPC

lnGDPmin

lnGDPmax

EU

OMS

–.2 –.1 0 .1 .2 –.2 –.1 0 .1 .2 –.2 –.1 0 .1 .2

Base model Augmented model

Model 2

IIT HIIT VIIT

lnDGDPC

lnGDPsum

lndispersion

EU

OMS

–.6 –.4 –.2 0 .2 –.6 –.4 –.2 0 .2 –.6 –.4 –.2 0 .2

Base model Augmented model

Figure 4.6 Baseline Helpman (models 1 and 2)

88 Imre Fertő and Szilárd Podruzsik

Member State size effects are strongly significant with expected signs for
lnGDPmin variables. However, lnGDPmax variables have unexpected
signs with strong significance. The EU accession dummies positively and
significantly influence the various IIT indices. In other words, EU acces-
sion has had a positive impact on the beer trade. However, trading only
among OMS has positive, but statistically insignificant, impact on the
different types of IIT. In general, our results are fairly robust to different
measures of IIT and specifications.
In the next step we consider an alternative specification of benchmark
model to separate the effect of absolute country size from the impact of
relative country size. Our results are rather mixed (model 2 – equation
4.5 in the Appendix). Similar to the previous model, difference in GDP
per capita is not significant with expected sign for all cases. However,
our estimations support the positive effect of absolute country size on all
types IIT. The coefficients of relative country size are insignificant for all
specifications. EU accession positively influences total and vertical IIT,
while the opposite is true for HIIT. Similar to previous models, OMS do
not have significant effects on IIT. Again, our estimations are robust to
various IIT indices and specifications.

5.2 New evidence

It is well known that the use of GDP per capita as a proxy for relative
factor endowments is problematic. Linder (1961) noted that inequality
in per capita income may serve as a proxy for differences in preferences.
In addition, Hummels and Levinsohn (1995) argued that this proxy is
appropriate only when the number of factors is limited to two and all
goods are traded, thus they proposed income per worker as a measure of
differences in factor composition and used actual factor data on capital–
labour and land–labour ratios. Interestingly, despite these limitations
of the use of the GDP per capita, it became a popular and dominating
proxy for factor endowments in the empirical literature.
As a first step, we present results focusing on the relationships between
IIT and differences in capital–labour ratios and control for variation
in the sum of capital–labour proportions predicted by Cieślik (2005).
The estimated coefficients for sum of capital–labour ratios, shown in
Figure 4.7, are highly significant and consistent with theoretical predic-
tions, irrespective of alternative specifications. The absolute value of
differences in capital–labour ratios has the negative and expected sign
for HIIT, but not for the base VIIT models. The EU has significant posi-
tive impact on IIT and VIIT, while it influences HIIT negatively. The
OMS variable is positive and significant for all cases.
 Intra-industry Trade in the Beer Industry 89

IIT HIIT VIIT

lnDCAPLAB

LnsumCAPLAB

EU

OMS

–.2 0 .2 .4 –.2 0 .2 .4 –.2 0 .2 .4

Base model Augmented model

Figure 4.7 Cieślik model

5.3 Sensitivity analysis

In order to verify the robustness of our results, we estimate several
alternative models including common control variables provided by
the empirical literature. Bergstrand (1990) suggests distinguishing the
demand-and-supply side to explain IIT. Because inequality in per capita
incomes among countries seems to influence the share of intra-industry
trade via two channels, both should be taken into account in econo-
metric analysis. Thus we add the logs of minimum GDP per capita and
logs of sum of GDP per capita of trading partners to control for diver-
gences in tastes and the average level of development. The results remain
qualitatively the same (Figure 4.8a). Estimations show that sum capital–
labour variables are significant and they are in line with the theoretical
expectations for the IIT and HIIT indices, but significant with unex-
pected sign for the baseline VIIT model. The difference in capital–labour
ratios is positive and significant for all specifications. Both GDP per
capita variables significantly influence IIT for all specifications, except
for lnGDPmax in the augmented HIIT model. The EU accession and
OMS variables have the same results as in earlier estimations.
Finally, we investigate the role of distance to explain IIT. Bergstrand
(1990) provided a formal justification for the relationship between
horizontal IIT and transport costs. Our results, shown in Figure 4.8b,
90 Imre Fertő and Szilárd Podruzsik

Sensitivity analysis 1

IIT HIIT VIIT

lnDCAPLAB

lnsumCAPLAB

lnGDPmin

lnGDPmax

EU

OMS

–.2 0 .2 .4 –.2 0 .2 .4 –.2 0 .2 .4

Base model Augmented model

Sensitivity analysis 2

IIT HIIT VIIT

lnDCAPLAB

lnsumCAPLAB

1nDIST

EU

OMS

–.4 –.2 0 .2 .4 –.4 –.2 0 .2 .4 –.4 –.2 0 .2 .4

Base model Augmented model

Figure 4.8 Sensitivity analysis

 Intra-industry Trade in the Beer Industry 91

confirm that distance is significantly and negatively related to IIT in

all specifications. The estimates of the coefficients on the sums of
capital–labour ratios have the predicted sign and remain statistically
significant at the 1% level. As with previous estimations, differences in
capital–labour ratios have predicted signs and are significant only for
HIIT in the base model. EU accession has a positive impact on IIT and
VIIT, while its coefficient is negative for HIIT. OMS positively influ-
ences IIT in all estimations.

6 Conclusions

This paper analyses the pattern and driving forces of IIT in the beer
industry using relative factor endowments and the integrated Helpman
and Krugman model. This framework predicts a negative relationship
between differences in capital–labour ratios and IIT. However, there
exists conflicting evidence to support this theory. Previous empirical
studies have failed to provide an exact link between theory and data.
Thus, we employ a new empirical strategy developed by Cieślik (2005) to
test the predictions of the Helpman and Krugman (1985) model.
Our results confirm the increasing role of IIT for beer products within
the enlarged EU during the period considered. Estimations supporting
the dominance of vertical- over horizontal-type trade accord with the
general findings of recent empirical literature. At the Member State level,
Austria, France, Germany, Italy and the UK report the highest levels of
IIT within the enlarged EU.
Our empirical evidence indicates that the standard IIT theory is
supported when we control for the sum of capital–labour ratios in the
estimating equations instead of relative country-size variables. The
empirical research based on the C-H-O framework usually neglects
the distinction between horizontal and vertical IIT. Our results highlight
that both the Helpman and Cieślik models perform better for horizontal
IIT than for total IIT. In other words, measuring IIT does matter. The
results confirm the negative impacts of distance on IIT. Policy variables
suggest that the EU enlargement has had positive impacts on total and
vertical IIT, and has negatively affected HIIT. OMS usually prefer to trade
beer with one another. Finally, our estimations also present a consider-
ably high level of instability in the IIT classifications which casts some
doubt on the use of the unit value approach to distinguish horizontal
and vertical IIT.
92 Imre Fertő and Szilárd Podruzsik

Acknowledgements

The authors gratefully acknowledge financial support from the

COMPETE research project, supported by the European Commission’s
7th Framework Programme, contract number 312029. The opinions
expressed here are not necessarily those of the EC.

Appendix 4.1 Measuring horizontal and vertical IIT

Greenaway et al. (1995) developed the following approach to disentangling hori-
zontal and vertical IIT: a product is horizontally differentiated if the unit value of
export compared to the unit value of import lies within a 15% range, and other-
wise they define vertically differentiated products. Formally, this is expressed for
bilateral trade of horizontally differentiated products as follows:

UVi X
1−α ≤ ≤ 1+α (4.2)
UVi M

where UV means unit values, X and M means exports and imports for goods i
and α = 0.15. The choice of a 15% range is rather arbitrary, and Greenaway et al.
(1994) proposed widening the spread to 25%. Interestingly, papers checking the
possible impact of various thresholds confirm that results coming from the selec-
tion of the 15% range do not change significantly when the spread is widened to
25% (Jensen and Lüthje, 2009). Based on the logic above, the Greenaway-Hine-
Milner (GHM) index becomes formally as follows:

∑ ⎡⎣(X
j
p
j ,k )
+ M jp,k − X jp,k − M jp,k ⎤⎦
GHM = p
(4.3)
∑ (X )
k
j ,k + M j ,k
j

where X and M denote export and import, respectively, while p distinguishes

horizontal or vertical intra-industry trade, j is the number of product groups
and k is the number of trading partners (j, k = 1, ... n). Blanes and Martín (2000)
emphasize the distinction between high and low vertical IIT. They define low
vertical IIT as when the relative unit value of a good is below the limit of 0.85,
while a unit value above 1.15 indicates high vertical IIT.

Appendix 4.2 Econometric models for IIT

The early tests of Helpman-Krugman were based on the following specifications
introduced by Helpman (1987).

nIITijt = α0 + α1lnDGDPCijt + α2min(lnGDPit, lnGDPjt)

+ α3 max(lnGDPit, lnGDPjt) + εij + ij (4.4)
 Intra-industry Trade in the Beer Industry 93

where IIT is the bilateral GL index. To separate the effect of absolute country size
from the impact of relative country size, Helpman (1987) suggests the following
modification:

lnIITijt = α0 + α1lnDGDPCijt + α2sum(lnGDPit, lnGDPjt) + α3lndispersionijt

+ vij + εij (4.5)

where dispersion can be expressed as follows:

⎡ ⎛ GDP
2
⎞ ⎛ GDPj ⎞ ⎤
2

dispersion = In ⎢1 − ⎜ i
⎟ −⎜ ⎟ ⎥
(4.6)
⎢ ⎝ GDPi + GDPj ⎠ ⎝ GDPi + GDPj ⎠ ⎥
⎣ ⎦
To test two propositions by Cieślik (2005) we estimate following model:

lnIITijt= α0+ α1lnDCAPLABijt + α2lnsumCAPLABijt + vij + εij (4.7)

Appendix 4.3 Panel unit root tests

We employ the Levin, Lin and Chu (2002) method (common unit root process),
the Im, Pesaran and Shin (2003) method (assuming individual unit root proc-
esses), ADF-Chi square and PP-Chi square. The lag length has been chosen
according to the Modified Akaike Information Criterion (MAIC) proposed by Ng
and Perron (2001).

Table 4.4 Panel unit root tests

ln ln ln ln ln
IIT HIIT DGDPC GDPmin GDPmax DCAPLAB sumCAPLAB

Levin, Lin & 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Chu t*
Im, Pesaran and 0.000 0.000 1.000 0.999 1.000 0.995 1.000
Shin W-stat
ADF-Fisher 0.000 0.000 1.000 1.000 1.000 1.000 1.000
Chi-square
PP-Fisher 0.000 0.000 0.000 1.000 1.000 0.154 1.000
Chi-square
with trend
Levin, Lin & 0.000 0.000 0.080 1.000 1.000 0.000 0.999
Chu t*
Im, Pesaran and 0.008 0.000 1.000 1.000 1.000 1.000 1.000
Shin W-stat
ADF-Fisher 0.000 0.000 1.000 1.000 1.000 1.000 1.000
Chi-square
PP-Fisher 0.000 0.000 1.000 1.000 1.000 1.000 1.000
Chi-square

Source: Own estimations.

94 Imre Fertő and Szilárd Podruzsik

Notes
Imre Fertő is a professor at the Institute of Economics, Centre for Economic and
Regional Studies of Hungarian Academy of Sciences, at the Kaposvar University
and at the Corvinus University of Budapest. Szilárd Podruzsik is a senior lecturer
at the Corvinus University of Budapest.
1. We use the coefplot programme developed by Jann (2013).

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5
“When Helping the Small Hurts
the Middle”: Beer Excise Duties and
Market Concentration
Simon Loretz and Harald Oberhofer

1 Introduction

During the last decade the beer market has been in the focus of the
media, largely because of spectacular mergers among the big players. The
formation of Anheuser-Busch InBev created the world’s largest brewing
company with a global market share of approximately 20%. This consol-
idation process in the beer market triggered substantial interest as to
how concentrated the market will eventually become and its key driving
forces.
In this chapter we argue that beer excise taxes have a significant influ-
ence on market concentration. Taxes and levies on beer are not a new
phenomenon; they are among the oldest sources of central government
revenue. The availability of other forms of taxation, most notably income
consumption taxes, has significantly reduced the need to raise revenues
via beer excise taxation. However, due to health concerns the taxation
of alcoholic drinks has begun to increase. This is reflected in the deci-
sion of the European Union (EU) to introduce a minimum excise duty
on beer. While the minimum tax is set low enough not to be binding
for the vast majority of the Member States, this directive results in a
comparable excise tax system. Variation in its implementation among
the different Member States provides a neat framework to analyze the
impact of beer excises on market structure (see Bamforth and Cabras,
this volume).
Furthermore, the EU introduced a provision for a possible reduc-
tion of the beer excise for small and independent breweries (European
Commission, 1992). If Member States decide to implement this there

97
98 Simon Loretz and Harald Oberhofer

should be a direct impact of excise taxes on market structure. The

fact that smaller breweries can face up to 50% less excise taxes works
like a subsidy and could significantly increase their competitive posi-
tion, increase their market share and reduce market concentration.
However, the way the reduction in the excise taxes has been imple-
mented may well result in a more concentrated market, if medium-
sized breweries decide to reduce their output to benefit from the lower
excise burden. Similarly, the market can become more concentrated if
increased competition from small and independent breweries drives
the medium-sized breweries out of business, resulting in a polarized
market structure only leaving very large and very small competitors in
the market.
To test how beer taxation affects market structure we collect a unique
dataset of beer excise rates and the corresponding provisions for reduced
rates for small independent breweries, as well as information about
market shares and data from mergers and acquisitions (M&A) in the
28 EU countries plus 11 other major beer-drinking nations. Empirically,
we estimate the impact of the overall level of beer excises on the
recent waves of (international) M&A and hence the indirect impact
on the market structure (Madsen and Wu, this volume). We also assess
the direct impact of a more progressive beer excise system on market
concentration.
Our results confirm that large international mergers dominate
changes in market structure. These in turn are influenced by the
overall level of beer excise. Theoretically the influence of the level of
beer excise on the attractiveness of a potential target company is inde-
terminate: on the one hand higher excise makes a company with a
strong dependence on the home market less attractive. On the other
hand, a high level of excise could reduce the competitiveness of local
companies and make them takeover candidates. Evidence suggests
that the latter effect dominates and that countries with higher levels
of beer excises have larger share of the beer market controlled by big
international brewers (Madsen and Wu, this volume). Concerning the
direct effect of lower taxes for small breweries we find mixed results.
While anecdotal evidence suggests that the rapidly increasing number
of small breweries could be partially due to the lower tax burden, there
is also evidence that overall concentration increases due to the largest
breweries gaining market share.
The remainder of this chapter is organized as follows: Section 2
presents a short review of the literature on the market structure of the
brewing industry. Section 3 discusses EU regulation on beer taxes and
 “When Helping the Small Hurts the Middle” 99

presents some case study evidence on how the level and structure of
excise has affected beer market structures. Section 4 discusses the main
results of our empirical investigation, while Section 5 concludes.

2 Previous literature

The beer industry has attracted attention in the academic literature for
a prolonged period of time and this short literature review primarily
aims at embedding the current research within the literature, rather
than providing an exhaustive literature review. Most of the early studies
focused on the US brewing industry. In an early influential contribu-
tion Horowitz and Horowitz (1965) start from the observation that
the beer market in the US was stagnating and experienced a dramatic
increase in market concentration at the same time. Investigating the
role of technological change they derive a minimum efficient size
(m.e.s.) of 100 thousand barrels and conclude that economies of scale
are the main driving force for the dramatic increase in market concen-
tration. A number of authors, including Scherer (1973) and Tremblay
(1987), also estimated m.e.s. in brewing. Tremblay et al. (2005) bring
together a number of these estimates and show that the m.e.s. has
increased substantially.
The reasons for economies of scale in the brewing industry have also
been subject to extensive research. Greer (1971) emphasized the role of
advertising and product differentiation as an important force in the US
beer market. Sutton’s (1991, 1999) model uses endogenous fixed costs
as the key determinant for the industry’s structure while Bresnahan
(1992) discusses the role of advertising in this context. More recently
Nelson (2005) and George (2009) investigate the role of advertising on
the market structure of the US beer market.
Demand side factors that shape market structure in the beer
market also have been subject to extensive research. Estimating the elas-
ticity of demand for beer, Horowitz and Horowitz (1965) use excise taxes
as proxy for the beer price, which indirectly (already) links beer excise to
the market structure. Similarly, Hogarty and Elzinga (1972) estimate the
demand for beer and find that excise significantly affects consumption
behaviour.
Another strand of the literature specifically focused on M&A activities
in the beer market. Again, early contributions are based on US expe-
rience. Tremblay and Tremblay (1988), for example, investigate the
main determinants of acquisitions in the US beer market. More recently
Pinkse and Slade (2004) also investigate M&A in the UK beer market. In
100 Simon Loretz and Harald Oberhofer

addition, the German market is also gaining attention. Gourvish (1994)

compares the differences in market concentration in the US, the UK and
Germany. While focusing on the role of technological change, Gourvish
(1994) also notes differences in the taxation of beer. Similarly, Adams
(2006) compares the market concentration in the beer market in the US
and Germany and also discusses the effect of reduced excise on small
breweries. However, he concludes that taxes are unlikely to be the most
important driving force on market concentration, since the advent of a
large number of micro-breweries is insufficient to reverse the trend in
market concentration in the US.
The role of micro-breweries in the concentration of the US brewing
industry is central to Tremblay et al. (2005). Accordingly, from 1977 until
the mid-1990s one observes a substantial increase in market concentra-
tion in the macro-brewery sector while, at the same time, the micro-
brewery sector also grew dramatically. The fast growth in the number of
breweries was followed by a shakeout in the late 1990s. Horvath et al.
(2001) specifically analyzed the industry shakeout in the US brewing
industry and find that mass exits can be largely traced back to previous
mass entries. The mass entries in turn are explained by a delay in the
entry decision to gather more information. This empirical stylized fact
is also consistent with the findings for many industries: the overall
number of firms remains relatively constant despite high numbers of
entry and exit (Geroski, 1995).
Finally, Pugh et al. (2001) investigate the impact of the introduction
of reduced beer excise on small breweries in the UK. Specifically, they
conclude that lower beer excise benefits small breweries mostly in the
short run. In the longer run, they expect the number of small breweries
to increase, but not their profits, due to a monopolistically competitive
market structure.

3 Beer excise taxation and the beer market in Europe

This section discusses the legal regulations with regard to beer excise
within the EU and its potential implications for the development of
the European beer market. For this purpose we first present the main
regulations on minimum beer excise (Section 3.1) as well as the possi-
bility of reduced rates for small breweries (Section 3.2). Furthermore,
we present data on the European beer markets and highlight structural
differences in the demand for beer and provide two case studies on the
potential effects of EU’s beer excise regulations on the development of
the Austrian and German beer markets (Section 3.3).
 “When Helping the Small Hurts the Middle” 101

3.1 Minimum beer excise taxation

Excise duties on beer can take various forms and tend to be quite tech-
nical in nature. The first basic distinction is whether the excise is ad
valorem or specific. For example, in the EU the minimum excise for beer
is defined in a specific way, namely at EUR 0.748 per hectolitre/degree
Plato or ECU 1.87 per hectolitre/degree of alcohol of the finished beer
product. The minimum tax is defined with respect to the strength of
beer; the EU encourages beer excises that are progressive according to
the strength of beer. For the purpose of this chapter we need to define
a typical beer in order to make the different tax systems comparable.
Specifically, we use the value of 4.8% of alcohol, respectively 12 degree
Plato, which corresponds to a minimum beer tax burden of EUR 8.976
per hectolitre. In terms of a pint, this translates into a minimum tax
burden of about 5 euro cents.
Figure 5.1 displays the beer excise for a typical beer across all EU-28
Member States. It also compares the most recent figures for 2014 with beer

160

140

120

100
Euro per hl

80

60

40

20

0
Finland
United Kingdom
Sweden
Ireland
Slovenia
Slovak Republic
Denmark
Netherlands
France
Greece
Estonia
Italy
Hungary
Croatia
Austria
Cyprus
Poland
Belgium
Portugal
Malta
Czech Republic
Latvia
Lithuania
Spain
Romania
Luxembourg
Germany
Bulgaria

2014 2003

Figure 5.1 Beer excise tax burden in EU-28 for a typical beer with 4.8% of alcohol
Source: EU excise duty tables provided by the European Commission 2003, 2014.
102 Simon Loretz and Harald Oberhofer

excise in 2003. First of all, Figure 5.1 points to heterogeneous preferences

on beer excise as one of the so-called sin taxes. The Scandinavian Member
States collect the highest beer excises. They are joined by the UK and
Ireland which rank among the top four in terms of the beer tax burden.
With approximately EUR 140 per hectolitre beer that contains 4.8% of
alcohol, Finland charges 15 times the minimum required beer excise.
At the other end of the distribution, countries such as Bulgaria (EUR
9.20) and Germany (EUR 9.44) only collect beer excise that are marginally
above the minimum required by EU legislation. In 2014, Austria ranks
fifteenth among 28 member states with a beer excise burden of EUR 24
per hectolitre of a typical beer. Comparing both sides of the distribution,
for one pint of an average beer Finland charges an excise duty of 70 euro
cent while Germany only charges 5 euro cent for the same.
Comparing 2014 with 2003 it turns out that five countries lowered
the beer excise including, Ireland, Denmark, Croatia, Austria and Latvia.
Another group of three countries did not change their beer excise burden
(i.e. Belgium, Luxemburg and Germany). Spain only slightly increased
its taxation by EUR 0.24 per hectolitre. The remaining 19 Member States
all increased their beer excise over time. The largest increases (in abso-
lute values) are observed for Slovakia, the UK and Slovenia, for which
corresponding changes amount to EUR 34.37, EUR 25.58 and EUR 24.00,
respectively.

3.2 Reduced rates for small breweries

The second aspect of EU legislation we are particularly interested in is
the possibility of a reduced beer excise rate for small and independent
breweries – those with a yearly output of less than 200,000 hectolitres of
beer. The maximum allowed reduction is 50%. Consequently, we want
to construct a measure which reflects the extent to which the Member
States make use of the allowed reduction for small breweries. We define
our measure of progressivity, θi, as follows: Denote the excise duty which
is applicable in country i for a brewery with an output of x hectolitres as
τix, and the excise duty for a brewery with an output of 200,000 hecto-
litres or more as τi 200,000. Relating the excise that is applicable at the
various output levels to the excise tax for large companies yields our
progressivity measure:

⎛ ∑ τi x ⎞
200000 x

θ i = 2 ⎜ 1 − 200000
x=0
⎟ (1)
⎜⎝ ∑ x = 0 τ i200000 x ⎟⎠
 “When Helping the Small Hurts the Middle” 103

If a country imposes the same excise rate for all breweries regardless
of their output level, the value of θ will be unity and our measure for
progressivity will be zero. At the other extreme, if a country lowered the
excise burden by 50% for all companies below 200,000 hectolitres, the
value of θ would take the value of 0.5 and θi equals 1. Hence our measure
of progressivity can be interpreted as the percentage of the maximum
allowed reduction granted to small and independent breweries.1
Figure 5.2 compares the resulting measure of progressivity for Austria
and Germany with the maximum possible reduction and the case of no
reduction. The solid line shows the case where there are no reduced rates
for small breweries. This implies that the beer excise burden rises linearly
with the excise tax rate τ. In 2014 seven EU countries did not apply lower
beer excise (Croatia, Cyprus, Italy, Lithuania, Slovenia, Spain and Sweden).
In contrast, the grey area illustrates the maximum possible reduction. In
this case the beer excise burden rises with 0.5τ up to the output volume of
200,000 hectolitres. Currently five EU countries (Bulgaria, France, Greece,
Malta and Portugal) are granting this maximum beer excise tax reduction.
The dashed line in Figure 5.2 shows the progressivity of beer excise in
Germany. For independent breweries below 200,000 hectolitres the excise
burden is gradually reduced to 56% of the standard rate. In contrast the

0.5τ

0 hl 200,000 hl
Maximum allowed reduction Germany
Austria No reduced rate

Figure 5.2 Illustration of the progressivity measure (Austria, Germany, maximum

allowance)
Source: Own representation.
104 Simon Loretz and Harald Oberhofer

dashed line shows the beer excise schedule for Austria. Here the reduc-
tion only starts for breweries with less than 50,000 hectolitres output and
increases stepwise to 60% of the standard rate. For some small output
range the relative reduction in Austria is more generous than in Germany,
but overall the reduction is more generous in Germany with 23% of the
maximum allowed reduction compared to only 12% in Austria.
Table 5.1 summarizes the current beer excise tax systems in the 28 EU
Member States. The first column lists our measure of progressivity. The
second column reports the progressivity measure with the current level

Table 5.1 Beer excise tax systems in EU-28 Member States, 2013

Implicit
average tax Largest
Progressivity saving threshold
Country measure (Euro/hl) in hl Tendency

Austria 12% 1.50 50,000 Constant

Belgium 8% 0.78 200,000 Constant
Bulgaria 100% 4.60 200,000 Increased
Croatia 0% 0 0 Constant
Cyprus 0% 0 0 Constant
Czech Republic 51% 3.82 200,000 Constant
Denmark 8% 1.46 200,000 Increased
Estonia 1% 0.21 3,000 Increased
Finland 19% 13.54 100,000 Increased
France 100% 17.28 200,000 Increased
Germany 23% 1.09 200,000 Reduced
Greece 100% 15.60 200,000 Constant
Hungary 4% 0.52 8,000 Increased
Ireland 10% 4.58 20,000 Increased
Italy 0% 0 0 Constant
Latvia 5% 0.37 10,000 Increased
Lithuania 0% 0 0 Reduced
Luxembourg 91% 4.31 200,000 Constant
Malta 100% 9.00 200,000 Constant
Netherlands 15% 2.69 200,000 Increased
Poland 30% 3.26 200,000 Increased
Portugal 100% 9.33 200,000 Constant
Romania 85% 4.20 200,000 Increased
Slovak Republic 52% 11.22 200,000 Reduced
Slovenia 0% 0 0 Constant
Spain 0% 0 0 Constant
Sweden 0% 0 0 Constant
United Kingdom 8% 4.36 60,000 Increased

Source: Euromonitor (2013).

 “When Helping the Small Hurts the Middle” 105

of beer excise. This gives an indication of absolute savings. For the case
where the progressivity measure is 100%, this absolute saving is the
discrete jump in beer excise tax burden for a company at the threshold.
For the intermediate cases it reflects an output weighted average. France
and Greece grant the largest reductions since they make full use of the
allowed reduction scheme. Finland and the UK only make little use
of reduced beer excise. However, due to the high rate of the standard
beer excise rate, the absolute savings are non-negligible. The fourth
column gives further information about the largest breweries which
will benefit from reduced taxation. Half of the EU Member States allow
for some reduced excise burden up to the maximum allowed threshold
of 200,000 hectolitre production per year. Some other countries only
reduce the rate for medium-sized breweries, including the UK (with
60,000 hectolitre) and Austria (with 50,000 hectolitre). Hungary and
Estonia only permit reduced beer excise for very small breweries with
a maximum annual beer production of 8,000 and 3,000 hectolitres,
respectively.

3.3 Beer markets in Europe: overview and two case studies

In this section we briefly present the main characteristics of the beer
markets within the EU and offer two more in-depth case studies for the
Austrian and German beer markets. According to Table 5.2, the largest
beer-consuming country in Europe in absolute numbers is Germany
with a beer market of almost 90 million hectolitres. A distant second
is the UK which is approximately half as big. At the other end of the
(absolute) size distribution are some of the small Baltic states like
Estonia with only 1.3 million and Latvia with 1.5 million hectolitres,
respectively.2
The ranking of beer markets changes substantially when one looks at
consumption per capita. Now the Czech Republic tops the list with a per
capita consumption of 147 litres of beer in 2013. Germany still ranks
very high with a per capita consumption of 112 litres, followed closely
by smaller countries such as Austria and Estonia. At the other end of the
per capita consumption rank are traditionally wine-drinking countries:
Greece (31 litres per capita), France (29 litres per capita) and Italy with
27 litres per capita.
The remainder of Table 5.2 gives a first impression about the struc-
ture of the beer markets by providing the names of the biggest brewing
companies in each country and their corresponding market share. To
give a more precise indication of the fragmentation of the beer market,
the last two columns also report the biggest-selling beer brand and its
 106 Simon Loretz and Harald Oberhofer

Table 5.2 Beer market characteristics in EU-28 Member States, 2013

Beer Beer Biggest Biggest

consumption consumption brewing Market beer Market
in 1000 hl per capita company share brand share

Austria 9216.11 109.60 Heineken NV 56.46% Gösser 21.82%

Belgium 9231.40 85.05 Anheuser- 52.48% Jupiler 35.13%
Busch InBev
NV
Bulgaria 5527.75 74.14 Heineken NV 34.26% Ariana 17.00%
Croatia 3430.61 82.71 Molson Coors 34.16% Ozujsko 29.93%
Brewing Co
Czech 15186.30 147.01 SABMiller Plc 43.22% Gambrinus 13.81%
Republic
Denmark 3500.58 61.53 Carlsberg A/S 50.10% Tuborg 30.38%
Estonia 1358.25 102.17 Carlsberg A/S 36.67% Saku 30.12%
Finland 4287.44 80.13 Carlsberg A/S 36.74% Karhu 19.21%
France 18787.38 28.90 Carlsberg A/S 26.24% Kronenbourg 21.83%
Germany 89967.67 112.81 Oettinger 6.21% Oettinger 6.21%
Brauerei
GmbH
Greece 3473.19 31.13 Heineken NV 47.48% Amstel 26.67%
Hungary 7205.61 73.33 Molson Coors 17.49% Borsodi 16.90%
Brewing Co
Ireland 4334.23 95.26 Diageo PLC 25.61% Guinness 21.22%
Italy 16172.13 26.97 SABMiller Plc 19.83% Peroni 12.72%
Latvia 1552.76 77.61 Olvi Oyj 18.34% Cesus 11.01%
Lithuania 2681.96 97.63 Carlsberg A/S 30.96% Svyturys 13.94%
Netherlands 11068.82 67.26 Heineken NV 38.49% Heineken 21.24%
Poland 38194.98 101.00 SABMiller Plc 36.86% Tyskie 12.74%
Portugal 4695.65 45.92 Unicer – 37.24% Super Bock 34.98%
Bebidas de
Portugal, SA
Romania 18159.60 91.11 SABMiller Plc 30.45% Timisoreana 14.08%
Slovakia 3903.57 72.96 SABMiller Plc 42.09% Saris 14.02%
Slovenia 1529.03 73.93 Pivovarna 73.95% Union 28.27%
Laško dd
Spain 33696.29 73.75 Grupo 28.91% Mahou 28.91%
Mahou-San
Miguel SA
Sweden 4798.56 50.48 Spendrups 24.38% Norrlands 14.94%
Bryggeri AB Guld
United 43642.61 70.47 Molson Coors 17.53% Carling 14.18%
Kingdom Brewing Co

Note: Cyprus, Malta and Luxembourg are not covered in the dataset.
Source: Global market information database by Euromonitor. Information is for 2013, to calculate
the per capita consumption; we use the population number from the world development indicators
from the Worldbank.
 “When Helping the Small Hurts the Middle” 107

corresponding market share. Starting with the major players in the

various countries, a number of observations can be made. By far the
biggest brewing group in the world, Anheuser-Bush InBev, is only
the market leader in its home market, Belgium. The other big brewing
companies, Heineken, Carlsberg and SABMiller, are market leaders in
more European countries. Carlsberg is market leader in its home country,
Denmark, and in a number of surrounding Northern and Baltic coun-
tries. In contrast, Heineken and SABMiller dominate some Central and
Eastern European countries. In terms of absolute market power, Slovenia
stands out with a market share of almost three-quarters for Pivovarna
Laško dd. Other very concentrated markets are Austria, which is domi-
nated by Heineken, and the home markets of Anheuser-Bush InBev in
Belgium and Carlsberg in Denmark. In all of these countries the leading
brewing group accounts for more than half of the beer market in 2013.
The two largest beer markets in absolute terms, the UK and Germany,
constitute the opposite extreme. In both these countries the beer market
is very fragmented with a market share for the biggest brewing company
of only 6.21% in Germany and 17.53% in the UK. Finally, comparing
the market shares of the biggest brand to the market shares of the biggest
brewing companies, one can see that the variation is much larger for
the brewing groups. This indicates that there are more market forces at
play than just consumer preferences which should be reflected in the
fragmentation of the beer markets in terms of brands. Differences in the
number of brands owned by the brewing groups also reflect past M&A
activity (Madsen and Wu, this volume).
Most of the available county data reported above only aggregate the
overall number of breweries but do not make a distinction for size. The
statistical offices of the Austrian and German brewery associations are
notable exceptions and provide a breakdown of breweries by the respec-
tive output levels. Accordingly, these data are most suitable for case
studies on the impact of EU beer excise regulation on the structure of
the brewing industry.
Figure 5.3 shows the number of breweries in Austria according to their
output level for the period 1984 to 2013. With respect to the taxation
of alcohol in general and beer specifically, there are several important
events over this period. Until the accession to the EU, the tax system for
beer was relatively complicated. In addition to the specific beer excise
(Biersteuer), there was an ad valorem general alcohol duty (Alkoholabgabe)
and an additional ad valorem beverage tax (Getränkesteuer). All of these
taxes added together and resulted in a relatively high tax burden on
beers.
108 Simon Loretz and Harald Oberhofer

200 150
No. Breweries
100 50
0

1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
<20,000 hl 20,001–50,000 hl 50,001–100,000 hl
100,001–500,000 hl >500,000 hl

Figure 5.3 Number of breweries in Austria 1984–2010

Source: Austrian Brewery Association.

Over the period encompassed in Figure 5.3, the key changes in the
taxation of beer can be linked to Austria’s accession to the EU since they
involved a restructuring of the tax system to comply with the acquis
communautaire. In particular the beer tax law (Biersteuergesetz) of 1977,
which imposed a beer excise of 83 Austrian Schillings per hectolitre,
already included provisions for reduced beer excise for the first 14,000
hectolitres produced. Starting in 1992 the beer excise was raised to
20 Austrian Schillings per degree plateau to compensate for the aboli-
tion of the 10% alcohol duty. At the same time the provision for the
reduced beer excise was changed to a 15% reduction for the first 10,000
hectolitres. Three years later, in 1995, Austria joined the EU and the
beer tax law was finally aligned with the European Commission direc-
tive. This meant that the provision for small breweries was changed to
a system where independent breweries with less than 50,000 hectolitres
of yearly output are granted a 10% reduction. Further, this reduction
is increased to 40% in 12,500 hectolitre steps, implying a reduction to
60% for those with a yearly output of less than 12,500 hectolitres. The
last major change in the taxation of beer in Austria was the abolition of
the beverage tax (Getränkesteuer) of 10% on alcoholic drinks in the year
 “When Helping the Small Hurts the Middle” 109

2000 which was compensated by an increase of the beer excise from 20

to 28.7 Austrian Schillings (approximately EUR 2.08) per degree plateau
hectolitre. The only subsequent change in the beer excise tax was the
slight reduction to two euros per degree plateau hectolitre. This results
in EUR 24 beer excise duties collected for a typical beer with 12 degrees
plateau as mentioned above.
Comparing changes in beer taxation with the number of breweries
of different sizes, a number of stylized facts can be identified. The most
noticeable trend is the large increase of small breweries with output
levels below 20,000 hectolitres. One cannot derive any causal relation-
ship in a graph, but the timing of the large surge of small breweries
coincides very much with the change in the taxation for small breweries
in 1995. The second (less) stylized fact is the reduction in the number
of medium-sized breweries. In particular, the group of beer producers
with an output level between 50,001 and 100,000 hectolitres have expe-
rienced a constant decline since the early 1990s. A possible explanation
is that medium-sized breweries came under pressure from two forces.
The large breweries possess m.e.s of operation, while the small breweries
outcompete them in the niche markets because of lower variable costs –
a result of reduced beer excise.
The second country for which we have reliable information on the number
of breweries by size is Germany (Figure 5.4). As a result of the reunification
1,500
1,000
No. Breweries
500
0

1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

<5,000 hl 5,001–10,000 hl 10,001–50,000 hl

50,000–100,000 hl 100,001–200,000 hl >200,000 hl

Figure 5.4 Number of breweries in Germany 1994–2010

Source: Statistics Germany.
110 Simon Loretz and Harald Oberhofer

of Germany, we are only able to show development between 1994 and

2010. Since this period is after the European directive on minimum beer
excise, there are hardly any changes in the beer excise in Germany. Even
more impressively, the taxation of beer in Germany remained unchanged
between 1952 and 1992, when it was altered to fulfil the requirements of
the EU. At the same time provisions for reduced rates for the first 120,000
hectolitres were replaced with a progressive reduction for small and inde-
pendent breweries below a yearly output of 200,000 hectolitres. The reduc-
tion increased stepwise up to 50% for breweries with an output of 5,000
hectolitres or less. In comparison to the previous provisions this represents
a more generous reduction which is now only applicable to the smaller
breweries. The latest reform in 2004 decreased the progressiveness of the
beer tax schedule by reducing the applicable beer excise for the smallest
breweries to only 56% of the standard rate. Nevertheless, the German beer
excise rate is comparably low and the provisions for the small breweries are
more generous than those in Austria.
Comparing the number of breweries in Germany to those in Austria,
one can find some striking similarities and differences. On the one hand,
the number of the smallest breweries is trending upwards in Germany.
Equally, this is accompanied by a clear reduction in the number of medi-
um-sized breweries. However, the striking difference between Germany
and Austria is that the overall number of breweries in Germany remains
roughly constant, while those in Austria have more than doubled. One
potential reason for this could be that the reduced beer excise has a
stronger incentive for small breweries to enter in Austria. Beer excise in
Austria is more than twice as large as in Germany, thus a reduction of up
to 60% of the full duty increases the competitiveness for small Austrian
breweries.

4 Empirical results on the impact of beer excise taxation

This section complements the case study evidence with a more system-
atic quantitative investigation. For this purpose we set up two empirical
models that allow us to assess the (average) impact of excise on a) cross-
border M&A activities in this industry (discussed in Section 4.1) and b)
of reduced excise rates for overall market concentration observed in 39
national beer markets (Section 4.2).

4.1 Impact of excise taxation on cross-border M&A

Starting with a complete download from the Zephyr database provided
by Bureau Van Dijk, which includes all ownership transactions, we
 “When Helping the Small Hurts the Middle” 111

identify M&A in the beer industry via the 4-digit NACE classification of
either the target or the acquiring firm. Further, we exclude all transac-
tions where an acquiring firm already holds the majority of outstanding
shares prior to the new deal or where only a minority shareholding is
acquired during the transaction. We then cross-check and complement
the resulting sample with Internet sources and previous studies of M&A
in the beer market.3 In total we identify 322 M&A over the period 1999
to 2011 that took place in the sample countries.
For the analysis of (cross-border) M&A activity in the brewing industry
we rely on the large literature estimating trade and FDI flows. More
precisely, we set up a model for bilateral cross-border M&A that accounts
for both target and acquiring country characteristics. Specifically, we are
interested in beer-market–related characteristics. For this purpose, the
main country information captures the market size of beer (measured
in terms of beer production) together with value-added taxation, beer
excise and our progressivity measure.
The number of (cross-country) M&A in the beer industry is the
dependent variable which can only take on positive integer values and
as such we are confronted with so-called count data (Cameron and
Trivedi, 2013). This violates the standard assumptions for simple linear
regression models and would result in biased results of an ordinary least
square estimator. Furthermore, for this level of bilateral aggregation we
observe a large number of country pairs with no M&A. This is indeed
the case for approximately 93% of all bilateral combinations including
those where the acquiring and target countries are the same (i.e. for
domestic M&A). Given such a large number of zeros, it is likely that
there are different reasons determining whether at least one M&A takes
place (e.g. are there any suitable takeover candidates at all) and many
M&A transactions take place (how attractive are the targets). In order
to tackle this issue appropriately in our empirical model, we account
for this mass-point in the distribution by formulating the zero-inflated
Poisson model (Lambert, 1992). This approach results in a model that
first estimates the probability of observing at least one M&A between
the bilateral combinations of countries and separately deals with all
observations that are non-zero. The second part of this model is typi-
cally based on a (zero-truncated) Poisson distribution which allows the
fitting of all integer values above zero. Formally, the resulting empirical
model is given by:

MAij = F(Xi βi + Xiβi + ∈ij) (2)

112 Simon Loretz and Harald Oberhofer

where Xi and Xj denote vectors of host- and source-country characteris-

tics with the corresponding vectors of parameters to be estimated, βi and
βi MAij denotes the overall number of bilateral M&A transactions, F is a
cumulative distribution function (cdf) to be specified (e.g. the Poisson
distribution) and εij represents the remainder error term.
We model the probability of observing any M&A activity with standard
gravity variables, that is, the logarithm of target and acquirer country
GDP per capita and the bilateral distance between the two countries. For
GDP per capita, as a measure for economic wealth, we expect a negative
impact on the number of M&A for the target country and a positive one
for the acquiring countries. The overall difference in economic wealth
might explain which country is more likely to be acquirer. For distance
we expect a negative sign (of the marginal effect), since the number of
M&A are assumed to decrease the further the target and acquirer coun-
tries are geographically apart.4
Starting our discussion on the probability of observing no (bilat-
eral) M&A, the estimated average marginal effects (AMEs) reported in
Table 5.3 are in line with expectations.5 Accordingly, an increase in the
distance between both countries increases the probability of observing
no M&A and thus reduces the number of expected M&A. This finding
indicates that brewing companies tend to increase their targeted markets
by engaging in M&A activities in neighbouring countries. In a similar
vein, for wealthier target countries we also observe a larger probability of
zero M&A taking place. By contrast, breweries located in rich host coun-
tries tend to engage more extensively in M&A activities because they
are more likely to be able to generate sufficient profits allowing them to
invest abroad. Moreover, the Voung test statistics reported in Table 5.3
indicates that the zero-inflated model should be preferred. Given the
large number of zeros in the data, this comes as not surprising.
When focusing on the results for the non-zero observations (provided
at the top of Table 5.3) we also obtain interesting results. First, the
estimated effects differ substantially across the model which includes
all M&A (first two columns) and one that only includes cross-border
M&A (columns 3 and 4). Accordingly, cross-border M&A motives differ
substantially from those for domestic M&A. However, starting with their
similarities, market size plays a role for all types of M&A in the brewing
industry. In countries with larger beer production, more M&A activity
takes place. This is indicated by the significant estimates for both the
acquiring and target country level of beer production. By contrast, value-
added taxation plays a role only for the acquiring country. Accordingly,
we observe more M&A transactions in and from countries with higher
 “When Helping the Small Hurts the Middle” 113

Table 5.3 Determinants of M&A, 1997–2011

All M&A only cross-border M&A

Average Average

Independent marginal marginal

variables Coefficient effect Coefficient effect

Target country variables

log(Beer production) 0.462 *** 0.095 *** 0.155 0.013 *
(0.061) (0.015) (0.090) (0.008)
Value-added tax 0.871 0.179 −1.357 −0.12
(1.312) (0.268) (2.156) (0.187)
Beer excise tax 0.007 *** 0.001 *** −0.001 −0.000
(0.002) (0.000) (0.004) (0.000)
Progressivity −1.523 *** −0.307 *** −0.644 −0.06
(0.383) (0.090) (0.478) (0.044)
Acquirer country variables
log(Beer production) 0.755 *** 0.155 *** 0.712 *** 0.061 ***
(0.085) (0.026) (0.147) (0.017)
Value-added tax 11.365 *** 2.333 *** 6.705 *** 0.576 **
(1.659) (0.464) (2.446) (0.228)
Beer excise tax −0.001 −0.000 −0.009 *** −0 **
(0.002) (0.000) (0.003) (0.000)
Progressivity 0.551 0.099 −4.767 *** −0.41 ***
(0.615) (0.129) (1.517) (0.152)
Constant −13.240 −8.598 ***
(1.112) (1.848)
Inflation
Target country GDP 0.349 ** −0.043 ** 0.251 −0.01
per capita (0.174) (0.078) (0.209) (0.011)
Acquirer country −1.890 *** 0.231 *** −2.603 *** 0.134 ***
GDP per capita (0.336) (0.045) (0.542) (0.031)
log(Distance) 0.798 *** −0.098 *** 0.697 *** −0.04 ***
(0.102) (0.014) (0.155) (0.008)
Constant 12.168 *** 20.493 ***
(3.283) (5.917)
Vuong statistic 4.55 3.57
No. of non-zeros 98 70
No. of observations 1,521 1,482

The Vuong (1989) statistic refers to the test statistic between the Poisson and a zero-inflated
Poisson. Average marginal effects are calculated according to Bartus (2005). ***, **, *denotes
significance at the 1, 5 or 10% level.
114 Simon Loretz and Harald Oberhofer

value-added taxation. Finally, a larger number of domestic M&A tends to

take place in countries with higher beer excise and with lower progres-
sivity in this tax measure while cross-border M&A are carried out by
countries with lower beer excise taxes (and also a lower progressivity
measure). Taking these last two findings together, the country-specific
regulations with regard to the taxation of beer production affects M&A
behaviour in this market and thus shapes market concentration (see
Madsen and Wu, this volume). In the next subsection we will shed more
light on this issue.

4.2 Impact of reduced excise rates on market concentration

In this section we investigate the impact of excise reduction on small
breweries and the effect of the resulting market concentration (see
Bamforth and Cabras; Madsen and Wu, this volume). There are a number
of widely used empirical measures of market concentration which differ
substantially both with respect to what they primarily measure and also
in terms of data requirements. For example, simple measures such as the
concentration ratio only require information about the market share of
the biggest companies. In contrast, measures like the Herfindahl index
require information about the output level of all firms in the market.
Given the data restrictions already discussed, we draw on the Global
Market Information Database provided by Euromonitor. This source
provides market shares of the leading brewing groups in the most impor-
tant economies (countries that have a comparable tax system and are
covered in the Euromonitor dataset limits the sample to 39). One draw-
back of the Euromonitor data is that it only includes information on the
largest brewing companies. For example, for Germany, which histori-
cally had the largest number of breweries and is currently home to 1,349
breweries (see Figure 5.3), the Euromonitor dataset only includes up to
30 companies. Therefore we use the three-firm concentration ratio as
our preferred measure.
We set up an econometric model that explains variation in market
concentration rates as a function of the beer excise regime in force and
further controls. Beer excise is measured by its level for a typical beer
together with the progressivity indicator defined above. In order to
investigate potential non-linearities in the effects of progressivity, we
also include an interaction. This is motivated by our case study evidence
highlighting that progressivity might be more important for higher
excise duties (see the comparison of Austria and Germany). Among
the additional controls, we account for overall market size (measured
by beer production), national wealth in terms of GDP per capita and
 “When Helping the Small Hurts the Middle” 115

the value-added taxation which will be levied on top of the beer excise
taxes. Similar to the discussion in Section 4.1, the outcome variable of
interest again shows a specific property which violates the assumptions
for applying linear regression models. Market concentration rates are, by
definition, bounded between 0 and 100% and cannot take on negative
values. In order to explicitly account for the bounded nature of market
concentration rates we apply a quasi-maximum likelihood estimator
(Papke and Wooldridge, 1996). This estimator is based on the logistic
distribution and assures consistently estimated values between 0 and
100%. Formally, the resulting model reads as:

CRit = G(Zitγ + ηit) (3)

where CRit denotes the three-firm market concentration in country i at

time t, G represents the cdf of the logistic distribution and Zit refers to
the full set of explanatory variables reported in Table 5.4 with the corre-
sponding coefficients collected in γ. ηit is an error term with the usual
assumptions.
Table 5.4 reports our results. The first two columns focus on the full
sample and report the estimated parameters as well as the AMEs. In the

Table 5.4 Determinants of market concentration, 2002–2011

All countries Excl. CYP, LUX and MLT

Average Average
Independent marginal marginal
variables Coefficient effect Coefficient effect

log(Beer production) −0.175*** −0.131*** −0.088*** −0.065***

(0.022) (0.017) (0.025) (0.018)
log(GDP per capita) −0.102*** −0.077*** −0.175*** −0.129***
(0.034) (0.025) (0.032) (0.025)
Value added tax −2.642*** −1.988*** −1.898*** −1.390***
(0.423) (0.332) (0.378) (0.278)
Beer excise tax 0.137*** 0.103*** 0.188*** 0.138***
(0.040) (0.031) (0.035) (0.029)
Progressivity 0.010 0.008 −0.260*** −0.192***
(0.104) (0.080) (0.096) (0.074)
Interaction 0.769 0.579 1.659** 1.223**
(0.660) (0.516) (0.647) (0.477)
No. of observations 358 337

Estimated following the procedure of Papke and Wooldridge (1996). All regression include
year fixed effects and a constant. The average marginal effects are calculated according to
Bartus (2005). ***, **, *denotes significance at the 1, 5 or 10% level.
116 Simon Loretz and Harald Oberhofer

remaining two columns we exclude Cyprus, Luxembourg and Malta. In

these countries the market concentration rate based on the three largest
market participants (CR3) remains 100% during the whole ten-year time
period.
Our estimates suggest that market concentration is lower in larger and
richer markets. Accordingly, an increase in the overall production of
beers allows more competitors to survive in the market, thus reducing
market concentration. In a similar vein, in more wealthy countries,
love-of-variety seems to be more pronounced. In addition, in countries
with higher value-added taxation, beer producers find it more difficult
to occupy a market-dominating position.
With regard to beer excise regulations across countries we find the
following results. First, in countries with higher beer excise, the beer
market is more concentrated. Higher excise increases variable costs and
this results in a smaller number of active firms. If the less profitable
and smaller firms are the ones driven out, then this results in a more
concentrated market. When focusing on the full sample, including all
39 countries, we do not estimate significant effects for progressivity.
However, when excluding the three countries with fully concentrated
markets, we obtain strong and significantly negative parameter estimates
and AMEs. This finding suggests that, on average, a more progressive
excise system helps to reduce concentration in the beer market. This
result points to the effectiveness of EU regulation. The significantly
positive effect estimated for the interaction variable (in the restricted
sample), however, indicates that progressivity in the excise system does
not increase competition in the beer market under all circumstances.
On the contrary, in countries with very high excise a more progressive
system further increases market concentration. This finding is counter-
intuitive but shows that regulating the beer market via excise is not
sufficient to guarantee a competitive environment. In countries where
beer is highly taxed, it seems to be difficult for new entrants to get
access to the market.

5 Conclusion

Over the last few years the beer industry has experienced an intense
consolidation process resulting in an ever-declining number of globally
active brewing companies. At the same time, in some large beer markets,
the number of micro-breweries steadily increased. While the former is
often explained by prevailing economies of scale, the latter is often
 “When Helping the Small Hurts the Middle” 117

associated with demand-side arguments including love-of-variety pref-

erences. This chapter offers an additional explanation for these tenden-
cies: taxation policy for beer might have a direct impact on market
structure.
Our main finding supports the view that the EU’s beer excise regula-
tion that couples a minimum amount of beer excises with the possibility
of reduced rates for small breweries has direct implications for market
structure in the brewing industry. More precisely, this regulation tends
to trigger a polarization of the market: a very small number of large
and globally active brewing companies coexist with a large number of
micro-breweries. Medium-sized beer producers tend to be forced out of
the market by this regulation or choose to adjust their production level
to a smaller amount. Some of the medium-scale beer producers have
also been targets of M&A, which further fosters an increase in market
concentration among the global beer producers.
Our overall finding confirms that specific tax rules might directly and
indirectly affect market structures and in the medium run might have
implications for customers. Especially, the very small number of globally
active brewing companies might increase the likelihood of collusive
behaviour; this calls for careful monitoring by competition authorities.

Notes
1. Note that since we analyse the minimum beer excise introduced by the EU,
we concentrate our analysis on countries that have a comparable system for
beer excises. This unfortunately rules out some important beer markets such
as China, Mexico and Brazil which use an ad valorem beer tax.
2. The beer markets in the smallest European countries, Luxembourg, Malta and
Cyprus, are too small to be covered in the Euromonitor dataset.
3. See, for example, Ebneth and Theuvsen (2007).
4. Note, in the full sample we also include domestic M&A. For these observa-
tions, the target and acquiring countries’ characteristics are equal and bilateral
information such as distance amounts to zero.
5. The marginal effects are calculated for the final outcome, which is the number
of M&A while the parameter estimates refer to the impact of each variable for
the probability to observe zero M&A.

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Part II
Developments in Regional
Brewing and Beer Markets
6
The Lack of Market Integration
in the Chinese Beer and Wine
Markets: Evidence from
Stationarity Test
Chi Keung Marco Lau, Zhibin Lin, David Boansi, and
Jie (Kitt) Ma

1 Introduction

Prior to economic and market reforms, China was a relatively closed

society in deep economic stagnation, mainly due to excessive centralized
bureaucratic control, misallocation of both investments and outputs,
and generally low factor productivity. The reforms introduced in the
1970s aimed at improving the country’s economic situation through
reducing (but not eliminating) centralized planning and direct control
in order to correct the economic deficiencies (Perkins, 1988).
The Third Plenum of the National Party Congress’s 11th Central
Committee, in December 1978, was a turning point as the central
government decided to undertake gradual economic reforms. At that
time, Chinese households could afford barely sufficient food supplies
and rationed clothing. Reforms began cautiously in 1979, initially
addressing agricultural production in rural areas by enabling farmers
to sell their surplus crops, and later addressing urban areas by creating
special economic zones which favoured the establishment and develop-
ment of Sino–foreign joint ventures within technology-intensive sectors
(Fan, Wailes and Cramer, 1995). These changes boosted the Chinese
agricultural and industrial levels of productivity, helping the country
to gradually open its market to foreign investment, and to expand trade
overseas.
In the early 1980s, reforms started to convert the Chinese command
economy to a price-driven market economy. The influence of the state

123
124 Chi Keung Marco Lau, Zhibin Lin, David Boansi, and Jie (Kitt) Ma

with regard to resource allocations was reduced by introducing a dual-

track pricing system in which some goods and services were allocated at
state-controlled prices (such as energy products), while others (such as
consumer goods) were allocated at market prices.1 The country’s Soviet-
type, centrally planned system changed into a market-oriented one.
Increasing liberalization, the rapid economic growth in many cities and
coastal provinces, and joining the International Monetary Fund and
World Bank supported the country’s policies towards decentralization,
privatization, free trade, free investment and deregulation (Su, 2011).
Between the 1990s and early 2000s, more market-oriented policies,
improving tax concessions and labour mobility were granted to the
coastal provinces to attract foreign investment. These policies increased
international trade as well as subregional economic cooperation between
coastal provinces and neighbouring countries. China maintained strong
ties with international markets, entering the World Trade Organization
(WTO) in 2001 and removing a number of remaining trading restric-
tions. Price protection on domestic industry and export subsidies on
agricultural products were gradually eliminated. During the first decade
of the 21st century, the governance infrastructure was also reformed.
New agreements were signed with the Association of Southeast Asian
Nations (ASEAN) and the ASEAN + 3 (China, Japan, South Korea) trade
framework (CSIS, 2015).
Since the reformation process started, China has experienced an
impressive economic growth. Today, the country is well integrated into
the global capitalism system. Trade liberalization, and the restructuring
of economic, social and geopolitical/regulatory environments increased
the levels of production, imports, exports, consumption and, most
importantly, retail prices. Over the last 30 years, China has witnessed
growing patterns related to levels of supply in various subsectors; this
has stimulated and increased the levels of national and per capita dispos-
able incomes.

2 The development of the beer and wine industry in China

2.1 Reforms and liberalization process

Several drivers steered growth in the Chinese beer and wine markets:
increased purchasing power in both urban and rural areas (Bouzdine-
Chameeva et al., 2013; Swinnen, 2011), growing patterns of internal
migration (Zhao, 2003; Huang and Rozelle, 1998; Huang and Bouis,
1996), stronger retail supply networks (Access Asia Limited, 2010),
 Market Integration in the Chinese Beer and Wine Markets 125

decreasing prices for alcoholic beverages due to higher market competi-

tion (Cui et al., 2012), and perceived health benefits associated with
the consumption of beer and wine compared to spirits (Stone, 2014).
Both on-trade2 and off-trade3 consumption of beer and wine in China
have been increasing since the 1980s (Cui et al., 2012). In 2003, China
became the world’s largest beer market (Swinnen, 2011), and the world’s
largest red wine market with regard to total volume consumption
(Stone, 2014; Chow, 2014). The country now ranks fifth among the
major wine-drinking nations; it is also the world’s fifth-largest producer
of wine (Stone, 2014), and approximately 83% of wine consumed in the
country between the years 2007 and 2013 was domestically produced
(Chow, 2014).
China has a rich history in relation to alcoholic beverages, especially
considering spirits such as rice wine. The consumption of beer and grape
wine in the past was relatively low (Jenster and Cheng, 2008). Both
Chinese beer brewing and grape wine-making started in the late 1890s,
when modern brewing technology was introduced (Liu and Murphy,
2007). The first Chinese breweries and wineries appeared in some
eastern cities of the country to serve the colonial powers (Heracleous,
2001). These included the ChangYu Winery, opened in 1892; the
Russian Ulubulevskij Brewery (later Harbin Brewery) opened in Harbin
in 1900; the German and British joint-venture Germania-Brauerei
Brewery and Winery (later Tsingtao Brewery) opened in Qindao in 1903;
the Scandinavia Brewery opened in Shanghai in 1910, and the TongHua
Winery opened in Jilin in 1912. Levels of production were modest and
even close to nil between the two world wars (Li, 2011). Due to high
prices, beer and wine were mainly produced to satisfy the demands of
expats and the Chinese national bourgeoisie (Bledsoe, 2011).
In 1949, after the People’s Republic of China (PRC) was founded, all
breweries and wineries were confiscated and turned into state-owned
enterprises, with beer and wine considered non-essential goods for the
industry restructuring process. Despite the efforts made by the govern-
ment to rehabilitate the industry in the late 1950s, levels of produc-
tion remained small scale and underdeveloped (Jenster and Cheng,
2008) until the mid-1960s, when a few small breweries and wineries
were opened. Production gradually increased but breweries and wineries
remained state-owned, with prices controlled and set by the govern-
ment. Since the 1980s, as a result of economic reforms, the food and
drink industry developed at an impressive rate, and the production of
both beer and wine experienced a sustained growth. Many state-owned
126 Chi Keung Marco Lau, Zhibin Lin, David Boansi, and Jie (Kitt) Ma

breweries, such as Harbin Brewery and Tsingtao Brewery, have been

privatized and price controls lifted.
Today, in the Chinese beer and wine markets, we can expect to see
price convergence across cities due to several reasons.4 First, the entry
of foreign brewers increased competition which brought more arbitrage
activities and price convergence. Second, the liberalization of State
Ownership Enterprise (SOE) increased the level of diversification in
terms of enterprise ownership, facilitating the creation of joint ventures
and private ownerships. Third, the introduction of the Labour Contract
System in 1986 opened profit opportunities for breweries with regard to
purchasing of raw materials, setting selling prices, recruiting employees
and changing wages within the enterprise. For these reasons, a process
of price convergence should result from a more efficient market across
different cities. However, disparities in terms of interregional develop-
ment and income, combined with persistent trade barriers across China,
may inhibit such process.

2.2 The Chinese beer and wine markets

The total consumption of beer in China between 2003 and 2009
increased by two-thirds (Access Asia Ltd, 2009). This proportion repre-
sents an increase in absolute volume from 24.3 billion litres to approxi-
mately 42.3 billion litres, and reflects an annual percentage growth rate
of about 7.6%5. China also witnessed a 6.7% annual growth in per capita
beer consumption, which increased from 19.6 litres in 2003 to 30.8 litres
in 2009 (57% growth between the two years).
Compared to less than one litre of beer consumed by the average
Chinese consumer between 1979 and 1980 (Swinnen, 2011), per capita
beer consumption in the country has increased by approximately a factor
of 30 in 2009. This figure is well above the 2010 per capita beer consump-
tion of less than 2 litres in India, although still significantly below the
levels in the US and Western and Central Europe (e.g. 156 litres per capita
in Czech Republic, 130 in Ireland and 116 in Germany [Swinnen, 2011]).
The relatively lower per capita beer consumption in China, in spite of its
role as the leading beer consumer in the world, presents a major growth
potential in the country’s beer market for both domestic and foreign
producers (see Piron and Poelmans, this volume).
Total and per capita beer consumption in China between 2003 and
2009 triggered a 125% increase in total expenditure on beer in current
values.6 The total expenditure rose from RMB139bn to RMB312.8bn in
current value7 during the same period, while the total per capita beer
 Market Integration in the Chinese Beer and Wine Markets 127

expenditure rose from about RMB108 to RMB228.7 in current values

(Access Asia Ltd, 2010). Retail sales accounted for 66.5% of total volume
consumed and 51.6% of total expenditure on beer. HoReCa (Hotel,
Restaurant, and Catering/canteen) sales accounted for 33.5% of the total
volume consumed and 48.4% of total beer expenditure.
Total and per capita wine consumption in China increased respec-
tively at average annual growth rates of 18% between 2005 and 2012
(Access Asia Ltd, 2010). The total volume of wine consumed in China
increased from 45.6 million (9-litre cases, equivalent to 0.55 billion
bottles8) to 170.5 million (9-litre cases, equivalent to 2.05 billion bottles
[Bouzdine-Chameeva et al., 2013]). This represents a 273.9% increase in
the period considered, with per capita consumption increasing from 0.3
litres to 1.12 litres. Therefore, total and per capita wine consumption in
2012 were almost four times the 2005 levels.
A study conducted by Vinexpo and IWSR (International Wine and
Spirits Research), as cited in Lodge (2012), reveals that per capita wine
consumption in China is going to reach two litres by the end of the year
2015,9 assuming a constant increase in consumer preferences for red
wine over other alcoholic beverages. Levels of consumption for red wine
almost tripled between the years 2007 and 2013, in contrast to a decline
of 18% and 5.8% experienced in France and Italy respectively.10
Increases in both beer and wine consumption in China have
attracted greater investment attention from domestic and foreign
investors. However, besides seeking ways to please the consumers, new
entrants in the Chinese beer and wine market need to better under-
stand the complexities and relevant characteristics of such markets –
most importantly regional prices – which vary considerably from
region to region. Such information is vital for investors who have to
make informed decisions on which markets have the potential to gain
significant profits.
The primary objective of our study is to explore and examine the level
of interregional integration within the Chinese beer and wine retail
markets. The rise of the middle class and higher levels of disposable
income enabled many Chinese consumers to afford foreign-made and
foreign-branded alcoholic beverages. In this context, both domestic
and foreign companies need to understand the marketization status
of different cities with regard to the changing regulatory environment
prior to investing. Hence, we aim to identify which cities are more
competitive and integrated by looking into the beer and wine markets
in China.
128 Chi Keung Marco Lau, Zhibin Lin, David Boansi, and Jie (Kitt) Ma

3 Theoretical background

We start from the assumption that, under restrictions on preferences and

technologies, competitive market equilibrium exists (Ravallion, 1986).
Generally this assumption holds for the spatial competitive equilibrium
in an economy comprising a number of regions in which trade occurs at
fixed transport costs. Such equilibrium ensures that, if trade takes place
between any two regions, prices in the importing region equal prices
in the exporting region plus the unit transport cost. In this case, the
markets can be said to be spatially integrated. Market integration can then
be defined as the extent to which changes in prices within one market
lead to changes in prices in another. In other words, differences in prices
for a given product across regional markets can be interpreted as a signal
of the degree of market integration in a general equilibrium sense: a
shortage in one regional market increases prices which attract suppliers
from neighbouring markets (Gibson, 1995). Increases in supply in one
receiving market, and increases in price in the source markets, continue
until differences are eliminated, net of transport costs. In an integrated
market, products flow away from locations where prices are low towards
locations where prices are high.
Any factor affecting trade between markets, such as trade costs, trade
barriers and price discrimination, affect market integration (Yu et al.,
2013). Arbitrage plays an important role in determining the degree of
market segmentation (Lutz, 2004). Zhou et al. (2000) suggest that access
to price information and availability of transport are the most stressed
exogenous factors affecting price behaviour. Related to transport is
the distance between markets. In principle, distance should not be an
obstacle to market integration, though it affects the speed of it. Within
international markets, three major sources of price discrimination across
national borders – demand elasticity, import quota and collusion – affect
pricing (Verboven, 1996). Within a domestic market, regional differ-
ences in demand (income effect) and supply (competition effect) are the
major factors affecting price integration (Yu et al., 2013).
The existing literature on market integration in China shows mixed
and inconclusive results. Young (2000) argues that, although 20 years
of economic reform have brought extraordinary economic growth
and burgeoning international openness, they have also resulted in
a fragmented internal market due to the rise of local protectionism.
Based on five fairly aggregated sectors, Young found out that prices of
goods diverged and resource allocation deviated from the principle of
comparative advantage. Zhou et al. (2000) analysed the rice markets in
 Market Integration in the Chinese Beer and Wine Markets 129

southern China using the monthly prices of indica rice from 35 major
cities with a time series from February 1992 to May 1996. Their results
indicate a general lack of integration among the indica rice markets in
the country, suggesting poor transport facilities, government interven-
tions and limited amounts of grain available for arbitrage as the major
impediments to market integration. Poncet (2005) examined the indus-
try-level trade flows between Chinese provinces to measure the level
of domestic market integration between 1992 and 1997. Their results
show that, while international trade barriers dropped, domestic trade
barriers among provinces increased, indicating fragmentation in the
Chinese domestic economy and a spread of local protectionism. Poncet
concluded that China is a collection of separate regional economies
protected by barriers, rather than a single market. These barriers include
a variety of protectionist policies, such as regulatory, physical and judi-
cial obstruction (Young, 2000).
The domestic trade protection in the provinces pursues a dual objec-
tive of socio-economic stability preservation and fiscal revenues maxi-
mization (Poncet, 2005). Gravier-Rymaszewska et al. (2010) analysed
the effects of intra-provincial disparities on the development of the 28
mainland provinces in China. According to their findings, while the
growth increases, distances in wage levels along with inequality in each
sector are also rising, with prices not really reflecting the relative scarcity
of goods.
In contrast, Chen et al. (2011) suggest that the past three decades
have witnessed high levels of integration in Chinese markets, encom-
passing urban agglomeration, rural–urban migration, labour and capital
markets. For Chen et al. (2011) there is emerging evidence, based on
more refined data, of increasing integration in China’s domestic goods
and commodities markets, which indicates increasing regional speciali-
zation and product market integration over time, with distances in
product prices closing up across regions.
Other studies support this view. Holz (2009) argues that China has
seen an increasingly integrated domestic product market, which is well
within the range of that of a normal, relatively integrated large economy.
Huang et al. (2004) identify high degrees of integration between coastal
and inland markets and between regional and village markets in China’s
agricultural sector since its accession to the World Trade Organization.
Finally, Nagayasu and Liu (2008), examining relative prices and wages in
the 29 provinces in China using annual data from 1995 to 2005, provide
evidence of non-divergence in prices among provinces compared to
Beijing.
130 Chi Keung Marco Lau, Zhibin Lin, David Boansi, and Jie (Kitt) Ma

In light of these mixed and inconclusive results, in the next section

we investigate whether beer and wine prices have converged across
Chinese regions. Allocative efficiency in the goods market is an impor-
tant outcome of market liberalization. Although China has become one
of the largest consumer markets for alcoholic beverages, its allocative
efficiency has not been examined. Therefore we examine how well the
beer and wine retail markets have integrated across the country.
Our economic theory of reference is the “Law of One Price.” The
concept was developed by Gustav Cassel in 1920; Cassel argued that iden-
tical goods should converge to one price across regions due to the force
of “arbitrage activities.” Similarly, Gibson and Smout (1995) indicate
that reductions in price differential among regional markets represent an
efficient condition when these reflect nothing more than transport cost
differences. However, the presence of trade barriers (e.g. lack of infra-
structure, ineffective policies at a local level) and imperfect market struc-
tures may result in price divergence across domestic markets.

4 Data and Results

In order to perform our analysis, we use data obtained from the Price
Supervision Centre under the National Development and Reform
Commission (NDRC) of the PRC.11 Our data cover domestic beer and
wine consumption in 10-day intervals, collected respectively at 5th,
15th and 25th of each month. These provide us with an average of 250
observations per city. First, we construct a set of relative price series
towards the national average price, so that we have g as the series of
interest for a particular alcoholic beverage in city i at time t, as shown
in equation 6.1:

⎛g ⎞
yi ,t = ln ⎜ i ,t g ⎟ t = 1,...T (6.1)
⎝ t⎠

Where yi,t is the relative price series, gi,t is the price level and ḡt is the
average price level across all cities at time t. Figure 6.3 illustrates prices
and price differentials for beer and wine respectively. Wine became
popular in China in the period considered: the average price for wine
was RMB36.6 per bottle from January 2006 to November 2010, with an
average price difference of −0.085 (Figures 6.1a). The price for wine in
most cities is lower than the national average price (Figure 6.2a). The
price for beer is about RMB2.98, with a price variation across cities lower
than that found for wine (Figure 6.1b). The price for beer in most cities
is lower than the national average price (Figure 6.2b).
Panel a: Price for Wine
2,000
Series: Price
Sample 1/21/2006 01/11/2010
1,600 Observations 7562

Mean 36.62361
1,200 Median 33.30000
Maximum 162.0000
Minimum 7.800000
800 Std. Dev. 18.11915
Skewness 3.538451
Kurtosis 23.11738
400
Jarque-Bera 143297.2
Probability 0.000000
0
20 40 60 80 100 120 140 160
Figure 6.1a Prices and price differences for wine and beer
Panel b: Price for Beer
2,000
Series: Price
Sample 1/11/2005 5/01/2009
1,600 Observations 8515

Mean 2.985728
1,200 Median 2.910000
Maximum 7.000000
Minimum 7.800000
800 Std. Dev. 0.990329
Skewness 1.307192
Kurtosis 5.365741
400
Jarque-Bera 4410.677
Probability 0.000000
0
1 2 3 4 5 6 7
Figure 6.1b Continued
Panel c: Price Difference for Wine
1,200
Series: Price Difference
Sample 1/21/2006 01/11/2010
1,000
Observations 7562

800 Mean –0.085081

Median –0.086085
Maximum 1.550105
600
Minimum –1.572147
Std. Dev. 0.402699
400 Skewness 0.081726
Kurtosis 5.703972

200
Jarque–Bera 2312.139
Probability 0.000000
0
–1.5 –1.0 –0.5 0.0 0.5 1.0 1.5
Figure 6.1c Continued
Panel d: Price Difference for Beer
800
Series: Price Difference
700 Sample 2/21/2005 6/01/2009
Observations 8515
600
Mean –0.047754
500
Median –0.045724
Maximum 0.932856
400
Minimum –0.980119
Std. Dev. 0.304882
300
Skewness 0.241648
200 Kurtosis 3.421045

100 Jarque–Bera 145.7675

Probability 0.000000
0
–1.0 –0.8 –0.6 –0.4 –0.2 0.0 0.2 0.4 0.6 0.8
Figure 6.1d Continued
 Market Integration in the Chinese Beer and Wine Markets 135

A) Wine
Price Difference
.4
.2
.0
–.2
–.4
–.6
–.8
I II III IV I II III IV I II III IV I II III IV I
2006 2007 2008 2009 2010
Mean +/– 1 S.D.
B) Beer
Price Difference
.4
.3
.2
.1
.0
–.1
–.2
–.3
–.4
–.5
I II III IV I II III IV I II III IV I II III IV I II
2005 2006 2007 2008 2009
Mean +/– 1 S.D.

Figure 6.2 Mean and standard deviation of price difference for wine and beer

5 Univariate Unit Root test

The dataset used for this investigation covers 141 cities.12 In order to
conduct our analysis, we used “unit root test,” an applied economet-
rics test developed by Dickey and Fuller (1979) .13 Unit root test plays
an important role in mainstream economics research, with numerous
surveys and studies in the fields of economics and finance developed
by using unit root test, encompassing topics such as purchasing power
parity, unconditional income convergence hypothesis, and financial
market bubbles, corporate profit persistence, financial leverage mean
reversion, and price convergence (Perman, 1991; Campbell and Perron,
1991; Dolado et al., 1990).
136 Chi Keung Marco Lau, Zhibin Lin, David Boansi, and Jie (Kitt) Ma

Unit root test is used to verify the stationarity of a time series. For
instance, the price of beer in a time series may fluctuate in the short
run after an external shock due to increases in import tax, although
fluctuation may stop at some point. We call the time series stationary if
it exhibits these characteristics of stationarity, otherwise the dataset is
said to contain a unit root. We can use this terminology to examine if two
cities show evidence of price convergence by applying unit root test to
their relative price. If the relative price exhibits stationarity behaviour,
then price convergence is evident.
A rigorous assessment regarding price convergence across Chinese
markets can be carried out through a univariate unit root test and panel
unit root test.14 Panel A of Table 6.1 presents unit root tests of relative
price series for wine using evidence from 105 Chinese cities. Of these,
only 11 cities (10.5% of the total number) show price convergence for
wine. For beer, the convergence rate is much lower: only five cities
(3.5%) show evidence of price convergence. Based on these results, we
can therefore conclude that Chinese beer and wine markets are not well
integrated, and there is no evidence of significant arbitrage activities
in the two markets. It is possible that high transaction costs, internal
trade barriers and imperfect market structure exist. Several panel unit
root tests were performed to verify the robustness of our results. The
outcomes of this exercise are presented in Table 6.2.
Overall, our findings suggest a general lack of evidence for price
convergence for beer and wine markets, corroborating evidence provided
by Fan and Wei (2006) indicating that non-perishable consumer goods
have the lowest rate of convergence compared to other consumer goods
in China.
The degree of local protectionism or market structure in other indus-
tries (e.g. the textiles, automobile and gasoline sectors) is probably
another interesting aspect to consider. For instance, in the Russian
textiles sector, there is strong evidence in favour of market integration,
and so fewer hidden trade barriers in the domestic market (Lau and
Akhmedjonov, 2012). This suggests that the textile market is efficient in
Russia due to a better regulation and institutional arrangements made
in anticipation of accessing the WTO. In addition, an investigation of
the automotive market in the European Union (EU) between 1995 and
2005 identified exchange rate uncertainty as the main cause of price
divergence across EU Member States, indicating trade liberalization as a
key determinant for regional integration in the long run (Gil-Pareja and
Sosvilla-Rivero, 2008). Finally, a study of price convergence mechanism
in the Canadian retail gasoline market since 2000 indicated the internal
 Market Integration in the Chinese Beer and Wine Markets 137

Table 6.1 Univariate unit root test of relative price

Panel A: Wine (evidence based on 105 cities)

Probability
City Value Significance Conclusion

Mianyang 0.0002 *** Converging to the national mean price

Yinchuan 0.0907 *** Converging to the national mean price
Yantai 0.0083 *** Converging to the national mean price
Jinzhou 0.0532 ** Converging to the national mean price
Beihai 0.011 *** Converging to the national mean price
Jilin 0.0196 *** Converging to the national mean price
Nanjing 0.0128 *** Converging to the national mean price
Luoyang 0.0511 ** Converging to the national mean price
Tai’an 0.0252 ** Converging to the national mean price
Tonghua 0.0076 *** Converging to the national mean price
Anshan 0.008 *** Converging to the national mean price
Number of 11 cities or 10.5%
instances of
convergence

Panel B: Beer (evidence based on 141 cities)

Probability
City Value Significance Conclusion

Xiamen 0.0006 *** Converging to the national mean

price
Shanghai 0.0152 *** Converging to the national mean
price
Dalian 0.0452 *** Converging to the national mean
price
Anqing 0.0142 ** Converging to the national mean
price
Xingtai 0 *** Converging to the national mean
price
Number of Converging to the national mean
instances of price
convergence
5 cities or
3.5%

market as well integrated despite the introduction of fuel price regula-

tions in Nova Scotia and New Brunswick which may potentially distort
the market at a national level (Suvankulov et al., 2012).
The robust evidence of a lack of price convergence in the Chinese beer
and wine markets indicates the two as a collection of separate regional
138 Chi Keung Marco Lau, Zhibin Lin, David Boansi, and Jie (Kitt) Ma

Table 6.2 Panel unit root tests of relative price series for China’s 105 cities

Wine Beer

Method Statistic Prob.** Statistic Prob.**

Null: Unit root

(assumes common unit root process)
Levin, Lin and Chu t 4.167 1 1.003 0.842
Null: Unit root
(assumes individual unit root process)
Im, Pesaran and Shin W-stat 2.183 0.986 1.000 4.526
ADF – Fisher Chi-square 207.89 0.4891 215.66 0.918

markets, protected by barriers, rather than a single market. These empir-

ical findings pose a question of whether new business ventures entering
the domestic market could earn abnormal profit and capture market
share. Therefore, further research is needed to examine the determinants
of price convergence in the Chinese beer and wine markets.

6 Discussion and conclusions

This chapter has investigated the level of integration in the beer and
wine markets across regions in China. From the findings gathered from
our analysis, we can conclude that both the Chinese beer and wine
markets are not well integrated, and that there is no evidence of signifi-
cant arbitrage activities. After more than a decade of integration with
the world economy following its economic reforms and entrance in the
WTO, China remains a collection of separate regional markets protected
by many barriers, rather than a single national market (Poncet, 2005).
Our analysis of beer and wine prices across different cities in the
country tends to support the suggestion from Young (2000) and Poncet
(2005) that China remains a fragmented market, with limited cross-
regional price convergence that can be reflected in the test of the Law
of One Price, in contrast with Holz’s (2009) that indicates China has a
relatively integrated economy.
As discussed in the literature review section, there are several factors
that affect market integration. Speedy access to quality price informa-
tion and availability of transport facilities are the most cited exogenous
factors affecting price behaviour (Zhou et al., 2000). Given the fast
diffusion of Internet, mobile technology and other Information and
Communication Technologies (ICTs), and the significant improvement
 Market Integration in the Chinese Beer and Wine Markets 139

of transport facilities (particularly with the development of high-speed

railways in China), these factors might no longer pose barriers to inter-
regional trade. Instead, interregional trade barriers may be fostered by
forms of protectionism at a local level: although the central government
has released control over prices, this function has been taken up by local
governments (Young, 2000). Local protectionism represents a major
barrier to market integration, given that local governments pursue a
dual objective consisting of socio-economic stability preservation and
fiscal revenues maximization (Poncet, 2005). Due to the growing inter-
regional competition among substitute industries such as beer and wine
production, local governments impose a variety of interregional barriers
to trade which generate a significant fragmentation of the domestic
market.
Other key factors that inhibit market integration are the historic
differences among regions within China. In particular, the interregional
income disparity in China is significantly prominent. Pedroni and Yao
(2006) indicate that per capita incomes in the coastal provinces do not
appear to be converging towards one another, revealing that the growth
patterns among provinces with similar degrees of preferential open-door
policies follow divergent paths. Likewise, the growth of interior prov-
inces as a group do not show a converging pattern, but diverging instead.
Lau (2010) further reports that the gap of income levels among Chinese
provinces has been widening since the country’s economic reforms. The
growth patterns, along with other differential factors among regions in
China are unlikely to become homogenous in the short run. Yet all these
factors will continue to influence the economic performance of these
regions as well as their differential consumer demand and subsequent
prices.
The benefits of regional integration and the aggregate efficiencies
associated with it are usually desirable (Baldwin and Venables, 1995).
Moreover, internal integration may also have important redistributive
effects, because the reductions in the costs of interregional transactions
help to reduce interregional income differences and increase national
growth rates (Martin, 1999). However, as suggested by Eberhardt
et al. (2013), local protectionism prevents the efficient allocation of
resources, reducing the benefits of scale economies and spatial spillo-
vers. Such protective behaviour harms domestic market efficiency and
offsets potential gains from a more liberal international trade policy
regime.
Findings from this study seem to suggest that the Chinese central
government needs to reduce local governments’ protectionism in the
140 Chi Keung Marco Lau, Zhibin Lin, David Boansi, and Jie (Kitt) Ma

beer and wine markets and equally should promote market integra-
tion (and therefore market efficiency). Moreover, government policies
should also encourage brewers in the country to specialize according
to their comparative advantages. Obviously local traders who want to
take advantage of price differentials among different cities will not be
successful because of the lack of arbitrage opportunities and the unique
market structure in these markets (e.g. allocative inefficiency).
Further reforms to reduce regional disparity are imperative. The
Chinese government has already implemented policy initiatives such
as the “Western Great Development” in 1998, the “Northeast Revival”
in 2003 and the “Rise of Central China” in 2004 to narrow the gaps
in terms of economic development among different regions. These
policies provide excellent opportunities for both foreign and domestic
investors. Relatively poor regions do show comparative advantages
such as low prices of land and labour. Regional disparities still exist;
therefore the Chinese government should focus on public investment
improving infrastructures and the education system, increasing the
efficiency of production and the rate of return on investment in the
lagging regions. Continued financial reform is particularly needed to
improve access to finance for investors in inland provinces and rural
areas (Wang et al., 2014). Furthermore, both central and local govern-
ments should assume defined roles. For example, the central govern-
ment should focus on equalizing regional disparities, while local
governments should focus on public services and social development
(Wang et al., 2014).
Foreign brewers entering the Chinese market should not consider
the country as one single market, but as multiple subnational regional
markets. Given that China is such a segmented market and the
increasing purchasing power of a growing middle class in China’s major
cities, foreign beer brands should probably focus on highly developed
cities such as Beijing and Shanghai. There are plenty of opportunities
for foreign beer and wine brands to succeed in China, particularly with
regard to premium beer because consumers’ willingness to pay is higher
for foreign brands.
The main limitation of our study is that we do not examine the deter-
minants of price divergence. Future research should address this issue
in more detail, in addition to investigating consumption convergence
for beer and wine in China. There is a significant regional disparity in
income and wealth across the country (Lau, 2010). Therefore, it may
be useful to examine whether large cities generate higher demand
(consumption per person) compared to small towns in the provinces.
 Market Integration in the Chinese Beer and Wine Markets 141

Appendix 1

List of cities investigated in the study

Anqing Guigang Jiujiang Qiandongnan Tangshan Yangzhou

Pref.
Anshan Guilin Jiuquan Qianjiang Tianjin Yantai
Anshun Guiyang Kongtong Qiannan Pref. Tianmen Yichang
District
Baoji Haikou Kunming Qianxinan Tieling Yichun
Pref.
Baotou Hami Lanzhou Qingdao Tonghua Yinchuan
Prefecture
Bayingolin Hangzhou Lhasa Qinhuangdao Tongling Yiyang
Mongol
[Link].
Beihai Hanzhong Lishui Quanzhou Tongren Yuncheng
Beijing Harbin Liupanshui Qujing Ürümqi Zaozhuang
Bijie Hefei Liuzhou Quzhou Weinan Zhangshu
Changchun Hengshui Mud,anjiang Renshou Wenzhou Zhangzhou
County
Changde Heze Nanchang Sanming Wuhai Zhanjiang
Changsha Hinggan Nanjing Sanya Wuhan Zhengzhou
League
Changzhi Hohhot Nanning Shanghai Wuhu Zhongwei Xian
Chengdu Huangshi Nanping Shangqiu Wuzhong Zhoukou
Chenzhou Hulunbuir Nantong Shantou Xi’an Zhoushan
Chongqing Huzhou Nanyang Shaoguan Xiamen Zhuhai
Chuzhou Ili Kazakh Neijiang Shaoxing Xiangyang Zunyi
Aut. Pref.
Dalian Jiamusi Ningbo Shenyang Xianyang
Daqing Jiangmen Ordos City Shenzhen Xingtai
Datong Jiaxing Panjin Shijiazhuang Xining
Fuzhou Jilin Panzhihua Shizuishan Xinxiang
Ganzhou Jinan Pengxi Suzhou Xuanhan
County County
Golmud Jincheng Pingluo Tai’an Xuzhou
County
Guandu Jinhua Pu’er City Taiyuan Yan’an
District
Guangzhou Jinzhou Puyang Taizhou Yanbian Pref.

Notes
1. Almost all goods were allocated at market prices by the early 1990s.
2. On-trade consumption of beer and wine refers to purchase and consumption
of beer and wine sold in restaurants, bars, etc.
3. Off-trade consumption of beer and wine refers to purchase and consumption
of beer and wine sold in retail stores.
142 Chi Keung Marco Lau, Zhibin Lin, David Boansi, and Jie (Kitt) Ma

4. The sign of price convergence across different geographical locations is a

prerequisite for efficient resource allocation and hence proper functioning of
free market economy.
5. Average percentage growth = 100*(final value/<initial value)^(1/number of
years covered) – 100.
6. About 120% in constant terms with 2002 as base.
7. From RMB139.3bn to RMB307bn in constant terms with 2002 as base.
8. Computed by authors using a conversion factor of 83.35, thus number of
bottles (billion) = total volume (million 9-litre cases)/83.35.
9. French and Italian consumers are expected to consume 50 litres per person per
year, while consumers in the US are expected to consume 13 litres on average.
10. Per capita wine consumption in China increased from 1.12 litres to 1.5 litres
between 2012 and 2013. However, this figure is still well below the 51.9 litre
average recorded for France in the same year (Chow, 2014).
11. For details: [Link]
urls_count=1&url=info/S_0_0_0_0.htm.
12. The list of cities included in this study is provided in Appendix.
13. The article received 4,322 citations from different social science disciplines
since its publication. [Link]
y+and+Fuller+%281979%29&btnG=&lr.
14. Literature on unit root test includes: Dicky and Fuller (1979), Campbell and
Perron (1991), Maddala and Wu (1999), Levin et al. (2002), Im et al. (2003).

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7
The History and Development of
Brewing and the Beer Industry in
Africa
Richard B. Nyuur and Pauline Sobiesuo

1 Introduction

The brewing and beer industry in Africa dates back to ancient times and
has gone through numerous changes over the centuries (Haggblade and
Holzafel, 2004; Obot, 2013; Willis, 2006). The industry can be defined
as the process, types and contexts of beer production, distribution and
consumption. Van Wolputte and Fumanti (2010, p.12) noted that beer is
not a single drink but implies many things serving as a “general denomi-
nator that covers a wide range of beverages, from nutritious gruels to
industrial brews.” Beer production and consumption have historically
been integral to the fabric of the socio-economic lives of the people in
the sub-Saharan Africa (SSA) region (Obot, 2006; WHO, 2014). It is also
suggested to have played a vital role in the more recent political past
of the African region (Van Wolputte and Fumanti, 2010). Accordingly,
beer was produced by women mainly for the senior aged male groups to
drink either at home, in groups or at special occasions (Haggblade and
Holzafel, 2004; Willis, 2006).
Despite the integral nature of the beer industry in the lives of people in
the region, substantial changes have taken place over centuries, including
the commoditisation of indigenous beers which refers to the transfor-
mation of beer demand as desired commodities that could be bought,
exchanged, traded or taxed (Van Wolputte and Fumanti, 2010). Other
changes included the introduction of large-scale commercial production
of new brands, and the penetration of the regional market by multina-
tional breweries (Obot, 2013). Moreover, there are changes in drinking
places/settings as well as an increasing patronisation of beer by women,

145
146 Richard B. Nyuur and Pauline Sobiesuo

teenagers and young adults. Old cultures of beer drinking have been
adapted to changing circumstances, and newer ones developed (Willis,
2006). Beer is currently a commodity that is in high demand across
Africa and cannot be ignored (Van Wolputte and Fumanti, 2010).
Notwithstanding these developments, academic research has not
kept pace with the changes and dynamism of the industry, resulting
in substantial gaps in our knowledge of the African brewing and beer
industry, as well as the current drinking cultures in Africa. Admittedly, it
is difficult to generalise issues for such a large and diverse continent. The
cultural, economic and geographical complexity of Africa implies that
differences will exist in different parts of the region. In spite of these
differences, there are useful general historical facts that can be unpacked
and current dynamics discussed to illuminate our understanding of
developments in the industry.
This chapter aims to cover this lacuna and to contribute to the limited
literature by mapping out the genesis of the current brewing and beer
industry in Africa, the changes that have taken place over centuries and
the antecedents for these changes. Furthermore, the current nature and
future prospects of the industry are discussed. Following this introduc-
tion, we turn our attention to understanding the historical nature of the
brewing and beer industry in Africa. This is followed by discussions of
the prominent changes that have occurred in the industry. The current
state of the brewing and beer industry in Africa is then discussed. The
future of the industry is then projected and the factors accounting for
these projections discussed. Finally, a conclusion and limitations of the
study bring the chapter to an end.

2 The indigenous African brewing and beer industry

Beer has been brewed, consumed and used for libation in Africa since
ancient times (Heap, 2010). The brewing and beer industry thus existed
in Africa long before European contact with people on the continent.
For centuries the indigenous beer was an important part of the African
social fabric and a prominent component of the African diet (Willis,
2006). These beers were brewed for consumption at ceremonies and
social occasions such as funerals, weddings, festivals and other social
gatherings (Haggblade and Holzafel, 2004). In addition, they were used
for family consumption, entertaining guests or friends, as well as for
ritual performances, religious rites and initiation ceremonies such as the
rites of passage of an individual through certain stages in society (Willis,
 The History and Development of Brewing and Beer Industry in Africa 147

2006). Beer drinking was also organised at the occasion of a circumci-

sion or a returning migrant (Van Wolputte and Fumanti, 2010).
Beer played an important role in mobilising labour for cooperative
work which was necessary for preparing fields, harvesting or building
houses in the seasonal rounds of agricultural and domestic work
(Haggblade and Holzafel, 2004). People exchanged their labour for beer
(McAllister, 2010). The cooperative activities were purely reciprocal and
beer drinking also facilitated discussions and understanding of arrange-
ments for such cooperative work (McAllister, 2010). Thus, beer was
supplied at different stages of the cooperative work to workers (neigh-
bours and kin) who came together to cultivate the harvest or building
houses (Willis, 2006). Arguably, both the nutritional and alcoholic
content of beer served as a good energy source for continuing with the
task until completion.
Furthermore, beer was used in initiating young men into warriors, and
consumed by the young warriors as a key ingredient in their training for
battle (McAllister, 1993). Leaders such as kings and chiefs were honoured
with more beer as gifts in recognition for their political power than
other elders in the community (McAllister, 2010). Moreover, the kings
used beer as a political tool by distributing their supply of beer to young
warriors who reciprocated with respect and supported their authority
and power (Willis, 2002). Guests were also always welcomed by kings
and leaders with beer (McAllister, 2010). The practice of drinking was
encouraged by the kings who asserted their authority over everyone,
including the elderly men (Bowdich, 2014). For instance, Willis (2006,
p.4) revealed that “the king and other prominent men of the Asante
drank extravagantly, letting the palm wine flow down their beards in
a casual flaunting of excess; they plied their guests with drink; and on
grand occasions they quite literally poured out drink for the populace,
who were expected to become more drunk than their rulers.”
The wide use of beer for rituals and libations to ancestors revolved
around the notion that beer drinking was mainly for the older men
and not for young men or women (Willis, 2006). Even in some cultures
where women and young men did all the work, it was the older and
wealthier men who drank first and drank the most (Willis, 2006). Speke
(1967), however, argues that women and younger men also drank even
if not as much as the older men. Notwithstanding, the historical prac-
tice of mainly older men drinking beer across communities in the region
supported and sustained the practice of hierarchy and power in African
societies (Landau, 1995).
148 Richard B. Nyuur and Pauline Sobiesuo

Almost all the beer consumed then in Africa was home-brewed (Willis,
2006). These indigenous African beers are usually consumed in a state
of continuing fermentation with a distinctly sour and yogurt-like taste
(Haggblade and Holzafel, 2004). They were consumed immediately after
brewing and could be stored only for a few days (Van Wolputte and
Fumanti, 2010). The material used for the production and fermenta-
tion of beer came from a variety of sources such as sorghum, millet,
maize, sugar cane, banana, honey, fruits and the sap of some palm trees
(Haggblade and Holzafel, 2004; Roberts, 2010; Willis, 2006). These mate-
rials were locally cultivated and produced by communities across the
continent. The process of home-brewing was relatively simple to the
extent that almost anyone could make it (Willis, 2006). In fact, beer
home-brewing was one of the main occupations of women, and as such
it was a customary requirement for every young girl to learn how to
brew local beer (Speke, 1967).
Today, the vast majority of traditional African beers are still home-
brewed using a variety of grains (Van Wolputte and Fumanti, 2010).
They are generally thicker, opaque and pinkish-brown in colour with
an alcoholic content normally between 2% and 5% (Haggblade and
Holzafel, 2004; Van Wolputte and Fumanti, 2010). The low alcoholic
content levels, coupled with the thickness of the African indigenous
beer, contributed to observers as well as consumers considering them
to be as much a food as a beverage. The wide assortment of recipes
as well as many possible combinations of malt and starch used in
the brewing process of the indigenous beer across countries and
regions on the continent, resulted in a wide variety of tastes and local
names (Haggblade and Holzafel, 2004). Some of the names of the
locally brewed beer in African countries include pito (in Ghana and
Nigeria), dolo (in Ivory Coast, Burkina Faso, Mali, Niger, Togo), chapalo
(in Benin), walwa (in Angola), amgba (Cameroon), pombe (in Kenya and
Tanzania), busaa (in Uganda and Kenya), and mqomboti (South Africa).

3 The monetisation of indigenous beer and importation of

bottled beer

As time went on, the African home-brewing and drinking practices

underwent dramatic changes (Van Wolputte and Fumanti, 2010).
Between 1850 and 1930, beer was imported into African economies for
the limited European population (Heap, 2010; Roberts, 2010). The impor-
tation of beer disrupted the home-brewing and beer-drinking practices
by changing the manner in which indigenous beers were produced and
 The History and Development of Brewing and Beer Industry in Africa 149

consumed (Heap, 2010). The introduction of money in the exchange

of goods and services in African economies during this period further
contributed to the home-brew beer becoming a commercial product (Van
Wolputte and Fumanti, 2010). Women began to produce and distribute
these beers for sale (Haggblade and Holzafel, 2004). Home-brewing was
therefore no longer for the limited purpose of social and ritual practices
but extended to commercial purposes. Urbanisation and labour migra-
tion further motivated many into brewing for sale as a substitute for
agriculture and cash cropping (Van Wolputte and Fumanti, 2010).
The sale of home-brewed beer by women was further facilitated
by the ability of young men to earn money by selling their crops or
earning a wage by labouring (Akyeampong, 1996; Wilson, 1977). The
home-brewing of beer for sale in exchange for money became a source
of independent income for women (Willis, 2006). This, together with
the increased earning ability of young adults, challenged the established
social restrictions on young adults and women and initiated the change
of the beer-drinking culture. This trend led to the setting up of drinking
spots (pubs) known in some countries as ‘dolotieres’, ‘dolo bars’, ‘shebeen
queens’, or ‘pito bars’ (Haggblade and Holzafel, 2004). The stage for
commercial beer production and consumption was set. These drinking
spots were usually set up informally and operated predominantly by
women (Van Wolputte and Fumanti, 2010).
Dobler (2010) refers to shebeens, dolotieres, dolo bars or pito bars as
small bars usually in a shed made of wood or corrugated sheets where
home-brewed beers are mainly served. The clientele of these drinking
spots usually consists of people who live in the area or know the owner.
Single passers-by may enter such drinking spots to quench their thirst
but rarely stay long. They serve as places ‘where memories are told and
retold, hopes and ambitions expressed’, and where issues and systems are
evaluated in endless process of excitement (Van Wolputte and Fumanti,
2010). Beers sold in these spots are normally not taxed as they are outside
the formal channels of government control (Jernigan et al., 2006; WHO,
2014). Other types of drinking spots also exist and are similar to the
British pubs, as they are more formal with tables and chairs, pool tables,
gambling machines and provide a larger variety of bottled drinks than
the shebeens or dolotieres (Dobler, 2010). The excitement associated
with these formal settings present them as a centre for state supervision
and government control (Van Wolputte and Fumanti, 2010).
As demand kept increasing, business-conscious people in some regions
established breweries to produce large quantities of the indigenous
beer for sales in bottles to keep pace with demand. An example is the
150 Richard B. Nyuur and Pauline Sobiesuo

‘Chibuku beer’ that is produced by breweries in eastern and southern

African countries such as Kenya, Tanzania, Botswana, Malawi, Zambia
and Zimbabwe (Haggblade and Holzafel, 2004). In addition to the brew-
eries, the home-brewing of beer increased and became more commer-
cialised to the extent that over 90% of current production in both rural
and urban areas were cash sales. The increased earning ability of women
and young adults further contributed to the erosion of social restric-
tions such as social pressures and protocols placed on them in the past.
This correspondingly triggered an increased consumption of indigenous
beers by young adults and women. Today, the indigenous beer, both
home- and factory-brewed, is mainly consumed away from home in
retailing outlets and pubs.

4 Imported bottled beer and spirits

European contact with Africa witnessed the importation of bottled beer

and distilled spirits which were exchanged for African slaves (Obot,
2013; Odejide, 2006; Pan, 1975; Willis, 2006). Bottled beer, gin, rum,
whisky, other distilled spirits and beverages, together with ammunition
and firearms, were the essential trading items of the commerce between
Europe and Africa in the infamous barter system of trade (Pan, 1975;
Siiskonen, 1994). These were seen as prestigious goods and were in high
demand by the kings and rulers who exchanged their slaves for them.
In some instances these drinks were used by traders to pay chiefs and
community rulers for passage through their villages with captured slaves
on their way to the ships at the coastal areas (Hill, 2009). Drinking of
these imported bottled drinks alongside the indigenous beer eventually
became popular. Roberts (2010) reveals that Africans began to consume
imported beers as a way of associating themselves with the lifestyles and
values of Europeans. Yet in West Africa it was only the United African
Company that was importing bottled beer for the limited demand by
the Europeans (Roberts, 2010).
However, with colonisation, a set of restrictions on the drinking
of imported bottled beer and spirits by Africans were put in place by
the colonial administrators. Accordingly, there was an imposition on
women and young people less than 18 years from drinking bottled beer.
There was also a distinction between the types of beer Africans were
allowed to drink. During this colonial period, Africans were allowed to
drink only the traditionally brewed beers. Willis (2006, p. 8) recounts
that: “In South Africa, and in most other parts of Anglophone Africa,
African subjects of the colonial state who rejected locally made grain
 The History and Development of Brewing and Beer Industry in Africa 151

beer, palm wine or other such beverages could find no legal alterna-
tive: all kinds of ‘European’ liquor – even bottled beer – were forbidden
by law to Africans in these territories through most of the colonial
period.” Even in a few territories with a less restrictive drinking policy,
only a tiny minority of Africans could legally buy and consume limited
imported bottled beer and wine. Many of the sub-Saharan Africa coun-
tries were also forbidden from producing beer for European consump-
tion. The policy further dictated where and when the imported bottled
beer could be sold and consumed (Willis, 2006). Notwithstanding,
demand for the imported beer continued to increase as cities along the
coast also grew (Roberts, 2010). In 1933, the United Africa Company
(UAC) established the Accra Breweries Limited in the then Gold Coast as
the first West African brewery (Roberts, 2010). Based on the increasing
demand, the Nigerian Brewery Limited was also established in 1949
(Roberts, 2010).
Thus, while the market and demand for bottled beer was expanding,
another layer of restrictions impacted on the overall profitability poten-
tial of the industry. Arguably this was another type of power mechanism
instituted using the brewing and beer industry. It again enforced distance
between ruler and subject (Willis, 2006). Willis (2002), however, notes
that this restriction was also born out of the concern that beer drinking
made people unfit for work and disrupted the labour supply. However,
these attempts at controls turned imported bottled beers further into
high-status consumption products, and fuelled people’s desire for such
drinks as well as a steady growth in their sales (Willis, 2006). With
time, people quickly learned the techniques of how to illegally produce
bottled beer and the practice eventually became common, particularly
in the West African region (Akyeampong, 1996).
The sweeping attainment of independence by many African coun-
tries in the 1950s heralded the removal of these restrictive laws, making
bottled beer legally available to most Africans (Willis, 2006). A number of
the newly independent nations established national breweries, including
Ghana Brewery Limited, Nigeria Brewery plc, Swaziland Breweries,
Lesotho Brewing Company, Kenya Breweries Limited and Tanzania
Breweries Limited (Jernigan et al., 2006; Willis, 2003). Consumption
of imported European bottled beer was then encouraged. Per capita
consumption of recorded beer sales increased rapidly from 1970 to
1980. The SSA region was seen as an untapped and lucrative market
by bottled beer producers in search of new and expanding markets to
compensate for the declining consumption in the mature markets of
North America and Europe (Jernigan et al., 2006). Many alliances were
152 Richard B. Nyuur and Pauline Sobiesuo

formed between international beer companies and the new independent

African states. Although a wave of nationalisation in the 1970s threat-
ened these alliances, the economic structural adjustment and liberali-
sation programmes in many of these independent states consolidated
these companies’ interests in the African brewing and beer industry and
their relationships with the new independent African states (Bryceson,
2002). With the emergence of a middle class and a large population, the
demand prospects of Westernised beer consumption was estimated to be
positive as the trend was set to continue.
However, instead of increasing or flattening, recorded beer consump-
tion in Africa began to fall steadily from 1980 to 1999. This sudden
change of consumption trend was facilitated by the 1980s’ global reces-
sion, military conflicts, corruption and HIV prevalence across the length
and breadth of Africa during that period which together depressed
economic growth rates in the region (Jernigan et al., 2006). Economic
growth rates from 1980 to 2002 fluctuated between negative 1.5% and
positive 1%, while the rest of the world recorded growth rates of almost
2% during this entire period (Artadi and Sala-i-Martin, 2003). Many
global beer brewers therefore turned their attention to China and Eastern
European markets which were more promising during that period than
Africa. South African Breweries (SAB) took advantage of that and made
inroads into the rest of SSA (Jernigan et al., 2006). It acquired competi-
tors such as Ohlsson Breweries, Chandlers Union Breweries, Swaziland
Breweries and Lesotho Brewing Company. It also went into alliances
with major multinational brewers such as Guinness, Heineken and
Carling breweries; and built new breweries in countries such as Angola
and Botswana (Jernigan et al., 2006). These measures consolidated the
company’s dominant position in Africa.
Positive economic growth and increasing affluence coupled with the
consumption pattern of beer from 2005 presented a positive market
potential to investors once again (Willis, 2006). The increasing popula-
tion perceived as potential consumers, the falling poverty levels on the
continent, and the comparatively low consumption rates per capita, all
painted a substantial market potential in Africa (Jernigan et al., 2006). Beer
consumption in Africa was never attached to the intense patriotic feelings
as in other parts of the world, particularly in Asia (Slocum et al., 2006).
Since then, a number of global multinational breweries and distilleries
such as Heineken and Diageo entered the African market by acquiring
and controlling many of the national breweries (Obot, 2013). They have
since consistently and actively engaged in the African beer and brewery
industry by producing and distributing their drinks (Willis, 2006).
 The History and Development of Brewing and Beer Industry in Africa 153

5 Current and future state of the African beer industry

The limited scholarship on brewing and beer in Africa has noted the
fluctuations in production, distribution and consumption of beer over
the past four decades (Odejide, 2006). Following a period of depressed
consumption (Jernigan et al., 2006), recorded adult per capita consump-
tion between 2001 and 2005 increased by 25% (WHO, 2011). The
increase in the rate of beer production and consumption since the
early 2000s has therefore been acknowledged (Siiskonen, 1994; Willis,
2006). Arguably, this increasing trend is occasioned by liberalisation
and deregulation of the industry and African economies in general, free
trade, globalisation of markets and improved transportation systems
in African countries (Jernigan et al., 2006; WHO, 2014). Moreover, the
erosion of traditional control measures on beer consumption, and the
introduction of new drinking customs and institutions that allow equal
access of beer to women and adolescents may equally be a contributing
factor (Odejide, 2006; WHO, 2014). A new variety of beer products with
fruity and sweet tastes, as well as drinking in pubs, are also increasingly
presented, particularly to young people as good experiences, concepts
and lifestyles (Odejide, 2006). The brewing and beer industry is one
of the thriving industries on the African continent (Van Wolputte and
Fumanti, 2010).
Beer drinking in Africa is no longer defined by age or gender, but over-
whelmingly by income (Bryceson, 2002; Willis, 2006). Although the
influence of tradition still remains, the patronisation of Western beers
has penetrated into the remote villages as they have become the preferred
drink choice for anyone who can afford it (Jernigan et al., 2006; Obot,
2006). There has also been a surge in the brewing and bottling of local
beer for commercial purposes (Obot, 2006). These products are drunk at
different places and times by different sorts of people who cannot afford
the imported or nationally recognised bottled beers. Nonetheless, the
traditional fermented beers such as burukutu, dolo, chapalo, pito and palm
wine or gin-like (sometimes illicit) drinks like kachasu in Zambia, ogogoro
in Nigeria, akpeteshie in Ghana and gongo in Tanzania are consumed
mostly in the rural areas and among the urban poor (Obot, 2006,
p.18). These, however, remain unrecorded as they are not taxed but are
produced, distributed and sold outside the formal channels of govern-
ment control (Jernigan et al., 2006; WHO, 2014).
Notwithstanding, the beer market in Africa is not fully tapped and
has substantial growth potential (Jernigan et al., 2006). Currently the
brewing and beer industry is still more in the sub-Sahara region as
154 Richard B. Nyuur and Pauline Sobiesuo

alcohol consumption is discouraged in the North African region in line

with the values of the Islamic religion which is predominant in that
part of Africa. Although limited wine is produced in Tunisia for export,
beer production, distribution and consumption is limited in the North
African region. Table 7.1 below depicts the general drinking levels among
males and females of more than 15 years of age in different regions.
Table 7.1 reveals that only 40.2% of males and 19.6% of females of
ages 15 years and above drink in the African region. This consump-
tion level is below the world average of 47.7% male and 28.9% female
consumption levels. The consumption level in SSA also translates into
an unserved market of 59.2% males and 80.4% females in the region
aged 15 years and above. The last column of Table 7.1 refers to the
proportion of male drinkers as compared to female drinkers in all the
regions. The ratio of male to female consumption in the SSA region is
2:1 suggesting that as many as twice the number of males as compared
with females drink in Africa. This confirms the view that many women
in Africa tend to abstain from alcohol and for that matter beer for life
(Martinez et al., 2011). The high level of females’ abstinence from beer
consumption may arguably be due to the influence of cultural, religious
and social factors.
Figure 7.1 below further highlights that only 40% of the recorded
alcoholic beverages consumed in Africa are beer, followed by wine at
37%, spirits at 12% and other alcoholic drinks at 11%. Table 7.2 below
presents the percentage of beer consumption in 2010 among 15-year-
olds and above in all African countries. The measure is in litres of beer
consumption. Table 7.2 reveals that in some countries, such as South
Sudan and Mauritania, the beer industry is very much untapped.
Moreover, consumption levels in many countries in the region are

Table 7.1 Proportion of current drinkers among all 15+ years

Males/
WHO Region Males (%) Females (%) Females (%)

African Region 40.2 19.6 2.1

Americas Region 70.7 52.8 1.3
Eastern Mediterranean Region 7.4 3.3 2.2
European Region 73.4 59.9 1.2
Southeast Asia Region 21.7 5.0 4.3
Western Pacific Region 58.9 32.2 1.8
World 47.7 28.9 1.6

Source: WHO (2014).

 The History and Development of Brewing and Beer Industry in Africa 155

other, 37% Beer, 40%

Spirits, 12% Wine, 11%

Figure 7.1 Recorded alcohol consumption by type, 2010

Source: WHO (2014).

Table 7.2 Beer consumption levels in sub-Sahara African countries, 2010

Consumption
level (%) Country consumption levels of beer (%)

Below 10% South Sudan, Mauritania (0%); Sierra Leone (6%); Gambia
(6%); Nigeria (8%); Malawi (9%); Uganda (9%)
10–19% Burkina Faso (10%); Tanzania, Rwanda, Liberia (11%); Mali
(13%); Côte d’Ivoire, Central African Republic (16%)
20–29% Guinea-Bissau (20%); Comoros (23%); Zambia (23%); DR
Congo (24%); Sao Tome and Principe (24%); Zimbabwe (24%);
Burundi (25%); Equatorial Guinea (28%)
30–39% Ghana (30%); Swaziland (33%)
40–49% Cameroon (45%); Niger (46%); South Africa (48%);
Togo (49%)
50–59% Ethiopia (50%); Lesotho (51%); Benin (55%); Senegal (55%);
Botswana (56%); Madagascar (56%); Kenya (56%)
60–69% Algeria (63%); Mozambique (63%); Angola (64%); Eritrea
(64%); Cape Verde (64%); Chad (66%); Mauritius (66%);
Seychelles (67%); Gabon (68%)
70–79% Congo (78%); Guinea (79%)
80–89% None
90–100% Namibia (97%)

Source: WHO (2014).

156 Richard B. Nyuur and Pauline Sobiesuo

below 30%. Nigeria, which has the largest market in the African region,
records only 9% consumption level of beer as of 2010. South Africa,
with a substantial market, also has only 48% beer consumption level.
It is only in Congo, Guinea and Namibia where consumption levels are
above 70% (see Table 7.2). Figure 7.1, however, confirms the view that
beer remains the most preferred beverage across the African continent
(Obot, 2013).
Arguably, positive economic development of a society has a posi-
tive influence on beer consumption levels. A greater economic wealth
is broadly associated with higher levels of consumption and lower
abstention rates (WHO, 2014). The sustained positive economic growth
rates of many African countries signal an increasing level of disposable
incomes and purchasing power of people and hence a favourable market
potential (Obot, 2013). Additionally, there is an increase in population
in Africa which could eventually lead to high levels of consumption;
however, there is also a large pool of abstainers (WHO, 2014). Moreover,
there are limited or no restrictions on marketing and promotional activ-
ities and the enforcement mechanisms of these limited restrictions are
at best ineffective (Obot, 2013). Based on the above factors, an increase
in brewing and beer consumption in the region is projected up until
2025 (WHO, 2014). Accordingly, the number of potential consumers
and the total amount of beer consumed in the region during this period
might substantially increase because of the high growth rate and poten-
tial increase of the adolescent and adult population (WHO, 2014).

6 Marketing, health impact and regulations

The largely untapped African beer market has been described as a ‘jewel’
and companies such as Heineken, Diageo and SABMiller are investing
heavily in building new breweries, expanding to other countries and
advertising their products (Obot, 2013). As local products are increas-
ingly capturing some of the market share of the established firms, compe-
tition is even becoming more intense in recent times. Both established
industrial giants and local players are escalating their marketing and
promotional activities across the SSA region as the competition heats
up (Obot, 2013). The fragmented nature of the African market, coupled
with infrastructural problems, is however posing a challenge to the effec-
tive promotion and distribution of beer and beer products. Arguably
the poor transportation and communication systems, particularly in
the rural areas, complicate distribution and other operational issues.
Additionally, the economic, institutional, cultural and geographical
 The History and Development of Brewing and Beer Industry in Africa 157

differences across the continent have also had a profound impact on the
marketing of beer products by companies.
As a result, television and radio commercials, billboards, newspapers,
magazines and the Internet are used as marketing channels for beer and
beer drinking places in African countries (Anderson et al., 2009; De Bruijn
et al., 2014). Also, events that attract people, particularly the young ones,
are usually targeted as good places to advertise beer by companies and
distributors. Some of these events include beauty contests, sports events,
carnivals, fashion shows, music segments on radio and other sponsored
programmes (Jernigan et al., 2006). Advertising at such events has been
found to be associated with young people’s subsequent intention to drink
(De Bruijin et al., 2014; Kwate and Mayer, 2009). The movie, music and
sports industries are being used equally to promote beer products (Obot,
2013). Scholars have suggested that beer advertising has a stronger influ-
ence on people in this context to drink more than in Western cultures
(De Bruijn et al., 2014). It has also been found to influence and enhance
the likelihood of people who abstain from beer to initiate beer drinking
(Anderson et al., 2009; Henriksen et al., 2008).
The trend of beer marketing and increasing consumption in the region
has also attracted an increasing body of research on the health-related
impact of beer drinking (Obot, 2013; WHO, 2014). Accordingly, beer
drinking is, in excess over a long period of time, injurious to people’s
health as it contributes to morbidity, disability and mortality. Some of
the health-associated effects of beer drinking are suggested to include
cancers, diabetes, disorders, infectious diseases, unintentional and inten-
tional injuries, and neonatal conditions (WHO, 2014). According to
WHO (2014), about 5.9% (3.3 million) of all global deaths in 2012 were
attributable to beer and alcohol drinking. The African region, however,
recorded the lowest number of deaths. Nevertheless, it is suggested that
developing countries such as those in Africa are affected disproportion-
ately by a large burden of beer- and alcohol-related problems (De Bruijin
et al., 2014; Rehm et al., 2009). Obot (2013) thus noted that in 2010 beer
and alcohol drinking constituted the leading risk factor for diseases in
the sub-Saharan African region.
The potential burden on economies has also been articulated (Obot,
2013; WHO, 2014). While excessive alcohol consumption can be harmful,
there is substantial medical literature suggesting that moderate alcohol
consumption is beneficial for health and well-being (Baum-Baicker,
1985; Stampfer et al., 2005; see also Chapter 1 in this book). Accordingly,
moderate consumption of alcohol effectively reduces stress, tension
and depression. It is also found to increase overall affective expression,
158 Richard B. Nyuur and Pauline Sobiesuo

happiness and certain types of cognitive performances such as problem-

solving ability and short-term memory (Baum-Baicker, 1985).
Notwithstanding, the increasing attention on both the economic
and health burden of beer drinking is triggering the development of
policies by countries in the region to regulate beer drinking as well
as its marketing (Obot, 2013; WHO, 2014). Many countries are using
increasing taxation and excise duties in controlling the marketing of
beer and alcohol in general (WHO, 2014). In some countries, such as
Gambia, advertising beer on television, radio or through sport sponsor-
ship is prohibited (De Bruijn et al., 2014). In other countries, such as
Ghana, Uganda and Nigeria, the brewing- and beer-related policies and
regulations developed so far are not very strict (De Bruijn, 2011). In fact,
Uganda and Ghana both rely on self-regulation by the brewing and beer
industry (De Bruijn, 2011; De Bruijn et al., 2014). Madagascar, on the
other hand, has legislation that prevents beer advertising as well as sale
anywhere near public institutions such as religious buildings, hospitals
and schools (De Bruijn et al., 2014). Because of religious reasons, coun-
tries in North Africa also have restrictive policies on beer drinking and
marketing. Notwithstanding, the general regulatory framework in the
SSA region is still comparatively favourable, and both local as well as
multinational firms are taking advantage of that to expand their prod-
ucts in this underserved market.

7 Conclusion

This chapter has examined the development of the brewing and beer
industry in Africa since pre-colonial times to the present. The paper
uncovered that beer drinking and the industry in general is rooted in the
socio-economic fabric of countries in the region. Beer can be considered
as the most social lubricant in African culture as it is used for a variety of
social, religious and political settings. Furthermore, the paper highlights
that the industry has gone through a number of changes over centu-
ries. Urbanisation, labour migration, market liberalisation and structural
adjustment programmes have contributed to changes in the brewing
and beer industry. Young adults and women challenged the established
social restrictions on them as they earned wages for their labour. This
trend led to the setting up of drinking spots across many communi-
ties in Africa. New technologies and ingredients further resulted in the
bottling of home-brewed beer for commercial sale.
The study further underscored that the beer market is largely untapped
and the industry for brewing and beer has a substantial growth potential.
 The History and Development of Brewing and Beer Industry in Africa 159

This stands in stark contrast to the matured developed markets where

sales have stagnated and in some cases declined for a number of years
(Roberts, 2010). Both multinational companies and local companies
are meticulously investing and expanding their operations, as well as
marketing and promoting their products. These efforts are meant to
enable them make more inroads into this underserved market. Local
brewers are also producing and bottling new types of beers for this
market. The situation therefore projects an intense rivalry among
industry players in the long term.
The present study suffers from some limitations. First, the brewing and
beer industry is under-researched. Thus, there have been limited sources
of published work that could be used in producing this chapter. Much
of this published body of literature covers the wider alcoholic beverages
and not only beer. Thus obtaining reported data specific to the beer-
brewing industry for this work became difficult. Notwithstanding, this
chapter contributes to enhancing our knowledge of the development of
the brewing and beer industry in Africa.

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8
South of the Border: The Beer and
Brewing Industry in South America
Luis Alfonso Rivera Mena, Katia Beatriz Villafán Vidales, and
José Odón García García

1 Introduction

This chapter presents the history of beer brewing from its beginnings in
South America, analysing how the beer and brewing industry developed
as part of the industrialization process that developed in the region from
the late sixteenth century until the early twenty-first century.
The chapter comprises five sections, including this brief introduction.
The second section presents a chronological account of beer brewing
in the main regional economies of South America. The third section
examines data about beer production and trade to illustrate the impor-
tance of South America in the global beer industry. The fourth section
discusses the most important mergers and acquisitions (M&A) in the
South American brewing industry, investigating how large multinational
companies bought regional and national breweries which accelerated
the resulting industrial concentration in these economies. Finally, the
penultimate section presents some reflections on how domestic capital
turned the traditional South American brewing companies into multi-
national actors. Conclusions are presented in Section 6.

2 A brief history of beer and breweries in South America

In South America, various fermented alcoholic beverages were the

precursors of beer during the pre-colonization era. The sustained produc-
tion and consumption of fermented beverages among ancient indig-
enous populations provide evidence of millenarian traditions, based on
extensive knowledge and skills about plant cultivation, harvesting and
processing.

162
 South of the Border 163

Fermented beverages were mainly consumed during religious cere-

monies. The tesgüino, obtained from corn grains or cane, was brewed
also in many other parts of South America. This beverage is still very
popular in the north of Mexico, and regularly consumed by local tribes
including the Opata, Pimas bajos del sur, Taraumaras, Yaqui, Tepehuanes
del Norte, and the Huicholes. Traditionally, the consumption of tesgüino
accompanied ceremonial purposes, for example, the Tarahumaras drink
it to venerate “Father Sun” and “Mother Moon” in order to provide
them with rain (Fournier and Mondragon, 2012).
Another beverage, pulque, was obtained from the maguey or agave,
known as the “wonderland tree,” a very important plant for Mesoamerican
civilizations (Fournier and Mondragon, 2012). According to sixteenth-
century chronicles, but before the Spanish Conquest, the consumption
of pulque was restricted to the elderly or sick, to postpartum women
and to hard workers. Other individuals were authorized to drink pulque
only during the celebration of the tenth month, which was dedicated to
death. Those who were born on the day dedicated to one of the two god
patrons of the beverage, Ometochl or Conejo, were cursed to get drunk
the rest of their lives (Fournier and Mondragon, 2012).
The chronicles reveal also that, when Christopher Columbus discov-
ered the “New World,” indigenous people brewed fermented beverages
that tasted similar to English beers (Contreras and Ortega, 2005). The
Spanish conquistadors preferred wine to beer, but there were no optimal
conditions in the newly founded lands to produce wine, though ideal
conditions existed for the production of beer which needed the Crown’s
approval. In June 1542, Alfonso Herrera became the first to obtain a
license authorized by King Charles V to brew beer in the colonies, and
established the very first beer brewery in Amecameca, México State.
However, the natives did not readily accept beer and continued to
drink their own traditional fermented beverages (Contreras and Ortega,
2005).
The production of beer in South America remained limited for three
centuries. National brewing industries and markets started to develop
only at the end of the nineteenth century. In the five main regional
economies of South America – Argentina, Brazil, Colombia, Chile and
Mexico – this was one result of the Industrial Revolution, which also
brought significant growth in transport and communications infrastruc-
ture. Brewing activities were very diverse among countries, and were
mostly dependent on imported raw materials and technologies. Chile
developed a strong domestic wine industry, while Argentina, Brazil,
164 Luis Rivera-Mena, Katia Villafán-Vidales and Odón García-García

Colombia and Mexico were first oriented towards commercializing

liquors and spirits. All converted to beer brewing as a second stage.
In Chile, 46 breweries and distilleries operated in Santiago in 1867,
and 73 breweries were in operation in 1884, mostly located in the
provinces of Santiago, Valparaíso and Quillota. Of these breweries, 50
were owned by German immigrants (Fernández Labbé, 2006). Despite
production difficulties, the rapid growth of breweries benefited from the
high costs of transport which favoured small, local brewers. With the
expansion of the national railway network, competition among small
breweries became fierce, leading to M&A in the Chilean beer industry.
Between 1916 and 1930, La Compañia de las Cerverías Unidas (CCU)
became Chile’s leading brewery (Couyoumdijan, 2004).
CCU began the construction of workers’ housing projects in Limache
in 1937. In 1959, the company started producing soft drinks for Pepsi
Cola. In 1986, the Luksic Group, through Quiñenco S.A., and the
German group Schörghuber, via Paulaner-Salvator AG, formed a joint
venture with the company Rentas S.A. which eventually became the
major shareholder in CCU. During the 1990s, CCU began to produce
and distribute Paulaner in Chile. CCU acquired control of Karlovacja
Pivovara (Croatia) and entered the Argentine and Peruvian beer markets.
In 2003, Heineken formed a joint venture with BHI that included partial
ownership of CCU, and signed several agreements with AB-InBev for the
production and distribution of many beer brands in Argentina, Chile
and Uruguay (CCU SA, 2015; Wehring, 2014).
In Brazil, tastes for alcoholic beverages were influenced by Portuguese
colonizers. Between the nineteenth and twentieth centuries, a liqueur
obtained from sugar cane, cachaça, became the biggest selling alco-
holic beverage. Imported wines from Portugal, France and Italy were
frequently available in the hotels and restaurants of São Paulo and other
main cities. Imported beers from Germany were also available, but their
consumption was marginal. However, local breweries started to emerge
in minor towns, such as Juiz de Fora, where three local breweries opened
between 1880 and 1886 (Luiz de Souza, 2004). Small regional breweries
dominated the beer market until the 1930s, when the Brahma and
the Antarctica breweries increased their production and acquired large
sections of the Brazilian market.
Brazil was the first country in South America to experience a merger
between a national brewer and a multinational brewing company. In
1999, AmBev was formed through the merger of Companhia Antarctica
and Cervejaria Brahma, which subsequently merged with the Belgian
company Interbrew to form InBev in 2004 (Howard, 2014). This company
 South of the Border 165

became AB-InBev in 2008 (Leonard, 2012). In 2003, AmBev acquired

Cervecería y Maltería Quilmes, the largest Argentine brewer with subsid-
iaries in Bolivia, Paraguay and Uruguay. In the same year, AmBev also
acquired 80% ownership of the Ecuadorian Cervecería Suramericana,
renaming the company Compañía Cervecera Ambev Ecuador. In 2004,
AmBev acquired a 66% stake in Embotelladora Dominicana from the
Dominican Republic and renamed it AmBev Dominicana. In 2007,
AmBev acquired Goldensand Comércio e Serviços Lda., the control-
ling shareholder of Cervejarias Cintra Indústria e Comércio Ltd., a local
brewer present in the Southeast of Brazil. (AMBEV, 2015). Today, AmBev
is the operative arm of AB-InBev in South America, and covers busi-
ness agreements with Pepsi in Argentina, Bolivia, Uruguay, Peru and the
Dominican Republic (AMBEV, 2015).
In Colombia, the first breweries developed with the fast industrializa-
tion processes that occurred at the end of the nineteenth century. These
breweries were horizontally integrated with companies producing other
goods, such as soft drinks. During the first decades of the twentieth
century, the beer industry became one of the most important industries
in the country. The 1930s were characterized by M&A in the Colombian
beer market. Of particular interest is the case of Consorcio de Cerverías
Bavaria, S.A., also known as Bavaria. This company originated from the
merger of Bavaria de Bogotá and Continental de Medellín, and with the
acquisition of Consorcio las Cervecerías Unidas de Colombia de Cali.
This operation was financed by Industrie Maatschappij, a joint venture
funded by Dutch and German families with interests in the country. It
took seven years for Bavaria to become the largest brewing company in
Colombia (Martinéz Rey, 2006). During World War II, the Colombian
government confiscated and nationalized German-owned property
in the country, and Bavaria was acquired by local investors. The new
managers started an aggressive campaign of expansion, building new
breweries in commercially remote areas and promoting horizontal
integration. Between 1943 and 1975, M&A gave Bavaria a complete
monopoly of the Colombian beer market (Martinéz Rey, 2006; Plano
Danais, 2015). This monopoly lasted until 1995 when new companies,
such as Cervecería Leona and the Venezuelan Polar, entered the market.
In 2005, Bavaria merged with SABMiller (Plano Danais, 2015).
Between 1880 and the early 1900s the largest share of beer consumed
in Mexico was imported from the United States, Great Britain and
Germany. Beer was a very expensive beverage compared to traditional
alcoholic drinks like pulque or mezcal. Being up to 30 times more expen-
sive, beer was rarely accessible to the masses (Recio, 2007). The modern
166 Luis Rivera-Mena, Katia Villafán-Vidales and Odón García-García

brewing industry in Mexico gained momentum after the 1910 revolu-

tion. Companies in the north and centre of the country, with a privileged
access to import of raw materials, dominated domestic production.
In the 1940s, Mexico adopted import-substituting policies.1 However,
the Mexican beer industry remained characterized by several medium-
sized producers until the early 1980s, when three large companies, Grupo
Modelo, Cervecería Cuahutemoc and Cervecería Moctezuma, started to
progressively substitute locally produced for imported barley. The three
companies began to act as brokers for barley farmers, supporting them
with advanced technology to produce barley. The Mexican brewing
industry remained vertically integrated and highly concentrated in the
hands of a few national companies (Salomón, 2005; Medellin, 1980).
The Mexican brewing industry changed significantly after Mexico
signed the General Agreement Trade and Tariffs (GATT)2 in 1986 and
the NAFTA (North America Free Trade Agreement)3 in 1994. In 1988,
Cervecería Cuahutemoc acquired Cervecería Moctezuma and later
became FEMSA Cerveza, establishing a duopoly4 with Grupo Modelo
in the domestic market. While production by both brewing groups still
targeted the domestic market, commercial alliances with large interna-
tional breweries opened the way to export markets. As a result, Mexico
became the first Latin American exporter of beer to the United States.
Beer brewing in Argentina has existed for more than two and a half
centuries, and, as in most Latin American countries, it was first intro-
duced by European immigrants who came to the New World. Towards
the second half of the eighteenth century, small breweries founded by
immigrants began to emerge (Oliver and Colicchio, 2012; Krebs, 2015).
The nascent Argentinean brewing industry operated almost exclusively
with imported raw materials. Local breweries differed significantly
because of poor communications and the absence of ice to cool the beer
during transport (CCU Argentina, 2012).
Between 1860 and 1880, the Alsatian immigrant Emilio Bieckert
started brewing in Buenos Aires. Another brewery began its operation
in 1888 under the direction of German immigrant Otto Bemberg. The
legacy of these two brewery companies live on in the “Bieckert” and
“Quilmes” brands that are currently produced by AB-InBev. In 1863, the
German immigrant communities started to celebrate the Oktoberfest in
San Carlos and Esperanza. The Brewery Isenbeck opened in 1893 and
continued to operate independently until 1990 when it was taken over
by SABMiller (Oliver and Colicchio, 2012; Krebs, 2015). In 1912, another
German immigrant, Otto Schneider, founded the Santa Fe Brewery in
the town with the same name; this brewery eventually became part of
 South of the Border 167

CCU Argentina. In 1917, CCU implemented the production of malt in

Hudson, Argentina. Since 1998, Cargill malt processes in Bahia Blanca
(south west of Buenos Aires) have been marketed under the Malta
Premium brand (Oliver and Colicchio, 2012; Krebs, 2015).
During the 1990s the neoliberal policies of President Carlos Menem
opened the market to investment by Brahma, and Isembeck and
Warsteiner (Krebs, 2015). Currently the Brazilian brand has been
owned by AB-InBev since 1999, while German brands have belonged
to SABMiller since 2010 (Sainz, 2010; Bidegaray, 2010). Since 2010, four
large companies: Cervecería Quilmes Industrial S.A., Brewing Company
(CICSA), Inversora SA Brewing (ICSA) and Isenbeck are totally respon-
sible for domestic production. The Quilmes Company, controlled by
the Belgian–Brazilian company InBev, has 71% of the market share,
followed by a Chilean company, Compañia de la Cervecerías Unidas
(CCU, United Breweries Company) with a 16% share of consumption.
The third ranking ICSA corresponds to 7% of the market. The remaining
6% is supplied by Isenbeck (Ablin, 2011). In recent years Argentina’s
regional and national trademarks have been absorbed by leader compa-
nies which extended their trademark portfolio and maintained their
traditional beers by using niche or segment strategies or secondary
trademarks to avoid dilution of their first-class trademarks in price
wars (Bullard, 2004). In 2002, AmBev obtained authorization to acquire
230.92 million shares that represented 36.05% of the voting shares and
37.5% of the value of Quilmes Industrial, a company that controlled
Cervecería y Maltería Quilmes (Bullard, 2004).
Argentinean exports between 2000 and 2011 increased both in value
and volume, particularly from 2005. Paraguay, Chile, Brazil and Uruguay
were the major buyers of Argentinean beer. In terms of beer imports,
the country has reflected recent trends by acquiring prestigious brands.
Since 2005, this phenomenon has given great impetus to imports, both
in value and volume (Ablin, 2011). Beer consumption in Argentina was
traditionally – and largely – consumed in summer. However, season-
ality trends in the country have progressively diminished from 2000s
onwards, with Argentinian beer now making around 40% of annual
domestic sales (Ablin, 2014).

3 Beer production and trade in South America

Beer production and trade varied significantly among South American

countries during the period between 1960 and 2011, when consider-
able M&A occurred. Overall, South America has lower per capita beer
168 Luis Rivera-Mena, Katia Villafán-Vidales and Odón García-García

45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Production (Thousand Tonns) Production Value 1000 Current USD

Figure 8.1 South America’s beer production (tons) and value (US$ millions)
1961–2013
Source: Elaborated by the authors with data from FAOSTAT. [Link]
QD/E Date: Wed Feb 11 [Link] CET 2015.

consumption compared to Europe, North America or Oceania (Colen,

2010).5 South American beer production has grown at an average rate
between 4 and 4.5% (Figure 8.1). About 30 large multinational compa-
nies operate in the region, including Kirin, Heineken, SABMiller and
Anheuser-Busch Imbev Global, the last integrated by Brazil in partner-
ship with Anheuser-Busch Intergroup (Ablin, 2014).
Between 2001 and 2011, South America accounted for about 17% of
global beer supply. Beer production is concentrated in just a few coun-
tries, with the first five regional economies generating almost 80% of
beer brewed in the region. As shown in Table 8.1, Brazil and Mexico
account for more than two-thirds (41 and 26% respectively) of the total
production in 2011, followed by Venezuela (8.16%), Colombia (6.38)
and Argentina (5.57). In 40 years (1961–2011), the share of global beer
volume produced in South America doubled, passing from 7.3 to about
14.9%.
Figure 8.2 shows aggregate values of beer imports and exports in South
America, measured in USD. Exports started to increase in the 1970s, and
hence the region became a net beer exporter for the first time in 1976.
Almost all South American countries dealt with a variety of structural
problems between the 1970s and 1980s. Argentina experienced substan-
tial currency devaluations. Similarly, Chile experienced devaluation
and a significant deficit on its national trade balance. Brazil promoted
 South of the Border 169

Table 8.1 South America’s beer production value (US$ million) and regional share,
by country, 2001–2011

Rest of
Dominican South
Year Brazil Mexico Venezuela Colombia Argentina Peru Chile Republic America

2001 7,274 4,906 1,658 1,071 986 420 269 253 1,293
Share 40.1% 27.1% 9.1% 5.9% 5.4% 2.3% 1.5% 1.4% 7.1%
2011 12,109 7,793 1,795 1,736 1,548 1,047 543 445 1,948
Share 41.8% 26.9% 6.2% 6.0% 5.3% 3.6% 1.9% 1.5% 6.7%

Source: Elaborated by the authors with data from FAOSTAT. [Link]

QD/E Date: Wed Feb 11 [Link] CET 2015.

2,500,000

2,000,000
1000 US $

1,500,000

1,000,000

500,000

0
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Exports Imports

Figure 8.2 South America’s beer trade 1961–2011 (US$ million)

Source: Elaborated by the authors with data from FAOSTAT [Link]
QD/E Date: Wed Feb 11 [Link] CET 2015.

export-oriented policies with significant subsidies given to domestic

industries, while Colombia and Mexico diminished their exports signifi-
cantly, tightening controls on imports and increasing tariffs, with their
respective currencies becoming increasingly overvalued (Hoffman,
2000). During this period it is estimated that beer exports were about
half the level of imports.
Negotiations between 1985 and 1995 culminated in accession to
NAFTA and MERCOSUR6 (Southern Common Market). This period repre-
sented a phase of transition and adjustment for South American coun-
tries, and was characterized by liberal reforms that promoted commercial
exchange within the region and overseas (Howard, 2014). During this
170 Luis Rivera-Mena, Katia Villafán-Vidales and Odón García-García

phase, the beer industry in South America consolidated its role as a net
exporter, with the largest shares of exports being from Mexico to the
US. M&A increased concentration levels in many national industries
(Amézquita, 2008; Bullard, 2004; Flores Paredes, 2007; Romero, 2003).
The period between 1996 and 2011 was characterized by intense M&A
activity involving AB InBev, SABMiller, Heineken International, Carlsberg
and Kirin. Domestic oligopolies in Brazil, Chile and Mexico financed
new, technologically advanced plants that reduced costs and increased
product diversification in the industry. National markets presented a
small number of global/national brands, aside from many custom-made
local brands and a few premium imported brands (Howard, 2014). At
this time, it is estimated that the beer exports were about 5.94 times
higher than imports.
In 2011, beer from South America represented about 18.5% of total
world exports. However, as shown by Figure 8.3, exports were mainly
concentrated on one country, with Mexico accounting for 91.3% of the
total beer exports, quantifiable in value to 17.3 billion USD, dwarfing
all the other countries in terms of quantity exported and revenues. As
shown in Figure 8.4, in 2011 Mexico was ranked first in terms of beer
imports, which trebled compared to 2001. Paraguay, Chile and Brazil
experienced significant rises in the levels of imports between 2001 and
2011. More than 60% of all South American beer imports were concen-
trated in these four countries in the period considered.

2,000
2,022.12

1,500
994.47

1,000
102.65

500
72.25
48.26

34.43

31.16
16.18

11.21

4.14

0
Mexico Brazil Jamaica Argentina Rest of South
America
2001 2011

Figure 8.3 South America’s beer exports (millions of current US$) 2001 and
2011, by country
Source: Elaborated by the authors with data from FAOSTAT [Link]
QD/E Date: Wed Feb 11 [Link] CET 2015.
 South of the Border 171

120

119.53

114.03
100

73.52

73.03
68.31
80
40.92

40.62
60

26.84
21.24

16.57
40

15.65

11.50
11.14

5.95
5.66
4.52

3.94
2.07
20

0
Mexico Paraguay Chile Brazil Panama Argentina Honduras Colombia Rest of
South
America
2001 2011

Figure 8.4 South America’s beer imports (millions of US current $) 2001–2011,

by country
Source: Elaborated by the authors with data from FAOSTAT [Link]
QD/E Date: Wed Feb 11 [Link] CET 2015.

4 M&A and micro-breweries

Since 1950, several brewing companies in South America acquired control

of their respective domestic markets while expanding and establishing
their presence abroad. These include the Bavaria Group in Colombia,
AmBev Group in Brazil and Grupo Modelo in Mexico. Large national
breweries merged or allied with multinational companies, with domestic
markets heavily penetrated by important global brewing companies,
such as AB InBev, SabMiller, Heineken International, Carlsberg and
Kirin. As a result, in 2014, 85% of the total South American market was
controlled by eight large brewing companies.
Concentration in the South American beer industry occurred in three
major phases. The first was characterized by increasing economies of
scale at the local and national level which had prepared the ground
for acquisitions and mergers occurring in the industry since 1968 when
Heineken adquired Amstel (Heineken, 2015).7
The second was characterized by liberalization processes that started
and consolidated during the Uruguay Round, probably the most signifi-
cant reform affecting the international trading system since the creation
of the General Agreement on Tariffs and Trade (GATT). The Uruguay
Round also considered international financial cooperation, services
trading and competition between developed and developing coun-
tries.8 Before the Uruguay Round, local and national breweries in South
172 Luis Rivera-Mena, Katia Villafán-Vidales and Odón García-García

America were largely unaffected by prices, costs and pressures associated

with international competition, partly because their respective national
markets were not attractive for foreign companies. The signing of other
multilateral free trade agreements, such as NAFTA and MERCOSUR,
satisfied the need to create new markets. These agreements allowed large
national companies to enter and consolidate their position in foreign
markets, primarily in North America. This situation initially enabled
companies to become dominant in the region, though they later became
attractive prey for European and North American companies.
The third phase was characterized by regional interaction and market
dynamics occurring within South America during a period of economic
liberalization which favoured the development of beer industries in
many countries. A substantial increase in beer production and M&A
led to higher levels of concentration in the regional brewing industry
(Table 8.2). However, the opening processes in terms of international

Table 8.2 Mergers and acquisitions in the brewing industry in Argentina, Brazil,
Colombia, Chile and Mexico

Operation
Value
(millions of
Resulting current US
Year Origin companies Operation company dollars)

2000 Companhia Antarctica Paulista Merge AmBev 7,000

(Brazil) & Bramha (Brazil)
2004 Interbrew (Belgium) & AmBev Merge InBeV 11,200
(Brazil)
2005 SABMiller (UK) acquires Bavaria Acquisition Bavaria 7,800
(Colombia)
2006 FEMSA Cerveza (Mexico) acquires Acquisition FEMSA 68,000
Cervejarias Kaiser (Brazil) Cerveja
Brasil
2008 InBev (Belgium-Brazil) acquire Acquisition AB InBev 52,000
Anheuser-Busch (U.S.A.) they
form AB InBev
2010 Heineken (Netherland) acquires Acquisition FEMSA 7,347
FEMSA Cerveza (Mexico) Cerveza
2013 AB InBev acquires Grupo Modelo Acquisition Grupo 20,103
(Mexico) Modelo

Source: Romero (2000), Bloomberg (2004), Saigol (2005), López (2006), De la Merced (2008),
Saavedra (2010), Notimex (2013).
 South of the Border 173

trade pursued by national governments were accompanied by tax poli-

cies that favoured large regional companies, and equally by policies that
encouraged direct foreign investments. Alarcón et al., (2001) and Arashiro
(2011) indicate that a lack of coordination among national economic
policies had impacted the economic performance of the region during
the Uruguay Round. This lack of coordination benefited breweries indi-
rectly, as it created the conditions for strengthening domestic invest-
ments in the brewing industry and promoted the internationalization
of its products.
At the end of 2014, many national beer markets were characterized
by high levels of concentration (Figure 8.5). In Argentina, AB InBev
controls 70% of the Argentinian market share and SABMiller controls
about 23% (Ablin, 2011, 2014). AB InBev also controls about 63% of the
Brazilian beer market, aside from Kirin’s 11.2% market share; Petropolis,
a Brazilian company that produces beer, soft drinks and vodka, controls
about 10.6% market share, with Heineken accounting for 8.2% of market
share (Moreira, 2014). In Colombia, SABMiller controls about 98% of the
market, with the remaining 2% controlled by different micro-breweries
like Bogotá Beer Company, Cervecería Colón, Tres Cordilleras and San
Tomás (Oliveros, 2015). In Chile the CCU, partly owned by Heineken,
controls about 80% of the market, with AB-InBev controlling between

7% Rest 7% Rest 2% Rest 5% Rest 1% Rest

of Brewers of Brewers of Brewers of Brewers of Brewers

55.9%
AB InBev
63%
70% AB InBev 80%
AB InBev
98% Heineken
SAB Miller

11.2% Kirin 43%

Heineken
23% 10.6% Petropolis
SABMiller 15%
8.2% Heineken AB InBev

Argentina Brazil Colombia Chile Mexico

Figure 8.5 Beer market composition in Argentina, Brazil, Colombia, Chile and
Mexico 2014
Source: Elaborated by the authors on data provided by Ablin, 2011; Ablin, 2014; Moreira,
2014; Oliveros, 2015; Fiscalía Nacional Económica, 2013; and Pallares, 2014.
174 Luis Rivera-Mena, Katia Villafán-Vidales and Odón García-García

10 and 15%9 (Marticorena, 2014; Fiscalía Nacional Económica, 2013).10

Finally, in Mexico, ABInBev and Heineken control, respectively, 55.9
and 43.0% of the Mexican beer market (Pallares, 2014).
In recent years, the beer industry in South America has witnessed
the rise of small and micro-breweries (see Bamforth and Cabras, this
volume). This rise is partly associated with specific features related to
beer industries in each country. For example, Mexico has a relatively
constant consumer demand for beer during the whole year. However,
beer demand in Argentina and Chile is mainly concentrated during the
spring/summer months. Similarly, Brazilian consumer demand for beer
is mostly concentrated in summer during Carnaval season. This season-
ality opens opportunities for small brewing companies in different parts
of the region.
In Argentina, the first craft brewery company, Cervecería El Bolsón,
started in 1984 (Cervecería El Bolsón, 2015). Since then, the number of
craft breweries in the country increased at an impressive rate, reaching
300 in 2014. With a production of about 134,000 hectolitres, these
breweries represent only 0.6% of the total market, although their share
is set to grow further (Grimaldi, 2014; Samela, 2015).
In Brazil, the first micro-brewery, Baden Baden of Campos de Jordao,
emerged at the beginning of the twenty-first century (Yenne, 2014).
Nowadays, there are about 200 micro-breweries mainly concentrated in
the south and southeast areas of the country. Micro-breweries represent
less than 1% of the national beer industry, but it is estimated that they
will double their size of the market during the next decade (G1, 2015).
In Chile, the first micro-brewery company, Cervecería Kunstmann,
was established in Valdivia by the German-Chilean Kunstmann family
in 1997 (Yenne, 2014). In this country, small and micro-breweries have
grown with an annual 20% rate since 1994, reaching 200 units in 2012
(Romo, 2014). However, with their average annual production esti-
mated at 10 million litres, micro-brewers account for less than 0.05% of
Chilean beer production (Muscatelli, 2013).
The first micro-brewery in Colombia opened in Cali in 1997; the
second opened in Bogotá three years later (ProChile, 2011). Since 2007,
the number of Colombian micro-breweries began to increase. Although
annual production remains low (about 30,000 hectolitres a year [Lozano,
2013]), estimates indicate more than the five million bottles sold in
2012 (Gallo Machado, 2012). The top brands in Colombia are Palos de
Moguer (by Cervecería Colón) and Bogota Beer Company (BBC).
The Mexican micro-brewing sector experienced an even stronger
pattern of growth compared to the other countries in the region since
 South of the Border 175

1997. During that year the first modern brewpub named Beer Factory
opened in Mexico. In 2014, there were 293 micro-brewers operating all
over the country, with the number set to increase.11 Although no official
data exists that relates to beer production, the Asociación Cervecera de
la República Mexicana (Acermex) estimates that, in 2014, 105 thousand
hectolitres were produced, with sales growing between 10 and 20% on
annual basis (Rivas, 2014).

5 Conclusions

This chapter has discussed the development of the beer industry in South
America. The industry emerged as part of the Industrial Revolution
which occurred in the late nineteenth century, although it remained
fragmented in many national and sub-national markets for the first
part of the twentieth century. Only in the second part of the twen-
tieth century did foreign investments change South American brewing
companies with M&A which involved larger international brewers,
these operations frequently blessed by national governments. Up to this
point, South America’s beer production had always been traditionally
dependent on European and North American imports with regard to
ingredients and raw materials.
Economic reforms and trade liberalization increased exports in
almost all South American countries. A clear example was the signing of
NAFTA, which boosted exports of Mexican beer towards North America.
South American brewing companies used exports as one of the main
ways to enter international markets. In the second decade of the twenty-
first century, this option has changed from the late-twentieth-century
strategy because the costs involved became too high and revenues did
not offset the investments. Large breweries in South America are pres-
ently focusing their strategies towards seeking mergers and acquisitions
that would grant access to more markets, in order to achieve econo-
mies of scale by minimizing their costs. Even with a highly concen-
trated industry and global beer markets driven by local and regional
trade, there are differentiated trade patterns for national and regional
beer trade.
Foreign investments in the South American brewing industry have
been relatively recent. Local brewers are still in the process of fully
absorbing these investments to optimize production and innovation
processes. However, the small but growing number of micro-brewers
almost everywhere in the region, mainly encouraged by immigrants,
is slowly increasing its weight in terms of market share. The growth
176 Luis Rivera-Mena, Katia Villafán-Vidales and Odón García-García

of micro- and craft brewers around the world has attracted the interest
of global brewing companies, which started to acquire micro-breweries
and/or their distribution channels. This is happening in South America:
in 2015, AB-InBev acquired an indirect control over craft brewer BBC
in Colombia, while marketing premium beer brands and craft brews in
Mexico through the [Link] website belonging to Grupo Modelo
(Granados, 2015).
A number of insights gathered from this study can stimulate further
research. For instance, the transnational nature of M&A in the South
American beer industry has implications for our understanding of
increasing concentration at the national level. In addition, foreign
direct investments have not really produced any significant effect on
regional brewing industries in the twenty-first century. This observation
raises the question: what is the critical level of investment and demand
required to trigger M&A?
In addition, it would be interesting to verify whether M&A in the
South American beer market has been affected by consumer tastes and
preferences for domestic brands (see Bamforth and Cabras, and Piron
and Poelmans, this volume). Such investigation would help to explain
the low level of beer imports, the declining number of new domestic
brands, and may help to explain whether breweries prefer to acquire
national beer brands rather than buying brewing companies.
Finally, while Mexico experienced an impressive growth in beer
exports, the same growth was not experienced by other national
beer industries in South America. This situation raises questions as
to whether MERCOSUR has had an effect on beer exports and capital
flows in brewing within the Southern Cone. In this context, it would
be interesting to examine the role of export subsidies, intra-firm trade
and lobbying as result of the many mergers and acquisitions which
occurred in the South American brewing industry. Exploring the setting
of intra-industry trade of perfectly homogeneous as well as differen-
tiated products may require the of use disaggregated data for prices
and production factors – such as labour and transportation cost – to
measure industry growth.

Notes
1. The import substitution model (1940–1982) was driven by high public invest-
ment in infrastructure and education that fueled private investment. In
1982, this model began to dismantle and was replaced by low state control of
the economy and export promotion (Romero, 2003).
 South of the Border 177

2. The worldwide organization overseeing the multilateral trading system since

1947. The governments that had signed GATT were officially known as “GATT
contracting parties.” On 1st January 1995, the World Trade Organization
(WTO) replaced GATT. At the end of 1994, there were 128 GATT signatories.
3. Trade agreement between México, Canada and United States operating since
January 1st, 1994.
4. The duopoly eventually attracted the attention of the Mexican National
Authority in 2000, although all allegations made against FEMSA and Grupo
Modelo regarding monopolistic practices and price agreement were dismissed
(Flores Paredes, 2007).
5. Information and data regarding beer consumption in South America are
discussed by Piron and Poelmans, this volume.
6. MERCOSUR is a common market established based on the Treaty of Asunción
signed by the four countries of Argentina, Brazil, Paraguay and Uruguay
on March 26, 1991. It aims at promoting free trade of goods, services and
production inputs. Venezuela and Bolivia have also signed the agreement
(Mercosur, 2015).
7. In 1954 Cervecería Cuauhtémoc – now part of FEMSA Cerveza – acquired
Cervecería Tecate (Fomento Económico de México, 2015).
8. The Uruguay Round was negotiated between 1986 and 1994 by 123 coun-
tries, and resulted in the creation of the World Trade Agreement (WTO) that
replaced GATT. The objectives of the Uruguay Round included the elimina-
tion of international restrictions on free trade, such as administrative fees,
import licensing, technical requirements and clearly discriminatory origin
trade practices. The Round aimed to eliminate the constraints that existed on
the free movement of capital, technology and knowledge. It led to non-dis-
criminatory rules in regulating foreign investment, intellectual property and
access to financial services and non-financial foreign capital (WTO, 2015).
9. There are discrepancies on the sources about exact beer market shares in
Chile.
10. CCU is set to expand further in the Colombian beer market after signing
a joint-venture deal with the private conglomerate Postobón, the largest
producer of soft drinks maker in Colombia (Wilmore, 2014).
11. More information about Mexican micro-craft breweries is availabe at www.
[Link] and [Link].

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9
The Locational Determinants of
Micro-breweries and Brewpubs in
the United States
Michael S. Moore, Neil Reid, and Ralph B. McLaughlin

1 Introduction

In recent decades the American craft beer industry has experienced

impressive growth. Between 1980 and 2013, the number of craft brew-
eries in the US increased from 8 to 2,768. This growth is reflected in
increased market share. In terms of production volume, in 2013 craft
brewers had a 7.8% share of the US beer market as compared with only
2.6% in 1998. The craft segment’s penetration of the US beer market is
even more impressive when viewed in terms of dollar sales. In 2005,
craft breweries accounted for 5.4% of US beer sales. By 2013, this share
stood at 14.3%. From the perspective of economic impact it has been
estimated that the craft-brewing industry contributed $33.9 billion to
the US economy in 2012 and was responsible for more than 360,000
jobs (Brewers Association, 2014c). Some communities are hoping
to capitalize on growing consumer interest in craft beer by incorpo-
rating micro-breweries and brewpubs into their plans for community
and neighbourhood revitalization (Weiler, 2000) while the potential
economic benefits of beer tourism are being increasingly recognized
(Plummer et al., 2005).
Growth of the craft beer industry has not been evenly distributed
across either time or space. Following several decades of growth, the
industry experienced a decline in the number of breweries between 2000
and 2005. Since 2005, however, growth has been impressive, particu-
larly in 2012 and 2013 when the country experienced a net increase of
773 new craft breweries (Figure 9.1). Likewise, growth of the industry
has not been evenly distributed across space, and while there are craft

182
 Microbreweries and Brewpubs in the United States 183

1600

1400

1200

1000

800

600

400

200

0
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Brewpub Mocobrewery Regional

Figure 9.1 Growth of brewpubs and micro-breweries in the US, 1994–2013

Source: Compiled from data accessed at [Link].

breweries in all 50 states the industry has grown faster in some places
than in others. Some states and metropolitan areas have been more
successful than others in fostering the growth of the industry (Baginski
and Bell, 2011; McLaughlin et al., 2014; Reid et al., 2014). With that in
mind, the primary purpose of this chapter is to describe and explain
geographic variation in the location of micro-breweries and brewpubs
across the US metropolitan system. In doing so we hypothesize that
brewpubs and micro-breweries respond to different locational criteria
and as such we consider them independently and construct separate
regression models for each one. Brewpubs depend, to a large extent, on
customers coming to their brewery not only to consume their beer but
also to eat food available at their on-site restaurant. As such, brewpubs
are akin to a retail/restaurant facility. In contrast, micro-breweries may
have a tasting room but do not have prepared food available for sale.
Their primary focus is on brewing and packaging beer for distribution
to off-site retailers, bars and restaurants. As such, micro-breweries can be
thought of as being similar to a light manufacturing facility.
The remainder of this chapter is divided into eight sections. In the
next section we explain the emergence and subsequent popularity of
craft beer. We do so by invoking the theories of resource partitioning
and niche formation. In the third section we briefly describe the current
geographical distribution of the craft brewing industry in the US and
184 Michael S. Moore, Neil Reid, and Ralph B. McLaughlin

review the small number of studies that have attempted to explain these
spatial variations. In Section 4 we outline some of the key differences
in the business models of brewpubs and micro-breweries. In the fifth
section we describe our analytical methodology and data. In Section 6
we outline the results of our analyses. This is followed by, in Section 7,
a discussion and interpretation of our analysis. In the eighth and final
section we make some concluding remarks and observations.

2 The emergence of craft beer

A craft brewery is defined in terms of production volume, ownership

structure and brewing ingredients. According to the Brewers Association,1
a “craft” brewery must produce no more than 6 million barrels2 of beer
on an annual basis, have an ownership structure in which less than 25%
is owned or controlled by an alcoholic beverage industry member who is
not a craft brewer, and must utilize traditional or innovative ingredients
in its fermentation process. The American craft beer industry comprises
three major segments:

i. Micro-brewery – produces less than 15,000 barrels of beer a year

of which at least 75% is sold off-site. The beer that is sold off-site
is made available to customers in retail stores and in bars and
restaurants. In 2013 there were 1,406 micro-breweries in the US
(Figure 9.1).
ii. Regional Craft Brewery – produces between 15,000 and 6,000,000
barrels of beer per year. The large volume of beer produced means
that the vast majority is sold off-site, in retail stores, bars and
restaurants. In 2013 there were 119 regional breweries in the US
(Figure 9.1).3
iii. Brewpub – produces less than 15,000 barrels of beer a year and sells
at least 25% on-site. The beer that is sold on-site is often dispensed
directly to the customers from the storage tanks and is sold in the
brewpub’s restaurant and bar. In 2013 there were 1,243 brewpubs in
the US (Figure 9.1).

Two theories are regularly invoked to explain the growth of the craft
beer industry in the United States – resource partitioning and niche
formation. Resource partitioning theory suggests that, as an industry
evolves and matures, it increasingly takes on an oligopolistic structure
in which a small number of firms control an increasing share of the
market. This has occurred in the US where the market for beer became
 Microbreweries and Brewpubs in the United States 185

concentrated in the hands of a small number of companies. By 2002,

three companies (Anheuser-Busch, Miller and Coors) enjoyed 88.9% of
the US beer market (Tremblay and Tremblay, 2009), while the number of
large brewery establishments was 20.4
This had not always been the case. As recently as 1941 there were
857 breweries in the US (The Beer Institute, 2014). Over time, however,
changes in the minimum efficient scale of production and the emer-
gence of television as a medium to reach larger audiences (both of which
favoured larger breweries) altered the brewing landscape. Television was
a particularly important medium for the larger breweries to grow and
consolidate their market share. By 1955 50% of American households
owned a television set. By 1962 this percentage had increased to 75%
(Bowden and Offer, 1994). Mergers, acquisitions and closings resulted
and the industry became increasingly oligopolistic in structure (Tremblay
and Tremblay, 2009).
A mass market is most efficiently served and economies of scale most
effectively realized when members of an oligopoly can produce a homo-
geneous product. In the case of the American beer industry, this was
a rather bland-tasting American-style pale lager. Indeed, such was the
homogeneity of the product that consumers were generally unable to
distinguish among the beers produced by the different breweries (Allison
and Uhl, 1964; Jacoby et al., 1971). Choi and Stack (2005) suggest that
Prohibition (1920–1933) also had an impact on the American beer palate.
They argue that 13 years without beer meant that many Americans
forgot what good beer tasted like. Also, the increased consumption of
soft drinks during this period changed the American palate with the
result that many post-Prohibition breweries produced beer that was
more carbonated and less bitter. In addition, the appearance of refrig-
erators as a standard household appliance meant that many Americans
developed a taste for colder beer, the chilling of which meant that many
of the nuances of flavour were lost. Finally, Americans were increasingly
demanding convenience and uniformity (in terms of taste and quality)
in their food and drink products. This was most effectively delivered
by the development of national brands, which in the case of breweries
meant a homogeneous beer that would appeal to the broadest possible
consumer base. While these bland-tasting beers satisfied the palates of
the vast majority of American beer drinkers, there was a small segment
of the market who desired greater variety in terms of style, flavour and
strength. Thus a niche market (niche formation theory) emerges that
can be exploited by willing entrepreneurs. This niche market exists in
what has been referred to as the “competitive fringe” (Caves and Porter,
186 Michael S. Moore, Neil Reid, and Ralph B. McLaughlin

1977; Swaminathan, 1998) and, constrained by structural inertia, the

large-scale producers were unable to respond to this market opportunity
(Hannan and Freeman, 1984).
A key demographic driving the demand for craft beer is the millen-
nial cohort, those born after 1980 (Eisenberg, 2014; Watson, 2013;
Clarke, 2012). Millennials have been described as “confident, self-ex-
pressive, liberal, upbeat and open to change” (Pew Research Center,
2010, p.1). Openness to change is important because “the US market
has become locked in a suboptimal equilibrium in which most
consumers are no longer familiar with the full range of what beer
is and can be” (Choi and Stack, 2005, p.85). Changing from bland-
tasting to more flavourful beer involves “switching costs” that are
just too high for many older Americans who have been raised on a
diet of Budweiser and Miller Lite. Millennials, in contrast, are open to
change and are willing to try new things, including beer. One study
of millennial craft beer drinkers found that 94% had tried a new beer
during the previous month, 87% had drunk a craft beer during the
last week, and 25% said that the availability of craft beer influences
which restaurants they choose to patronize (Granese, 2012). Thus,
the importance of this demographic to the industry cannot be over-
emphasized. The importance of craft beer has also been recognized
by the National Restaurant Association. A survey of nearly 1,300
chefs ranked locally produced wine/beer/spirits second among the
49 top trends in alcoholic beverages. Furthermore, these products were
considered “hot” by 70% of the chefs surveyed (National Restaurant
Association, 2014).
Some craft brewers view themselves as rebels and renegades who are
at the forefront of a taste revolution – a revolution that is challenging
the status quo with an emphasis on innovation, uniqueness and quality.
They also often establish a personal connection with the customer –
many started out as home brewers and are, at heart, craft beer lovers who
now brew on a commercial scale. In other words, they are both producer
and consumer who “make beer for people like us.” This is abundantly
apparent in the way in which many craft brewers describe themselves,
their brewery, and their beer on company websites.5
Another factor that has generated demand for craft beer is the rise
of neolocalism. Neolocalism is “the deliberate seeking out of regional
lore and local attachment by residents as a delayed reaction to the
destruction in modern America of traditional bonds to community and
family” (Shortridge, 1996, p.10) and has manifested itself in a number
of different ways including the growing popularity of farmers’ markets,
 Microbreweries and Brewpubs in the United States 187

community-supported agriculture and broad-based “buy-local” move-

ments across the US (Brown and Miller, 2008; Hardesty, 2008). It
has been argued that the growing popularity of craft beer is partly a
response to the “smothering homogeneity of popular national culture”
(Schnell and Reese, 2003, p.47) and the “rejection of national, or even
regional culture, in favour of something more local” (Flack, 1997, p.49).
Neolocalism and the desire to establish a clear connection with the local
community has influenced the labels and beer names chosen by many
craft breweries (see Flack, 1997; Schnell and Reese, 2003; Reid et al.,
2014; Cabras and Bamforth, 2015).
Not only do many craft brewers choose names for their brews that
reflect a local landmark, historical event, historical figure, and so forth;
they are also connected to their local community through charitable
and philanthropic work (Kirchenbauer, 2014). For example, Hardywood
Park Brewery in Richmond, Virginia’s philanthropy focuses primarily on
environmental, humanitarian and educational issues. They host fund-
raisers and provide meeting space for groups working in those areas. In
January 2013, the brewery began donating two dollars for every barrel
of beer produced to non-profit organizations in the communities where
their beer is sold (Hardywood Park Craft Brewery, 2014).

3 The geography of commercial craft beer production

While micro-breweries and brewpubs can be found in all 50 states, there

are some distinct geographic concentrations that can be identified. At a
broad regional level the main concentrations can be found in the Pacific
Northwest (Washington and Oregon), northern and southern California,
Colorado, eastern Texas, the Great Lakes region, New England and North
Carolina (Figures 9.2 and 9.3). The leading metropolitan area in terms of
the number of micro-breweries is Seattle, Washington (67 micro-brew-
eries), followed by San Diego, California (48) and Portland, Oregon (47;
see Table 9.1). With respect to brewpubs, the top three metropolitan
areas are Portland, Oregon (45 brewpubs), Chicago, Illinois (35) and Los
Angeles, California (30; see Table 9.1). The lists of top 10 metropolitan
areas in terms of the number of micro-breweries and brewpubs are almost
identical, with the eight MSAs6 appearing on both lists. The exceptions
are Minneapolis, Minnesota and Boston, Massachusetts which appear
on the top 10 micro-brewery list but not the top 10 brewpub list, and
Philadelphia, Pennsylvania and Washington, DC which appear on
the top 10 brewpub list but not on the top 10 micro-brewery list. The
top 10 MSAs contain 296 micro-breweries which represents 19.4% of
 Microbreweries 0 125 250 500 Miles
N

Figure 9.2 Spatial distribution of micro-breweries in the US, 2013

Source: Compiled from data obtained from the May/June 2013 edition of The New Brewer,
Brewers Association, 2014a.

Brewpubs 0 125 250 500 Miles

N

Figure 9.3 Spatial distribution of brewpubs in the US, 2013

Source: Compiled from data obtained from the May/June 2013 edition of The New Brewer,
Brewers Association, 2014a.
 Microbreweries and Brewpubs in the United States 189

Table 9.1 Top 10 MSAs for micro-breweries and brewpubs, 2013

Micro-breweries Brewpubs

MSA Number MSA Number

Portland, OR 45 Seattle, WA 67
Chicago, IL 35 San Diego, CA 48
Los Angeles, CA 30 Portland, OR 47
San Francisco, CA 29 Denver, CO 33
San Diego, CA 29 New York, NY 33
Philadelphia, PA 28 Los Angeles, CA 30
Denver, CO 28 Chicago, IL 30
Seattle, WA 26 San Francisco, CA 27
Washington, DC 25 Minneapolis, MN 24
New York, NY 21 Boston, MA 23

Source: Compiled from data obtained from the May/June 2013 edition of The New Brewer,
Brewers Association 2014a.

all micro-breweries in the US. In contrast, the top 10 MSAs contain 362
brewpubs which represent 29.1% of all brewpubs in the US.
Despite their fast growth, there have been a relatively small number
of analytical studies that have attempted to identify the locational
determinants and explain the geographic distribution of craft breweries
within the US. Using Metropolitan Statistical Areas (MSAs) as their unit
of analysis, Baginski and Bell (2011) found that the penetration of craft
breweries (number per 100,000 population) was greater in MSAs with
higher costs of living, more wealthy elites, higher quality educational
and healthcare facilities, stronger cultures of social tolerance and a
higher quality of life. At the interstate level, Florida (2012a) found the
extent of craft brewery penetration to be greater in states with higher
levels of education, happiness and well-being, and lower in states where
the population was politically more conservative, religious, smoked
more and had higher levels of obesity. In a more descriptive paper,
Reid et al. (2014), using the absolute number of craft breweries and the
number of craft breweries per capita, identified six states that appear to
be leaders in the craft beer movement – Colorado, Oregon, Washington,
California, Michigan and Wisconsin. In explaining the success of
commercial craft brewing in these states they note, for example, that
California was the birthplace of the post-Prohibition craft-brewing
movement in the US while the states of Wisconsin and Michigan
have well-established brewing cultures as a result of being home for
large numbers of German immigrants during the 19th century. They
190 Michael S. Moore, Neil Reid, and Ralph B. McLaughlin

also invoke the work of Cortright (2002, p.4) who suggested that the
growth of the craft beer industry in Portland, Oregon was a response
to “distinctive local tastes” driven and supported by a thriving home-
brewing culture, a higher-than-average preference for imported beer,
a spirit of eclectic entrepreneurialism and the example provided by
a dynamic boutique wine industry. In sharp contrast, they identi-
fied the Southern US to be a “craft brewing desert” due to the small
number of craft breweries. Here, they note the influence of conserva-
tive Protestantism, as well as the fact that Southern states were slower
than their Northern counterparts to legalize home brewing as major
reasons for the region lagging behind the rest of the country in the
count of craft beer establishments. A vibrant home-brewing culture
is important as it is here that many commercial craft brewers learned
the basics of brewing and made the decision to commercialize their
hobby. In other words, basements and garages across America served,
and continue to serve, as an incubator for the commercial craft beer
industry. Examining brewpubs and micro-breweries as separate entities,
Swaminathan (1998) found evidence, at the interstate level, that niche
formation was a stronger driver of the emergence of both brewpubs
and micro-breweries than resource partitioning.
Given the paucity of studies, plus the fact that there has been a net
gain of 773 new craft breweries (608 micro-breweries and 165 brewpubs)
in 2012 and 2013, it seems that there is space in the literature for some
additional analysis to try to understand the geographic distribution of
this fast-growing industry. To a large extent we build on the work of
Baginski and Bell (2011) with one significant difference being that we
conduct two separate analyses – one for micro-breweries and one for
brewpubs.

4 Business models: micro-breweries versus brewpubs

Though they both offer the same type and quality of products in the
form of craft beer, micro-breweries and brewpubs are distinctly different
in day-to-day operations. Range of services, distribution channels,
quality control and marketing vary between the two and makes each
subcategory uniquely different from the others. Some businesses start
as either a micro-brewery or a brewpub and remain in that subcate-
gory for years. Some breweries change from one to the other as produc-
tion levels and means of delivery change. Some businesses act as both,
with one facility serving as a micro-brewery and another serving as a
brewpub. Micro-breweries and brewpubs have different business models
 Microbreweries and Brewpubs in the United States 191

and require different sets of goals and priorities in order to thrive within
their segments.
The business model of the micro-brewery is more similar to that of
light manufacturing operations – brewing, bottling and packaging beer
for distribution throughout a given market area (Brewers Association,
2014b, Brewery Reviewery, 2010). Some micro-breweries have an on-site
tap room, but usually minimal amounts of food are served, if at all.
Location decisions for micro-breweries are based more on site size and
transportation accessibility, as volume and distribution are the two
major keys to operation (Brewers Association, 2014b; Brewery Reviewery,
2010). Because the final product is shipped to downstream retailers,
micro-breweries can locate in non-retail-centric areas, with distribution
costs and size requirements taking precedent over population density
(Brewers Association, 2014b; Weber, 1929). Micro-breweries tend to
produce beer at greater volumes compared to brewpubs, and therefore
require more space (Brewers Association, 2014b).
The brewpub business model, on the other hand, is more akin to that
of a restaurant (Brewers Association, 2014b). The location of brewpubs
must adhere to concepts of population thresholds and consumer ranges,
20 to 30 miles, as customers come to a single location for consumption
(Brewery Reviewery, 2010; Wieland, 2013). This subjects brewpubs to
the bid-rent theory, in which the optimal location is a highly central-
ized area with high levels of retail foot traffic (Brewery Reviewery, 2010;
Alonso, 1964). By default, property rents will be priced at a premium.
There is usually a variety of food options ranging from light pub fare to
full-course meals, with beer pairings to accompany a meal. This is an
added layer of cost and labour requirements as brewpub owners need
to operate a kitchen, manage a wait staff and provide the desired ambi-
ence in order to remain solvent (Brewery Reviewery, 2010). The cost
of running a kitchen is somewhat offset by the fact that the beer goes
through minimal post-brewing processing.
With micro-breweries, product is shipped to market by means of
either three-tier distribution (producer-distributor-retailer), two-
tier distribution (producer-retailer) or directly to customer through
on-site taprooms (Brewers Association, 2014b; Wieland, 2013). Going
through intermediaries, such as in the case of the three-tier distribu-
tion system, micro-breweries are subject to costs, truck space avail-
ability and loss of quality control once the product is in the hands
of distributors. Beer distribution channels are highly monopolized by
the states, meaning that costs are artificially set high in order to get
product to market (Crowell, 2013). Getting product on distribution
192 Michael S. Moore, Neil Reid, and Ralph B. McLaughlin

trucks may be difficult for micro-breweries, as most of the space is

consumed by commercial beer products. With brewpubs, the beer,
in most cases, comes straight from on-site storage tanks to the glass
(Brewers Association, 2014b). A majority of what is brewed at a
brewpub does not go through the bottling/packaging process though
most brewpubs will sell beer in limited quantities for consumption
off-site. This is packaged in the form of four-packs, six-packs, bombers,
growlers and sometimes kegs, but will not exceed 75% of a company’s
beer sales. On-site sales laws prohibit brewpubs from selling certain
items for off-site consumption and sometimes limit a brewpub from
brewing over a certain volume annually (Thurston, 2014). Direct to
customer sales levels vary between brewpubs, but it is a vital distribu-
tion channel. Many states, such as Indiana, have reconsidered such
on-site sale restrictions to accommodate growth within the brewpub
sub-category.7
Once the product is in the hands of downstream retailers, product
rotation and handling is out of the control of micro-brewers. Quality
of product is important for craft beer establishments and the proper
handling and rotation of product is vital for success (Sparhawk, 2014).
Not having complete control over this aspect of business can be trouble-
some for micro-breweries. Quality control for brewpubs is far more in
their control. If products become outdated, management simply pulls
the product from the menu. There is minimal transport of the product
within brewpubs, leaving little opportunity for beer-spoiling elements
(oxygen, light and bacteria [Lewis, 1997] to pollute the product. Beer is
much fresher from the storage tank in comparison to a bottle which has
sat on a shelf for any given amount of time, unless the beer is meant to
be bottle-conditioned.
Marketing is important for both micro-breweries and brewpubs, with
techniques and approaches varying between the two craft beer subcate-
gories. Product placement and promotion within retail establishments
is crucial for successful competition within a burgeoning market like
the craft beer industry (Armstrong and Kotler, 2013). As with quality
control, micro-breweries are at the mercy of distributors and retailers
for marketing success. Depending on market size, some micro-breweries
may need to utilize regional or national advertising channels to increase
awareness of their products. This can be a high cost for some micro-
breweries. Marketing of brewpubs takes place on a larger geographic
scale compared to micro-breweries. People usually travel up to 30 miles
to a brewpub, so, by theory, marketing should extend to just over
30 miles of the brewpub location (Brewery Reviewery, 2010). Advertising
 Microbreweries and Brewpubs in the United States 193

comes in the form of billboards, local television and radio ads, word of
mouth and social media.
While this analysis is somewhat exploratory we do anticipate that,
given the differing business models of brewpubs and micro-breweries,
each may have different sensitivities to different locational determi-
nants. Indeed our results bear out this expectation and these differences
are highlighted and discussed below.

5 Methodology and Data

To test whether the locational determinants of micro-brewery location

are different from brewpubs at the metropolitan level, we utilize a variety
of econometric techniques to estimate the impact of these factors while
controlling for the effects of other exogenous characteristics. Our selec-
tion of independent variables follows that of Baginski and Bell (2011),
and we conduct our analysis for all metropolitan counties in the US,
with the number of breweries in 2013 as our dependent variable.
Our empirical analysis consists of two separate models where we
test separately for the locational determinants of the counts of micro-
breweries and brewpubs in US metropolitan areas. Although we base
our models on Baginski and Bell’s (2011) analysis of brewery location
in the Southern US, we depart from their specification in three ways.
First, instead of using a population standardized dependent variable
(breweries per 100000 persons), we choose to use the count of either
micro-breweries or brewpubs as the dependent variable and control
for metropolitan population by including it as an independent vari-
able. We choose a non-standardized dependent variable so that we
can estimate the relative effect of population size on micro-brewery/
brewery counts compared to other explanatory variables. Second,
and following our use of counts as our dependent variables, we use
alternative estimation techniques (Poisson regression) to control for
the non-normal distribution of micro-breweries and brewpubs across
metropolitan areas. And third, we extend Baginski and Bell’s model
by testing for the effect of metropolitan variation in creative class
culture and innovation.
Our models appear as equations (9.1) and (9.2) below:

microbreweriesi = α + β1creativeindexi + β2innovationindexi +

β3farmermarketi + β4agei + β5popi + β6popdeni +
β7incomei + β8educationi + β9whitei + Θregdummyr + εi
(9.1)
194 Michael S. Moore, Neil Reid, and Ralph B. McLaughlin

brewpubsi = α + β1creativeindexi + β2innovationindexi + β3farmermarketi

+ β4agei + β5popi + β6popdeni + β7incomei + β8educationi
+ β9whitei + Θregdummyr + εi (9.2)

where microreweiesi and brewpubsi is the number of micro-brewery and

brewpub establishments in metropolitan area i in 2013; creativeindexi
is the Richard Florida’s creativity index for 2010; innovationindexi is
the 2012 innovation index, developed by Indiana University; farmer-
marketi is the number of farmers’ markets; agei is the proportion of
the population aged 25 – 44; popi is the 2010 population; incomei
is the median income; educationi is the proportion with a college
degree; whitei is the proportion of non-Hispanic whites; regdummyi is
a vector of dummy variables for census regions;8 and α, β, Θ, and εi
are intercept, the coefficients for the independent variables, a vector
of coefficients for the regional dummy variables, and the stochastic
error term, respectively. All terms except the regional dummies are
logged.
Our data exhibit two issues that we must account for in our estimation
procedure. As shown in Figure 9.4, the distribution of our dependent
variables, microbreweriesi and brewpubsi, is non-normal. Both figures
show these variables exhibit a rare-occurrence distribution, where
between a quarter and a third of MSAs do not have a micro-brewery
or brewpub registered with the Brewers Association. Furthermore, our
dependent variables are count data, and thus lie between the interval
[0, ∞]. As a result of these two issues, use of OLS would provide incon-
sistent estimates of the predicted values of our dependent variables.
Thus we estimate equation (9.1) using a Poisson regression, whereby a
log transformation is applied to the dependent variable. Because we also
log our independent variables, we can interpret their coefficients as true
elasticities, whereby a 1% change in an independent variable is associ-
ated with a percentage change in the number of either micro-breweries
or brewpubs.
We obtained our data from a variety of sources. First, we gathered
locational information on all craft brewing establishments in the US in
2013 (both micro-breweries and brewpubs) from the Brewers Association
national database (Brewers Association, 2013). We then aggregated these
data to the 361 metropolitan statistical areas (MSA). Second, we sourced
the creativity index for each MSA from Florida’s (2012b) second edition
of The Rise of the Creative Class. The innovation index was obtained from
 Microbreweries and Brewpubs in the United States 195

(a)

.2

.15
Density

.1

.05

0
0 10 40 60 80
Microbreweries

(b)

.3

.2
Density

.1

0
0 10 20 30 40
Brewpubs

Figure 9.4 Frequency distribution of micro-breweries (a) and brewpubs (b) across
US metropolitan areas, 2013
Source: Compiled from data obtained from the May/June 2013 edition of The New Brewer.
196 Michael S. Moore, Neil Reid, and Ralph B. McLaughlin

Table 9.2 Descriptive statistics

Variable Obs Mean Std. Dev. Min Max

Micro-breweries 361.00 3.31 6.90 0.00 67.00

Brewpubs 361.00 2.75 5.48 0.00 45.00
Innovation Index 361.00 84.88 8.58 72.00 128.50
Creative Class Index 361.00 0.50 0.24 0.05 0.98
Farmers’ Markets 361.00 15.29 29.04 0.00 332.00
Age 25–44 361.00 0.26 0.02 0.16 0.32
Pop 361.00 713,855.40 1,588,969.00 55,274.00 18,900,000.00
Population Density 361.00 2,386.75 2,242.14 523.00 31,251.00
Income 361.00 47,567.96 8,734.56 15,743.00 86,680.00
Education 361.00 0.21 0.07 0.08 0.49
White 361.00 0.71 0.17 0.03 0.96

the Innovation in American Regions Project, a collaboration between

Purdue University’s Center for Regional Development and the Indiana
Business Research Center at Indiana University’s Kelley School of
Business (Stats America, 2014). We gathered data on age, population,
income, education and percent non-Hispanic whites from the 2010 US
Census (United States Census Bureau, 2010). Data on the number of
farmers’ markets were obtained from the US Department of Agriculture
(US Department of Agriculture, 2014). We present the descriptive statis-
tics for all of our variables in Table 9.2.

6 Results

Table 9.3 provides our estimates for all three of our models. Our micro-
brewery model explains approximately 65% of the inter-metropolitan
variation in the number of micro-breweries, while our brewpub model
explains approximately 60%. All but two of our independent varia-
bles – innovation index and population density – are significant at
below the 5% confidence level. Both of these results suggest that the
general explanatory power of our two models is quite strong. Percent
of population between the ages of 25 and 44 has the greatest impact in
both models, with a coefficient of 2.03 for micro-breweries and 2.49 for
brewpubs. This suggests that a 1% increase in the proportion of persons
aged 25 to 44 is associated with a 2% increase in micro-breweries and
a 2.5% increase in brewpubs. The percent of non-Hispanic whites has
the second-highest effect, where a 1% increase is correlated with a 1.8%
 Microbreweries and Brewpubs in the United States 197

increase in micro-breweries and a 0.97% increase in brewpubs. Third,

a 1% increase in median income is surprisingly negative, and is corre-
lated with a 0.89% decrease in micro-breweries and a 0.90% decrease in
brewpubs. Fourth in magnitude is the coefficient on education, where
a 1% increase in the proportion of college graduates is correlated with
a 0.69% increase in micro-breweries and 0.7% increase in brewpubs.
From this point in the coefficient interpretation, the relative magni-
tudes of our independent variables diverge between the two models.
A 1% increase in population is associated with a 0.54% increase in
the number of micro-breweries and a 0.38% increase in brewpubs; a
1% increase in the creativity index is correlated with a 0.5% increase
in micro-breweries and a 0.59% increase in brewpubs; and last, a 1%
increase in the number of farmers’ markets is associated with a 0.4%
increase in the number of micro-breweries and a 0.43% increase in
the number of brewpubs. All of our regional dummy variables except
Mountain West in the brewpub model are significantly negative, which
suggests that metropolitan areas in these regions all have significantly
fewer breweries relative to the excluded dummy, which in our case are
metro areas in the Pacific regional division. Generally, the regional
dummy variables behave as anticipated given the large number of
brewpubs and micro-breweries in the states of California, Oregon and
Washington (Figures 9.2 and 9.3, Table 9.1).

7 Discussion

So what do these results tell us about the different locational deter-

minants between micro-breweries and brewpubs in the US? First, our
results essentially corroborate the findings of Baginski and Bell (2011)
and Florida (2012a). Craft breweries – both in the form of independently
owned micro-breweries and brewpubs – are most likely to exist in metro-
politan areas that have a larger proportion of their population between
the ages of 25 and 44. However, the difference in coefficient magnitudes
for this age demographic is of primary interest: the impact of the percent
of population between ages 25–44 is 25% larger for brewpubs than for
micro-breweries. This could be because the brewpub business model
focuses more on customers who go out for meals and drinks than micro-
breweries (where customers are more likely to buy from retail outlets
and consume at home), and the 25–44 age demographic is probably
more likely to do so.
198 Michael S. Moore, Neil Reid, and Ralph B. McLaughlin

Table 9.3 Regression results predicting number of micro-breweries and

brewpubs

Micro-breweries Brewpubs

Variable Coeff. Std. Err. Coeff. Std. Err.

Innovation Index 0.091 0.456 −0.279 0.497

Creative Index 0.502*** 0.156 0.594*** 0.170
Farmers’ Markets 0.409*** 0.077 0.438*** 0.085
Age 25–44 2.029*** 0.590 2.492*** 0.661
Population 0.541*** 0.074 0.380*** 0.079
Population Density −0.106 0.086 −0.014 0.091
Income −0.890*** 0.199 −0.901*** 0.222
Education 0.687*** 0.179 0.698*** 0.198
Non-Hispanic White 1.811*** 0.174 0.977*** 0.183
Mountain −0.513*** 0.114 −0.158 0.127
W. N. Central −1.303*** 0.140 −0.660*** 0.151
E. N. Central −1.165*** 0.112 −0.396*** 0.118
Mid Atlantic −1.155*** 0.138 −0.623*** 0.152
New England −1.230*** 0.154 −1.039*** 0.188
South Atlantic −1.182*** 0.115 −0.886*** 0.128
E. S. Central −1.456*** 0.201 −1.237*** 0.238
W. S. Central −0.947*** 0.160 −1.009*** 0.193
Constant 8.504** 3.792 11.510*** 4.241
Obs. 361 – 361 –
Pseudo R2 0.65 – 0.60 –

***is 99% significance level and **is 95% significance level.

Second, the effect of population is 42% larger for micro-

breweries than brewpubs. Again, this difference may be due to the
varying business models between micro-breweries and brewpubs: micro-
breweries are more oriented towards packaging and distribution of beer
to their market than brewpubs, and thus may have better success in
larger markets than brewpubs. Additionally, larger markets may provide
better access to raw material inputs for packaging and distribution, such
as bottling components, keg servicing, and beverage distribution and
dispensing services.
Third, the proportion of non-Hispanic whites and the creative class
index exhibits markedly different effects on micro-breweries than
brewpubs. The former is 86% greater for micro-breweries, and the latter
is 18% greater for brewpubs. General interpretation of these two coef-
ficients and their differentials is difficult. However, one possible angle
 Microbreweries and Brewpubs in the United States 199

is that brewpubs offer a customer experience more akin to restaurants

and bars than micro-breweries, and thus they may be more successful in
metropolitan areas that are have more innovation and tolerance (more
of the “creative class”) as well as more diversity (fewer non-Hispanic
whites).
Last, our results indicate that education is positively correlated and
that income is negatively correlated with the number of craft breweries.
The former correlation suggests more highly educated individuals may
be more knowledgeable and appreciative of craft beer, and may have
greater capacity to be entrepreneurial and open new breweries. While
our finding that income is negatively associated with the number of
craft breweries in a metropolitan area may appear – at face value – to
be counter-intuitive, exploring both the cost and competition effects of
high-income areas may help rationalize the finding: high-income areas
are also likely to have expensive real estate markets, and since breweries
tend to be space-intensive (that is, the inputs for production require a
relatively large parcel of real estate for holding brewing equipment), there
are economic disincentives for breweries to locate in high-income areas
because of greater competition with other land uses. In addition, beer
(even craft beer!) may be an inferior good to high-income individuals.
That is, as income increases, the preferences for high-income consumers
may switch from craft beer to high-quality wine and spirits. However, the
coefficients magnitudes for both education and income suggest there is
no difference in effect between micro-breweries and brewpubs.

8 Conclusions

In this chapter we have explored the growth of commercial craft beer

production in the US. This is a growing segment in an otherwise stag-
nant market. We invoked two main ideas to explain the growth of the
industry and the increasing popularity of craft beer among American
beer drinkers – resource partitioning and niche formation. We also
demonstrated that growth of commercial craft beer production has been
rather uneven across space and trying to understand this spatial varia-
tion was our main purpose in this chapter. Recognizing that the industry
comprises two distinct segments – micro-breweries and brewpubs – that
operate under two different business models, we constructed two regres-
sion models. Our regression models focused on understanding the role
of socio-economic factors in explaining inter-metropolitan differences
in the number of micro-breweries and brewpubs. Our results suggest
200 Michael S. Moore, Neil Reid, and Ralph B. McLaughlin

that, while the same socio-economic factors tend to explain both micro-
breweries and brewpubs, the total population size of an MSA as well as
the size on an MSA’s non-Hispanic white population appear to have a
stronger influence on the geographic distribution of micro-breweries,
while the existence of the millennial cohort and a high creativity
index score have a stronger influence on the location of brewpubs.
This suggests that while the growth of micro-breweries may be more
driven by agglomeration economies (total population size), the growth
of brewpubs is somewhat more nuanced and is more sensitive to the
existence of diverse, creative populations who are within the millennial
cohort. A number of variables – median income, education and farmers’
markets – appear to be equally important in influencing the inter-metro-
politan distribution of both micro-breweries and brewpubs.
The popularity of craft beer is likely to grow for the foreseeable
future. This means that we can expect to see more micro-breweries
and brewpubs appear in the cities of America. There are a number of
projections surrounding the continued growth of the industry. One
projection suggests that by 2020 the craft segment may comprise 15%
by volume, up from the 7.8% share that it enjoyed in 2013 (Demeter
Group Investment Bank, 2013). As of June 2014, there were 4,526 active
beer permits9 in the US and only 2,822 active breweries (including the
large-scale mass producers). The difference between these two numbers
(1,704) represent breweries that may be just starting to brew or may be
brewing but are falling under everyone’s radar (National Beer Wholesalers
Association, 2014). The question of how many micro-breweries and
brewpubs the market can bear is uncertain. The fact that brewpubs are
akin to restaurants, are small-scale in nature, and depend upon food
sales for a part of their revenue suggests that this particular segment
may have the greatest growth potential. While competition may be
fierce in the restaurant industry, with quality food and beer and a dedi-
cation to customer service, the opportunity does exist for brewpubs to
displace many non-brewpub restaurants. Yet, in 2012 the number of
micro-breweries exceeded the number of brewpubs in the US for the
first time since 1988 (Brewers Association, 2014d). In 2012 and 2013,
the US experienced a net gain of 608 micro-breweries and 165 brewpubs.
Given their almost exclusive focus on beer, the continued growth of
micro-breweries is probably a lot more dependent upon being able to
woo new customers – either first-time beer drinkers reaching the legal
age for alcohol consumption or existing consumers of Budweiser, Miller
Lite or one of the more popular imports such as Stella Artois, Heineken
or Corona.
 Microbreweries and Brewpubs in the United States 201

Whatever the future holds, it promises to be interesting. One issue not

touched upon in this chapter is the strategies of Anheuser-Busch and
MillerCoors as they seek to come to terms with this new competition. This
brings in the counter-movement deployed by the commercial brewers in
the form of “crafty” beers; beers of the same flavours and diversification as
offered by craft brewers, but sold by commercial brewers. This topic is one
that lends itself to future investigation within the craft beer literature.

Notes
1. The Brewers Association is a trade association that represents the interests of
American craft brewers. Its website is [Link].
2. A barrel is equal to 31 US gallons.
3. In Figure 1 and in our subsequent analysis we combine micro-breweries and
regional craft brewers and include them in the same category of “micro-
breweries.” While the Brewers Association does distinguish between micro-
breweries and regional craft brewers, our logic for including them in the same
category is that the latter are simply large micro-breweries.
4. Thanks mainly to the growth of the craft beer segment, the share of the US
market controlled by Anheuser-Busch and MillerCoors (Miller and Coors
formed a joint venture in 2008) was only 65% of the US market in 2013
(Bookman, 2013).
5. Good examples are introduction web pages displayed on the websites of Rogue
Brewery in Ashland (Oregon) and of Founders Brewery Company in Grand
Rapids (Michigan). More details provided by Rogue (2015) and Founders
Brewery Company (2015).
6. Metropolitan Statistical Areas (MSAs) are geographic entities delineated by the
federal government. As defined by the US Census Bureau (2015), “each MSA
consists of one or more counties and includes the counties containing the
core urban area, as well as any adjacent counties that have a high degree of
social and economic integration (as measured by commuting to work) with
the urban core.”
7. Guys Drinking [Link], 2012.
8. A map of the nine US Census Regions can be viewed at [Link]
gov/geo/maps-data/maps/pdfs/reference/us_regdiv.pdf.
9. To operate a commercial brewpub or micro-brewery in the US it is necessary
to acquire a legal permit to do so. These are obtained from the US Department
of Treasury’s Alcohol and Tobacco Tax and Trade Bureau.

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10
Beer, the Preferred Alcoholic Drink
of All? Changes in the Global and
National Beer Consumption Since
1960 and Convergence and Trends
Since the 1990s
Elena Piron and Eline Poelmans

1 Introduction

Levels of beer consumption worldwide have mostly been unstable after

World War II. A sustained growth occurred in Europe and the US in
the period 1950–1980, mainly associated with technological innova-
tions and increasing incomes which lowered real prices and increased
demand. However, since then beer consumption has shown markedly
different patterns across countries. Per capita consumption declined
in all major beer-producing countries, with consumers switching to
other beverages due to wider choice and higher incomes (Poelmans and
Swinnen, 2011a, b). In contrast, per capita consumption grew tremen-
dously in emerging countries such as China, Russia, Brazil and India
(Arora et al., 2011; Bai et al., 2011; Deconinck and Swinnen, 2011).
Several factors have an impact on beer consumption (Colen and
Swinnen, 2011, pp.124–125): first, product(ion) characteristics such
as flavour, price, colour, smell, alcohol content, quality, production
method, marketing aspects and packaging; second, consumer charac-
teristics such as age, gender, income, health issues and addiction influ-
ences; third, economic conditions such as exposure to international
trade, the diffusion of technology, economic growth and substitute
prices; fourth, cultural backgrounds – possibly associated with religious
restrictions – and climatic conditions; lastly, new situations often induced
by technological innovations and industry, or consumer responses to

205
206 Elena Piron and Eline Poelmans

shortages, or changes in regulations and/or taxes. All these factors affect

not only the total level of consumption, but also consumers’ preferences.
For instance, in recent years the sustained strong growth of specialty and
craft beers in the US and Europe is shaping consumer demand towards
diversification (Tremblay and Tremblay, 2005). In contrast, Chinese beer
consumers typically prefer large quantities of undifferentiated, low-alco-
holic and low-priced beer – ‘cheaper than water’ (Bai et al., 2011).
The literature on beer consumption can be divided into two broad
categories. A first group of studies focus on global convergence in
beverage preferences1 and on regional drinking patterns (Clements and
Selvanathan, 1991; Greenfield and Rogers, 1999; Simpura and Karlsson,
2001; Bloomfield et al., 2002), mostly addressing differences in per capita
consumption, and a second group of studies that investigate the impact
of multiple factors on beer production or consumption. The latter group
include studies that explored changing economic conditions, different
cultural background and contexts, and new types of products (Allison
and Uhl, 1964; Jacoby et al., 1971; Gallet and List, 1998; Guinard et al.,
2001; Caporale and Monteleone, 2004; Tremblay and Tremblay, 2005;
Lee et al., 2006; Fogarty, 2009; Colen and Swinnen, 2011 and 2015).
However, there are not many studies addressing the interaction of all
these characteristics in different geographical regions.2 This chapter
intends to contribute to further fill this gap.
By presenting an overview of regional beer consumption patterns since
1960, and with particular emphasis on the 1990s and 2000s, we explore
the reasons behind differences and underlying trends in the different
areas of the world. We address variation in absolute and per capita beer
consumption, patterns of expenditure and location of consumption,
and levels of appreciation for different types of beers. Our analysis is
based on a large dataset encompassing consumption volumes, values
and preferences (from 1961 to 2007), consumer expenditure (from 1990
to 2011), off-trade sales (1997–2007) and off-trade product categories
(1997–2015). The dataset has been compiled from different sources, such
as Faostat, Euromonitor International and Mitchell.3 In our analysis, we
assume that consumption equals domestic supply, e.g. national produc-
tion minus export plus import plus changes in stock.

2 A tale of two snapshots (i.e. the global picture:

1960–2010)

Figures 10.1 and 10.2 indicate beer-, wine- and spirits-drinking nations
in 19604 and 2007. Beer is defined as the aggregation of lager, dark beer,
 Beer, the Preferred Alcoholic Drink of All? 207

stout and low/non-alcoholic beer (Jackson, 1977; Euromonitor, 2011a, d).

A ‘beer drinking nation’ is a country where beer makes up at least 50%
of total consumption of alcoholic beverages.5 As shown in Figure 10.1,
in Eastern European countries are labelled as spirits-drinking nations;
while more than 50% of the total consumption of alcoholic beverages
accounts for spirits, consumers normally drink lower volumes of spirits
compared to beer. Hence, computing levels of alcohol consumption
across countries by using a standard/comparable unit, while accounting
for beverages’ alcoholic content, may identify a larger number of coun-
tries as being spirits- or wine-drinking nations rather than beer-drinking
nations.6
By comparison, we deduce that the beer consumption as a share of
alcoholic beverages consumption has increased between 1960 and 2007.
In addition, many of the heavy beer-drinking nations (where the share
of beer consumption is above 90%) have diversified their consumption
patterns, as shown by a decrease in the proportion of beer. Beer has
lost some importance, but retains a strong position in North America,
Belgium, Denmark, Ireland, the UK and the Netherlands. Many wine-
drinking nations have become beer-drinking nations (e.g. Chile,
Argentina, Spain and Portugal), while spirits consumption has dimin-
ished in Eastern Europe and Asia Pacific. While our figures solely do not
reflect absolute volume changes, they seem to corroborate patterns of
‘homogenization’ and ‘more evenly spread consumption’ identified by
other studies conducted on data for the period 1950–1995 (Bruun et al.,
1975; Smart, 1989; Leifman, 2001), which demonstrated how tradition-
ally dominant beverages in different countries were losing ground in
relative terms.

3 How much do we really drink? (i.e. consumption

volume)

Figure 10.3 shows absolute global consumption volumes of beer, wine

and spirits (left-hand side) and per capita consumption levels (right-
hand side). Absolute consumption volumes are higher for beer, spirits
and wine in 2007 compared to 1960. Total beer consumption has
nearly quadrupled from 431.9 million hectolitres to 1,716.8 million
hectolitres, and per capita consumption has almost doubled from 14 to
27 litres (Faostat, 2011a, b) in the period considered. The gap between
beer consumption and wine and spirits consumption has widened with
regard to both absolute and per capita terms. Differences registered in
1960 may be explained by differences in alcohol content – people will
 Beer > 50%
Beer > 60%
Beer > 70%
Beer > 80%
Beer > 90%
Wine > spirits (beer < 50%)
Spirits > wine (beer < 50%)

Figure 10.1 Beer-drinking nations, 1960

Source: Compiled with data from various sources: Faostat (2011b); Mitchell (2007a, b, c) and Presentation Magazine (2015).
 Beer > 50%
Beer > 60%
Beer > 70%
Beer > 80%
Beer > 90%

Wine > spirits (beer < 50%)

Spirits > wine (beer < 50%)

Figure 10.2 Beer-drinking nations, 2007

Source: Compiled with data from various sources: Faostat (2011b); Mitchell (2007a, b, c) and Presentation Magazine (2015).
210 Elena Piron and Eline Poelmans

2,000,000 30
1,800,000
25
1,600,000

Volume in l per capita

1,400,000
Volume in 000s hl

20
1,200,000
1,000,000 15
800,000
10
600,000
400,000
5
200,000
0 0
1961 1970 1980 1990 2000 2007

Global beer consumption Global spirits consumption

Global wine consumption Beer consumption per capita
Spirits consumption per capita Wine consumption per capita

Figure 10.3 Absolute and per capita consumption of beer, wine and spirits,
1960–2007
Source: Domestic Supply. The bars indicate the absolute volumes and should be measured
from the left while the lines indicate the per capita volumes and should be measured from
the right-hand side.1961 is the first available year. Source: Compiled with data from Faostat
(2011a, b).

drink less spirits, volume-wise, than beer. However, differences registered

in 2007 are very large; we assume these may be due to beer popularity
among other reasons (cf. infra).
Data by region indicate that beer-drinking regions remained so
throughout the measurement period, although consumption patterns
among countries in the same region varied, as shown by Figures 10.1
and 10.2. For instance, Eastern Europe – a beer-drinking region in 1960 –
includes beer-drinking nations (those countries bordering Western
Europe), wine drinking-countries (Balkan countries) and spirit-drinking
countries (mostly the USSR). However, by 2007 nearly all countries in
the region became beer-drinking countries
Figures 10.4 and 10.5 illustrate the seven regions of the world on
a roster.7 The bubble size of each region indicates its absolute beer
consumption volume in 1960 (Figure 10.4) and 2007 (Figure 10.5). The
location of a bubble on the roster indicates the region’s share of beer
consumption in comparison to total alcoholic beverages (i.e. wine, beer
and spirits), and the per capita beer consumption in litres.8
When comparing both figures, three important changes become
apparent. The first change is a general increase in absolute beer
 Beer, the Preferred Alcoholic Drink of All? 211

Bubble size indicates consumption volume

120

100
Australasia
Consumption volume in l per capita

80

Western
rn Europe
60

North America
40

Eastern Europe
e
Latin America
20
Middle East and Africa

0 Asia Pacific
40

50

60

70

80

90

10
%

0%
–20
Proportion of beer in total alcoholic beverages consumption volume

Figure 10.4 Beer consumption per region, 1960

Source: Compiled with data from: (Faostat, 2011a, b; Euromonitor, 2011e).

Bubble size indicates consumption volume

120

100 North America

No
Eastern Europe
Consumption volume in l per capita

Australasia
80
Western Europe
e

60 Latin America
La

40

Asia Pacific
20
Middle East
E and Africa

0
40

50

60

70

80

90

10
%

0%

–20
Proportion of beer in total alcoholic beverages consumption volume

Figure 10.5 Beer consumption per region, 2007

Source: Compiled with data from: (Faostat, 2011a, b; Euromonitor, 2011e).
212 Elena Piron and Eline Poelmans

consumption: all bubbles have grown in size. In 1960, the largest beer-
consuming regions were Western Europe, North America and Eastern
Europe. However, by 2007 Asia Pacific ranks first, followed by North
America and Western Europe.
The second change relates to per capita consumption levels in different
regions. All bubbles have moved upwards, except Australasia which
shows the highest level of per capita consumption in 1960, and ranks
second after North America in 2007. Asia Pacific became the largest
beer-consuming region in 2007, but its per capita level remains low.
Eastern Europe surpassed Western Europe with regard to per capita beer
consumption. The Middle East and Africa maintained lower per capita
consumption levels in the period considered.
The third change is a possible convergence of consumption patterns.
All the bubbles initially on the left-hand side moved right between 1960
and 2007: beer increased its weight in these regions. Conversely, all the
bubbles initially on the right-hand side moved left in the period consid-
ered, signalling a growing importance of spirits and/or wine in these
regions.
Various historical factors can explain initial differences in consump-
tion patterns between regions/countries and the three above-mentioned
changes that took place throughout time. The growth in absolute beer
consumption between 1960 and 1980 was mainly caused by increasing
consumption in already established beer markets such as Western Europe,
North America9 and Eastern Europe. In 1961, Western Europe accounted
for 40.2% of the total global beer consumption, North America for 28.4
and Eastern Europe for 13.2. Since then, proportions for North America
and Western Europe decreased in spite of their increasing consumption
volumes, although in 2007 these regions were the second- and third-
largest global beer consumers. In contrast, beer consumption increased
in Eastern Europe from the late 1990s onward. In 1960, Eastern Europe
accounted for 13.2% of the total global beer consumption and the
region comprised beer-, wine- and spirits-consuming nations. By 2007,
its proportion grew to 15.1%, with nearly all Eastern European coun-
tries becoming beer-drinking countries (as shown in Figures 10.1 and
10.2). The shift in Eastern Europe can be explained with convergence in
consumption patterns due to increased contact with Western Europe, or
may be due to mutual exchanges and influences across countries with
different drinking vocations in the regions over time (Swinnen and Van
Herck, 2011, p.247). Russia, which experienced a beer boom in 1996
when (mainly young) consumers switched en masse from vodka to beer,
contributes to most of the consumption volume in the region. However,
 Beer, the Preferred Alcoholic Drink of All? 213

a 200% increase excise duty on beer in 2010 (not applied to the stronger
(>9%) alcoholic beverages), and new distribution and consumption
constraints in 2013, made levels of beer consumption in Russia fall
after 2010 (Euromonitor, 2011f; Deconinck and Swinnen, 2011; Landi,
2010).
The recent growth in absolute levels for global beer consumption
volumes can be mainly attributed to increasing levels in Asia Pacific
(from the late 1980s onward10) and to a steady growth in Latin America.11
Australasia shows the smallest beer consumption volume of all regions
in 1960, and its consumption only slightly increased in 2007.12 In the
Middle East and Africa, beer consumption volumes were very low in
1960 but increased strongly over time, although the contribution of this
region in terms of absolute consumption remains small.13
In 1960, Australasia, North America and Western Europe were the
largest per capita consumers. Per capita consumption levels developed
similar patterns in these regions between 1960 and 2007: increases
until the 1970s (Australia), 1980s (North America) and 1990s (Western
Europe), followed by a gradual decrease and stagnation. Part of this
decline can be attributed to government campaigns addressing drinking –
and driving, changing consumer behaviours (such as a trend towards
premiumization, cf. infra) and an increased interest in a healthy life-
style with impact on smoking and drinking habits and higher levels of
sports activities (Smart, 1987, 1989; Johnson et al., 2008). As the markets
in these regions are saturated, per capita consumption volumes should
remain within the band of 80–100 litres per capita in North America
and Australasia. However, Western Europe, historically divided between
beer- and wine-consuming nations, appears to show convergence
among consumption patterns for different alcohol beverages, caused by
factors such as migration, increased trade and cross-country travelling.
As a result, the increase in beer consumption in traditionally wine and/
or spirits-drinking nations may be counterbalanced by declining trends
in traditionally beer-drinking nations (Euromonitor, 2008b, 2011e).
Particularly in Eastern Europe some countries show very high per capita
consumption levels, e.g. 146 litres in the Czech Republic in 2007.14
Between 1960 and 2007, levels of per capita beer consumption in
Latin America increased gradually from 14 litres to 45 litres, although
the region still ranked fifth in 2007 among regions in terms of per capita
consumption. While Asia Pacific was the largest beer-consuming region
by volume in 2007, it was the smallest, together with the Middle East and
Africa, with regard to per capita consumption. Religious constraints (e.g.
Islam and Buddhism), high market regulation and an unstable political
214 Elena Piron and Eline Poelmans

climate may explain such low levels in these regions (see Datamonitor,
2010; CIA, 2011).15 However, despite the exponential growth experi-
enced by many countries in these regions since 1960, per capita beer
consumption remained less than 15 litres in 2007 in Asia Pacific, and
less than 8 litres in the Middle East and Africa (Datamonitor, 2010; see
also Lau et al., and Nyuur and Sobueso, this volume).

4 How much are we willing to pay? (i.e. consumption

value)

Table 10.1 and Figure 10.6 illustrate changes in consumer expenditure

for beer, wine, spirits and alcoholic beverages as a whole between 1990
and 2011. Overall, total consumer expenditure on alcoholic beverages
increased in the period considered. This growth could be explained by
inflation, an increase in consumption volume, a sudden increase in
imports or a combination of these factors. Another explanation could
be a change in consumption patterns between mature and emerging
markets (Euromonitor, 2008a, 2011c, 2012, 2013).
In mature markets, per capita beer consumption volumes stagnated
or declined in the period considered, while they are still growing in
emerging markets. In addition, mature markets tend to consume premi-
um-priced products (e.g. higher quality beers sold at higher prices), a
trend known as ‘premiumization’ (Euromonitor, 2012). As a result, most
consumers in mature markets choose quality over quantity, increasing
their expenditure without increasing their consumption volumes. In
contrast, consumers in emerging markets tend to prefer low-priced
products, a trend labelled as ‘economization’. There is no strict divi-
sion between the two trends, and both can appear simultaneously in
the same market. This may happen when consumer groups differ signifi-
cantly within the same market, or in situations of economic downturn,
since consumers tend to be more price-sensitive. The recent financial
crisis and related economic recession has further increased polarization

Table 10.1 Proportions of consumer expenditure, 1990–2011

1990 1995 2000 2005 2011

Alc. drinks/total cons. exp. 2.06% 1.71% 1.53% 1.46% 1.42%

Spirits/alcoholic drinks 38.99% 33.00% 30.03% 31.56% 31.28%
Wine/Alcoholic drinks 22.87% 21.96% 23.57% 26.49% 25.42%
Beer/Alcoholic drinks 38.14% 45.05% 46.40% 41.95% 43.31%

Source: Calculated with data from Euromonitor (2011b).

 Beer, the Preferred Alcoholic Drink of All? 215

Consumer expendiure 400,000

350,000
300,000
in mn EUR

250,000
200,000
150,000
100,000
50,000
0
94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11
19

19

19

19

19

19

20

20

20

20

20

20

20

20

20

20

20

20
Beer Wine Spirits Alcoholic drinks

Figure 10.6 World consumer expenditure on alcoholic beverages, 1990–2011

Source: Compiled with data from Euromonitor (2011b).

by cutting out the middle segment, with more consumers buying econ-
omy-priced beers for everyday consumption while buying premium-
priced beers occasionally. One effect of the economization trend is that
drinking economy-priced beer, such as Oettinger, has become popular
among many youngsters in Germany; the same applies for Cara Pils in
Belgium (De Rechtzetting, 2011; Eén, 2010).
Premiumization and economization are not mutually exclusive: both
trends are found in mature markets as well as in emerging markets
(Hoyer and MacInnis, 2007, pp.260–264). Moreover, the consumption
pattern of alcoholic beverages seems to change depending on the matu-
rity of the market. Over time, spirits are partially substituted by beer
when disposable income levels increase; equally, beer consumption is
partially substituted by wine (Madsen et al., 2011; Faostat, 2011b; Colen
and Swinnen, 2011 and 2015).
Whereas consumer expenditure on alcoholic beverages increased over
time, the actual proportion it accounts for in total consumer expendi-
ture has sunk from 2.1% in 1990 to 1.4% in 2011 (see Table 10.1). This
indicates that, overall, expenditure on alcohol beverages increased, but
consumers spend a smaller proportion of their disposable income on
these products.
However, according to Figure 10.6, consumer expenditure on beer ranks
first,16 followed by spirits and then by wine. Although Figure 10.3 shows
that wine consumption volumes are higher than those for spirits, consump-
tion expenditure on spirits is higher than on wine. This reflects average
higher prices per volume of spirits over wine (Euromonitor, 2011b).
Finally, it appears that total consumer expenditure on alcoholic bever-
ages in all regions increased, while the proportion of total consumer
216 Elena Piron and Eline Poelmans

expenditure on alcoholic beverages decreased between 1990 and 2011.

Beer shows the largest share throughout the period considered, followed
by spirits and wine almost everywhere. In Australasia, and from the
beginning onwards (1990), more money was spent on wine than on
spirits. In Western Europe, consumer expenditure on wine was higher
than that of beer and spirits, in contrast to the global tendency of beer
usurping the largest share. In Eastern Europe, spirits show the largest
share in 1990, followed by wine and then beer. However, expenditure
on beer in this region increased, surpassing expenditure on wine in the
late 1990s, and on spirits in the mid-2000s.

5 Where do you want to hang out? (i.e. consumption

location)

Consumers’ choice on where to consume beer depends on two different

types of legislative restrictions: consumption constraints, thus laws and regu-
lations concerning licensed premises, anti-social behaviours, drinking age
limits and drinking and driving; and distribution constraints, concerning
different forms of alcohol licenses and distribution regulations that vary
among countries.17 Due to these restrictions, preferences about locations
for imbibing beer may differ from country to country across countries. To
verify the situation in different regions, we explore a range of locations
and places where consumers may have their beers by analyzing on-trade
versus off-trade sales (Euromonitor, 2011d). In doing so, we assume that
off-trade selling is either for delayed consumption at private events (at
home or somewhere else) or for private consumption at public events
such music concerts, art festivals, and so forth. In contrast, on-trade selling
is assumed to be immediate on-site consumption, e.g. in pubs or restau-
rants. Locational choice in our analysis, therefore, is linked with selected
sale points, although we are fully aware that other factors have an impact
on consuming beer – e.g. disposable income, service costs, urbanization,
climate conditions, cultural preferences, access to on-trade licensees and
so forth. (Euromonitor, 2008b, 2011b, d).
Figure 10.7 reports proportions of total consumption by off-trade sales
per region in the period 1997–2007. All regions considered show 50%
off-trade consumption, with a higher number of off-trade consumers
located in Australia and Eastern Europe, while off-trade sales are propor-
tionally less in Western Europe. Although the share of off-trade beer
sales in Western Europe increased from 50% in 1997 to nearly 60%
in 2009, the hospitality sector is still more important in this region
than anywhere else in the world. At-home consumption in the period
 Beer, the Preferred Alcoholic Drink of All? 217

85%

80%

75%

70%

65%

60%

55%

50%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Asia Pacific Australasia Eastern Europe

Latin America Middle East and Africa North America

Western Europe

Figure 10.7 Off-trade consumption as a proportion of total consumption,

1997–2007
Source: Compiled from Faostat (2011a,b) and Euromonitor (2011d).

considered has been favoured by economic downturn, tougher drink-

driving measures and intensified government campaigns addressing
health risks and anti-social behaviour associated with alcohol consump-
tion (see Bamforth and Cabras, this volume).18
The proportion of beer sold off-trade is very high in Australasia –
around 80% in Australia and 70% in New Zealand. The obvious cause for
this high share could be the low-density populated areas in these coun-
tries which reduce urbanization patterns and so prevent the hospitality
sector from developing. However, despite low population density,19 89%
and 86% of the population in Australia and New Zealand lived in urban
areas in 2010 (CIA, 2011). Hence, urbanization and population density
seem not to have determined the off-trade sales and beer consumption
in these cases.20 More probably, other factors influencing locational
decision in this region could be related to climatic conditions, cultural
preferences, the presence of a pub culture and high price differentials
between on-trade and off-trade beer (Srivastava and Zhao, 2010).

6 Pick your poison (i.e. consumption of different beer

categories)

Nowadays, consumers worldwide can choose between different types of

beers and different beer brands. For our analysis, we define and group beer
in four categories: lagers, dark beers, stouts and low/non-alcoholic beers.21
218 Elena Piron and Eline Poelmans

The first category, lagers, is incorporated in premium/standard/economy

imported or domestic lager by origin, where premium, standard and
economy refer to price categories. However, lagers (and beer in general)
may have different pricing strategies in different countries. For example,
Stella Artois is considered a standard lager in its home market, Belgium,
while it is considered a premium lager in the US. Other examples of lager
beers are Budweisier (US); Heineken (The Netherlands); Tuborg (Denmark) and
Snow Beer (China). The second category, dark beers, includes ales, bitters,
wheat and sorghum beers.22 Examples of major brands in this category
include Erdinger, Paulaner, and Maisel (Germany); Bass Ale and Molson
Red Jack Ale (US); and John Smith’s and Newcastle Brown Ale (UK).
The third category, stouts, which comprises also porters, include very
dark, almost black beers. Notable examples are Kostritzer (Germany),
Guinness (Ireland) and Mackesons (UK). The fourth and final category,
low/non-alcoholic (NA) beers, includes beers with alcoholic content below
1.2% ABV. Most of these beers are lagers, although some ales/dark ales
and wheat beers also fall within this category. Examples are Kirin Free
(Japan), Bittburger Drive (Germany) and Jupiler NA (Belgium).
Table 10.2 illustrates off-trade consumption volumes for the four
categories from 1997 to 2010, together with 2015 projected sales at
global level and for the different regions. Lagers account for the largest
share of global off-trade consumption volumes in the period consid-
ered, and this trend is expected to continue in the near future. However,
patterns of diversification can be identified among different regions and
Euromonitor expects varying growth rates by 2015 for other beer catego-
ries in different parts of the world.
Diversification is growing in Western Europe, the Middle East and
Africa, and Australasia, where tastes tend to vary more among consumers
compared to the global average. Dark beers, stouts and low/NA beer
account for significant proportions of total beer consumption in these
regions. Dark beer is very popular in Western Europe and the Middle East
and Africa. Many Western European countries, such as the UK, Ireland
and Belgium, have a history of brewing dark beer. Moreover, although
the technique to brew lagers was invented in the mid-19th century, many
countries continued to brew with their traditional method (for instance,
in Belgium, lager beer brewing on large scale arrived only between the
1920s and 1930s). This explains why many Western European coun-
tries enjoy a much wider choice of beer (Poelmans and Swinnen, 2011a,
2011b). The recent revival of monastic-style brewing and trappist beers,
and the growth of micro-breweries in many Western European coun-
tries, have further diversified and refined Europeans’ beer palate.23
Table 10.2 Off-trade consumption of different beer categories by region, 1997–2015 (in percentage of total off-trade consumption
of that region)

Middle
Western North Eastern Latin Asia East and
World Europe America Australasia Europe Amrica Pacific Africa

1997 Lager by origin 93.9 84.6 96.6 82.4 98.8 99.6 99.5 73.5
Dark beer 3.8 9.4 2.4 5.1 0.4 0.0 0.2 19.8
Low/NA beer 1.7 5.2 0.7 12.2 0.4 0.2 0.1 2.1
Stout 0.6 0.9 0.4 0.3 0.4 0.1 0.2 4.6
2000 Lager by origin 94.2 85.8 96.6 83.1 98.9 99.6 99.6 74.0
Dark beer 3.5 8.9 2.4 5.1 0.4 0.0 0.1 17.0
Low/NA beer 1.5 4.4 0.6 11.4 0.4 0.2 0.1 3.2
Stout 0.7 0.9 0.4 0.4 0.3 0.1 0.2 5.8
2005 Lager by origin 94.4 87.0 96.2 83.3 97.6 99.7 99.5 75.0
Dark beer 3.4 8.4 2.9 5.7 0.7 0.0 0.1 13.4
Low/NA beer 1.5 3.6 0.4 10.5 1.4 0.2 0.3 6.2
Stout 0.7 1.0 0.5 0.4 0.3 0.1 0.1 5.4
2010 Lager by origin 94.6 86.3 94.1 85.5 97.1 99.5 99.3 70.0
Dark beer 3.3 8.9 4.2 6.4 1.1 0.1 0.1 16.3
Low/NA beer 1.4 3.7 1.2 7.7 1.5 0.3 0.5 9.4
Stout 0.7 1.0 0.5 0.4 0.3 0.1 0.1 4.3
2015 Lager by origin 94.6 85.1 92.6 85.1 96.8 99.4 99.2 65.4
Dark beer 3.4 9.7 5.4 7.4 1.2 0.1 0.1 16.4
Low/NA beer 1.5 4.2 1.3 7.1 1.7 0.3 0.6 14.3
Stout 0.7 1.0 0.7 0.4 0.3 0.2 0.1 3.9

Source: Calculated with data from Euromonitor (2011b).

220 Elena Piron and Eline Poelmans

In the Middle East and Africa, the popularity of dark beer is associated
with sorghum (see Nyuur and Sobueso, this volume). Possible factors
explaining the popularity of low/NA beers in Australia and in the Middle
East and Africa (and, to a lesser extent, in Western Europe) can be asso-
ciated with improved product characteristics for these types of beers,
changing consumption habits, increasing awareness for health issues
and alcohol-related antisocial behaviours, and religious constraints on
alcohol consumption.24 Low/NA beers may be gaining popularity with
regard to on-trade consumption too, particularly in countries where
drinking and driving regulations have been progressively toughened in
the past decades, although we have no empirical evidence to support
this statement.
In North America, Latin America, Eastern Europe and Asia Pacific,
lagers have always been popular for several reasons. The North American
preference for light-coloured lager beers is a legacy of the Temperance
Movement, which pushed consumers towards bland and seemingly mild
beers. In addition, with the end of the Prohibition, American consumers
were relatively unaccustomed to other types of beers, with many
switching to sweet carbonated soft drinks.25 The following generations
struggled to readjust to bitterness, so brewers tended to brew sweeter
and lighter beers (Poelmans and Swinnen, 2011b; New Yorker, 2008).
However, a decrease in the share of lager consumption since 1997
reflects an increase in consumption of other types of beers. The emer-
gence and rising popularity of the craft brewery beer movement that
took off in the US between the 1970s and 1980s, seems to be a sort
of renaissance for the American beer industry, and has significantly
widened the choice for American consumers (Carroll and Swaminathan,
2000; Poelmans and Swinnen, 2011a, b; Cabras and Bamforth, 2015;
Moore et al., this volume). In addition, increasing consumption of low/
NA beers has had an impact on lager consumption in the region (Stack,
2003, Tremblay and Tremblay, 2005).
In Asia Pacific, China is responsible for the largest share of the beer
consumption, particularly in relation to lagers and, to a lesser extent,
low/NA beers (Bai et al., 2011). Chinese consumers frequently engage in
drinking games; hence, consumer preferences tend to converge towards
beers that can be drunk fast and easily, such as lightly carbonated, low
alcoholic and soft-flavoured beers (Bai et al., 2011 and Euromonitor,
2009a).
Finally, the increasing diversification in beer consumption observed
in North America, Latin America and Eastern Europe between 1997
 Beer, the Preferred Alcoholic Drink of All? 221

and 2010 may be related to factors such as premiumization (cf. supra),

increased levels of trade associated with Eastern European countries
joining the European Union, and international mergers and acquisitions
that increased and widened the supply of non-lager beer to traditionally
lager-drinking regions (Euromonitor, 2011d; European Union, 2007).

7 Conclusions

In this chapter we presented an overview of the beer consumption

patterns at global and regional levels between 1960 and 2007, and
we explored the presence of different trends in beer consumption
worldwide.
A number of important changes that took place occurred in the period
considered. First, a general increase in absolute beer consumption in all
the regions examined, with a traditionally beer-drinking region such as
Western Europe surpassed by Asia Pacific and North America in terms of
consumed beer volumes. Second, per capita beer consumption increased
in all regions except one (Australasia). Third, there is possible conver-
gence of consumption patterns: traditionally beer-drinking regions
started to diversify their consumption patterns, switching to wine and
spirits, and traditionally wine and/or spirits-drinking regions increased
their per capita levels of beer consumption.
Fourth, although consumer expenditure on alcoholic beverages
increased over time, the proportion of total consumer expenditure
designated for alcoholic beverages decreased between 1960 and 2007.
Fifth, beer consumers in mature markets are usually wealthier than
those in emerging markets and, as a result, tend to purchase premium
beers. The opposite happens for consumers in emerging markets, on
average less wealthy and oriented to purchase less expensive beers.
However, the distinction between both trends is not entirely defined,
and consumers of these opposite groups may coexist in the same
market, particularly in times of economic downturn or when consumer
groups differ significantly within one market. Sixth, while more beer
worldwide is consumed off-trade than on-trade, there are large differ-
ences across regions.
Lastly, beer consumption in all the regions examined experienced
diversification between 1990 and 2011. While lagers remained the most
popular type of beer consumed worldwide, other types such as stout,
dark beer and low/non-alcoholic beer are increasing their shares in terms
of consumption volumes across different regions.
222 Elena Piron and Eline Poelmans

Notes
1. See, for instance, Smith and Solgaard (2000); Selvanathan (2006); Aizenman
and Brooks (2008); and Colen and Swinnen (2011 and 2015).
2. Notable exceptions are: Berger and Snortum (1985); Hennessy and Saltz
(1990); Nelson (2003); Kuntsche et al. (2009); Srivastava and Zhao (2010);
George (2011); McCluskey and Shreay (2011); and Vanrafelghem (2013).
3. Faostat (2011a,b); Euromonitor International (2008a,b; 2009a,b; 2011a–f,
2012, 2013) and Mitchell (2007a,b,c).
4. The available data for all regions starts from the year 1961 onwards. For the
year 1960 only limited data is available. For simplicity we mention the year
1960 with the data of 1961 in our text.
5. Due to lack of information on the alcohol percentage of each drink
throughout time and the differences in the alcohol percentages of beer, wine
and spirits in different countries, it was not possible to recalculate all alcohol
products of all countries into one completely comparable unit (e.g. a certain
percentage of alcohol). Therefore, we used absolute consumption data in
litres.
6. Please note these figures are given to show the proportion of beer in the
consumption of alcoholic beverages within each country – e.g. in two different
countries beer can have a share of 90% of total volume, although the actual
beer consumption volume in both countries can be rather different – and
the change in consumer habits throughout time, not to mention the exact
consumption volumes in each country.
7. Western Europe, North America, Australasia, Eastern Europe, Latin America,
Asia Pacific and Middle East and Africa.
8. E.g. in Western Europe a total of about 17.4 million litres of beer (bubble
size) were consumed in 1961. Beer consumption represented 50.9% of total
consumption of alcoholic beverages (x-axis) and Western European citizens
consumed 48.8 litres per capita (y-axis).
9. Initial migration to North America originated in the beer drinking countries
of Western Europe. As a result North Americans have been avid beer drinkers
Smart (1987, 1989).
10. This exponential growth since the early 1980s was partly due to the substan-
tial demographic growth that took place in the segment aged 20 to 35 years,
i.e. the age segment with the largest per capita beer consumption. In this
respect, China is responsible for the largest share of consumption (CIA, 2011;
Freeman, 2011, p.112).
11. Most migration to Latin America originated in Western Europe’s wine
drinking countries. Hence – and in combination with climatic conditions –
Latin America was historically more of a wine drinking region. The largest
shares of beer consumption go to Brazil and Mexico. See Chapter 7 in this
volume.
12. Also, the initial migration to Australasia originated in the beer-drinking
countries of Western Europe although wine became very popular in Australia
over time (Smart, 1987, 1989). While beer in Australia still had a share of
93% of total alcohol volume in 1960 – and although the absolute volume of
beer consumed increased over time – its share has decreased to 73% by 2007
and wine’s share increased from 6.7% to 25%.
 Beer, the Preferred Alcoholic Drink of All? 223

13. We may assume that actual beer consumption in this region is higher than
depicted in Figure 10.4 and Figure 10.5, as only beer made of barley and
not beer made of sorghum is included in the data. In the Middle East and
Africa (mostly in Southern Africa) sorghum is used as a substitute for barley,
resulting in an under-representation of total beer consumption (Jackson
(1977, pp.242–246). Hence, even if the beer consumption volume data given
in the figures is an under-representation, it would never have been as high as
in the largest beer-consuming regions.
14. Other countries that had per capita consumption volumes of 100 litres or
higher were Hungary, Slovakia and the former Yugoslavia.
15. In Asia Pacific, China is the largest contributor in terms of both absolute
and per capita beer consumption. Beer consumption increased rapidly since
1980 mainly due to changing consumer behaviours, rural–urban migration,
increasing average household incomes and constant real prices for beers.
However, compared to other regions, Chinese per capita beer consumption –
30 litres per capita in 2007 – is still considerably low (Bai et al., 2011).
16. In 1990, the share of world expenditures on spirits in total world expenditures
on alcohol was slightly higher (38.99%) than for beer (38.14%). However, by
1995, beer was already more important and it has kept this position ever since.
17. For example, the State Alcohol and Tobacco Company of Iceland holds a
monopoly in the sales and distribution of all alcoholic beverages in Iceland
(Vínbúdin 2012).
18. See Brewers of Europe (2012) and Johnson et al. (2008, pp.88–99).
19. 2.8 people per km² in Australia and 16.5 people per km² in New Zealand.
20. Also in Eastern Europe (with off-trade shares of 70% in 1997 and 82% in
2007), urbanization and population density do not appear to determine the
off-trade proportion of consumption.
21. Division into the four categories and examples: Jackson (1977, pp.14–15);
definition of the different categories: Euromonitor (2011a, d).
22. Bitters have a harder, more bitter flavor than ales, tend to be darker in colour,
are usually less carbonated than lagers, and are generally drunk at warmer
temperatures.
23. For more information about the growth of monastic style and trappist beers in
Europe, see Jackson (1991: 157–192), The International Trappist Association
(2014) and De Standaard (2015).
24. An example of how the beer-producing companies play into this trend is the
innovative marketing strategy in 2009 of the Dutch brewer Bavaria, based
around the two main drivers for alcohol-free consumers; ‘drunk driving’ and
‘sports’ (The Economist 2013, Bavaria 2012).
25. As reported by Stack (2003), Cabras and Bamforth (2015), and Dighe
(forthcoming).

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Part III
Pubs, People and Places
11
Tied Houses: Why They Are So
Common and Why Breweries
Charge Them High Prices for
Their Beer
Koen Deconinck and Johan Swinnen

1 Introduction

Pubs with exclusivity contracts with breweries or drinks distributors are

known as “tied houses.” Often, the building in which the pub is located
is property of the brewery or is being rented by the brewery from a third
party on behalf of the publican. In other cases, the brewery has made
financial or material investments in the pub, e.g. by giving loans or
providing furniture. In return, publicans agree to exclusively buy prod-
ucts from the brewery.1
Tied houses have a long history and are common in several countries.
Tied houses have been a feature of pubs in countries such as the UK
and Belgium since the 19th century and in several countries (including
Germany, Belgium, France, the Netherlands, the UK and countries
outside Europe such as Mexico) a significant portion of pubs are char-
acterized by tied house contracts. However, given their prominence
both historically and in many countries with a rich beer culture, it is
somewhat surprising that there are hardly any representative data and
few studies on them. Some exceptions are the studies by Pleijster et al.
(2011) on the Dutch market and a few studies on the UK market such as
Gottfried and Muir (2011), the work by Margaret Slade (1998, 2011) on
competition policy and the divestiture of brewer-owned pubs and more
general studies by David Preece (2008) and his colleagues (Preece et al.,
1999) on public house retailing in the UK.

231
232 Koen Deconinck and Johan Swinnen

The few data that are available do suggest that tied houses are very
important in several countries. Recent data for the UK shows that two-
thirds of pubs are tied to regional breweries and so-called “pub compa-
nies” or “pubcos” (real estate companies specializing in pubs, for which
they also act as exclusive beer distributor; Gottfried and Muir, 2011).
Evidence from the Netherlands shows that more than 60% of pubs have
some form of contract (Pleijster et al., 2011). For Belgium, a survey on
a representative sample of 250 pubs found that around two-thirds of
the pubs in the sample had tied contracts, although it is not exactly
clear from the study how stringent these contracts are (Van Passel and
Wauters, 2009). The European Commission concluded in 2000 that
of the 36,000 pubs in the country, around 12,000 have some form of
exclusivity contract with Belgium’s leading brewer, AB InBev (European
Commission, 2002).2
The tied house system has received a great deal of criticism from
publicans who blame the contracts for forcing unreasonably high beer
prices on the tied houses. In the UK in the 1980s such complaints led
the Thatcher government to force a divestiture of tied houses by brew-
eries, in hopes of improving the situation of formerly tied publicans.
In retrospect, however, it has become clear that the divestiture was a
complete failure (Slade, 1998). It has merely caused a shift from pub ties
with breweries to ties with real estate companies.
The new contracts came under scrutiny after an interest group, the
Campaign for Real Ale (CAMRA), lodged a complaint with the Office of
Fair Trading (the British government’s antitrust and consumer protec-
tion agency; OFT hereafter). In 2010, the OFT rejected the complaint,
noting that the pub sector appears to be competitive overall. In addi-
tion to the OFT investigation, however, the Business, Innovation and
Skills Committee of the House of Commons investigated the issue, and
eventually the government developed legislative proposals to introduce
a code of practice and an “Adjudicator” to arbitrate disputes (Helsey
and Seely, 2014). However, the House of Commons unexpectedly voted
to add an amendment allowing publicans in tied house contracts to
buy beer “free of tie,” thus effectively abolishing the tied house system
(see Preece, this volume). This option was not proposed by the govern-
ment, as preliminary analysis indicated that abolishing the tie would
increase the rate of pub closures (London Economics, 2013), an argu-
ment disputed by CAMRA, and other campaign groups in the UK. The
unexpected vote led to a sharp drop in the shares of publicly traded
companies owning tied pubs. Analysts expected the companies to fight
the decision (Fletcher, 2014).
 Tied Houses 233

Criticism of the tied house model has also attracted media attention in
Belgium and the Netherlands. Although the debate in Belgium and the
Netherlands has not yet reached the same political level as in the UK,
interest groups in both countries have been trying to put the issue on
the policy agenda (Baarsma and Rosenboom, 2013; Horeca Vlaanderen,
2010).
The complaints are remarkably similar for the three countries, with
the publicans arguing that the contract forces them to pay unreasonably
high beer prices compared to pubs free of tie. As noted by Gottfried and
Muir (2011), “The main allegation made against the pubcos is that they
are charging their lessees too much for their beer and that this is putting
tied pubs at a competitive disadvantage.” For instance, one UK website
advocating reform asks: “Is it right that publicans tied to big pub compa-
nies can pay above £110 for a barrel of beer, but independent publicans
are able to purchase for less than £70?”3 In the Netherlands, Baarsma
and Rosenboom (2013) allege that the beer tie is bad for pubs, as it
leads to higher wholesale prices, lower profitability and a relatively high
bankruptcy rate. The authors conclude that the pub market can only
function properly if the exclusivity contracts between bars and brew-
eries disappear. In a memorandum for the 2010 elections in Belgium,
the professional federation of the hospitality industry asserted that tied
houses pay up to 60% more than free houses. The federation asked for
more transparency in price-setting and a strict separation between rental
contracts and beer distribution contracts (Horeca Vlaanderen, 2010).
Despite the media attention, and the relevance of the issue for an
important economic sector, there is little serious economic analysis of
the problem.4 From an economic point of view, there are several issues.
Why do we observe the tied house contract in the first place? Why is it
so widespread? Why do brewers use the wholesale price of beer as a main
instrument to differentiate between tied houses and free pubs since this
seems to disadvantage the tied houses?
In this chapter we present an economic analysis of tied houses,
drawing on a formal and more elaborate theoretical model and analysis
in Deconinck and Swinnen (2014). We use the model to demonstrate
that one can explain the empirical observations, i.e. that tied houses
are common and that they are charged high prices for their beer, with a
model of rational agents who decide to join in a contractual arrangement
taking into account important transaction costs, credit market imperfec-
tions, moral hazard and differences in risk aversion. In a Williamson-
type (1985) framework one can see tied houses as an intermediate stage
between a free house and a “managed pub,” which affects the type of
234 Koen Deconinck and Johan Swinnen

tenant and their attitude to risk – which in turn affects the nature of the
contract.
The chapter is organized as follows. In the next section, we discuss the
“demand” for tied houses – i.e., the motivations of publicans to engage
in a tied house contract. In the third section, we discuss the “supply”
factors – i.e., the economic motivations behind breweries’ involvement
in tied house contracts. The fourth section then offers an explanation
for the observed structure of the contracts. A fifth section offers some
implications and conclusions.

2 Credit constraints and the demand for tied houses

Given the well-documented differences in beer prices between tied

houses and free houses, and given the frequent complaints from publi-
cans with a tied house contract, the question is why publicans are none-
theless willing to enter into such a contract. We argue that an important
part of the explanation is that many publicans are credit-constrained.
The start-up cost of a pub frequently exceeds publicans’ own means.
Moreover, credit institutions often appear to be reluctant to invest in
pubs.5 In such cases, breweries can step into the void by paying for the
necessary investments as part of a “tied” contract with the pub. In this
way breweries provide interlinked contracts with their pubs, much like
other economic agents do in supply chains.6

2.1 Credit constraints and investments

Tied house contracts are indeed usually linked to the provision of such
investments or support. In the Netherlands, 64% of businesses rely on
the brewer for the draft equipment, 11% rely on the brewer for credit
and 8% work from a building which is rented from the brewer. For
traditional pubs in particular, 16% rent the building from the brewer
(Pleijster et al., 2011). The largest investments by brewers occur in rental
pubs where brewers invest in the real estate, decoration, maintenance
and repairs, draft equipment, refrigerators, furniture and so on.7 In non-
rental pubs, brewers also often provide some of these services. An esti-
mate for the UK puts the value of such services for rental pubs at around
£6,000 to £8,000 per year, including repairs and maintenance and oper-
ational support such as free training (OFT, 2010).
One form of financial support by the brewer which is common in
Belgium is a so-called “lost fund” (fonds perdu). The lost fund is a lump
sum payment by the brewer to the publican which is repaid through the
publican’s purchases of beer from the brewer. Some brewers consider the
 Tied Houses 235

lost fund to be an advance on a volume discount. From this perspec-

tive, publicans can choose whether they want to receive the money as a
discount on wholesale prices over time or as a lump sum payment at the
beginning of the contract. At any rate, the lost fund payment provides
clear illustration of the role of credit constraints.
The investments by the brewer stand in stark contrast with typical
“franchise” contracts in the retail sector (e.g. fast-food chains such as
McDonald’s). Often such contracts require large up-front investments
or payments by the operator. Investments by the parent company are
usually limited. In fact, one dominant theory to explain the popularity
of franchising postulates that parent companies use franchising when
they lack the funds to finance their own expansion. By requiring opera-
tors of outlets to finance investments themselves, the parent company
can achieve a quick expansion with minimal investments (Combs et al.,
2004). As a result, the “barriers to entry” for an individual operator are
usually higher in these typical franchise contracts compared to a tied
house contract (Lashley and Rowson, 2002). As Subway, the popular
sandwich franchise, explains on its website: “[O]ur startup costs are
lower than most restaurants. The initial franchise fee is $15,000, and
total investment can be as low as $ 78,600” (Subway, 2014). McDonald’s
warns prospective operators that “Generally, we require a minimum of
$750,000 of non-borrowed personal resources to consider you for a fran-
chise” (McDonald’s, 2014). Start-up costs for a tied house are consider-
ably lower: Lashley and Rowson (2002) report that these costs could be
as low as £4,000–£ 5,000.

2.2 Investments and Exclusivity

In return for its investments in the tied house, breweries often demand
that the publican exclusively sells products of the brewery. The economic
logic behind exclusivity requirements is that competing breweries might
otherwise benefit from the brewer’s investments in a pub – a situation
known as a “free rider” problem (Slade, 2011). By imposing exclusivity
requirements, the brewery can be sure that the benefits of its investment
will not go to competitors.
On the other hand, exclusivity requirements also increase the incen-
tive for the brewery to invest in the pub. By associating its name with the
pub, the brewer puts its brand reputation at stake. A classic example is the
insistence of brewers that publicans should regularly clean the draught
equipment. Brewers may include such requirements in their contracts,
or they may in some cases offer these services for free. Investing in clean
draft equipment improves the quality and the taste of the beer, which
236 Koen Deconinck and Johan Swinnen

in turn improves the reputation of the brewer. A good reputation of

the brewer will stimulate the sales of beer in other pubs or in supermar-
kets. This “spillover effect” (Slade, 2011) reduces the incentives for the
publican to invest in clean equipment. The problem will be especially
severe in tourist locations where there is a large fraction of non-repeat
customers, so that the individual reputation of the publican plays only
a minor role. The exclusivity arrangement increases the incentives for
brewers to invest in quality control.

2.3 Credit constraints and the terms of the contract

Credit constraints will affect the beer price paid by the publican to
the brewer. In return for providing the publican with infrastructure
and equipment, the contract needs to create sufficient cash flow for
the brewery to generate a return on investment. Many brewery–pub
contracts can thus be thought of as the brewery and the publican nego-
tiating about both a level of investments by the brewer and a wholesale
beer price (and possibly a rental payment).
A large investment by the brewery implies that the brewery will
require a large surplus from the beer contract to achieve a return on its
investment. At the same time, a large investment by the brewery will
be needed when the publican’s own financial means are smaller, which
in turn implies that the publican has less bargaining power. The result
will be a relatively high beer price. On the other hand, if the publican
bears all the investments, he may be able to play off different brewers to
obtain the best possible terms of contract and the lowest beer price.

3 Market power and the supply of tied houses

From the perspective of the brewer, there are several possible motivations
for investing in a network of exclusive pubs as a distribution channel.
These motivations will differ importantly between large brewers and
small brewers. Large brewers can use tied houses as a way of reducing
competition. Small brewers may rely on tied houses to withstand
competitive pressures of larger (and more cost-efficient) brewers.

3.1 Large brewers and small brewers

Tied houses can be used by large brewers to stifle competition. The
competitive effects of “vertical restraints” between producers and
retailers (such as the tied house contract) have received much atten-
tion in the industrial organization literature (Rey and Vergé, 2008). An
important anti-competitive effect occurs when most of the distribution
 Tied Houses 237

outlets are tied through exclusivity agreements. If most pubs are tied to
existing brewers (a situation known as “foreclosure”), a new entrant in
the brewing industry would not be able to sell any beer in existing pubs.
To enter the industry, the new entrant would need to invest in its own
distribution network, which creates a barrier to entry. For large brewers,
investing in a large network of “tied houses” is therefore one way to
prevent future competitors from entering the market.
However, tied houses also offer a strategy for small breweries to with-
stand competitive pressure. Brewing is characterized by important
economies of scale, not only in the brewing process itself but also in
procurement, distribution and advertising (Swinnen, 2011). As a result,
larger breweries often achieve lower unit costs than smaller breweries. In
addition, larger breweries can often rely on larger marketing budgets. In
a context of free houses, for a given quality level and reputation, larger
breweries would therefore be able to give better terms to publicans (and,
ultimately, consumers). This raises an important challenge for small
breweries. By investing in a network of pubs that are required to buy
from the small brewer, the latter is guaranteed a minimum production
volume. By selling beer in the tied houses at a higher price, the brewer
can recover the fixed costs of brewing. This in turn allows the brewer to
compete with the large brewer in the “free” pubs.8

3.2 Empirical observations

Data for the Netherlands suggest that tied houses are most important for
small brewers. Brewers with a larger market share are less likely to rely
on tied houses. Figure 11.1, based on data from Pleijster et al. (2011),
shows the market share of different breweries in the Dutch market,
as well as the relative importance of rental pubs in the total number
of pubs selling beer of that brewer. (Since rental pubs typically have
the most stringent “tied” contract terms, this is a good proxy for the
use of tied house contracts overall.) Heineken, the market leader, has a
market share of almost 50%, but rental pubs only account for about 5%
of all pubs selling Heineken. For smaller breweries, rental pubs are more
important: for Bavaria which has 10% market share, the share of rental
pubs is 20%.
Likewise, in Germany the existence of “tied houses” is cited as one of
the reasons for the survival of a large number of small, regional brew-
eries (Adams, 2006). While there are no representative data on this for
other countries, our discussions with brewery managers suggest that the
situation is similar in Belgium. However, one should take into account
the regulatory environment. In the EU, current regulations limit the use
238 Koen Deconinck and Johan Swinnen

25%

20% Bavaria
Share of rental pubs

15%
Grolsch

10% Inbev

5% Heineken

0%
0% 10% 20% 30% 40% 50% 60%
Market share

Figure 11.1 Importance of tied houses for smaller brewers in the Netherlands

of exclusivity agreements for large companies but provide considerably

more leeway for smaller companies.9
In countries where such regulations do not exist, foreclosure by large
brewers can be an important problem. This appears to have occurred in
the Mexican beer market, where Heineken and AB Inbev together until
recently controlled nearly 100% of the market and relied on an exten-
sive network of tied houses. SABMiller (the world’s third-largest brewery)
challenged this practice, alleging that the tied houses prevented its entry
into the Mexican market. In July 2013, the Mexican antitrust authori-
ties ruled that AB Inbev and Heineken need to reduce their reliance on
exclusive agreements (Wall Street Journal, 2013).

4 Why high beer prices in tied houses?

Tied contracts typically imply high wholesale prices. However, using

the beer price to extract profits leads to at least two potential efficiency
losses. First, if the brewer takes a profit margin, and the publican then
takes another profit margin, the resulting retail price will be inefficiently
high – a problem known as “double marginalization.” Second, using the
beer price also reduces the incentives for the publican to put effort into
improving his pub. From an economic point of view, the use of high
wholesale beer price thus seems puzzling at first sight. Both efficiency
losses could be avoided if the brewer would simply charge a high fixed
payment (e.g. a higher rent) to the publican, while selling beer more
 Tied Houses 239

cheaply. However, a high beer price (even with the two inefficiencies
involved) may be optimal if publicans are risk averse, as we explain in
this section.

4.1 Tied contracts: high beer prices and low rents

Although the specific terms of contract will vary depending on the
circumstances, in general brewers seem to use the wholesale beer price
as the central mechanism to extract the surplus of the pub, instead of
a high fixed franchise fee (e.g. through a higher rental payment). In
the Netherlands, Pleijster et al. (2011) report rents of brewery-owned
pubs are similar to the going market rate. On the other hand, in 2009
the net beer price (after rebates) paid by pub operators varied between
1.77 and 2.17 euros per litre of beer depending on the type of contract
(Pubs rented from the brewer paid the highest price). In Dutch super-
markets, the same brands of beer cost between 1.13 and 1.62 euros
per litre. Likewise, for the UK, Slade (1998) notes that rental prices of
brewery-owned pubs in the 1980s were usually below the market rate.
While pubs with an arm’s-length relationship with brewers received a
7 to 8% discount off the list price, pubs that were rented out by the
brewer received no discount compared to the list price. More recently,
the Office of Fair Trading estimated that a typical tied house would on
average pay 30% more for beer than a free pub, although this is compen-
sated by a “subsidy” on the rent which works out to roughly a similar
yearly amount (OFT, 2010). While rents are often subsidized or at least
not higher than typical market rents, brewers use the wholesale beer
price to extract surplus from the publicans.

4.2 Problem I: double marginalization

The double marginalization problem is well known in the industrial
organization literature (Rey and Vergé, 2008). The brewer charges a
markup over marginal costs when setting his wholesale price and the
publican also charges a markup over this wholesale price. The resulting
retail price is inefficiently high, in the sense that it does not maximize
the joint profits of the brewer and the publican. A lower price would
imply more consumption and more profits.
In theory, there are several solutions to this double marginalization
problem using contractual features known as “vertical restraints” (Rey
and Tirole, 1986). For instance, the brewer could impose a maximum
retail price – a practice known as “retail price maintenance,” which is
illegal in most cases. The brewer could thus impose the joint profit-
maximizing price which in turn induces the publican to sell the optimal
240 Koen Deconinck and Johan Swinnen

quantity. Alternatively, the brewer can also set the optimal quantity
directly (a practice known as “quantity forcing”) which in turn induces
the publican to set the optimal price. Since the retail price and total
quantity are fixed in both cases, the wholesale price no longer influ-
ences the quantity decision, and the brewer can use the wholesale price
to divide the joint profits.
Another solution to the double marginalization problem is “two-part
pricing.” In addition to charging for the beer, the brewer could also
charge a fixed fee (e.g. through a higher rent). In this case the brewer
would set his beer price equal to the marginal cost. If the publican then
takes a profit margin on this low beer price, the resulting retail beer
price will be at the joint profit maximizing level. The lower price leads
to larger consumption and higher profits. The fixed fee can then be used
to divide the surplus among the brewer and the publican.10
This theoretical analysis would predict that tied house contracts,
especially in rental pubs, would be characterized by a relatively high
fixed fee (rental price) combined with a relatively low wholesale
price for beer, which is the opposite of what we observe in reality.
Reliable data to assess the efficiency loss is difficult to obtain. Pleijster
et al. (2011) present some estimates of wholesale and retail prices
for different contract types in the Netherlands. Using their numbers
we estimate that the double marginalization problem leads to lower
revenues of approximately 13% (see Deconinck and Swinnen, 2014).
Hence, the question is why the normal solutions to double marginali-
zation (in particular two-part pricing) are not used. This suggests that
other problems must be more important than the double marginaliza-
tion problem.

4.3 Problem II: moral hazard and incentives for effort

The success of a pub depends in large part on the effort of the publican
in creating a friendly atmosphere, in organizing events such as quizzes,
sports nights or live music performances, and so on. Much of this
effort is hard to monitor. It is difficult, for instance, for a brewer to
ascertain whether an employee is doing his best to create a friendly
atmosphere. One solution to the moral hazard problem is to reward
employees with a share of the profits of the pub. Another solution is to
rely on independent publicans. In both cases, as their incomes depend
on the profits of the pub, the publicans can be expected to be more
motivated to improve the attractiveness of their pub, solving the moral
hazard problem.
 Tied Houses 241

The relative scarcity of “managed pubs” (where the pub is operated by

an employee of the brewery) is an indication of the importance of such
moral hazard issues. In the UK, only about 15% of pubs are managed
(Gottfried and Muir, 2011); in Belgium and the Netherlands managed
pubs are extremely rare. The large majority of pubs are operated by an
independent publican.
However, this adds a second inefficiency to the high beer prices in
tied house contracts. Since the income of the publican depends on the
margin between the retail beer price and the wholesale beer price, and
since publicans cannot fully pass on a higher wholesale price to their
consumers, a high wholesale price reduces the returns to the publican
of exerting extra effort. That is, the wholesale price acts as an “income
tax,” making it less profitable for the publican to invest time and energy
in the pub.
The use of two-part pricing (i.e. low beer prices but high rents)
would again prevent this problem. So the moral hazard problem can
explain why we do not see more brewery-managed pubs, but it cannot
explain why we observe the high beer prices in tied contracts – to the
contrary.

4.4 Risk aversion

Why, then, do we not observe low beer prices and high rents in reality?
A likely answer is that publicans, given the relatively small scale of their
operations, are risk-averse, since it is hard to protect themselves against
fluctuations in income. A contract with a low beer price and a high rent
implies that the publican faces a high (fixed) monthly payment, while
his own revenues may vary a lot, for instance depending on weather
conditions. Since breweries are usually larger firms, it is plausible that
they would be less risk-averse than the publican: a brewery sells to many
pubs so that fluctuations “average out.” In addition, the brewery may
have easier access to finance to bridge periods of low income.
Under the standard two-part pricing solution, the brewers would be
receiving the least volatile revenue stream and publicans have to absorb
most of the volatility. Prospective publicans would probably not be willing
to accept such a risky contract. A risk-averse publican would prefer a
higher wholesale beer price and lower rent over a contract with high rent
and a low beer price, even if this implies (on average) a higher payment to
the brewer. The reasoning here is similar to that of an insurance contract:
by using the beer price instead of a fixed payment, the publican can partly
insure himself against the volatility of his revenues.
242 Koen Deconinck and Johan Swinnen

5 Conclusion and implications

In this chapter we have identified the importance of credit constraints,

moral hazard and risk-aversion in understanding the role that tied
houses play among pubs, and why beer prices are (much) higher in tied
houses than in free houses.
Our analysis has implications for the controversy regarding the high
wholesale beer prices charged by brewers to tied houses compared to
“free houses.” Our analysis implies that the debate on the functioning of
tied house contracts and comparisons of the relative level of wholesale
beer prices in tied and free houses needs to take into account the corre-
sponding investments of the brewer and the publican. Since brewers
typically invest larger amounts in tied houses than in free houses, higher
wholesale prices are needed to cover the brewer’s opportunity costs.
Ignoring these investments will lead to incorrect conclusions regarding
economic efficiency and rent distribution.
Any policy proposals thus need to take into account the possibly
unintended consequences in a context of credit constraints. A ban or
restriction on tied contracts may reduce the incentive of the brewer
to invest in pubs. While this may lead to a short-run advantage for
publicans, in the long run this might reduce investments in the pub
industry, or it may induce spillover effects on other markets. This is
illustrated by the experiences with the forced divestiture of pubs in
the UK. The UK government decided in 1989 that breweries owning
more than 2,000 pubs had to divest themselves of half of the number
of pubs in excess of 2,000. The idea behind these “Beer Orders” was to
create more independent pubs, which would lead to more competition
in the sector. However, instead of the divested pubs ending up in the
hands of independent publicans, a new organizational form appeared:
the so-called “pub company” or “pubco.” These companies bought the
pubs from the brewers and started acting as distributors for their pubs.
Whereas national breweries owned 32,000 of the UK’s 60,000 pubs in
1989, this number was reduced to zero in the wake of the Beer Orders.
The pub companies, non-existent before 1989, bought practically all
the divested pubs. Given the apparent aim of the reform to create more
independent pubs, the Beer Orders clearly failed (Gottfried and Muir,
2011; Slade, 1998; Preece et al., 1999). This outcome is consistent with
our argument about the importance of credit constraints on the part
of publicans.
In their discussion of interlinked contracts in developing country agri-
culture, Bardhan and Udry (1999) note that “[i]f, in our reformist zeal,
 Tied Houses 243

we do not pay enough attention to the underlying economic rationale

of pre-existing institutions and their interconnections, and try to hack
away parts of them, we may not always improve (and may even worsen)
the lot of ... the intended beneficiary of the reform programme.” At the
same time, they note that understanding an institution should not
be confused with blindly accepting the resulting outcomes as the best
possible state of events. The same may apply to tied houses. The end of
tied house contracts or a forced divestiture may have negative conse-
quences for publicans in the long run. On the other hand, this does not
imply that the current situation of publicans in tied houses is necessarily
optimal. To the degree that the terms of contract depend on bargaining
power, there might be scope for changes in the wholesale price which
would not affect economic efficiency and which, given the negative
effects of wholesale prices in terms of double marginalization and moral
hazard, may even improve the total surplus.

Notes
1. Both breweries and distributors (drinks wholesalers) can have such exclusivity
contracts with pubs. For simplicity, we will refer to “breweries” only, although
the argument extends to distributors. Throughout, we will refer to the oper-
ator of the pub as the “publican.”
2. In the US, by contrast, tied houses have been illegal since the end of
Prohibition. After the repeal of Prohibition, a “three-tier” system was intro-
duced with a strict separation between production, distribution and retailing
of alcohol. The situation persists to this day.
3. See [Link] (accessed 22 December 2013).
4. An exception is Slade (1998), who studied the consequences of the forced
divestiture of tied houses in the UK after 1989.
5. In Belgium, the professional federation of the hospitality industry complains
about a lack of access to credit (Horeca Vlaanderen, 2010). A series of telephone
interviews with the leading financial institutions in Belgium, conducted by
the authors in 2013, confirmed that the hospitality industry is seen as a high-
risk sector, so that institutions are reluctant to extend credit.
6. Contracts are interlinked when the terms of one transaction are “linked” to
those in another transaction. In agriculture, for example, processing compa-
nies often provide inputs to farmers who then in turn sell their output to the
processor. Studies show that such contracts improve access to technology and
inputs for poor producers (Dries et al., 2009; Swinnen, 2006). For a compre-
hensive theoretical analysis, see Swinnen et al. (2015).
7. Current debates in the UK often center around the alleged lack of investments
by pubcos in their pubs. This is partly linked to the switch, after the forced
divestiture, from rental contracts to long-term lease contracts which legally
make the tenant responsible for a larger part of maintenance and other costs
(Slade, 1998).
244 Koen Deconinck and Johan Swinnen

8. Clearly this argument will be more relevant in the context of, e.g., Germany,
Belgium and the Netherlands (where breweries still have important networks
of tied houses) and less in the UK, where many pubs are owned by specialized
real estate companies. However, the argument may have applied to the UK
before the “Beer Orders” of the 1980s.
9. The exact regulations are rather complex. Article 101 §1 of the Treaty on
the Functioning of the European Union prohibits contractual arrangements
which restrict trade, including exclusivity agreements such as the tied house.
Potential violations need to be assessed on a case-by-case basis in court. As a
rule of thumb, the so-called “de minimis” rule exempts those arrangements
among players that are too small to influence the market, where “too small”
is typically interpreted as “less than 15% market share” (see Communication
of the European Commission 2001/C 368/07). However, in case most pubs
are tied, a stricter threshold of 5% market share is used. The rationale is that
the risk of “foreclosure” is greater if most pubs are tied. In practice, larger
brewers will typically make arrangements with antitrust authorities to make
the exclusivity provisions less strict (e.g. by allowing some beers of competing
brewers in tied houses), or by reducing the duration of the contract (Atsma,
2003).
10. These solutions (retail price maintenance, quantity forcing, two-part
pricing) assume that the brewery and the pub remain two separate firms.
Another solution would be for the brewer to fully own the pub (using
employees of the brewery to run the pub). This gives the brewer complete
control over the pricing decision, thus avoiding the double marginalization
problem.

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12
Turbulence in UK Public House
Retailing: Ramifications and
Responses
David Preece

1 Introduction

UK public house retailing (PHR) has experienced a good deal of turbu-

lence since the early 1990s (see, for example, Spicer et al., 2012; Slade,
2011; Preece, 2008). The major contributory factors are the 1989 ‘Beer
Orders’ (arising out of the Monopolies and Mergers Commission’s
investigation into the UK brewing and public house retailing sector);
changing socio-economic contexts; technological innovations; the
smoking ban; taxation and beer duty; extensive regulation and bureauc-
racy; the development and extension of strategic branding; cheap
booze in supermarkets (often sold as a ‘loss-leader’); and, from the
later 1990s, the increasingly widespread incidence of financialization
in the sector.
Against this backdrop, pub companies, the ‘regional brewers’/
pub operators and the larger national/international brewers have
responded in a number of ways. The large public house retailing
companies (or ‘pubcos’) originated during the 1990s and continued to
expand their estates until a few years ago (burdening their companies
with debt in the process), since which time they have been reducing
the size of their estates. Other responses of pubcos, brewers and brew-
er-pubcos have included selling off/closing breweries; churning pub
estates; acquisitions, mergers and takeovers; exiting brewing; devel-
oping new ‘offers’/brands; and extending opening hours. Comparing
the current situation to the early 1990s, two main outcomes have been
a much-reduced estate of UK public houses (down from c. 60,000 to
c. 48,000) and a number of pubs struggling to survive. In particular,

247
248 David Preece

the ‘private equity’/financial capital – backed pub companies (given

the downturn in the on-trade over recent years, the 2007/2008 finan-
cial crisis and other contextual changes referred to above) have been
struggling to repay their debts and have been selling off significant
portions of their estates.
These developments have created a situation whereby the freehold
of many of the extensive number of pubs on the market can be bought
cheaply, for example for £100,000–£400,000, depending on location,
existing trade, the state of the pub and so forth. Sometimes the pubs
are bought by other PHR companies or brewer/pub retailers, sometimes
by an independent pub operator, but often they are closed down and
replaced with a supermarket chain outlet, residential housing, betting
shops, or even a church.
The chapter will focus upon UK PHR. This is for reasons of word-count
and focus, not because there have not been significant developments
and changes in UK brewing as well over recent years, which indeed there
have, not least a major expansion in the number of micro-breweries
(brewing predominantly real ales) which, as of April 2015, total over
1,400, with a concomitant increase in the number and range of beers.

2 Turbulence and change in UK public house retailing:

early 1990s to date

Public houses, or ‘pubs’ for short, are a ‘third place’ (Oldenburg, 1999),
distinct from homes and workplaces, where people meet to relax, chat,
gossip, play games, eat, drink and exchange local knowledge and intel-
ligence. Public house retailing in the UK can be traced back to at least
Roman times, that is to around 2,000 years ago (see e.g. BLRA, 1996;
Jackson, 1976; Brown, 2004). Jennings comments that:

Historically, there were three main types of establishment for the sale
of alcoholic drink: the inn, the tavern and alehouse. All three dated
back to the medieval period and were the designations used in a
government survey of 1577, which provides the first detailed informa-
tion we have on drinking places. The term ‘public house’ only came
into general use in the late seventeenth century. Its precise origin is
unclear, but it seems likely that it derived simply from a contraction
of ‘public ale-house’, as this form was also employed. ... The term, it
would seem, was [thus] used in an overlapping way for inns and more
substantial alehouses, and in an inclusive way to cover all types of
establishment. (2007, p.19)
 Turbulence in UK Public House Retailing 249

Inns had as their primary purpose the service of travellers, but also
sold ale and food. The tavern can be traced back to the Middle Ages,
and was a specialist establishment for the sale of wine (as well as ale).
Greatly outnumbering inns and taverns were alehouses, which ‘ ... were
common by the early fourteenth century in town and country. Based
on the 1577 survey, estimates of between 20,000 and 24,000 alehouses
for the county as a whole [England] have been made’ (Jennings, 2007,
p.22). Until the emergence of commercial brewers in the seventeenth
and eighteenth centuries, ale was mostly brewed in the alehouse itself
or its outbuildings.
Since those very early days, the sector has mostly experienced
incremental change, but has from early times always been subject to
regulation by the monarchy and, later, national (and in recent years,
supranational, e.g. the EEC) and local government. An understanding
of the UK history of brewing beer and the buildings/public houses in
which it is consumed goes some way to helping us contextualize where
we are today (think, for example, of those ornate and characterful public
houses on the Campaign for Real Ale’s (CAMRA) ‘heritage list’ which
survive today from the Middle Ages). However, this chapter is not a
history of UK PHR (or brewing), but, rather, our point of departure is
to outline and examine what has been happening since the early 1990s
following a piece of legislation which, in its unfolding impact since
then, has had a profound impact upon UK PHR – one so substantial that
it is not an over-statement to describe what has occurred as a ‘transfor-
mation’ of the sector. In the wake of this legislation, there have been a
number of other socio-economic developments during the 20-plus years
up to the present time which have also contributed to the turbulence
the sector has been – and still is – experiencing. These developments can
be summarized under the following headings: (i) the 1989 ‘Beer Orders’;
(ii) a changing socio-economic context; (iii) public house investment
and branding; (iv) financialization.

3 The 1989 ‘Beer Orders’

Following a brief recovery in beer consumption after the Second World

War, a downward trend reappeared and continued until the late 1950s,
followed by an increase in beer consumption through to a peak of
42.1 million barrels in 1979 (Gourvish and Wilson, 1994, pp.451–452)
and a downturn during the 1980s. There was intensified competition
to maintain/increase market share in a context of declining volumes,
and this led to takeovers and mergers of brewery companies, and over
250 David Preece

time the formation of six major companies which dominated the sector
from around the early 1960s to the early 1990s. Millns has noted: ‘The
UK brewing industry and beer market changed fundamentally between
1945 and 1995, with the main shifts coming in the rapid concentration
of the 1960s mergers, in increasing diversification away from concentra-
tion on beer production, and in the reduction of vertical integration
through the 1989 Beer Orders’ (1998, pp.157–158).
The UK beer and PHR industry at the end of the 1980s, then, was verti-
cally integrated (see Crompton, 1998). The ‘Big Six’ brewing companies
of Bass, Scottish & Newcastle, Courage, Allied, Grand Metropolitan and
Whitbread were responsible for the entire process from buying the barley
and hops, brewing the beer, distributing it to the pubs and selling the
beer to the customer. They owned over 70% of the UK estate of managed
and tenanted pubs, as well as exercising indirect control through free
trade loan accounts and grants. For example, in the late 1980s Bass
owned around 7,500 pubs, supplied 20% of the UK beer market and had
a free trade loan portfolio worth hundreds of millions of pounds.
The Department of Trade and Industry’s ‘Beer Orders’ of 1989, arising
out of the Monopolies and Mergers Commission’s investigation into the
UK brewing and PHR industry, was the chief instigator of change in
the sector during the 1990s. The Commission stated that ‘A complex
monopoly situation exists in favour of the brewers, with tied estates and
loan ties ... restricting competition at all levels’ (Monopolies and Mergers
Commission, 1989, p.4). The Commission had in mind in particular
the national ‘big six’ companies which dominated the sector at the
time. The Orders required brewers owning more than 2,000 on-licensed
premises to, by November, 1992, either cease brewing, or sell, or lease
free from any tie, half the pubs they owned over the DTI-imposed limit
of 2,000. The stated objectives were to increase competition and improve
customer choice, and thus drive down prices and achieve better value
for customers. Tenants were given the first option to buy their pubs if
they were put on the market by one of the nationals, and many indeed
did so.
Three main responses from the ‘Big Six’ national brewer/retailers
followed: Scottish & Newcastle Breweries decided to remain in both
brewing and PHR, but as it had the smallest estate of all the nationals,
and did not reach the 2,000 ceiling, it did not need to divest itself of
any pubs. Another response was a ‘pubs for breweries’ swap by Courage
and Grand Metropolitan, with the former taking over the ownership of
the latter’s breweries and the latter taking over the former’s pubs and
 Turbulence in UK Public House Retailing 251

then entering into an exclusive supply agreement of Courage beers

in Grand Met pubs. Bass and Whitbread decided to remain in both
brewing and PHR, but as they owned well above the 2,000 ceiling,
they had to sell off a large number of pubs. Bass had to sell 2,680
pubs in less than two years. They were bought, along with all the pubs
released by the other brewers, by individuals and pub retailing chains
(see Millns, 1998; Crompton, 1998; Preece et al., 1999; Knowles and
Egan, 2002). This release, over a short period of time, of thousands of
pubs onto the market meant that:

there were opportunities for entrepreneurs and for companies to

acquire assets at reasonable prices and with reasonable prospects
of being able to manage these premises in such a way as to make
money through pub retailing or through pub leasing. Several new
pub retailing companies were formed at this time. Most of them had
a bias towards a tenanted or leased estate, for that was the kind of pub
that was being disposed of ... the new companies acquiring the assets
simply had to make money. They had to be responsive, they had to
be competitive and they had to be ‘fleet of foot’ in order to survive
and grow their businesses. (Preece et al., 1999, pp.12–13)

As Knowles and Howley (2000, p.366) comment:

The result of this order [the Beer Orders, qv] was that 11,000 pubs
were subsequently sold by the big six brewers, triggering a radical
overhaul of pub estates and a restructuring among the big brewers.
At the same time, smaller, more entrepreneurial companies found
it easier to enter or expand within the market, leading to increased
competition and more niche operators. This whole process has had
the effect of revitalising the pub industry by paving the way for more
innovative pub and bar formats to emerge.

Lashley and Rowson (2002) classified the types of public house retailers
that emerged after the Beer Orders as: (i) national retailer with brewing;
(ii) national retailer with no brewing; (iii) regional/local retailer with
brewing; (iv) regional/local retailer with no brewing; (v) (totally)
independent operator/freehouse. Just three years after this paper was
published, category (i) no longer existed and some companies in
category (iii) had spread their pub estates out of what were formally
their original regional heartlands (Greene King and Wolverhampton &
252 David Preece

Dudley [now called Marstons] in particular), and have continued to do

so since this time.

4 A changing socio-economic context

The early 1990s was a period of limited growth in real personal disposable
income in the UK, an increasing level of unemployment and super-in-
flation of house prices, which resulted in low levels of consumer confi-
dence. During the period 1990–1996, the home entertainment market
(video recorders, rented videos, etc.) grew by over 10% per annum, while
the consumption of alcoholic beverages by volume in retail premises
declined overall (while beer volumes were down, however, revenues
were maintained through price increases; see Pratten, 2007a, b, c).
Thus, PHR companies’ only possibility for growth was through gaining
market share from competitors. The predominant view in the sector at
the time was that if net growth was to be achieved, it would be through
food sales, entertainment machines, consumers trading up to premium/
higher margin products, and a reorientation around market segments
such as country inns with a food emphasis and branded city town bars.
Reasons for the beer volume decline included demographic changes
(especially the relative decline in the proportion of 18–25-year-olds in
the population over most of this period), changing consumer lifestyles,
the influence of the health lobby, and the switch from on- to off-trade
consumption, especially the purchase of cheap alcoholic drinks in super-
markets (reflecting changes in consumer lifestyles towards home-based
leisure activities). The view emerged that other pub market segments
needed to be developed or expanded to compensate for this loss of trade,
such as families, young women and retired people. This led to calls for
enhanced pub investment targeted at such segments. At the same time,
the policy of sustaining revenues by increasing prices in the on-trade
meant that the increasingly cheaper products in the off-trade became even
more attractive. For those companies that had chosen to remain in both
brewing and retailing, this was to the benefit of their brewery divisions,
but it was not helping their PHR divisions, both of which belonged to the
same PLC, or were in a ‘strategic alliance’ with a brewery company.
Up until and during the earlier part of the time period being consid-
ered, the predominant view in the PHR sector was that:

consumers were individuals, and would not want to be considered as

‘typical’ of a target-market segment for a brand. It was believed that
customers wanted a ‘personal relationship’ with the landlord, to be
 Turbulence in UK Public House Retailing 253

treated as individuals ... they were ‘locals’ in their local. If brands were
to succeed and attain scale and scope economies, then this accepted
wisdom had to be broken down: this was to become the objective of
brand management in the 1990s. (Preece et al., 1999, pp.18–19)

5 Public house investment and branding in the 1990s

Attempts to increase sales volumes and profits were made by the introduc-
tion of new concepts/brands, the acquisition of more pubs, the building of
new pubs and the refurbishment of older pubs. Of course, a major inhibitor
for some of the nationals here was the DTI’s imposed cap. If a company was
at its maximum allowed estate, it would only be able to acquire or build new
pubs if it sold some of its existing estate. The major disposal programme
imposed by the Beer Orders meant that there was a unique opportunity
to improve the overall quality of a company’s estate by disposing of those
pubs with the lowest sales volumes. Through an emphasis on larger pubs,
it was hoped that the cost of sales would be reduced via the spreading of
‘fixed’ costs over higher volumes. From this time period on, disposals and
estate churning became an everyday aspect of PHR companies’ corporate
strategy, the effect of which was to create a ‘virtuous circle’ of investment in
those pubs or parts of the business that were achieving the highest margins
and profits, and disinvestment at the opposite end of the estate. In the
latter case, either the pubs were sold off to another organization, or were
(initially at least) retained in the form of tenancies, for

the more marginal properties were let out to tenants as a way of

securing outlets for the beer product and at the same time tapping
into the entrepreneurial, managerial and financial resources of the
small firm. (Lashley and Rowson, 2002, p.354)

During this period there was also an increased amount of capital invest-
ment in some of the PHR estate – much of it facilitated by the emergent
new/IT technology – in the form of back-office computer workstations,
beer lines measurement and monitoring equipment, EPOS systems and
so forth. The latter was usually linked to the ‘back-office’ computer and
into company databases (this had significant implications/possibilities for
labour/workplace monitoring and control, and hence for the pub auditing
role/function, and, in some respects at least, gave the publican more imme-
diate day-to-day control over his/her pub. See Preece et al., 1999).
Thus, by the mid-1990s, some of the national companies had exited
from brewing altogether, while there had been a significant increase in
254 David Preece

the PHR company sector, with 22 PHR chains owning over 13,000 pubs
in 1995 (Millns, 1998). In 1989 the vertically integrated brewers owned
almost 45,000 pubs; by the end of 1994 this had been reduced to under
22,000 (Pressnell, 1995, p.14). Millns observed in 1998:

Convergence and diversification are likely to continue. Brewing has

already converged with other industries in terms of adopting a mana-
gerial rather than family/craft guild approach to the business, being
market and brand-led rather than producer-dominated, tending to
separate production and retailing, and viewing itself as part of a
wider sector, in competition with other forms of leisure for consumer
spending. Diversification will continue as brewing companies give
different answers to the strategic question of what business they are
in, and fewer answer that they are simply brewers of beer. (Millns,
1998, pp.158–159)

This prediction has, of course, been borne out by subsequent events.

People working in and writing about the sector now talk in a ‘matter-
of-fact’ way about ‘pubcos’ and ‘pub chains’, rather than ‘brewers’,
unless, of course, they are specifically referring to brewing companies.
The newly formed PHR companies were more responsive to increas-
ingly more sophisticated consumers, and were prepared to challenge
the established norms and expectations of what had hitherto been a
rather conservative industry. Consumers had become more discerning
and fickle and less loyal towards an established offering. The industry
response in terms of capital investment and refurbishment soon mopped
up much of the finance which had been generated through the national
companies’ public house disposal programmes. The introduction of
public house branding (going beyond having the brewery/pub retailer’s
sign at the door, a long-established practice still to be found with the
regional brewer/retailers) for all or part of a pubco’s estate began to gain
some momentum from the mid-1990s, examples being country inn
dining destinations, Irish and Australian theme pubs, ‘chameleon’ pubs,
‘heritage’ pubs, real ale pubs and female-friendly and family-friendly
pubs. This was an attempt to gain some customer loyalty/affiliation in a
context where consumers had become more fickle and discriminating,
and where alcohol could be purchased much more cheaply in the off-
trade for consumption at home with friends/family, perhaps while
availing oneself of the new home entertainment offerings.
From the later 1990s the trend towards branding, especially in the
managed estates, gathered momentum, as did the sale or conversion
 Turbulence in UK Public House Retailing 255

Table 12.1 Ownership of UK public houses by type of

operator

1989 2004

National brewers
Tenanted/leased 22,000 0
managed 10,000 0
Subtotal 32,000 0
Regional brewers
tenanted/leased 9,000 5,972
managed 3,000 2,617
Subtotal 12,000 8,589
Independents
tenanted/leased negligible 23,857
managed negligible 10,268
freehouses 16,000 16,850
Subtotal 16,000 50,975
GRAND TOTAL 60,000 59,564

Source: ‘Pub Companies’, Second Report, 2004/5, House

of Commons Trade and Industry Committee, HC 128–1,
21/12/04, p. 8.

of ‘community-managed’ houses to tenancies or leases. Much of the

remaining national brewer/retailers’ managed estate was either sold
or converted from community-based businesses to high street outlets,
restaurant operations or lodges. These disposals gave a fillip to the crea-
tion of more, mainly leased-based, PHR companies. The days of the
managed house as the ‘shop window for the brewery’s products’ had
long since gone. Table 12.1 gives an indication of the outcome of the
transformational change which had taken place in UK public house
ownership over the 15-year period between 1989 and 2004.

6 Financialization

In order to understand the transformation of public house retailing

since the later 1990s, it is essential to discuss the ‘financialization’ of the
sector, which has been a, if not the, main cause of this continuation of
change and turbulence in the sector. In ‘financialized economies’ (Froud
et al., 2002; Williams, 2000):

New forms of financial competition reflect the requirement to meet

the expectations of the capital market as much if not more than
256 David Preece

those of consumers in the product market. Capital markets are no

longer merely intermediaries in relations between economic actors,
but a regulator of firm and household behaviour. (Thompson, 2003,
p.366)

In the increasingly deregulated and globalized market places of recent

years, the search for new and/or enhanced ways of satisfying share-
holders has produced a shift towards the dominance of financial circuits
of capital (Lazonick and O’Sullivan, 2000; O’Sullivan, 2000). At the same
time, the increased dominance of institutional investors has ‘ ... acceler-
ated the stronger emphasis on anticipated future cash flows and dividend
payments, appreciation in share price, new metrics of measurement and
rates of return above other means of investment as markers of financial
performance’ (Thompson, 2003, p.366).
Thus, the financialization of (much of) the UK PHR sector is by
no means atypical and is expressive of the way in which ‘shifts in
the circuits of capital are changing the character of corporate change
itself ... away from internally oriented, commitment and values-based
transformational change, to one that is based on the financialization of
change in response to the new dynamics of capital markets.’(Thompson,
2003, p.367, emphasis in original). Financialization led, inter alia,
to the emergence of two very large lease-based PHR companies
(Enterprise Inns and Punch Taverns) and a number of smaller ones.
Guy Hands was the leading early instigator and player in this process.
During the late 1990s he was the UK Chief Executive of The Principal
Finance Group, part of Nomura Equity Investment. His acquisition
strategy was based on the maxim that pubs are excellent generators
of cash. In leasehold pubs, cash flows are expected to be generated
on a regular basis, primarily because of the rental payment by the
lessee (otherwise they have no business or, often, home), and drinks
sales (the lessee, in the arrangement we are discussing here, is ‘tied’ to
pay the PHR company for his/her supply of beer, with the company
getting the beer from the brewers at one (discounted) price, and then
charging the lessee a higher (‘above market’) price. Nomura used the
projected ‘near certainty’ of these cash flows, as measured by Earnings
before Interest, Tax, Depreciation and Amortisation (EBITDA), as a
new way of valuing pubs and borrowing money (i.e. taking out loans
to fund the pub purchases, hence incurring debt). The old ‘site and
bricks and mortar plus annual barrellage’ valuation method produced
one figure at the time (say £300,000), whereas notionally capitalising
 Turbulence in UK Public House Retailing 257

the cash flows produced a higher figure (say £340,000). Employing

this methodology (see note 1), Nomura was successful in several pub
estate purchasing deals, to the extent that at one time they were the
UK’s largest pubco, and Nomura’s methodology was adopted by a
number of other PHR companies. Table 12.1 shows how the number
of ‘Independent/tenanted and leased’ (i.e. ‘pubcos’) pubs grew from
‘negligible’ in 1989 to nearly 24,000 in 2004.
When discussing PHR financialization and securitization,1 the Finance
Director of a privately owned PHR company observed in an interview:

And what has happened now is that it is just a pure financial punt at
the end of the day. It has got nothing to do with breweries, almost
nothing to do with pubs ... when we were trying to do our various
deals [with finance houses and investment companies] we talked to
similar people and we discovered that they were not bothered with
what the business was ... All they were interested in was ‘could the
business be securitised?’, because that is the way they could get the
money out and they could make their return, and therefore pay the
most to secure the business. Just had to be a business that had a
secure regular income, because that is what they would secure it as.
But it has all just been driven by this desire to securitise the income of
the business, to get more and more money and cheaper and cheaper
costs, to have more and more pubs selling more and more beer and
getting better and better discounts. But it is all just pure finance.
(Preece, 2008, p.1116)

Why has securitization not been applied to the same extent in managed
house estates? As the same Finance Director commented, a key reason is
that there is no rental income for the PHR company:

I mean, well it only works for tenanted pubs. I think people have
securitised managed pubs, but at a much lower value, and the reason
they do it on tenanted pubs is because they believe – I mean this is
the crazy thing about all of this – they believe that because you have
got a chunk of the income as rental coming in, then they just see
rental income as being secure. They do not seem to recognise that the
tenant can only pay the rent if he is selling the beer ... well, what that
is finishing up is if you had all your income in rent, that would be
absolutely fantastic to hear. That is called a property company, that is
not called a pub. (Preece, 2008, p.1116)
258 David Preece

The key features, then, of this new ‘pubco’ business model were:

● the pubcos purchase pubs through financialized debt

● they then lease the pubs to lessees/tenants via leases/tenancies of
varying length and conditions
● beer and certain other supplies must be purchased from the pubco or
suppliers nominated by the pubco
● rent is paid, and is reviewed (usually upwards) at least annually
● pubcos enjoy the ‘right of entry’ to the lessees’ premises
● the pubco buys its beer from breweries in bulk at discounted prices,
which it then sells onto its lessees at a higher price.

7 Ramifications and responses

The new pubcos’ business model did not work out as effectively as they
anticipated and planned. There are a number of reasons for this, many
of which have been mentioned already. These include: decreasing beer
volumes in the on-trade; cheap alcohol in supermarkets; taxation on
alcohol and pubs (one piece of good news is that the ‘duty escalator’ on
beer was abolished in the April 2013 budget and duty has been reduced by
1p/pint each year since then); extensive regulation of practice: bureauc-
racy, monitoring and control of pub operations; enhanced home enter-
tainment facilities; and last but not least, the economic downturn in
the economy and financial crisis of 2007/2008. These factors have also
affected the remaining brewer-retailers and freehouses, of course, but
the former and many of the latter have not been embroiled in moun-
tains of debt, and the former have guaranteed outlets for their beers
and other products. The upshot of all this is that the two largest pubcos
in particular have been struggling financially to repay their debts and
have addressed the matter in three main ways: (i) by selling off many
of their pubs, (ii) by setting the rents for many of their lessees at levels
that the latter have found difficult, if not impossible, to meet, given the
level of their pub’s activity and hence cash flows, (iii) by maintaining
the ‘tied’ system, whereby their lessees have to purchase their beer from
the pubco and the pubco makes money from them by charging a higher
price than a) it has paid to the brewers for the beer, b) the publican could
get by directly buying beer on the open market (as freehouses do). See
also Deconinck and Swinnen, this volume.
Given the above, many of the pubcos’ lessees have been struggling
to remain in business, and many have indeed chosen or been forced to
leave their pubs, whether because the pub was to be sold/closed, or the
 Turbulence in UK Public House Retailing 259

pubco wanted a new tenant in the pub, or the tenant decided ‘enough is
enough’ and chose to leave the sector/company. This in turn helped spark
the establishment or attention of a number of campaigning and political
groups, such as the All Party Parliamentary Save the Pub Group (APPSPG)2,
the ‘Fair Pint Campaign’, the Campaign for Real Ale, and the ‘Fair Deal For
Your Local’ campaign (which comprises the foregoing three groups along
with the Federation of Small Business, Forum for Private Business, UNITE
and GMB unions, and ‘Justice for Licensees’). These groups and organiza-
tions have been campaigning to save the British pub, with the overall
estate continuing to fall at between 18 and 30-plus per week. Of course,
some pubs are sold to other pub operators and some are new builds, but
many are sold for development or alternative use and many are demol-
ished, the net effect being a continued overall decrease in the UK estate.
Examples of campaigning issues are the calls these and other pressure/
consumer groups have made for the establishment of a ‘statutory code’
for rent reviews (arguing for the option of an ‘open-market rent’ being
available to lessees) and for the abolition of the tied house system.
Largely as a result of the efforts of these groups and the APPSPG,
the UK government consulted the sector on pubco reform. Following
much campaigning and lobbying (from a range of interested parties,
not least the publicans and pubcos – the large pubcos having opposed
anything other than ‘voluntary/discretionary’ reform), and in particular
the galvanizing efforts of Greg Mulholland in the House of Commons3,
following a vote in the House of Commons, a clause was inserted into
the Small Business, Enterprise and Employment bill in November 2014
which enshrines in law that tenants ‘tied’ to a pubco which has over
500 pubs will in future be able to choose a ‘market rent only’ (MRO)
option (i.e. they can choose not to be also tied with regard to their
beers). Tenants of these large pubcos will have the right, at the renewal
or review of their lease, to request an independent assessment of their
rent, and to choose to have an MRO only, and not a beer tie as well (they
might, however, choose to have both). The bill received Royal Assent on
26 March 2015, with the requirement that the statutory code, along
with the appointment of an independent adjudicator, be in place by
May 2016 at the latest. The Adjudicator will investigate ‘unfair practices’
and disputes with tenants/lessees and pronounce on the course of action
to be taken. Also, a ‘Pubs Advisory Service’ will be established to advise
tenants and lessees on the MRO option. The changes will be phased in
over a five-year period, and exemptions will be allowed for ‘genuine
franchise agreements’ (where, of course, no rent is payable) and where
pubcos make a ‘significant’ investment in the pub.
260 David Preece

Another response to the turbulence experienced in UK PHR in recent

years has come directly from pub customers and their local communi-
ties. There has been local community opposition to proposals to close
pubs, especially in rural areas. Since 2012, this opposition has been
aided by ‘Asset of Community Value’(ACV)/ ‘Community Right to Buy’
legislation, which gives community groups six months to draw up and
submit a case to retain a pub. This will only apply where the pub has
already been listed as an ACV with the relevant local authority, and
it also requires members of the local community to get together and
engage in such action. If there is no such ACV or no preservation order
(e.g. as a ‘site of historical interest’) for a given pub, developers generally
experience little difficulty in buying a pub from, say, a pubco, closing
it down within days or weeks, and either converting it to a restaurant/
retail outlet of some form or literally knocking it down and replacing it
with a different building, for example a Tesco or Sainsbury ‘local’. Even
with ACV pubs, it has still been possible to convert them to alterna-
tive use, although from 6 April 2015, new planning protection for pubs
has made ACVs subject to full planning applications should they come
under threat from demolition or change of use.
One key reason for local opposition to a pub closure is that it may
be not just the last public house, but also the last public facility in the
area (see, for example, Muir, 2012; Cabras, 2011; Cabras and Reggiani,
2010). Sometimes the local response has been that members of the
local community have purchased the pub from the pubco or brewery,
and have then refurbished and reopened it. There are instances where
such pubs have been established as cooperatives (registered under the
Industrial and Provident Societies Act, 1965 or, since 2011, under the
Co-operative and Community Benefit Societies and Credit Unions Act,
2010) and run thereafter for the benefit of the members and the local
community (the two being synonymous to a greater or lesser extent).
ACV status has facilitated the purchase of pubs by local communities by
granting them a six-month period of time to organize themselves into
a planning/working party group, mobilize local and wider communi-
ties, raise the capital required and make the necessary arrangements to
purchase and renovate the pub.

8 Conclusions

So, what is the current situation of UK brewing and public house

retailing? Although this chapter has focused upon the latter, it is worth
noting that as a result of extensive takeover and merger activity since
 Turbulence in UK Public House Retailing 261

the early 1990s, the pub and non-pub (e.g. supermarkets, restaurants)
beer supply markets are now dominated by the major international
brewing corporations of Molson Coors, SABMiller, Carlsberg, ABInBev
and Heineken (none of which are UK-based or owned), hence there are
still strong monopoly elements here despite the intention of the 1989
Beer Orders. Some of the regional brewer-retailers of the early 1990s still
remain as such (although there has been some consolidation here also),
for example Hall & Woodhouse, Harveys, Holts, St. Austell, Arkells, and
Adnams. Others are now ‘nationals’ rather than ‘regionals’, in particular
Greene King and Marstons. There has been a major expansion of mini-
and micro-breweries over the last few years, from a handful in the early
1990s to over 1,400 as of June 2015, with over 100 such breweries in the
county of Yorkshire alone, and real ale (the focus of the great majority of
the micro- and mini-brewers) has been holding its own and expanding
its share in a declining on-trade.
As for UK public house retailing, this has now reached a watershed.
As we have seen, the major, securitized, pubcos are selling off their pubs
and thus reducing their estates, and, given that many of these pubs are
not reopening as pubs owned by other people/companies, the overall
UK estate is reducing. At the same time, many of the pubs that are still
open are struggling for the reasons outlined earlier, and a number of
interest and consumer groups are drawing attention to this serious state
of affairs and are campaigning for their retention, and for their staff,
tenants and customers (there is a certain irony in that the UK now has
more breweries than it has had for over 60 years, and yet the number
of pubs in which to enjoy their beers has reduced significantly). The
nature and structure of ownership of the UK’s public house retailing
sector today is such that continued volatility and turbulence seem inevi-
table, and it is difficult to see how it could be otherwise as long as a
large proportion of the estate continues to be owned by financial insti-
tutions, from whose position pubs are seen quintessentially as genera-
tors of cash and assets to be bought and sold. It is not all bad news for
pubs, however, as there some examples of the British pub crawling from
the wreckage, for example the successful Wetherspoon (managed house)
chain of over 800 pubs, the many freehouses and regionals that have
refocused their offer around food as well as beer and wine, and the local
community and cooperative pubs. A certain amount of optimism may
be justified given the abolition of the duty escalator, the reduction in
beer duty of 1p/pint in the last three budgets, the ACV legislation, the
more discerning customer demanding and enjoying an ever-changing
choice of real ales, the increasing incidence of micro-brewers opening
262 David Preece

and extending their own estate of pubs, and, not least, the hoped-for
positive impact of the MRO option for pub lessees. Tom Stainer, Interim
Head of Communications at CAMRA, has commented: ‘The combined
impact of the code, adjudicator and the genuine choice between a market
rent only deal or a tied deal will help ensure the return of a thriving pub
sector’ (What’s Brewing, 2015).
How might/will the major pubcos (those with over 500 tenanted/
leasehold pubs) respond to the introduction of the MRO option and
Adjudicator? It is too early to offer any definitive observations, but
already there are some indications as to what actions they will take. As
Ed Bedington observed in The Publican (1 May 2015), the MRO:

has the potential to disrupt and change the marketplace – but thereby
has the potential to open up new opportunities. ... [The major pubcos
have the opportunity] to look at [their] operations and build new,
stronger relationships with tenants. ... Changing the [business] model
may even bring in new business. The legislation is opening the pubcos
to greater competition.

In May 2015, Punch Taverns said that it believes that the new pubs code
is unlawful, put 160 of its pubs up for sale, and announced that it is
reviewing new managed and franchised models and new MRO leases,
and said that it is deferring some capital investment projects. In the
same month, Enterprise Inns announced a five-year plan which includes
the disposal of over 1,000 of its pubs, the conversion of 850 to managed
outlets and the aim to operate a ‘commercial property business’ with
around 1,000 assets. At the same time, it argued that it will (still) be
able to generate ‘significant’ income from its tied tenancy estate, and
will continue to offer tied leases of up to five years. The uncertainty
continues! Some lessees are now wondering, for example, whether they
will be offered five-year rather than fifteen-year agreements, others
who would like the MRO option whether their pub will be put in the
‘commercial property’ section. What sort of pubco are lessees going to
be dealing with in the future? There is undoubtedly going to be further
sectoral restructuring, perhaps with the larger regional brewers and pub
retailers taking their tied estates close to the 500 pubs threshold, while
those companies with more than 500 pubs may look to franchise agree-
ments (which fall outside the scope of the MRO option as we saw earlier)
and managed estates as they continue to expand.
A recent report by Oxford Economics for the British Beer and
Pub Association (BBPA, 2015) has estimated that brewing and pubs
 Turbulence in UK Public House Retailing 263

contribute £22b to the UK economy and support around 870,000 jobs,

44% of which are held by people under the age of 25. Of course, it is
not just the economic contribution that is significant – so is the contri-
bution of pubs to the social enjoyment and well-being of pub visitors.
For many customers, especially in rural areas, the visit to the local pub
is often the only time in the week that they meet and converse with
others; football, cricket, darts and dominoes teams are formed and
meet in the pub (often enjoying sponsorship from the pub); pubs act
as a ‘third place’ (Oldenburg, 1999; see also Markham and Bosworth,
this volume, and McLoughlin and Preece, 2010) where one meets, but
does not have to be concerned about feeding and watering, friends and
relations, but also where one meets new people; networks and contacts
are made for mending some household item/repairing the car, getting
a lift and so forth; facilities are available for people on the move (e.g.
Internet/Wi-Fi); the pub is where the village library and/or the post
office and/or village shop, and so forth, is located. So, while the UK
public house estate will always be changing and developing, and none
of us can predict the future with any degree of certainty, we can say
that what actually unfolds over the coming years will be the result
of the decisions and actions of a range of actors: brewery and public
house companies, politicians, publicans, pressure/consumer groups
and, not least, the preferences and choices of the general public. Will
more of them be tempted to visit and enjoy (and more often) the
facilities offered by the British pub, where the range of facilities and
opening hours has been extended, the beer and food choice in many
of them enhanced and, last but not least, they find a publican who is
able to make a decent living?

Notes
1. This financial strategy involves borrowing money on a short-term basis to
acquire pubs, and then later (through ‘securitisation’) converting the loans
into less costly medium and longer-term financial instruments, as and when
the pub estate confirms its EBITDA projection. The cheaper loans are a result
of the lower level of risk which has now been confirmed through EBITDA,
such data being required by longer term lenders in order to securitise the
debt. In essence, securitization is a process whereby future cash flows from
the PHR’s asset base (such as rental income) are used as financial backing for
investment bonds on international bond markets. As these longer-term debts
replace more expensive short term ones, they help generate additional cash
balances for further acquisition and expansion. Thus the possibility arises to
move ever ‘onwards and upwards’ in a pub-acquisition spiral.
2. Chaired by Greg Mulholland, Liberal Democrat MP for Leeds North West.
264 David Preece

3. The MRO only option clause was added to the Bill despite the government
whipping its MPs to vote against it, following a vote triggered by Mulholland,
with 284 MPs in favour and 269 against the first and only such instance in the
2010–2015 Parliament.

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and Society, 29(1): 1–12
13
The Village Pub in the Twenty-First
Century: Embeddedness and the
“Local”
Claire Markham and Gary Bosworth

1 Introduction

The pub, or colloquially “the local,” has been a familiar feature of English
villages for many centuries. As with European cafés or American bars
and inns, village pubs provide recognisable meeting places in their rural
communities and form part of England’s cultural history (Kingsnorth,
2008). While their portrayals may seem timeless and consistent, the
reality is that state legislation, demographic changes and the growth of
the capitalist economy have all led to significant economic and social
impacts upon English village pubs. Much has been written on the devel-
opment of the pub (Haydon, 1994; Jennings, 2007; Pratten, 2007a, b,
c) but rather than reiterate these, the aim of this chapter is to look at
how economic and social transitions have shaped the function of village
pubs today. The importance of the chapter resides in adding to our
knowledge about the village pub of today and how it is perceived and
experienced as a consequence of complex and interrelated economic
and social factors. At a time when rural pubs have been closing at a
rate of 13 a week (Muir, 2012), this can inform publicans, campaigners
and policymakers alike about the key challenges and opportunities for
village pubs in the future.
For the purposes of this chapter, any premises licensed to sell alco-
holic drinks in a rural settlement smaller than a town is considered to
be a “village pub.” We focus on the “village” pub because the commu-
nity that it serves has historically been more clearly defined and because
embeddedness is considered to be a stronger feature of rural than of
more urban areas (Bosworth and Atterton, 2012; Reimer, 1997). Today,
village pubs are more than just places where drinks are served as a large
number also include restaurants, some have taken over other village

266
 The Village Pub in the Twenty-First Century 267

services such as shops and post offices, and others have diversified
to have micro-breweries or visitor accommodation in an attempt to
sustain the business (Plunkett, 2011; Cabras, 2011, 2013). In light of
these changes, this chapter explores the contemporary significance of
village pubs as social meeting spaces, as parts of the rural economy and
as familiar images within their communities.
We explore these interrelated social and economic influences by
drawing on Granovetter’s (1985) concept of embeddedness which essen-
tially explains that economic decisions are always subject to individuals’
social influences – thus the decision to buy a drink in the village pub
is not taken as a purely rational economic decision based on the price
of the drink but is wrapped up in deeper social and cultural meaning.
Many scholars have argued that this feature is stronger in rural areas
because of the character of overlapping social relations, close-knit
communities and common behavioural expectations (Munoz et al.,
2014; Tonnies, 1955). Others have inferred that this creates a form of
“local embeddedness” where connections to the place are strengthened
by virtue of interrelated social and economic influences (Hess, 2004).
In particular, it has been argued that entrepreneurs can benefit from
being “locally embedded” as strong social connections within a locality
can increase loyalty, knowledge flows and cooperative behaviour (Jack
and Anderson, 2002), competitiveness and ultimately success (Hess,
2004). However, there are also dangers that can accrue from these local
connections where a lack of openness, a high degree of inflexibility and
a lack of adaptability can result in “a situation where social norms and
obligations may override economic arguments” (Atterton, 2007, p.240),
sounding a caution for today’s village pubs.

2 Methodology

This chapter is informed by literature on the history, sociology and

economics of pubs and of wider rural communities. Additional insights
are provided from 66 in-depth interviews carried out between 2010
and 2013 as part of a grounded theory study which explored how rural
inhabitants and connected actors perceive and experience the village
pub (Markham, 2014). These interviews were intentionally semi-struc-
tured to allow individual respondents to tell their own stories and
explain their personal connections, perceptions and experiences linked
to the village pub. A theoretical sampling approach was employed where
targeted data collection is guided by emerging theories (Birks and Mills,
2011). The study area of Lincolnshire is one of the most rural counties
268 Claire Markham and Gary Bosworth

in England and among the 25 villages covered, 60% saw a decline in

their number of pubs between 1949 and 2014 (see Markham, 2014 for
further details). Interviewees included a range of people with connec-
tions to village pubs, ranging from village residents to publicans and
other local service providers. Conversations covered the influences of
historical factors, perceptions of rural life and wider economic and social
changes relating to people’s experiences of the village pub. Just over half
the sample (56%) was male and the youngest participant was under 20
while the oldest was over 90. Since the interview data which informs
the chapter was collected for a different purpose, it is necessary to make
clear that additional analysis was needed. The sample allowed additional
analysis to draw comparisons between the experiences and perceptions
of males and females as well as older and younger people regarding the
evolution of village pubs.
The research is exploratory in nature; its aim is not to claim repre-
sentativeness but to provide deeper insights into the multiple represen-
tations of the village pub. The following structure therefore explores:
(i) the continuing role of history in shaping contemporary understanding
of the village pub, (ii) the interplay of economic and social behaviours,
and (iii) the distinctions that emerge between “lived” and “imagined”
experiences – with parallels to the wider debates about the meaning or
existence of a “rural idyll.” Drawing these together leads to conclusions
that highlight the “embedded” quality of village pubs as well as the
multiple experiences and interpretations that they engender.

3 Historical influences

Village pubs in England have evolved over many centuries, with

informal, unlicensed meeting places becoming gradually more regu-
lated with respect to opening hours, the volume of drinks’ measures,
the responsibilities attached to license-holders, health and safety legis-
lation and age restrictions on alcohol consumption. The shift of the
working classes to cities throughout the industrial revolution has also
been linked to a decline in village pubs (Clark, 1983). As a result, by the
twentieth century the village pub had already seen a significant decline
in its social importance (Brandwood et al., 2004), but many traditions
had already been established, not least that pubs were largely masculine
venues, associated with rural work and other rural activities. Following
World War I the numerical decline continued with increasing numbers
of larger pubs in suburbia serving a wider population (Campaign for Real
Ale, 2014) – foretelling the modern era of pubs entering the competitive
 The Village Pub in the Twenty-First Century 269

leisure sector of the economy. Heightened mobility and wider leisure

choices since the Second World War have been linked with a further
decline in the numbers of village pubs and more recent pressures from
tighter drink-driving legislation, competition from supermarkets, rising
prices and the ban on smoking in pubs have all added to the challenges
faced by pub owners and managers (Jennings, 2007; Preece, 2008; Preece,
et al., 1999; Muir, 2012).
Against this background, movements like the Campaign for Real Ale
(CAMRA) whose “pubs matter” campaign has, at the time of writing,
attracted the support of 102 MPs (CAMRA, 2015), highlight public
sentiment towards village pubs. Many of the social and economic
activities associated with today’s village pubs have their origins firmly
rooted in their social and economic history. In earlier times, the village
pub was at the heart of many social gatherings pertaining to weddings,
christenings, funerals and congratulatory celebrations (Clark, 1983),
placing the pub in the family biographies of many rural people. Social
activities such as games, sports and singing (Dunn, 1980; Jennings,
2007) have also continued over several centuries and remain integral to
the perceptions and experiences of the twenty-first century village pub.
While some of the activities may now have a more modern flavour (for
example, karaoke replacing communal singing or American pool tables
replacing traditional English games) the modern versions can be seen
to stem from an expectation that village pubs provide these forms of
social activities.
The social histories attached to village pubs are considered to offer
business opportunities through the reinforcement of local identity but
they can also create restrictions where preservationist attitudes create
a barrier to developments. Research interviews highlighted the sense
of ownership that communities felt towards their village pubs, notably
when national brands began to impose themselves on a pub’s identity:

What I didn’t like was the fact that the [pub name] became a subtitle to
the Watney Mann [a national brewing company] name ... I did continue
to frequent the pub after its refurbishment but not for long. ... It
became more focused on pound signs and less on community and
this was clear in its looks and attitude. (former village resident, 2010)

From the perspective of embeddedness, this is a clear example of

economic behaviour being moderated by social expectations and, in
this case, the imposition of an outside brand identity emphasises the
view that local embeddedness can be a particularly strong factor in rural
270 Claire Markham and Gary Bosworth

communities. In other words, economic choices are moderated by a

desire to support a local business with a local identity because part of
the value provided by the pub is a sense of continuity within a rural
community. Integrating the community identity of a village pub into
the business can lead to positive outcomes. One interviewee explained:

What makes our local a local is not just its locality but its identity, the
fact that the beer mats, pictures and trophies tell stories of the village
and its residents. It’s what makes it special and local. (village resident,
age: 41–61, Ruskington, 2012)

These stories are part of the consumer experience but also part of the
identity associated with being part of the village community as a whole.
Here the embeddedness on display fosters loyalty towards the pub and
also displays an inter-temporal quality as it is social relations and stories
from the past that are influencing current behaviour.

4 Combining social and economic functions

Village pubs have historically been places where travellers brought both
goods and news from beyond and pub owners have often provided other
services in English villages (see Clark, 1983; Winstanley, 1976). The pub
remains an economic hub in many villages and this is being actively
extended by the “Pub is the Hub” organisation promoting them as sites
for alternative economic and social activities extending from libraries
and educational group meetings through to part-time post office provi-
sions and a diverse range of manufacturing, retailing and hospitality
activities (Pub is the Hub, 2014). The economic value of the pub extends
beyond these visible activities, however, as it is also a key node in local
networks and a valuable link in local supply chains. In tourist areas,
selling local food and drinks can enhance the attractiveness of a pub as
a visitor destination and the local economy can benefit further as village
pubs often act as conduits for wider information about other local busi-
nesses and attractions. Even without tourists, village pubs, like other
retail services, tend to recognise the need to support local businesses as
part of reciprocal behaviour that supports the local economy (Newbery
and Bosworth, 2014). In each case, these are classic examples of embed-
dedness that strengthen local networks.
Aside from direct trade, village pubs continue to have an economic
importance in facilitating the growth of other local businesses and
business networks (see Cabras, this volume). While some village pubs
 The Village Pub in the Twenty-First Century 271

provide the meeting place for business network meetings, they also
provide more informal connections. One respondent said:

You could always count on the pub [and its customers] when you
needed to find a good, local tradesman ... I’ve found plasterers,
builders and electricians [through asking in my local]. (village resident,
Navenby, 2011)

As well as direct recommendations for business, social networks

supported by village pubs play a key role in filling information gaps and
facilitating the sharing of new ideas (Jack and Anderson, 2002). Based
on the concept of social capital, strong networks embedded in the local
community also promote trust resulting from “concern for one’s associ-
ates, and a willingness to live by the norms of one’s community and to
punish those who do not” (Bowles and Gintis, 2005, p.379).
For many older village residents, particularly men who see them-
selves as long-standing residents, the village pub of today is experienced
through the lens of past experience, and is very clearly a social facility:

My local is my place ... I get to meet friends and make new ones ... over
the years I have made lots of friends in the pub. To me it is more than
a watering hole – it’s my window to the outside world. Without it I
wouldn’t have a social life, I would be stuck in the same four walls
day in day out ... I would be existing, but not living. (village resident,
age: 61–80, Navenby, 2010)

From this it becomes clear that older residents attach a high level of
social importance to the village pub, which originates from their own
experiences. This past experience can then go on to influence how they
talk about the village pub and how they continue to experience its social
function amid aesthetic and social changes:

“I tended to sit with the same group of people ... I enjoyed myself ... I
still go to the same pub and sometimes I find myself imagining and
recreating [in my mind] the experience [of the pub] I had 40 years
ago ... The reality [in terms of appearance and ambience] of my local is
now very different to how it was back then but let’s not talk about
that. (village resident, age: 41–60, Billinghay, 2010)

In both of these quotations we also see customers referring to the

pub as “my local” (emphasis added to illustrate the possessive language),
272 Claire Markham and Gary Bosworth

something that would apply to very few other commercial premises.

The long-standing social function of the village pubs generates a strong
sense of embeddedness among regular users. They are customers and
their expenditure is critical to the survival of the business but their deci-
sion to frequent the pub is based far more on the social experience than
on pure economic utility. This factor is brought into sharper focus in
village pubs where competing attractions have traditionally been fewer
and the risk of isolation, especially among older generations, is starker.
In contrast to older village residents, those under 40 often see the
village pub in the context of the social and economic transitions that
have occurred post-1970. Their greater personal mobility and wider
choices of home entertainment and other night-time attractions
increase competition for the village pub. These increased opportuni-
ties, combined with intense marketing strategies, have enabled many
young people to readily consume social experiences beyond their home
village:

What I like about going into town [on an evening] is the fact that
I can experience new things each time I go ... there are always new
pubs and clubs opening and they are always a little different from the
last ... . (village resident, age: 18–40, Burton Pedwardine, 2010)

Another younger respondent commented:

I don’t use the village pub anymore, it’s too expensive, it’s cheaper
for me to get some drinks from the supermarket and have my friends
round. (village resident, age: 18–40, Helpringham, 2010)

The local dimension of embeddedness is stretched in modern lifestyles

where people are more mobile and connected through considerably
wider social networks. This exposure to the wider consumer-driven
economy undermines the advantage of a village pub’s locally embedded
position and potentially turns it into a disadvantage if their owners
are slow to adapt to external changes. The challenge for village pubs is
to recognise the value of their locally embedded status and what this
can offer to customers – including younger customers. For example,
although younger residents may not use the village pub as much as
their older relatives did when they were younger, several in the under-40
age bracket did recognise their social importance and still try to “carve
out” a social identity in village pub space (Leyshon, 2005, 2008a, b). As
the following quotation shows, young people’s decision-making is still
 The Village Pub in the Twenty-First Century 273

“embedded,” in Granovetter’s term, but the ongoing social relations are

not necessarily so spatially limited, thus the village pub cannot always
rely on local embeddedness to boost trade.

I was introduced to real ale by my grandfather at our ‘home-made’

pub ... I think it’s amazing, beats the stuff you get in town, it’s one
of the factors which keep me returning every month, that and the
fact that me, my dad and my granddad can enjoy a pint within a
5 minute walking distance of our houses. (village resident, age: 18–40,
Swaton, 2010, paraphrased)

In the case of the above resident part of the desire to engage with the
village pub was based on its social function of offering a social space
where different generations of the same family could publicly meet and
satisfy basic human desires (i.e. drink, conviviality and entertainment).
Although this is a weekly “pop-up” pub that bases itself in the village
hall, this participant is still experiencing this newer version of the village
pub in a similar way to how it has been perceived and experienced,
particularly by men, over the course of time. However, it is also more
complex than this because the loyalty to the pub in question is afforded
in the face of myriad choices and reflects the overriding influence of
strong social (in this case family) relations.
Many publicans are aware of the implications of the wider functions
that their business provides. For example, one explained:

You have to understand a pub isn’t just an economic venture, it’s also
a social one ... pubs by their very nature can enhance residents’ social
lives and I feel I have a responsibility to adopt some practices such as
a book club which result in a higher social return for residents over an
economic return for me. (former publican, Heckington, 2010)

However, a lot of the social activity does not generate calculable

returns and the subtleties of the expectations of local residents and
other customers can be very difficult to distinguish. Indeed, as the next
section sets out, perceptions and experiences of village pubs today are
fraught with inconsistencies.

5 Perceptions and experiences of today’s village pub

A common theme across the interviews was that the village pub
continued to be experienced as a space of social gathering where people
274 Claire Markham and Gary Bosworth

go in times of celebration and commiseration, and where friends and

family can publicly meet and enjoy one another’s company. Such views
provide a sense of continuity but this can mask a significant number of
changes that result in village pubs being somewhat different to those
unchanging representations of our imaginations. Before unravelling
some of these inconsistencies, it is important to introduce a debate from
rural studies literature where the notion of a “rural idyll” is similarly
critiqued for being an imagined “bucolic” state that never truly existed
(Bunce, 2003; Bell, 2006). The desirability of rural areas is influenced
through a range of media portrayals and a romantic notion that rural
places are “unspoilt” by modern, industrial changes, but this creates an
image of a historical rurality which is the residual of development rather
than a dynamic and changing place of its own making.
The village pub, as part of the rural idyll, can be viewed in a similar
way. For some people, cultural portrayals and shared memories have a
heavy influence on the expectations of a village pub resulting in less
desirable elements of village pubs being sidelined. The “sociable” and
“friendly” pub is also a place of gender and class rules. For example,
there were different physical spaces for different socio-economic groups,
with the land workers typically frequenting the public bar and land
owners the more reserved “saloon” or “lounge.”

Even if I had wanted to have mixed with [the upper classes] who visited
the saloon bar the fact that we were divided by a wall made it seem
like I couldn’t, like it was wrong ... against the rules. (village resident,
Thorpe Latimer, 2010)

In some villages with more than one pub, this division was more
pronounced:

The Nags was our [land labourers, drainage workers] local, the Willoughby
De Broke was theirs [those who owned land]. My boss sometimes came
into the Nags but when he did he bypassed us and went straight to the
saloon ... by today’s standards his actions would be seen as ignorant
but back then it was normal ... workers and bosses didn’t socialise, it
wasn’t the done thing. (village resident, Helpringham, 2010)

These distinctions spread into behavioural patterns too. More affluent

middle classes have tended to use the village pub as space to form new
friendships, which can then be developed and strengthened in different
geographical spaces, including the home (Hunt and Satterlee, 1986;
 The Village Pub in the Twenty-First Century 275

Hunt, 1991) while working-class groups have tended to use the village
pub as a social site where they can sustain existing friendships (Hunt
and Satterlee, 1986; Hunt, 1991). This is also reflected in the practices
of buying drinks where the reciprocal buying of “rounds” enables
middle-class groups to establish acceptance (Hunt and Satterlee, 1986;
Hunt, 1991; Heley, 2008) while working classes buy rounds to reinforce
friendship groups (Bell, 1994).
Existing literature also explains how the village pub has traditionally
been a male-dominated space with considerable evidence indicating
that these past traditions continue to influence both the actual experi-
ences of women patrons and perceptions of how women should behave
in pub spaces (see Hunt and Satterlee, 1987; Leyshon; 2005, 2008a, b;
Whitehead, 1976). It has been argued that while village pubs are increas-
ingly mixed-gender spaces, women often continue to endure patriar-
chal social relations within them (Hey, 1986). However, the comparison
of empirical interview data from male and female interviewees in
Lincolnshire highlighted that both genders saw the contemporary
village pub as a social space for men, women, couples and families at any
time of the day or week. This “legitimacy” of women was enhanced where
food was a more important component of the pub’s function. Elsewhere
women have identified alternative ways to “become” accepted, such as
joining female sports teams in the pub (Hunt and Satterlee, 1987).
A further dissonance relating to village pubs concerns the attitudes
of long-standing or older village residents with younger people and
newcomers. The last section has already illustrated changing social
networks and leisure choices among younger people but distinctions
can also be drawn in terms of their perceptions of village pubs. Those
who are “new” to village life, or those who have very little lived expe-
rience of the village pub, such as younger groups, are often drawn to
it by media portrayals or nostalgic memories passed on from friends
or relatives. However, these representations may not match the experi-
ence that they encounter when they actually visit. Sometimes, as the
following quote from an incomer to the village shows, their experience
can be positive and there can be a desire to continue consuming the
village pubs social function:

I love visiting the Barge, it’s everything I think a village pub should
be ... it’s busy with everyone chatting to one another in a lovely
friendly and warm atmosphere and you can get great food, what
more could you want from a village pub? (village resident, age: 41–60,
Heckington, 2010)
276 Claire Markham and Gary Bosworth

On other occasions, however, if the first visit to the village pub does
not match preconceptions, the loss of that image is detrimental to the
experience and subsequent attachment that might be felt. This can
even be true among indigenous residents as illustrated by the following
quotation:

The village pub [when participant first start visiting] wasn’t what I imag-
ined; instead of being a hive of activity with all and sundry visiting
with an open fire and luxury interior it was a select few residents with
a gas heater in the corner and décor which was dull. The atmosphere
was nothing like [what is shown] on television. (village resident, age:
18–40, Burton Pedwardine, 2010)

This idea of customers being disillusioned with the village pub after
their ideals have not been met provides one explanation as to why some
young people and those who class themselves as village “newcomers”
are, in some instances, actively choosing to spend their leisure time
elsewhere. Unlike older residents who have developed social networks
connected to the village, there is not the same local dimension to
embeddedness among newer village residents or younger people whose
social connections are spread more widely and centre on their own
age groups.
The consumer society and the “countryside of consumption” (Slee,
2005) affords greater choice to the majority of today’s mobile and
affluent rural population. However, this also weakens the locally
embedded networks that have underpinned notions of the rural idyll
and the attractiveness of rural communities as safe, friendly and more
fulfilling places to live (Bell, 2006). Mirroring debates concerning the
rural idyll, the village pub is in danger of becoming something that is
stronger in the imagination than it is in reality. A smaller proportion
of rural residents regularly use their pubs (Muir, 2012) yet evidence of
higher house prices in villages with pubs compared to those without
pubs indicates that they remain desirable assets for rural communities
(Mount and Cabras, 2015). Reinforcing this point, one of the Lincolnshire
publicans interviewed commented that villagers “just like to know it’s
[his pub] there for their property values.” Unlike the rural idyll, which
can endure to a large extent through imagined and symbolic represen-
tations, village pubs must also remain viable businesses if their desir-
able features are to be maintained as part of English rural communities.
Being more esoteric, the rural idyll can arguably be strengthened by any
perceived threats which serve to reinforce the value of the imagined
 The Village Pub in the Twenty-First Century 277

idyll. For village pubs, however, the loss of a definite, physical attribute
in the community has a more direct and tangible impact. This can have
serious implications for the lives of more marginalised rural people, as
shown in the quotations below:

For me the best part of going to the pub was meeting with Joey and
the rest of my pals, sometimes a pint would last me all night ... drink
really didn’t matter, it was the atmosphere and being with friends
that made it special. (village resident, age: 41–61, Heckington, 2011)
When it [the pub] shut my life changed ... I don’t drive and I can’t
walk far these days; going to my local was my time to socialise ... but
that got took away from me and it hurt ... at times I became lonely and
isolated, it was more than a pub to me it was a social lifeline. When
it went so too did a part of my life. (village resident, age: 81–100,
Helpringham, 2011)

This final quotation once again illustrates how the personal nature
of embeddedness comes to the fore when these consumer spaces are
conflated with deeply felt social functions. The local nature of the
embeddedness here is secondary in an emotional sense but is funda-
mental to the situation in which this resident is restricted by the sparse-
ness of the rural environment to one “local” space in which to fulfil his
social life.

6 The future of the village pub

Influenced by processes of counter-urbanisation (see Bosworth, 2010;

Champion, 1989) and changing consumer demands, the village pub
has had to transform from a social space in more “closed” villages to a
hospitality business serving increasingly mobile communities. Thus the
village pub today is simultaneously a material feature of its community
providing a social space and an economic service and a representation
of social memories and personal experiences. Village pubs are also able
to attract outsiders seeking to consume perceived rural experiences and
this affords additional values to traditional crafts and locally produced
food and drink linked to authenticity and heritage. The questions for
the village pub are whether this offers a sustainable future and whether
these three functions can be delivered in harmony.
By exploring the experiences and perceptions of older and younger
pub-goers, this research has demonstrated that the social features of the
278 Claire Markham and Gary Bosworth

village pub have evolved throughout history and the past plays a key
role in shaping contemporary expectations. As with debates about the
wider rural idyll, this can lead to an over-romanticised vision drawing on
selective memories concerning the positive features of past portrayals.
This creates dissonance between the lived experience of the present
day-villagers and the imagined experiences of outsiders and thus any
changes to increase the viability of the village pub as a business can
be fraught with social tensions. For the village pub, or rural life more
generally, rationalising reality against idealised perceptions is a perva-
sive challenge for the sustainability and cohesiveness of twenty-first-
century rural England. Essentially, this research suggests that the village
pub is a valuable microcosm of these wider rural debates.
The challenges are accentuated in rural communities because the
village pub is viewed as part of the social and built environment, not
just as a business. Providing a leisure experience to satisfy the demands
of a modern consumer society and fulfilling a social function for local
communities while sustaining an image of heritage and timelessness as
part of the rural idyll is not straightforward. Changing demographics
and greater mobility in rural communities alongside growing competi-
tion for leisure time and expenditure add to the vulnerability of village
pubs. Where these are integral to their rural communities, as is clearly
the case among those surveyed here, this has knock-on effects for local
people, especially those older residents who become isolated by virtue
of the changes taking place around them. If the village pub closes, it is
not just the business and the physical meeting space that are lost but
social networks are weakened and collective memories that make up
the community identity can also be lost. While embeddedness tends to
be viewed positively in terms of its impact for rural communities, once
businesses are under threat, embeddedness means that the impact of
closure extends beyond the economic.
Perhaps new models such as “pop-up” pubs or shared community
facilities are going to satisfy the demands of today’s rural communi-
ties and perhaps these will continue to sustain the local social ties that
support social well-being. Perhaps taking away the bind of historical
expectations will also afford greater freedom for new business models to
become more successful. In this scenario, community cohesion focuses
once more on the people rather than the place and the “village pub,” in
whatever representation, will continue to benefit from strong embed-
dedness in rural communities where customers support these enterprises
for a combination of social and economic reasons. Without the “local”
restraints of locked-in local networks and idealised expectations of how
 The Village Pub in the Twenty-First Century 279

the village “local” should appear, there is undoubted potential for these
new models to embrace diverse new ideas and rejuvenate the village pub
as a social space for the twenty-first century.

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14
“Pillars of the Community”: Pubs
and Publicans in Rural Ireland
Ignazio Cabras

1 Introduction

The traditional importance of public houses or “pubs” in Irish culture,

economy and society is widely acknowledged and has been analysed by
a number of studies (McCarthy, 2001, Munoz et al., 2006; Patterson and
Brown, 2007). Pubs in Ireland provide a fertile terrain for various social
activities and represent significant incubators for the development of
human relationships and social networking across the whole country.
Despite their importance, there has been a progressive decline in the
number of Irish pubs over the past decade (Foley, 2011; Smyth 2012).
The causes of this decline are many and diverse, such as the toughening
of drink-driving laws, rising costs and alcohol duties, the increased
popularity of home entertainment, and cheaper alcohol available in
supermarkets and other retailers. However, the effects relating to the
decline of Irish pubs may vary in different parts of the country, and pub
closures in urban and town areas may generate different outcomes from
a social and economic perspective compared to elsewhere.
In particular, closures affecting pubs located in rural and remote
areas – namely village or rural pubs – may have a more significant impact
on local economies and communities due to disadvantages related to
smaller populations and spatial remoteness from major railway routes
and road connections. In these areas, pubs are frequently the only places
providing physical spaces for individuals and groups to start a wide range
of communal initiatives, fostering community cohesion and engage-
ment, and enhancing the provision of social capital at a local level.
This chapter explores and examines the role pubs play in rural Ireland.
The author investigates the impact of pubs on rural economies and
supply chains, and their function in fostering and increasing levels of

282
 “Pillars of the Community” 283

community cohesion and social capital at a local level. By presenting

and discussing original information gathered from primary research, the
author illustrates how pubs directly and indirectly affect many economic
activities in the Irish countryside, shaping the formation of social capital
and networks and enhancing the consolidation of community cohesion
within communities in rural Ireland.

2 Pubs in Ireland: a brief historic overview

In many countries the pub industry is dominated by large national brew-

eries and retail chains which own and manage a large number of pubs.
It is definitely the case in the UK where these companies control about
half of the total pubs operating in the country (Cabras and Bosworth,
2014; see also the chapter by Preece in this volume). However, the struc-
ture of the pub industry in Ireland is still characterised by family-run,
independently owned businesses which represent the vast majority of
pubs operating in the country today. This situation may signal very little
variation in the state of Irish pubs for a long time, although changes in
legislation affected these businesses particularly in the past century.
For example, in 1902 the Liquor Licensing Act introduced a complex
system of tradable licenses for the provision of alcohol to the general
public, limiting the creation of new licenses, restricting the supply side
of the market and raising a significant entry barrier to potential licen-
sees. The Act also tied licenses to the premises they served, imposing very
stringent terms on licence transfers which reduced transfers across loca-
tions and regions. Obtaining new licenses in urban areas then became
very difficult, since rural licences could not be transferred (Maguire,
2006). This situation remained intact for 60 years, until in 1962 the
Intoxicating Liquor Act imposed the creation of new urban licences only
upon the demise of already existing licences from the same city or town.
Later, in early 2000s, new regulations introduced a sort of “two for one
rule” which required the extinguishment of two rural licences to obtain
a new urban licence. These changes created a market for rural licences
whose prices rose in function of opening new urban pubs, particularly
in Dublin (Maguire, 2006). As a result, many pubs in the Irish country-
side ceased their activity.
During the years of the Irish economic boom, also known as the Celtic
Tiger, the number of Irish pubs further increased almost everywhere in
the country, reaching a peak in 2003, but registered a significant reduc-
tion afterwards as shown in Figure 14.1a. The causes of this decline, in
Ireland as well as in other countries, are many and diverse. The most
284 Ignazio Cabras

a)

7,500

7,000

6,500

6,000

5,500

5,000

4,500

4,000
1999 2000 2001 2002 2003 2004 2005 2006 2007

b)

48,000

46,000

44,000

42,000

40,000

38,000

36,000

34,000

32,000
2006 2007 2008 2009 2010 2011

Employees In Active Enterprises

Persons Engaged In Active Enterprises (Number)

Figure 14.1 Number of pubs (a1) and level of employment in Irish pubs (b2)
1
Note: Numbers available only until 2007 due to changes in data collection afterward
2
Figures related to direct employment (employees – indicated by darker line) as well as other
figures (e.g. owners, lessees – in grey line) involved in the industry.
Source: CSO 2013.
 “Pillars of the Community” 285

important can be identified as the toughening of drink-driving laws

(Pratten and Lovatt, 2002; Cabras and Bosworth, 2014), rising costs and
alcohol duties (Foley, 2011), the increased popularity of home enter-
tainment (Pratten, 2007), and cheaper alcohol available in supermarkets
and other retailers (Preece et al., 1999; Cabras et al., 2012). The combi-
nation of these causes has had and still has a detrimental impact on
the pub industry, and contributes to reducing the attractiveness of pub
night-outs.
The effects of pub closures are also evident in terms of employ-
ment. The number of both operators and employees in the Irish pub
industry shrank considerably between 2006 and 2011, as illustrated in
Figure 14.1b, with about one-fifth of total jobs being lost in the five
years of reference. The latest report about pubs in Ireland provided by
the Allied Irish Banks (AIB, 2013) indicates that there are approximately
7,4001 pubs currently open in Ireland, providing about 50,000 jobs
across the country. However, figures provided by the Central Statistical
Office (CSO) and quoted by Smyth (2012) indicate a potential 5,000 jobs
lost in Ireland only in 2012. Unfortunately, sources do not distinguish
between urban and rural pubs.

3 The impact of pubs on rural economies and

communities

While the decline of Irish pubs affects the whole country, the effects
of this decline may vary in different places and locations. Closures
affecting village pubs or rural pubs, for instance, may generate more
significant effects for local economies and communities. This is because
pubs represent vital and essential networking places in areas that suffer
many disadvantages in terms of major railway routes and road connec-
tions. For villagers, “the pub may operate as the centre of their social
life, especially if there are no other alternative social facilities” (Hunt
and Satterlee, 1986, p.523). In addition, village pubs help communities
to achieve higher levels of community cohesion (Cabras, 2011), which
“is what must happen in all communities to enable different groups of
people to get on well together. . ... People all want to fulfil their potential
and feel that they belong and contribute to their local area” (CLG, 2008,
p.10). In this sense rural pubs are crucial in fostering and increasing
the provision of social capital, intended here as the whole of relation-
ships among individuals which define the settings and texture of a given
social context (see Putnam, 2000).
286 Ignazio Cabras

Many studies conducted by the author, mainly in the UK, have

demonstrated the significance of pubs for the economy in rural and
remote areas (Cabras and Reggiani, 2010; Cabras, 2011; Cabras and
Bosworth, 2014; Mount and Cabras, 2015). Pubs are important genera-
tors of part-time and casual employment in areas where work oppor-
tunities for some categories of people (e.g. students, lone parents) are
frequently reduced (Cabras et al., 2011). Moreover, village pubs often
work as selling hubs for local producers that use them for placing their
products (Cabras and Reggiani, 2010; see also Markham and Bosworth,
this volume).
In addition, pubs are important for rural economies with regard to
procurement and purchasing from local businesses. A pub serving food,
for instance, may prefer using small local producers and suppliers for their
weekly groceries, rather than national suppliers and large retail distribu-
tors. Its choice may then sustain the local supply chain, preventing a
leakage of financial resources and supporting development in the area
(Cabras and Bosworth, 2014; Mount and Cabras, 2015).

4 Methodology and data analysis

The data used in this study were provided by the Vintners Federation
of Ireland (VFI), an organisation that represents licensed premises in
Ireland, which gave the authors access to a membership database
comprising contact information of 3,280 pubs – about 44.3% of the total
number of operative Irish pubs based of figures from AIB (2013). Using
the definition of village and rural pubs provided by Cabras and Reggiani
(2010, p.949) – “[ pubs serving] communities or parishes with no more than
3,000 individuals, situated at least 5 miles (or 10 minutes’ drive) from towns
or larger parishes counting 5000 inhabitants or more” – the author identi-
fied and selected 1,772 businesses for this study.
A survey questionnaire was then conducted in order to collect rele-
vant data. The questionnaire framework was comprised of five sections
associated with specific domains of pubs’ activities and operations. The
first section, entitled “Pub location,” aimed at identifying pubs’ main
characteristics, such as types and years of activity, and seasonality. The
second section, “Business turnover and expenditure,” focused on the
level of weekly turnover generated by these businesses, in addition to
exploring the costs associated with general operations and the type of
custom these pubs tended to rely on. The third section, “Employment,”
explored the level of full-time and part-time employment generated by
the selected pubs, including salaries. The fourth section, “Suppliers,”
 “Pillars of the Community” 287

examined pubs’ supply chain and purchasing patterns, focusing on

the use of local businesses, average spend and types of suppliers used.
Finally, the fifth section, “Business issues,” addressed the challenges
faced by pubs with regard to different types of issues, including taxa-
tion, regulations and the recent financial crisis. Data were collected
by means of an online survey (for pubs whose contacts comprised an
email address) and a postal survey (for pubs whose contacts did not
comprise an email address) between June and July 2013. A total of
293 valid responses were gathered, accounting for 16.5% of the total
population surveyed.
To further corroborate and substantiate information gathered via
the survey questionnaire, the author visited six different locations and
conducted six focus groups with residents and ten in-depth interviews
with local publicans. The locations included two villages situated in
areas with a predominantly farming-based economy (Ballyporeen and
Lahardane), two villages characterised by a strong touristic vocation
(Killaloe/Ballina and Dingle), one village based on fishing and naval
activities (Castletownbere), and another village presenting a very mixed
economy (Manorhamilton). Each focus group lasted between 45 and
60 minutes, and interviews lasted approximately 30 minutes.
Answers and responses gathered via these means were video-recorded
and successively transcribed and used in the data analysis. The main
purposes of both focus groups and interviews were to identify proc-
esses related to the creation of social capital (e.g. provision of training,
volunteering and charity initiatives); to collect publicans’ views on the
capacity and capability of local pubs; and to further explore measures
that could be taken to increase local retention of business and halt the
closure of Irish pubs. Figure 14.2 shows the parishes where pubs selected
for this study are located.

4.1 Survey results

The 293 valid responses gathered from the survey questionnaires
covered all 26 counties across the four Irish provinces. The vast majority
of respondents were pub owners (94%) whose activity remained open
all year (96%). About two-thirds of the pubs surveyed served drinks
only, with one out of four serving food and a very small proportion
providing overnight accommodation. Interestingly, almost half of the
pubs first opened before 1913, with only 6% opening within the last
decade, corroborating evidence about the historical presence of pubs in
rural Ireland and confirming pubs as deeply rooted in Irish history and
culture.
288 Ignazio Cabras

0 25 50 100 Kilometers

Donegal County

Sligo Country Leitrim County Monaghan County

Cavan County
Mayo Country Louth County

Roscommon County
Longford County
Meath County
Fingal
Westmeath County
Galway County Dublin City
Galway City Offaly County South Dublin
Kildare County

Laois County Wicklow County

Clare County
North Tipperary
Carlow County
Limerick City
Kilkenny County
Limerick County Wexford County
South Tipperary

Waterford City
Waterford County
Kerry County

Cork County Cork City

Parish boundaries
Parishes including pubs
surveyed in the study
Locations of pubs
selected for interviews

Figure 14.2 Selected pubs and parishes

As shown in Table 14.1, the majority of surveyed pubs operate

between 50% and 60% costs ratio with regard to turnover. Costs related
to employment and services (e.g. electricity and gas), supplies and prod-
ucts, and alcohol excises and other taxation are the largest voices in
 “Pillars of the Community” 289

Table 14.1 Average turnover and costs* by business type (in euros)

A B C D E

Weekly average 4,350.2 5,641.1 3,542.9 4,781.4 2,062.7

TO
Annual average 226,212 293,335 184,233 248,631 107,263
Supplies and 599.24 777.06 488.04 658.63 284.14
products (29%)
Employees and 661.24 857.44 538.52 726.76 313.54
Services (32%)
Alcohol excise and 495.93 643.09 403.9 545.08 235.15
taxation (24%)
Costs
Mortgages and 247.96 321.54 201.95 272.54 117.58
leases (12%)
Other costs (3%) 61.96 80.39 50.49 68.13 29.39
Weekly total 2,066.30 2,679.50 1,682.90 2,271.10 979.8
Annual total 107,449 139,335 87,510 118,099 50,949

*Calculated on turnover (TO) figures. A = pubs providing food and overnight accommodation,
B = pubs providing food but no accommodation, C = pubs serving drinks only, D = hotels, E = other.
Figures reported in euros.

the budget, accounting for a cumulative average of 85% of total costs.

Changes between levels of annual turnover and costs with the previous
financial year, gathered from respondents during the survey, suggest a
worsened situation for the surveyed pubs, with nearly one out of three
logging a 26–50% decrease in turnover and 1–10% increase in costs.
Only 10% of respondents reported no changes in the levels of turnover
compared to the previous financial year. Overall, these figures indicate
an increasing economic strain on rural pubs that will directly affect their
survival.
In terms of employment, three out of four pubs have one or more
staff members (excluding the pub owner or manager), with about 23%
having no employees. Mean estimations suggest that surveyed pubs
usually employ one full-time and two part-time employees, and pay
an average salary of €10.30 per hour. Surveyed pubs tend to employ
younger workers, with the highest grouping being 16–24-year-olds
(33%), decreasing sequentially moving up in age groups: 25–34-year-
olds (27%), 35–44-year-olds (19%), and 44–54-year-olds (12%), with the
lowest employment group being 55+-year-olds (9%).
Responses gathered from the survey reveal that only 36% of surveyed
pubs had access to a national medium or large retailer (e.g. SuperValu,
Aldi, or Tesco within a five-mile radius), leaving the remaining 64%
possibly dependent on more local retailers. Patterns of local procurement,
290 Ignazio Cabras

A) Local retailers B) Supermarkets

Always Always

Often Often

Regularly Regularly

Rarely Rarely

Never Never

0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50%

C) Specialised retailers D) Other Suppliers

Always Always

Often Often

Regularly Regularly

Rarely Rarely

Never Never

0% 10% 20% 30% 40% 50% 60% 0% 10% 20% 30% 40%

Figure 14.3 Proportions of local/non-local purchasing by types of suppliers

shown by Figure 3, indicate that about 70% of publicans approached

indicated purchasing from specialised retailers for licensed businesses
either often (19%) or always (51%). Conversely, 30% of respondents
used local retailers on a regular basis and 10% used them almost exclu-
sively. The higher proportion of pubs not purchasing locally is probably
an effect related to many drinks-only pubs in the sample which tend to
buy from large breweries and distributors (e.g. Diageo and Heineken),
partially due to the low number of independent breweries operating in
Ireland – about 30 in 2013 (Irish BrewersAssociation, 2013).
The average weekly purchasing for five different types of suppliers –
bakers, butchers, fishmongers, farmers and grocers – shown in
Table 14.2 – indicate the latter group as by far the most popular,
accounting for over 44% of the total annual spend, followed by butchers
(25%) and fishmongers (12%). Figure 14.4 indicates that hotels appear
to generate the highest volume of purchasing among local suppliers.
Similarly, pubs serving food, and food and overnight accommodation,
are also good supporters of the local supply chain, while pubs serving
drinks only spend relatively low amounts on local businesses. Overall,
surveyed pubs contributed about €2.1 million to the local supply chain
per annum.
 “Pillars of the Community” 291

Table 14.2 Pubs’ weekly local expenditure per supplier group (thousands euros)

Bakers Butchers Fishmongers Farmers Grocers Total

Spend Spend Spend Spend Spend Spend

Count (€) Count (€) Count (€) Count (€) Count (€) (€)

€0 133 0 117 0 143 0 150 0 56 0 0

Up to €100 40 2.35 45 3.0 21 1.35 19 1.35 108 7.35 15.4
€101–€300 5 1.0 13 2.6 4 800 2 400 27 5.4 10.2
Above €300 4 1.3 13 4.7 8 2.9 2 0.8 14 5.2 14.9
Total 182 4.65 188 10.3 176 5.05 173 2.55 205 179.5 40.5
expenditure
Annual €241.8 €535.6 €262.6 €132.6 €933.4 €2,106.0
total

70%

60%

50%

40%

30%

20%

10%

0
Grocers Farmers Fishmongers Butchers Bakers

Pubs serving food and overnight accommodation

Pubs serving food
Pubs serving drinks only
Hotels

Figure 14.4 Patterns of local procurement*

*Although inserted in the survey, the “Other” category is excluded as no impact in four out
of five categories of suppliers.

Table 14.3 reports the correlations calculated among a number of vari-

ables extracted from the survey questionnaire, namely the level of local
competition (measured in the number of pubs within a five-mile radius),
levels and trends of annual turnover and costs, level of employment and
average wages, and average expenditure in the local supply chain. The
Table 14.3 Correlation table

Pubs within Turnover Proportion Turnover Costs Number of Average Average local
5-mile radius estimation of costs trend trend employees wage expenditure
Pubs within 5 mile radius 1 .091 .080 .087 .091 .135* .072 .016
Turnover estimation .091 1 .315** .061 .006 .565*** .443** .221**
Proportion of costs .080 .315** 1 .087 .138* .248** .251** .075
Turnover trend .087 .061 .087 1 .273** .145* .121 .072
Costs trend .091 .006 .138* .273** 1 .002 .010 .042
Number of employees .135* .565** .248** .145* .002 1 .796** .416**
Average wage .072 .443** .251** .121 .010 .796** 1 .460**
Average local expenditure .016 .221 .075 .072 .042 .416** .460** 1

**Correlation is significant at the 0.01 level (2-tailed); *Correlation is significant at the 0.05 level (2-tailed).
 “Pillars of the Community” 293

correlation matrix shows a high level of interdependence between levels

of turnover and proportion of costs. For instance, turnover is positively
correlated with costs, number of employees and general rates of pay for
different employee groups, indicating a clear relationship among size of
pubs, more employment opportunities and tendency to spend locally.
Although higher levels of turnover and number of employees are likely
to generate higher costs, trends in annual turnovers and costs (evalu-
ations expressed by respondents on these two items in the last three
years) suggest that those pubs that experienced growth were also able to
increase their workforce without experiencing significant cost increases,
with positive effects in terms of labour productivity. Correlations seem
also to indicate that larger-sized pubs pay higher wages, but this result
may be inflated by the presence of different categories of employees in
those pubs with more individuals employed, e.g. chefs and kitchen staff.
Further verification, however, did not identify any substantial confirma-
tion on this particular issue.

4.2 Results from in-depth interviews and focus groups

In-depth interviews with pub owners and managers, and focus groups
with residents, are used as a means of probing issues regarding atti-
tudes towards managing rural pubs, in order to verify the impact of
these businesses within local economies and communities in rela-
tion to social capital, community cohesion and engagement. The
evidence presented in this section is not intended as a “representa-
tive” sample. Rather, the material is used to provide greater depth
concerning a number of points already raised in the context of the
survey questionnaire.
The publicans interviewed confirm the difficulties experienced since
the decline of the Celtic Tiger economy and the start of the financial
crisis. Above all, the toughening of drink-and-driving regulations and
cheap alcoholic drinks sold by off-licence retailers and supermarkets
are indicated as having a major impact on business turnover and oper-
ations, with new regulations and bureaucracy perceived as increasing
new business costs without any evident return in terms of services.
In addition, higher costs related to services and suppliers also impact
business overheads, forcing many pub owners and managers to reduce
their workforce and to employ staff mainly over weekends or for
one-off events.

Now people have turned to drinking more at home, with the off-sale in super-
market ... this has killed the pub culture in Ireland, and what is happening
294 Ignazio Cabras

is that kids are growing up seeing their parents drinking at home. (Pub
manager from Dingle)
If you fall behind in your VAT or taxes, they will fine you as if you were
selling without a licence and you will need to re-licence your building,
which means you will need to go to court ... you will need to hire a barrister
and an architect ... deal again with fire officers, health inspectors, basically
you will end paying 15–20 thousands euros because of this. (Pub owner
from Manorhamilton)
Well, I have put on free Wi-Fi and that costs, but the major problem that
I’ve got is Sky ... paying [all] the subscriptions costs me 700 euros per month
between Sky and BT and that’s a massive blow for my budget. (Pub owner
from Castletownbere)

With the recent financial crisis, many publicans had to engineer new
strategies and policies in order to attract customers. However, while the
crisis had generally toughened things in terms of business costs and over-
heads, it also provided opportunities for diversification and expansion.
Possibly this situation may have pushed many publicans to increase the
level of attention devoted to their respective communities. All inter-
viewees appear to support a wide range of communal initiatives and
events, either providing logistics or financial sponsorship, particularly
with regard to sports teams. The way support is provided vary signifi-
cantly across responses:

There has been a dramatic change in the level of turnover, it fell at 40–50%
compared to the years of the Celtic Tiger, when you just needed to open the
door and the people flooded in. So the business changed and you need to go
back to being a proper publican in the sense that you are going to work for
any meal that you sell, any drink that you sell, so you cannot just take it
easy. (Pub owner from Lanahardane)
We are in the centre of the town, we get fishermen as well as tourists and
passers-by and locals, ... people call in anytime, it is a sort of meeting
place, I realie I am very lucky in that respect ... but you need to cut the cloth
accordingly, that’s what it is ... you need to be ready!” (Pub owner from
Castletownbere)
I have to do the driving myself for customers, otherwise I would not have
any customers ... I feel obliged, I am responsible for them so I drive them
home make sure they arrive safely. (Pub owner from Ballyporeen)
I sponsor any type of initiative here, football team for example ... Gaelic
team ... all under ages ... festivals, Paddy’s day, Christmas lightning,
 “Pillars of the Community” 295

everything ... it costs about 1,000 euros to sponsor the soccer team ... if
I stop I am sure nobody else will pick up the baton. (Pub owner from
Manorhamilton)

When asked about what could or should be done to improve the situ-
ation of rural pubs, interviewees identify two main issues that deserve
immediate attention: targeting prices of alcoholic drinks sold in super-
markets, and enhancing transport services in remote areas. With regard
to unfair competition from large national retailers and supermarkets,
interviewees advocate new regulations to reduce the distance in prices
between the on-licence and off-licence trade. As for improving the level
of transport services, interviewees suggest to allow pubs to run small
local transport schemes to collect and bring back customers from and to
their homes for free. In both cases, the Government and local authorities
were seen as the main bodies that could facilitate the process, possibly
working in collaboration with main national suppliers such as Diageo
and Heineken.

The supermarkets are able to sell at cheaper prices because they’re able to
buy alcohol cheaper than anyone else. As a result, women and kids now get
drinking more and more without control ... kids in particular buy bottles of
vodka and bring them to the nightclub hidden ... so that has fundamentally
hit us. (Pub manager from Dingle)
Well, transport, taxis cannot be a problem. We have two taxis in the
village and they work well during Saturday nights, their biggest business
is [provided by] pubs and rarely you have two people wanting to go at the
same time, and if they want they may just wait here and have another
drink. (Pub owner from Castletownbere)
Local authorities could provide their means and operate small transport
schemes around here, especially during weekends. Think about school
buses: they remain unused and basically still two days a week ... they could
be used instead at weekends to pick and leave people home at a time and
place and bring people to the pubs for free and we would be very happy to
pay for this service ourselves. (Pub manager from Ballyporeen)

General views collected from the focus groups provide a relatively

univocal perception of the role of pubs across different rural communi-
ties. Participants tend to identify pubs as the strongest facilitators for
socialisation and engagement compared to other places available locally.
A wide range of activities taking place locally, such as charitable events,
296 Ignazio Cabras

fund collections, language classes or exchange sessions, drama/artistic

courses, are likely to be organised in pubs rather than in other venues.
Comparable insights could be drawn in relation to sport centres: while
the actual sporting activities may be carried out on sport pitches and
premises, other parallel events related to such activities, e.g. celebrations
for victories or commiserations for losses reported by local teams, are
likely to be organised in pubs. This preference agreed to pubs is also due
to the quality of facilities offered, mainly associated with the presence of
a kitchen or the size of rooms.

I am a member of the local drama society and this is actually the room
where we do our weekly rehearsal ... because there isn’t any other place first,
and also because simply we do not have spaces at our homes ... this room has
been made available to us free charge ... .” (Resident for Castletownbere)
Yeah, if you go to a GAA match [Gaelic sporting event] then the team would
eventually end up in the pub celebrating, or commiserating ... You get to the
pub after a funeral, or for a wedding, to meet all friends ... this is where all
people go after these types of events.” (Resident for Ballyporeen)
We have a community hall now, which is working in the village ... before
there was no place with cookers and a kitchen, so there was no public loca-
tion for funerals ... but now we have that facility, so we now have an option.
You know, some people may not want to go to the pub after a funeral, they
may just want to go to a place where there is tea and coffee ... (Resident
for Ballyporeen)

Residents that took part in the focus groups tend to describe publi-
cans as very important for their communities, with pubs functioning as
informal “job centres” or info-points in relation to casual and part-time
employment or to find out what is going on in the local area. According
to responses, publicans often facilitate networking and exchange infor-
mation between those offering employment and those looking for
employment in a system that seems based mainly on reputation and
word of mouth. Many business owners indicate pubs as important assets
for their own businesses, as their presence increases the attractiveness
of the entire area, generating tourism and providing opportunities for
other local businesses and suppliers. Pub owners and managers were in
many cases described as the first ones to hear and/or know and the first
point of contact to find out what was going on in the local area.

See, you go to the pub here to know what’s happening in the area and find
out what’s going on in the village ... if you are in town, you may just go out
 “Pillars of the Community” 297

for a drink and don’t care about what’s happening around the streets ... but
here, in rural areas, the pub provides us with information about everything
and anything. (Resident for Ballyporeen)
Lots of jobs are generated because of the pub ... if this place closes down my
business would suffer a lot ... this pub alone is a great touristic attraction
for the village and if the pub is doing well the trend in tourism grows ... this
means good business for all the other businesses in town. (Resident from
Castletownbere)
Yeah publicans are sort of pillars for the community, a sort of sentinel ... publi-
cans and shop owners they’re highly regarded people within the community.
(Residents from Manorhamilton)

While admitting that the prices of alcoholic drinks sold in pubs

affect the attractiveness of pub nights out, the vast majority of resi-
dents also recognise an added value embedded into pints consumed
in pubs, which include non-marketable values such as the place, the
atmosphere and opportunities for socialisation. Many see live music
events, quiz nights and sporting events shown on TV as incentives for
visiting the pub over the weekend or during the week, although the
lack of an efficient public transport system represented a key concern,
particularly for those participants living in the parish area outside the
village.

I had my Sky Sports at home and I got rid of it ... I love rugby, but I never
watched matches at home, I prefer to go out and watch matches at the
pub, having a couple of pints. ... we talk about everything. (Resident from
Castletownbere)
Yeah the music is a major attraction, especially in getting people out of their
homes ... it is probably to do with tradition ... and very often connected with
dancing. (Resident from Lahardane)
We cannot come down to the village any time we want, you know the trans-
port here is reduced, there is a bus in the morning and then one in the after-
noon ... yes, sure you can get a taxi, but taxis are very hard to get and are
very expensive ... there may be one car for a household as well and it may be
used to go to work, so it’s not very flexible. (Resident from Ballyporeen)

Finally, participants confirm the support provided by pubs to a wide

range of initiatives and activities carried out within their villages and
parishes. According to many, pubs are the first points when looking for
help, and without their support many activities and initiatives would
simply cease to exist. Equally important, participants describe cases of
298 Ignazio Cabras

antisocial behaviour registered in their local pubs as exceptional, mainly

due to mutual knowledge among residents and the role of “guardians”
played by pub owners and managers who worked in strict collaboration
with the Garda.

Pubs here support lots of sporting activities and other types of events, such
as music gigs and charities. This pub does a lot for the community; spon-
soring the rugby team by buying the jerseys ... so you know they invest in the
community, they are community workers and they are part of the commu-
nity. (Resident from Killaloe/Ballina)
All the community activity that you may do at the church is based on
faith, but all the lotteries, sport, GAA and soccer ... they are all organised in
the pub ... if you are in the rugby area they may do that sport, handball in
another areas ... but really everything would be at the pub. (Resident from
Ballyporeen)
People are also keener to do things here together, you know if you get a good
group of people you will never get a group so mixed as in the pub ... and you
will get lots of ideas, tons of ideas ... you come in and say you get a hundred
different opinions from different people, and this is great. (Resident from
Ballyporeen)
There is no issue with antisocial behaviour, it would not happen, we would
not allow it to happen ... it is taken down to the bottom ... this establish-
ment is well run. (Resident from Castletownbere)
This is also a small place, as soon as something bad happens, people would
quickly turn their back to those creating troubles ... I’ve never experienced any
situation in which I felt uncomfortable. (Resident from Ballyporeen)

5 Discussion and conclusive remarks

Findings gathered from the survey questionnaire, in-depth interviews

and focus groups provide an interesting account and a valuable descrip-
tion of the role pubs play in rural Ireland. There are several aspects
unravelled by the analysis which shed light on the significant impact of
these businesses within Irish rural communities and economies.
Surveyed pubs confirm their importance as employment generators
in the countryside, a context frequently characterised by reduced job
opportunities. The positive effects of pubs in terms of employment
are felt particularly by workers at point of entry and/or living within
immediate spatial proximity. Equally important, the study confirms
the significance of pubs for rural supply chains: one surveyed pub out
 “Pillars of the Community” 299

of three purchases from local retailers on a regular basis, generating an

average of 600 euros every month which represents an important injec-
tion of financial resources into the Irish rural economic context.
The positive impact of pubs within the Irish countryside is further
corroborated by responses gathered from the focus groups. Many local
residents and entrepreneurs praise pubs for creating direct/indirect
custom to their own businesses, and for their informal role of “informa-
tion centres” in advertising jobs and promoting events and products,
targeting locals as well as tourists and passer-by traffic. Local pubs are
also perceived as the main centres for social aggregation and engage-
ment within selected parishes. Pubs are crucial in the development of
communal initiatives such as clubs or sport teams, as well as the forma-
tion of volunteering groups and charities, given their frequent financial
and logistical support to the organisation of communal initiatives.
Almost all the findings presented in this study corroborate evidence
provided from previous studies in relation to the positive role played by
pubs in creating and increasing the level of social capital within rural
areas, e.g. by developing the provision of skills and training within
the job market, strengthening reciprocal confidence and trust, and
increasing levels of trust among residents (Hunt and Satterlee, 1986;
Maye et al., 2005; Cabras, 2011; Cabras and Bosworth, 2014; Mount and
Cabras, 2015). It appears that preserving and supporting rural pubs in
Ireland would generate positive effects for entire areas and communities,
although several issues affecting the pub sector in Ireland are causing
their decline in number. These issues present some level of complexity
and involve different stakeholders at different levels, and are further
exacerbated in the rural context.
For instance, the high level of direct and indirect taxation experi-
enced by pubs represents a main burden on profits. In October 2013,
the Irish government further increased the excise duty on a pint of beer
and cider by 10 cent (AIB, 2013). This move is likely to hit the Irish
pub sector dramatically, with rural pubs set to experience even more
problems compared to urban and suburban ones, given the reduced
catchment areas they serve and type of economy characterising the Irish
countryside.
Higher excise duties on alcoholic beverages, combined with the signif-
icant increase in off-trade purchasing of alcoholic beverages fuelled by
cheaper prices available in large retailers and supermarkets, may have
a much wider impact on rural communities too. Large retailers may be
selling “below cost” (thus setting prices below the rate of duty plus VAT)
in order to recover the VAT on the difference between the sale price and
300 Ignazio Cabras

the cost price, a mechanism commonly applied by major national retail

chains endowed with significant bargaining power with manufacturers
(Royal College of Physicians Ireland, 2013). However, resulting higher
prices in pubs and bars are likely to push more and more people to
purchase their alcoholic beverages from off-licence retailers, with higher
quantities of alcohol consumed outside controlled environments, such
as those provided by pubs, which may determine a substantial increase
of health-related costs for taxpayers that will be inherited by future
generations.
The reduced level of public transport available in rural areas, as the
lack of valid transport alternatives, significantly affects the attractive-
ness of pub night-outs. Many pub owners tried to solve the situation
by using their own cars to pick customers up from their houses and
bringing them back, especially during weekends. This behaviour may
reduce risks for pub-goers, although it also exposes pub owners to unfair
expectations from residents, potentially increasing their running costs
associated with providing the service.
While these issues are complex and involve stakeholders at different
levels, a number of solutions may still help to prevent unnecessary pub
closures in rural Ireland. As highlighted by the focus groups, rural pub
closures represent a major issue for rural residents also in relation to
increasing levels of alcohol consumption in private premises and uncon-
trolled environments. The Irish government could target this issue by
campaigning in favour of social drinking and limiting the capability of
advertising alcohol-related offers by large providers on national media
and newspapers may reduce the level of alcohol consumption in private
premises. These strategies may further enhance community cohesion
and social engagement, creating more economic and employment
opportunities as demonstrated by this study.
As for the provision of transport, the Irish government and local
authorities could either enhance public transport or facilitate private
services in rural areas. While the first option appears not very efficient
in terms of cost–benefit analysis since aimed at serving lower popula-
tion catchments, the second option may be more feasible. Indeed, the
National Transport Authority (NTA) of Ireland has recently introduced a
number of “rural hackney licences” schemes, to provide licences to vehi-
cles operating in areas with a proven transport deficit at reduced costs
(NTA, 2013). Licences applicants need to be residents from the local
areas and must have the support of their respective local authorities in
order to apply; no financial support is provided by the government. The
 “Pillars of the Community” 301

first hackneys’ schemes started in early 2014, with other pilot schemes
planned in selected areas of the country.
These solutions may bring multiple advantages to pubs operating in
rural Ireland. However, given the wide range of benefits associated with
these businesses, it is likely that positive outcomes can spread also to
other rural businesses, not mentioning the positive social impact that
supporting pubs can bring for local communities. As demonstrated
in this study, pubs represent valuable assets in the Irish rural context.
Preserving and supporting these businesses can generate benefits that
transcend the mere rescuing of pubs from unnecessary closures.

Note
1. This figure probably relies on a very broad definition of “pubs,” and may
include other types of licenced premises such as European-style cafés and
disco bars. Hence, it needs to be considered carefully.

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15
Beer and the Boro – A Perfect
Match!
Alex Gillett, Kevin Tennent, and Fred Hutchinson

1 Introduction

Although football clubs (FCs) as firms are relatively unsustainable from

a purely financial perspective, the club brands appear highly sustain-
able in comparison with many other industries (Kuper and Szymanski,
2012). While the ownership and the companies running the clubs may
change, the club brands themselves appear to be more stable than in
other industries where firms and brands go out of business, relocate
or diversify to a far greater extent (e.g. Hannah, 1997). This may be
because they are less vulnerable to competition – FCs have historically
been geographic, and while their catchment area may shrink during
less successful periods, it will not disappear entirely. Furthermore, rival
foreign clubs do not enter and supply soccer at lower prices (although
foreign investors may bid to take over the ownership) and although
English clubs as a whole could fall behind foreign competitors and lose
their best players, foreign clubs have their own problems of finance and
management (Kuper and Szymanski, 2012). Put succinctly, society can
keep unprofitable clubs going cheaply: bank managers and tax collec-
tors have historically appeared reluctant to close century-old clubs –
and so society swallowed the losses. Perhaps clubs were and still are too
small to fail. At the same time, the brand loyalty of supporters means
that no matter how lousy the product, a hard core of customers will
continue to purchase: “Soccer is more than just a business. No one has
their ashes scattered down the aisle at Tesco” (Taylor, 1998, cited by
Kuper and Szymanski, 2012, p.82). Such support and brand awareness
among the public, together with the attraction of football matches for
bringing large crowds of consumers together in one locality, presents
an obvious target for marketers of products such as beer and gambling

303
304 Alex Gillett, Kevin Tennent, and Fred Hutchinson

that are associated with the consumption behaviour of soccer “fans.”

Weed (2007, p.400) refers to “the male holy trinity of alcohol, football
and male bonding,” while Horne and Whannel (2009) identify that in
England beer, football and working-class men appear interlocked – and
so it is logical that beer should sponsor football or advertise in televised
football. They believe that this is significant because few other adver-
tisers have working-class men as a target due to perceptions that they
have limited interests and income.1
The relationship between beer and English professional football
can be traced to the formative years of the football league during the
Victorian era. As Brown (2010, p.177) identifies, “when football was first
promoted heavily, it was as a way of getting people to stop drinking.”
Landlords were, however, quick to spot an opportunity, noticing that
clubs needed meeting places, and land to play the game on, and that
pubs were one of the few places large enough to host meetings and often
had land adjacent (Brown, 2010).2
Football Association (FA) rules at this time restricted directors’ divi-
dends to just 5% and football club owners were forever protesting they
were involved in the sport for reasons other than money (Sanders,
2010). While the likelihood of significant profitability was low, it is
thought that investment in sports clubs offered the dual benefits of
boosting one’s civic and philanthropic image, and also potentially real-
ising secondary profits from related activities, such as catering (the latter
identified as being of particular interest to directors whose main work
was in the drinks industry; Tischler, 1981, cited by Budd, 2012). The
owners of Manchester City, for example, made large profits from their
control of the pubs and bars in the ground and its vicinity (Metcalf,
2013). Such was the attractiveness of football to the beer industry that
15% of all shares in football clubs were owned by people involved in
brewing (Brown, 2010).
Although the relationship between beer/alcohol and football could be
dismissed as simply an issue of leisure, scratch beneath the surface and
questions emerge around the extent to which marketing is simply the
role of commercial enterprises in meeting demand, or the exploitation
by businesses of fans’ loyalty to their clubs. Linked to this are issues
about the extent to which sports teams that on the one hand promote
health and fitness, should also be used to promote and advertise drinking
culture and be financed by drinks companies on the other.
This chapter examines a historical case study, that of Middlesbrough
Football and Athletic Company Limited. Findings show that there was
always a close relationship between the ‘drinking’ industry, drinking
 Beer and the Boro 305

culture and the football club – and that the football club was part of
a turf war between two regional breweries whose investment aided
its survival. Given sports clubs’ role in promoting physical fitness as
well as their localities, to what extent should local authorities be (or
not be) involved in assisting their survival? Furthermore, should this
instead be left to private investors, particularly those that manufacture
or market alcoholic drinks? (cf. Horne and Whannel, 2009).
Having introduced the context and purpose of our study we next
outline our methods. The rest of the chapter then reports our findings.
We begin with two sections focusing upon MFAC, before discussing the
relationship between MFAC and the brewing industry in the 1980s.
Attention is given to the involvement of Camerons, a brewer based in
the neighbouring town of Hartlepool, and to MFAC’s relationship with
regional rivals Scottish & Newcastle. In particular we report on the ‘turf
war’ between the two brewers that involved sponsorship of the football
club and the supply of beer to its Ayresome Park stadium and facilities.

2 Methodology

The origins of this chapter stem from a broader research project in

which the authors investigated MFAC and its financial problems in
the mid-1980s. Approaching the topic from a business and manage-
ment perspective, it became clear that the story of the football club
was meshed with that of its local economy, including the local authori-
ties, entrepreneurs and locally based businesses that had invested in it.
Although MFAC’s financial troubles during the 1980s are oft-cited in
publications by (or endorsed by) the club and its former players and
managers, these accounts were targeted towards a partisan readership
of the club’s own fans. As such they tended to be anecdotal, incom-
plete, and at times contradictory. We have approached this study with
an awareness of the problem of archival silence (Decker, 2013) and by
using secondary sources such as the local newspapers, key informant
interviews with people independent from the club’s administration, and
by accessing the company archives of one of MFAC’s most significant
investors during the 1980s, Camerons brewery.
We conducted our literature search via three categories:

● Popular – including biographies and autobiographies such as those

of the former football club chairman and directors (e.g. Amer and
Wilson, 1998; Phillips, 2008), and books authorised by the club
itself (e.g. Allan and Bevington, 1996, which focused on the club’s
306 Alex Gillett, Kevin Tennent, and Fred Hutchinson

financial difficulties during the 1980s and subsequent reformation).

The primary audience for these publications can be described as foot-
ball supporters and enthusiasts. Despite obvious bias, we decided to
use these sources because of the lack of published material elsewhere
that was specifically related to the topic. Additionally, autobiographies
provided a substitute for interview data where potential key inform-
ants were unavailable, infirm or dead. We identified some literature
sources relating to Scottish & Newcastle breweries, but initially we
could not find anything specifically about Camerons. We arranged a
field trip to Camerons’ brewery in Hartlepool, UK, and were fortunate
to access a pre-publication draft of a forthcoming book about the
history of the firm authored by one of its employees.3
● Journalistic Popular –This literature was typically authored by news-
paper journalists and contained well-informed, analytic and critical
works based on primary and secondary sources, but was less well-
referenced than academic texts, meaning that it could be difficult
to verify sources, e.g. Kuper and Szymanski (2012), who provide a
statistical explanation for the evolution of football.
● Academic – there is a body of historical and social science literature
dedicated to sport and football, and a body of academic literature
concerned with beer and brewing (although it was not possible to
find any academic literature specifically about Camerons). Of partic-
ular interest to us were sources discussing the relationship between
sport and beer, such as Horne and Whannel (2009).

Consistent with the methods of business historians,4 we constructed

a narrative history in order to develop a picture of what was already
known – or perceived to be known – about the football club, its owner-
ship and finances during the 1980s, including its interaction with the
local economy. We also examined academic texts, newsletters and minute
books available in the libraries and research centres of the English Football
Association, British Library, British National Archives, and the headquarters
and study centres of the Fédération Internationale de Football Association
(FIFA) and International Olympic Committee (IOC) in Switzerland.
We conducted interviews with three authors who agreed to answer
questions about their work. Doing so enabled us to probe further and
to verify our understanding and also the veracity of the authors’ own
sources. The first interview was conducted in the exploratory stages of
our research with Bernie Slaven, a former footballer who was employed
by MFAC during the 1980s and 1990s and subsequently forged a career as
commentator and journalist in the local media. Slaven’s autobiography
 Beer and the Boro 307

(Slaven, 2012), as well as his interview cited by Brownlee and Cox

(2006), were among the first of the literature sources consulted. The
second interview was conducted with Marie-Louise McKay, Manager of
the Visitors Centre at Camerons’ brewery. McKay had authored a history
of the firm and brewery,5 and allowed us access to her draft version prior
to publication. We were granted access to the archive materials, such as
cuttings from the local and national press collected by Camerons, that
had underpinned her work. The third interviewee was John Wilson, who
has written several texts about MFAC and co-authored the biography of
former club director and chairman Charles Amer (Amer and Wilson,
1998). Two interviews and email correspondence took place during
the first three months of 2015. The first meeting garnered information
about the composition and backgrounds of the club’s Board of Directors.
At a follow-up meeting we were given access to an archival source which
we had experienced difficulty in locating6 as well as a recently reissued
book about MFAC’s Ayresome Park stadium.7
In addition to the above interviews, we also met Sean Wilson
(MFAC’s official Club Statistician) and Robert Nicholls (the editor of
Middlesbrough FC fanzine Fly Me To The Moon). These meetings allowed
us to discuss our findings and ideas, and resulted in us being granted
access to archival sources including MFAC official Annual Reports and
Financial Statements from the 1980s which we have used and cited as
empirical data.

3 The formative years

Before Middlesbrough was a hundred years old, it had more than a

hundred thousand inhabitants, whose chief passions, we were always
told, were beer and football. It is a dismal town even with beer and foot-
ball. J. B. Priestley (1934, cited by Horne and Whannel, 2009, p.55)

Middlesbrough Football Club was founded in 1876 as an amateur

club (Budd, 2012; Paylor, 1989) and, as today, football was the most
popular sport in Victorian Middlesbrough (Budd, 2012). In May 1892
Middlesbrough Football Club as a trading entity was re-formed as a
limited liability company, the Middlesbrough Football and Athletic
Company Limited (MFAC). In 1899 the club entered the English Football
League and its directors were willing to try professionalism8 in order to
build a team that could be a flagship “creditable to a town of the size
and importance of Middlesbrough” (Minute Book of MFAC, 3 February
1899, cited by Budd, 2012, p.310) which “would be able to play any
308 Alex Gillett, Kevin Tennent, and Fred Hutchinson

club in England, and to lift the name of Middlesbrough to the highest

pinnacle of fame, and be a credit and satisfaction to the town and the
whole district” (North Star, 4 March 1899, cited by Budd, 2012, p.311).
Evidencing the role of local businesses and government in the forma-
tive history of MFAC, records show that Alfred Mattison, a club director,
local councillor, as well as owner of the Zetland Hotel, was asked to help
raise funds by using his influence with local businesses. The contribu-
tion to the local economy of a successful football team was considered
by MFAC to be a selling point to local traders as an incentive to invest
because of the crowds it would bring to the town and shops. A committee
was formed to target tradesmen and licensed victuallers, and it appears
that MFAC was increasingly being used politically and economically by
its owners, which still included local men from industry and politics
(Budd, 2012).
George Cathey, an associate of Middlesbrough MP Joseph Havelock,
suggested that MFAC members should not patronise publicans “who
refused to support the team ... within a week they would take up a couple
of hundred shares” (North Star, 25 March 1899, cited by Budd, 2012,
p.312). Before long, sufficient investment was found and Middlesbrough
Football Club entered the English Football League for the 1899/1900
season (Paylor, 1989; Wood and Gabie, 2011).
The town’s drinking culture at around this time was not restricted
to the supporters but was also evident among the team, and this
appears to have been at times problematic. According to Budd (2012),
Middlesbrough’s minutes record the difficulties experienced by the club
with footballers’ behaviour, and drinking in particular, which was seen
as the cause of poor results on the field.9 Such behaviour was not exclu-
sive to Middlesbrough:

There was a drink culture among professional footballers from the

outset. ... The problem of young men with money in their pockets
and time on their hands, idolized by the local population, was
one professional clubs wrestled with from the start and they were
forever pleading with supporters not to ‘treat’ players. (Sanders, 2010,
p.145)

4 The intermediate years

Steel and chemicals provided reliable and secure employment to the

populations of Middlesbrough and its surrounding towns, along with
the extensive fabrication and spares businesses based on steel and
 Beer and the Boro 309

chemicals. These industries created a substantial local labour force, and

hence captive market for brewery products, and often had recreational
facilities attached to them; by the 1950s, ICI’s “Synthonia” social club at
Billingham was one of the largest licensed premises in the UK (Pettigrew,
1985). The local economy was sufficient to sustain its professional foot-
ball team, and throughout MFAC’s history up to and including the first
part of the 1980s, local businessmen populated the board. Its Chair,
Charles Amer, was a local entrepreneur and property developer with a
portfolio of hotels and dance halls (Wilson, 2015). Amer first became
a member of the club’s board of directors in the 1960s after heading a
consortium of local businessmen who had launched a takeover bid by
approaching many of the club’s listed shareholders (Amer and Wilson,
1998). Amer deemed the incumbent board of directors to have been
unambitious and stifled by inertia; he likened board meetings to “an
amiable old boys’ social club” (Amer and Wilson, 1998, p.135). This
criticism was echoed by another director, Dr Neil Phillips, who felt that
his fellow directors lacked even basic knowledge about the club that
they were supposed to be running (Phillips, 2008). Phillips recounts how
at his first board meeting in 1963, “As the meeting progressed, innu-
merable empty bottles lay on the table ... Some directors chain-smoked
throughout the meeting” (p.187).
The club was moderately successful and Amer’s investment appeared
to be paying off – by the end of the 1970s MFAC had established itself
in the First Division. In February, 1979 Middlesbrough Borough Council
(MBC) gave planning permission for building work to commence on
a new indoor sports hall adjoining the ground which would provide
the club with modern sports facilities, followed later by permission for
gymnasium and squash courts (Amer and Wilson, 1998). The project
was to be:

wholly self-financing, using grants received from the Sports Council,

the Football Grounds Development Trust, the League’s Safety of
Sports Grounds Trust, a loan from Scottish and Newcastle Breweries
(S&N), Parkway Estates, and by utilising the profits from the club’s
own lottery fund which could only be invested in new projects such
as the Sports Hall. (Amer and Wilson, 1998, p.179)

The club had long operated a social club on the Ayresome Park site
(Paylor and Wilson, 2014) and S&N supplied beer to it and to the
members’ bars within the stadium (Northern Daily Mail, 1983). The
brewery saw its financing of the sports hall, which was to include a bar,
310 Alex Gillett, Kevin Tennent, and Fred Hutchinson

as an opportunity to increase its revenue on the site by introducing new

selling points away from the fortnightly match-day peak.

5 A Teesside partnership: MFAC and the brewing industry

in the 1980s

After a promising start to the decade, MFAC did not continue to perform
well on the pitch and the first few seasons of the new decade saw the
club decline from being a well-regarded First Division side to a strug-
gling Second Division outfit. With relegation to the Third Division a
real possibility by the 1982–1983 season, there were lower crowds and
therefore lower gate receipts, which was a significant problem for the
club because (other than incoming transfer fees) ticket sales were by far
its largest source of income, and MFAC could no longer cover the cost
of wages, let alone many of its bills (MFAC, 1981, 1982, 1983). Such
pressures created the impetus for innovation on the commercial side of
the club, and in September 1983 a new sponsorship deal with Camerons
(based at the Lion Brewery in nearby Hartlepool) was announced, even
though the impact that this had on the financial situation is not entirely
clear from the club’s published accounts (MFAC, 1983).
Camerons had a prominent position in the Teesside area as one of
Hartlepool’s oldest firms and traditionally its largest private sector
employer (McKay 2014a, b). The firm is perhaps most strongly associated
with its Strongarm beer that was launched in 1955 and targeted squarely
at the industrial workforce.10 The launch of Strongarm had coincided
with an acquisition strategy that peaked in the 1960s with 750 licensed
premises throughout the North East and North Yorkshire.11 Camerons
was purchased by Ellerman Lines for £10 million in 1974 before the
whole Ellerman Group was purchased by Sir David and Frederick Barclay
in 1983 for £45million (McKay, 2014a).
MFAC’s deal with Camerons reportedly involved a cash injection
of £250,000 to develop the club’s sport and leisure facilities. It was
proposed that this investment would “at last open up the sports hall
white elephant” for six days per week in order to bring it online as a
revenue stream which could in turn help the financial standing of the
club as a whole (Northern Daily Mail, 1983). Additionally, Camerons’
money would be used to revamp function rooms and the executive suite
within the stadium so as to accommodate an additional 650 members
(Middlesbrough Evening Gazette, 1983a). The deal represented a major
step for the brewery, which was replacing its rival, S&N, at selling points
in the social club and members’ club bars, as well as in the sports hall
 Beer and the Boro 311

which S&N had helped to finance (Northern Daily Mail, 1983). Camerons’
Managing Director stated: “We’re not just making this move to sell our
beer on Teesside. We also want to get involved generating a good family
atmosphere at one of our local football clubs” (Northern Daily Mail,
1983).
On the same day, in another local newspaper, the lead story had
the headlines “Boro Faces Trial by F.A.” and “Lock up This Scum”
(Middlesbrough Evening Gazette, 1983b). A pitch invasion after a recent
match had caused concerns about hooliganism at Middlesbrough
matches. Football hooliganism was (and to an extent still is) a favourite
topic of the media and of politicians in the UK, with beer/alcohol
considered to be a catalyst for violent behaviour in and around soccer
grounds.12
By mentioning their efforts to generate a family atmosphere, both
MFAC and Camerons appear to have been emphasising self-regulation
and softening the message that they were investing to increase the
sale of beer in and around the stadium, particularly on match days but
also throughout the week. In a news article announcing the deal, the
football club even managed to promote one of Camerons’ premium
brands, Hansa lager,13 when the Club Chairman was quoted as punning
“together we have the Hansa” in reference to its newly forged relation-
ship with the brewer (Northern Daily Mail, 1983). Yet, ironically the deal
was initially controversial with fans of Hartlepool United FC, the club
in Camerons’ hometown,14 with the company accused of ignoring the
financial difficulties of that club, and some fans vowed to shift their
custom to rivals such as Vaux and S&N (Northern Daily Mail, 1983).
Considering the rivalry and competitive nature of the relationship
between Camerons and S&N at the time, it is apparent that Camerons’
displacement of S&N at the various bars within MFAC’s stadium and
social club was something of a coup. The promise of Camerons to help
bring online the club’s unopened sports hall and leisure facilities as a six-
days per week revenue stream explains MFAC’s incentive for switching its
supplier. The competition between Camerons and S&N continued, and
was still evident a year later when S&N bid to purchase Camerons from
the Barclay Brothers but were met with opposition, mainly from brewery
staff who perceived that such a takeover would threaten their jobs.
CAMRA (Campaign for Real Ale), the Unions and Hartlepool Council all
showed concern for the future of the Lion Brewery. The Council went
so far as to ask the office of Fair Trading to refer the proposed takeover
to the Monopolies and Mergers Commission, and the takeover did not
proceed (McKay, 2014a).
312 Alex Gillett, Kevin Tennent, and Fred Hutchinson

6 The white elephant looms large

Having initially helped to turn around MFAC in the 1960s and over-
seeing one of the most successful periods in the club’s history during
the 1970s, Charles Amer resigned from MFAC’s Board of Directors in
January 1983 and the club’s financial position now looked increasingly
precarious. Over the next 18 months MFAC continued to struggle to pay
its creditors and by summer 1984, with the Sports Hall still unopened to
the public, the club reported a loss of £300,000 and debt had increased
to £1.2 million (Carter, 1996). This contravened the conditions of the
Sports Council grant, which had required the hall to be open to the
public by December 1983. Amid concerns that the Sports Council might
take action to reclaim the grant, and acting upon the advice of its finan-
cial advisor, MFAC served a High Court writ to Amer, including a claim
for damages against his building firm, Parkway Estates, which had been
commissioned to develop the facility (Amer and Wilson, 1998).
A condition of the Sports Council’s £125,000 grant was that the sports
hall must be used by the general public by 31 December 1983, there-
fore MFAC urgently needed to open the premises to casual users or to
negotiate a joint user agreement with the County and/or the Borough
Council in time to do so. Unopened to the public, the sports hall
produced no direct revenue and as an asset was worth little, in fact the
market value of the centre was below its cost, and it presented a financial
burden and pressure on the development of the club (MBC, undated).
Use by the County/Borough would, however, require additional reme-
dial work, originally estimated to be in the region of £40,000–£70,000
to comply with Building and Fire Regulations (MBC, 1983) and later
revised to £175,000 (MBC, 1984a). The Council attempted to secure
central government funding to establish a joint partnership with the
club, but was unable to do so.
Having taken over the club’s alcohol supply contract from S&N,
Camerons had prepared the business plan and cash-flow forecast for
the Sports Hall. If the projected cash flow from the Sports Hall were
to become reality then it would be a big contribution to resolving esti-
mated losses. Middlesbrough Borough Council officers criticised the
report as being naive and based on over-optimistic assumptions around
demand and in particular the value and timing of money that the local
authorities would contribute. The cash-flow projections also made no
provision for coaching/supervision, repair and maintenance, or VAT.
Furthermore, the Council’s own analysis also questioned Camerons’
projections for income generated by the proposed licensed bar within
 Beer and the Boro 313

the Sports Hall facilities, which was deemed to be an overestimate on

the basis that drinking and health activities would not necessarily be
compatible (MBC, 1984b).
Despite the best efforts from the local authorities and the club’s owners
to improve its fortunes, as well as the support of Camerons, MFAC was
relegated to the Third Division of the English Football League on the last
day of the 1985–1986 season. The Sports Hall remained unopened to the
public and the Club’s financial situation was perilous, with many bills
still unpaid and former chairmen attempting to retrieve money previ-
ously invested (Allan and Bevington, 1996). Furthermore, the club was
unable to pay its players or other staff and several players left or requested
transfers. The impact of this was felt at all levels, including back-room
staff, players and the management team, with the distinct possibility of
the club going out of existence altogether (Todd and Brown, 2008).
In June 1986 there was speculation in the local press that MFAC’s
main sponsor, Camerons, might bid to buy the ailing club. Camerons
had, though, committed £13m to purchase 78 pubs in the Mansfield
and Hull areas at around the same time, and expressed a preference for
sponsorship deals rather than ownership (Middlesbrough Evening Gazette,
1986a). It was also reported that Camerons was owed £90,000 by MFAC
(Middlesbrough Evening Gazette, 1986b). In this context, the opportunity
to invest in ownership of the club would have looked like throwing
good money after bad. By August 1986, the club had two possible life-
lines: Camerons or the club’s bank appoint their own receiver, or, more
speculatively, a consortium led by one of the club’s directors attempt
to put together a rescue package that would pay off debts and provide
money to keep the club afloat (Middlesbrough Evening Gazette, 1986c).

7 S&N returns to MFAC

After a tense summer during which the team trained in local parks
and school fields, the club was eventually saved at the eleventh hour,
reforming – without the involvement of Camerons – as Middlesbrough
Football and Athletic Company (1986) Limited. Sufficient investment
had been obtained from the consortium of investors. Much to the
frustration of supporters, but after carefully considering its options,
Middlesbrough Borough Council declined to become an investor,
although, less publicly, it continued to assist and advise in other
ways “behind the scenes.” The consortium included London-based
entrepreneur Henry Moszkowicz, but mostly comprised firms with a
strong presence on Teesside including ICI, Bulkhaul and Scottish &
314 Alex Gillett, Kevin Tennent, and Fred Hutchinson

Newcastle Breweries, who in exchange for their investment gained

representation on the new Board of Directors15 (Paylor, 1989; Allan
and Bevington, 1996).
MFAC’s shirt sponsorship arrangement with Camerons,16 who were
still one of S&N’s largest rivals in the North East of England,17 was
unsurprisingly not extended into the 1986–1987 season and the team
were still officially locked out of their Ayresome Park stadium until the
receiver could remove the padlocks. As such the “new” club were due
to play their first fixture with no home ground and no shirt sponsor.
Eventually it was arranged for the fixture to be played at Hartlepool
United’s ground (Paylor, 1989; Brownlee and Cox, 2006). Despite the
investment by S&N, which helped save the club and the team’s jobs, the
players opted to continue wearing the previous season’s shirts embla-
zoned with the Camerons logo until they lost a match. After a strong
start to the campaign which had “kicked off” in August, defeat finally
came in October, meaning that Camerons benefited from around six
weeks “free” advertising on the shirts of a club which was now part-
owned by Scottish & Newcastle! (Slaven, 2012).
As well as being an important year in the history of MFAC, 1986 was
also the year of a Monopolies and Mergers Commission investigation
into “tied houses,” which found consumer choice severely limited and
no access for independent producers and wholesalers. It was concluded
by the investigation that wholesale and retail prices were higher
than they needed to be. Resultantly, the Supply of Beer (Tied Estates)
Order 1989 and the Supply of Beer (Loan Ties, Licensed Premises and
Wholesale Prices) Order 1989 were introduced in an attempt to liberalise
the industry. The Acts were a catalyst for the growth of the “pubco,”
and influenced the development of both Camerons and Scottish &
Newcastle Breweries.18
Camerons found itself bought and sold in fairly quick succession. In
1989, Camerons controlled 480 licensed public houses and 270 hotels
and off-licences. By that time the Barclay Brothers had sold their brewery
interests and Camerons was owned by Brent Walker, which spun
off the majority of the tied estate as a separate company: Pubmaster
(later acquired by Punch Taverns). Along with over 150 pubs and 300
customer accounts, Camerons was then sold to Wolverhampton &
Dudley Breweries in 1992 for £18.7 million. The Hansa contract ended
the same year and at around the same time the business of supplying
own label brands to Co-op, Spar and Winerite was also terminated.
Instead, efforts were focused on the Strongarm brand and the brewing
of Heineken, Kronenbourg and Irish Harp. Overall volumes shrank and
 Beer and the Boro 315

redundancies followed before Camerons was sold to another North East

brewery, Castle Eden, in 2001 (McKay, 2014a).
S&N had meanwhile switched its emphasis on brewing beer towards
leisure and restaurant investment and symbolically changed its registered
plc name by dropping the word “Breweries” to become just Scottish &
Newcastle Limited (Ritchie, 1999). The firm was a major shareholder of
MFAC until the 1992–1993 season, although afterwards their represent-
atives, Reg Corbridge and Graham Fordy, stayed with the club and were
given paid positions as development manager and commercial manager
respectively as the club expanded its commercial operations (Paylor and
Wilson, 2014). In 2008 Scottish & Newcastle Limited was acquired by
Carlsberg and Heineken for a reported £7.8 billion and subsequently
owned purely by Heineken (through a deal with Carlsberg). Also under
Heineken’s ownership, the former S&N Pub Company now traded as
“Star Pubs and Bars” and retained a blue star in its logo, a throwback to
that used for so long by the S&N brewery (Star Pubs, 2014).

8 Discussion and conclusions

This chapter has used a single case, Middlesbrough Football and Athletic
Company Limited, to discuss the relationship between brewers, beer,
pubs and football. The football club (including its stadium and social
club facilities) was attractive to Camerons and to its rivals Scottish &
Newcastle, and as such became a part of a North East turf war between the
two. The case illustrates the historic nature of the relationship between
beer and football and also shows this relationship as interwoven with
other stakeholders, such as local authorities. What is demonstrated is
the importance of “place” – the context of industry (in this case “heavy”
industry as well as beer and hospitality) and the roles played by local
government and the local football club. Several themes and questions
emerge.
First, to what extent should football rely on funding from the brewing
industry, which can be associated with problems at odds with the
supposed benefits of the sport, such as the promotion of health and
fitness? From the 1980s it became more common for clubs and the
drinks industry to invest money in the “hospitality and leisure” aspects
of the football club business model (particularly since the introduc-
tion of the English Premier League in 1992). One might question the
extent to which clubs such as Middlesbrough are financially sustainable,
whether or not they have an economic purpose (and if so, what that
economic purpose is). In the literature there exists an argument that,
316 Alex Gillett, Kevin Tennent, and Fred Hutchinson

through its financing and advertising of football, the beer industry has
exploited working-class males and is therefore contradictory to the sort
of health and community benefit that sport can potentially bring about
(see Horne and Whannel, 2009).
The two brewers discussed in this chapter were, during the earlier
period, “regional” firms with a stake in the North East region of England
and its communities. However, they were large enough to be able to
make significant investment in their local sports clubs, in part at least
because they were producers of “mass market” products, including a
relatively high volume of lagers and other keg beers. The sports club
presented a potential sales opportunity for keg and processed beers in
particular, which can be kept longer than real ales and thus are well
suited to sports stadiums where turnover may peak once per fortnight.
Given the changes that have occurred to the market structure of the
UK beer industry (see Preece, this volume), and changes in the amount
of money required to run or “save” a club, it seems doubtful that regional
brewers would be willing and able to invest to help keep afloat their
local football clubs today. In the present climate are football, beer and
pubs all destined to be dominated yet further by big money, and fewer
but larger organisations? A scenario of homogenizsation seems possible,
given the trend for clubs to court corporate hospitality, to strike deals for
exclusivity of supply and to seek sponsorship arrangements with mass-
market drinks brands. The case presented in this chapter has reported
how, even in the 1980s, executive suites and corporate hospitality facili-
ties were seen as an area for investment by clubs and breweries.
There are, though, indications that the way in which brewers and
football clubs interact may be evolving in ways other than just through
corporate hospitality and big-brand homogenisation. An example is
Crystal Palace FC, which began hosting a beer festival at its Selhurst Park
stadium, and in 2014 had 180 beers and ciders, with the emphasis on
craft and real ales (Crystal Palace FC, 2014a). The club has also launched
its own branded wine and bottled beer (Crystal Palace FC, 2014b).
The impetus for these initiatives appears to be the club’s co-chairman,
Stephen Browett who is also the Chairman of Farr Vintners, a wholesaler
of fine wines (Farr Vintners, 2014).
Concerns about hooliganism aside, football and beer consumed in
moderation are a perfect match, a point that has not been lost on brewers
nor on football clubs. The Middlesbrough case acts as a vehicle to illus-
trate the historic links between the two sectors, and the consolidation
and development within both. Particular attention has been given to the
1980s, a decade under-researched if not ignored completely by business
 Beer and the Boro 317

historians, but which we feel was significant for both industries due to
the declining consumption, financial difficulties and increasing compe-
tition experienced by brewers and FCs alike. In some ways then, the
1980s represents a “last days of empire” before the significant changes
that followed the 1989 Beer Orders, and for football clubs that followed
the launch in 1992 of the English Premier League. Given the history
and interconnections between beer and football, it seems implausible
to imagine that the relationship between the two is likely to cease any
time soon.

Notes
1. Horne and Whannel illustrate the point by comparing football and rugby
league which have been targeted by beer, with rugby union and cricket
which have tended to have a closer relationship with distilleries.
2. Everton, Arsenal and Tottenham Hotspur FCs were all clubs based at grounds
owned by publicans at various points during their formative years. Indeed,
when Everton FC disputed over rent, the brewer who owned the land told
them to move away and founded Liverpool FC to replace them (Brown, 2010).
When Wolverhampton Wanderers FC moved to Molineux stadium in 1889,
it was with help from the Northampton Brewery Company (Metcalf, 2013).
Both Manchester City and Manchester United also fell under the control of
local brewing interests around the turn of the twentieth century. In the case
of City, they rented their Hyde Road ground from Chester’s brewery whose
Managing Director was also the club’s honorary president while other board
members were publicans (Sanders, 2010).
3. McKay (2014a).
4. See Rowlinson et al. (2014) for a critical discussion and comparison of
methods in historical theory and organisation theory.
5. See McKay (2014a).
6. An article published in a 1982 edition of Private Eye magazine (Private Eye,
1982) about MFAC, which was cited by Amer and Wilson (1998) as being
inaccurate and based upon “contrived fabrication” (p.194).
7. Paylor. and Wilson (2014). This source had been unavailable for a number
of years but was reprinted (and subsequently cited) during the process of
writing the final draft of this chapter.
8. Not for the first time in the club’s history, which had previously experi-
mented with professionalism before returning to amateur status a few years
earlier.
9. A player named Roberts was released, with his excessive drinking and poor
conduct mentioned as part of the reason for his dismissal. Another player
named Galbraith was suspended on two separate occasions for drunkenness,
and a player called Stephenson was also cautioned after staying out until
11:45 p.m. and questions were raised about his sobriety (Budd, 2012).
10. Advertised as “The Strongest Ale on Sale in Teesside at 1/7 per pint,” Strongarm
was noticeably higher in price than the Coronation Ale it replaced, but such
was its popularity that within eight months of its launch Camerons’ decline
318 Alex Gillett, Kevin Tennent, and Fred Hutchinson

in sales of cask ales had been reversed and demand sufficiently stimulated
that the firm now reported an overall increase for all beers sold in cask
(McKay, 2014a).
11. It is important to understand that Camerons was not the only brewer
involved in takeovers during this time, and that its acquisitions can be seen
as part of a wider consolidation taking place within the industry.
12. As a result of alcohol-fuelled rioting at the Scottish Cup Final at Hampden in
1980, the Scottish Criminal Justice Act was introduced and made it illegal to
be drunk in a football ground or while attempting to enter a ground, and was
followed by the wider-reaching Sporting Events (Control of Alcohol, etc.) Act
in 1985 for England, Wales and Scotland (Collins and Vamplew, 2002).
13. Following the success of its “Icegold” lager brand and the general trend for
lager, in 1979–1980 Camerons invested around £2million to become the
first company to be granted overseas brewing rights in Hansa Lager Bier – a
premium German brand. Working in partnership with Dortmunder Actien
Brauerei (D.A.B.), one of Germany’s biggest breweries, Hansa was now brewed
and marketed in the UK under license. The investment included the building
of a German-style lager plant to meet D.A.B.’s specifications – the recipe,
brewing technology and ingredients were all to meet exacting standards
(McKay, 2014a, b). Camerons’ links with football clubs were exploited in the
marketing of Hansa, which involved the sponsorship of MFAC’s away shirts
during the 1985–1986 season (the home shirts carried the logo of Camerons
itself), and also shirt sponsorship of York City FC between 1984 and 1990.
14. Founded in 1865, Camerons is one of Hartlepool’s oldest firms and has
historically been the town’s largest employer (McKay, 2014a, b).
15. By 1986, S&N had become a large regional firm, had been ranked number
five brewer in the UK and was selling around 6 Mhl per annum with sales
mainly focused on Scotland and the North of England (BBC, 2008).
16. Significantly, Camerons Brewery Ltd was one of the first breweries to sponsor
football kits, first with Middlesbrough from 1984–1986, with Hartlepool
United FC from 1985 to 1990 and again from 1993 to 2000, and also with
York City FC during the 1980s.
17. In 1985 at the time of its shirt sponsorship deal with Middlesbrough Football
Club, Camerons held 5% of the North East of England beer market (Camerons,
2014).
18. See chapter from Preece (this volume), Preece (2008), Preece et al. (1999).

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Index

AB-InBev, 165, 166, 167, 171, 173, 232 distribution, 6–7, 34, 35–9
advertising, 5, 6, 25, 34–6, 41–3, 45, education about, 26–8
99, 157, 158 excise duties on, 9, 24, 97–117
Africa, 9, 62, 213–4, 218, 220 football and, 303–17
bars in, 149 history of, 1–4
beer consumption in, 145–8, 151–3, imports, 36, 37, 40, 148–53
154–6 prices, 25, 39–40, 41–2, 238–41
brewing industry in, 145–59 production, 16–9
colonial, 150–1 volumes, 16–9
imported beer in, 148–53 Beer Academy, 27
indigenous beer in, 146–50 beer belly, 28
agriculture, 2 beer consumption, 1, 6–7, 16, 19–21,
alcohol consumption, 18, 28, 157–8 27–8, 29, 44, 60–1, 125, 145–8,
see also beer consumption 151–8, 167–8
alcoholic beverages, 1 in Africa, 145–8, 151–6
consumer expenditures on, 214–6 by category, 217–21
taxes on, 22–3 changes in, 205–23
alehouses, 7 football and, 303–17
ales, 218 global trends, 206–7
AmBev, 5, 165, 171 location, 216–7
America, 3–4 value, 214–6
see also United States volume, 207–14
Anheuser-Busch, 4, 5, 15, 35, 38, 54, beer industry, see brewing industry
64, 68, 70 beer market
Argentina, 163–4, 166–7, 172, 173, in Africa, 145–59
174 in China, 123–42
Asia, 40, 61–2, 68, 212–4, 220 in Europe, 100–10
atherosclerosis, 28 factors affecting, 20–1
Australasia, 213, 216, 217, 218 in Mexico, 163–6, 169, 172–5, 238
Australia, 7, 217, 220 in South America, 162–77
Austria, 107–9 Beeronomics Conference, 8
Beer Orders (1989), 6, 17, 247, 249–52
barbarians, 3 beer pong, 26
bars, 35, 42, 45, 149, 183, 184, 199, Beer Steward program, 27
210, 233, 252, 266 behavioural lock-in, 56–9, 67
see also pubs Belgium, 16, 233, 234–5
barter system, 150 Bemberg, Otto, 166
Bass, 5 Bieckert, Emilio, 166
Bavaria Group, 171 bitters, 218
beer Black IPA, 21
consumer perceptions about, 25–6, Blue Moon, 72
27, 54–5 brands/branding, 5, 6, 35–6, 40–7,
defined, 1 50–1, 55, 61–2, 247

321
322 Index

brands/branding – continued Carlsberg, 5, 60, 63, 70, 171

global, 62–4, 67–70 Castlemaine, 6
local, 69 Celtic Tiger, 283
public house retailing and, 253–5 Chamberlin-Heckscher-Ohlin
top world brands, 65–7 (C-H-O), 75–7
Brazil, 16, 163–4, 168–9, 172, 173, 174 chicha, 4
bread, 2 Chile, 163, 164, 168, 172, 173
Brewery Isenbeck, 166 China, 2, 9, 16, 60, 67, 220
brewhouses, 4 beer market in, 123–42
brewing, 1 development of beer and wine
discovery and development of, 1–4, industry in, 124–6
8 economic reforms in, 123–5
extremes in, 21–2 wine industry/market in, 124–41
monastic, 3 Chinese Curse, 15
technological innovations in, 2, 4 Cicerone program, 27
brewing industry Coca-Cola, 64
in Africa, 145–59 cognitive function, 28
changes in, 15–30 Colombia, 163–4, 165, 169, 172, 173,
in China, 124–6 174
consolidation in, 4–5, 15, 38, 55, colonisation
57, 60 in Africa, 150–1
craft sector, 9, 15–21, 29, 42, 51, in South America, 164
71–2, 182–201 Columbus, Christopher, 163
in EU, 80–5 communication channels, 36
evolution of, 57–9 community cohesion, 282–3
expansion of, 5–6, 59–60 Compaña de las Cerverías Unidas
global, 6, 8, 9, 34–52, 59–72 (CCU), 164, 167
interwar period, 4 competitive fringe, 185–6
intra-industry trade in, 74–94 consumer perceptions, 25–6, 27
market concentration in, 97–117 consumer preferences, 54–5
market structure of, 99–100 consumption constraints, 216
MFAC and, 310–1 Coors Brewing Company, 5, 6
post-World War II, 4–5 coronary disease, 28
in South America, 162–77 counter-urbanisation, 277
US, 99 craft breweries, 5, 9, 15–21, 29, 42, 51,
brewpubs, 4, 182–201 71–2, 182–201
British Isles, 3 business models, 190–3
Budweiser, 6, 69 emergence of, 183–7
bureaucracy, 247 geography of, 187–90, 193–201
business models Cranston Act, 17
in craft sector, 190–3 cross-border M&As, 110–4
in public house retailing, 257–60 Czech Republic, 5, 16, 18

Camerons, 312–5 dark beers, 218, 220

Campaign for Real Ale (CAMRA), 232, Denmark, 16
249, 269 developing countries, 36
cancer, 28 Diageo, 156
capital-labour ratios, 75–6, 78, 88 distribution constraints, 216
carbon footprint, 23–4 double marginalization, 239–40
 Index 323

drinking establishments, 7 heart disease, 28

see also pubs Heineken, 5, 6, 60, 63, 69–70, 156,
drinking games, 26 171, 237
Heriot-Watt University, 26
Eastern Europe, 68, 212, 220 Holy Roman Empire, 3
economies of scale, 34, 35, 44–50, 52, home brewing, 7, 17, 147–8, 149
99, 185 hops, 3, 22, 24, 58
economization, 214–5
education, 26–8, 29 import duties, 36, 40
Egypt, 2 imports, 164, 166, 171
electronic media, 42 InBev, 5, 15, 38, 68–9, 70, 164–5, 171
embeddedness, 267, 269–70 Inca, 4
environmental issues, 23–4 India Pale Ale, 21
Europe/European Union, 2, 3, 5 Industrial Revolution, 163
beer industry in, 80–5 industry standards, 56
excise duties in, 97–117 inns, 7
intra-industry beer trade in, 8–9, Interbrew, 5, 68–9, 164
74–94 international market, 54–72
taxation in, 22–3, 24 Internet advertising, 42–3
tied houses in, 237–8 interwar period, 4
excise duty, 9, 24, 97–117, 247 intra-industry beer trade, 8–9, 74–94
exports, 36, 167, 170, 175 econometric models for, 92–3
extreme beers, 25 in EU, 80–5
introduction to, 74–5
fermented beverages, history of, 2–4, measurement of, 77–9, 92
162–7 panel unit root tests, 93
financialization, 255–8 regression results, 85–91
first-mover strategy, 50–1 sensitivity analysis, 89–91
food pairings, 29 theoretical framework for, 75–7
football, 10, 303–17 Ireland, 10, 16
football clubs (FCs), 303–17 Irish pubs, 282–301
Fosters, 6 historic overview, 283–5
franchise contracts, 235 impact on rural economies and
communities, 285–301
General Agreement on Trade and Italy, 5, 18
Tariffs (GATT), 166, 171–2
geography, 60, 187–90, 193–201 Japan, 23
Germany, 3, 5, 16, 36, 100, 107, Jihau, China, 2
109–10, 237
global brands, 6, 62–4, 67–70 kidney stones, 28
global brewing industry, 6, 9, 59–72 Kirin, 171, 173
globalization, 8, 34–52 Kronenbourg, 6
Greece, 2
Grubel-Lloyd (GL) index, 77–9 lagers, 218, 220
Grupo Modelo, 171 Latin America, 62, 68, 220
Guinness, 5, 6, 60, 62–3, 68 licensing regimes, 7
Liquor Licensing Act, 283
Hammurabi (king), 2 liquors, 1
health, 21, 25, 27–8, 29, 158 local brands, 69
324 Index

local embeddedness, 267, 269–70 Netherlands, 16, 233, 237

lock-in, 55–9, 67 network effects, 56
lost funds, 234–5 Newcastle Brown Ale, 6
low-alcohol beers, 218, 220 newspapers, 36
New Zealand, 217
malt, 22 niche formation theory, 185–6
managed pubs, 241 non-alcoholic (NA) beers, 218, 220
market concentration, 97–117 North Africa, 2
marketing, 26, 29, 34–52, 55, 157, 158 North America, 213, 220
market integration, 9, 123–42 North American Free Trade Agreement
market power hypothesis, 50–1 (NAFTA), 166, 169, 172, 175
market segmentation, 41–2 Norway, 7
market share, 44–9 nutrition, 28
mass market beers, 58–9, 68
mead, 3 off-trade sales, 216–7
MERCOSUR, 172, 176
mergers and acquisitions (M&As), 34, Pabst, 5
36, 38–9, 50–2, 70–1, 98–100, Parkinson’s disease, 28
110–4, 164–5, 170–6 pasteurization, 4
Mesopotamia, 2 path dependency, 55–7, 58, 67
Mexico, 163–6, 169, 172–5, 238 Pepsi, 64
micro-breweries, 5, 15–21, 29, 42, 51, 99 pop-up pubs, 278
vs. brewpubs, 190–3 porters, 218
business models, 190–3 post-World War II, 4–5
emergence of, 183–7 premiumization, 214, 215, 221
excise duties on, 102–5 print media, 36
geography of, 187–90, 193–201 product development, 23
growth of, 182–3 product differentiation, 99
in South America, 171–5 production costs, 21, 40
in US, 17–8, 182–201 product quality, 40–2
micro-pubs, 7 Progressive Beer Duty (PBD), 17
Middle East, 213–4, 218, 220 Prohibition, 4
Middlesbrough Football and Athletic Protected Designation of Origin
Company Limited (MFAC), 10, (PDO), 6
303–17 Protected Geographical Indication
millennials, 186 (PGI), 6
Miller Brewing Company, 4, 6, 15, 69 pub companies, 232
MillerCoors, 71–2 pubcos, 17, 247–64
mobile pubs, 7 publicans, 7
monasteries, 3 public house retailing (PHR), 247–64
monastery pubs, 3 Beer Orders and, 249–52
monastic brewing, 3 business model, 257–60
moral hazard, 240–1 financialization and, 255–8
introduction to, 247–8
national identity, 54–5, 58, 68 investment and branding and,
national markets, 36, 57–61 253–5
Neolithic period, 2 ramifications and responses to,
neolocalism, 186–7 258–60
 Index 325

public house retailing (PHR) – continued brewing industry in, 162–77

socio-economic context and, 252–3 history of beer in, 162–7
turbulence and change in, 248–9 imports to, 164, 166
public houses, 7, 10 M&As in, 171–5
see also pubs micro-breweries in, 171–5
pubs, 7–10 Soviet Union, 68
brewpubs, 4 Spain, 5, 18, 62
in Ireland, 282–301 Spanish Conquest, 163
managed, 241 spillover effect, 236
monastery, 3 spirits, 1, 18, 150–3, 215
pop-up, 278 steam engine, 4
tied houses, 231–44 Stella Artois, 6
village, 10, 266–79, 282–301 stouts, 218
pulque, 163 strategic branding, 247
pumpkin ales, 21 Sumer, 2
Sunderland University, 26
Quilmes, 166 supermarkets, 25, 247, 295
Sweden, 7
radio, 42 switching costs, 186
raw materials, 58
availability of, 22 taverns, 7
processing of, 24 taxation, 9, 17, 22–4, 97–117, 247
refrigeration, 4 Technical University, 26
regulation, 247 technological innovations, 4, 247
retailers, 27 television, 36, 42
rheumatoid arthritis, 28 Temperance Movement, 4, 220
risk aversion, 241 tesgüino, 163
Romans, 2–3 tied houses, 5–6, 9–10, 231–44
Russia, 23, 212–3 beer prices in, 238–41
credit constraints and investments,
SABMiller, 69, 71–2, 156, 166, 171, 234–6
173 double marginalization and, 239–40
sales costs, 34–5 exclusivity and, 235–6
Sante Fe Brewery, 166–7 introduction to, 231–4
Scandinavia, 3 market power and supply of, 236–8
Schneider, Otto, 166–7 terms of contract and, 236
securitization, 257, 261 trade agreements, 166, 169, 171–2,
smoking bans, 247 175, 176
social capital, 282–3 trade barriers, 36
soft drinks, 4 trademarks, 5
sorghum beer, 218, 220 transportation costs, 38
South Africa, 16 transport infrastructure, 4
South African Breweries (SAB), 63–4, trappist beers, 218
69 type 2 diabetes, 28
South America, 4, 9
beer consumption in, 213 United Kingdom, 5, 7, 10, 16, 99
beer production and trade in, beer market in, 107
167–71 Beer Orders, 6, 17, 247, 249–52
326 Index

United Kingdom – continued perceptions and experiences of,

breweries in, 19 273–7
football in, 303–17 social and economic functions of,
microbreweries in, 16–7 270–3
public house retailing, 247–64 Vinters Federation of Ireland (VFI),
village pubs in, 266–79 286
United States, 4–5, 16
beer market in, 58–9 water use, 24
breweries in, 19 West Africa, 150
micro-breweries in, 182–201 Western Europe, 213, 216, 218
microbreweries in, 17–8 wheat, 218
unit root test, 135–8 wheat beers, 218
University of California, 27 wholesale prices, 25
University of Leuven, 26–7 wine, 1, 3, 18, 21, 29
Uruguay Round, 171–2 consumption, 125, 210, 212
expenditures on, 215
value-added tax, 24 wine industry
village pubs, 10, 266–79 in Chile, 163
future of, 277–9 in China, 124–41
historical influences on, 268–70
in Ireland, 282–301 yeast, 4