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Don't Look for Solace in Beer, Analysts Say

Antonia Oprita,|Associate Web Producer
Friday, 19 Sep 2008 | 9:44 AM ET

Oktoberfest fans may be gathering in Germany for a feast to forget the turmoil in world financial markets, but the traditionally defensive beer sector looks unlikely to offer investors a safe haven this time, analysts told CNBC.com.

Growth is concentrated in a few emerging markets and even those look uncertain as the effects of the brutal flight to safe assets that has become known as the credit crunch are still playing out.

"People go on drinking beer even in tough times. But when consumers are under pressure, they cut sales across the board," Andrew Holland, beverages analyst at Dresdner Kleinwort, told CNBC.com.

Global volumes growth will slow to 2 to 3 percent this year from 5 percent last.

Investors looking for long-term gains in beer stocks should look at geographically-diversified companies with high exposure to emerging markets and enough world clout, such as SAB Miller, InBev and Carlsberg, analysts said, adding that they should also keep an eye on evolutions in the main markets.

The U.S., where major banks have disappeared virtually overnight, is the world's biggest market for beer. But the top-end segment for imported beer, which is sold at a 50 percent premium over local beverages, has been performing badly even since last year.

"The sort of people who drink Heineken and Corona are the sort of people who worked at Lehman," Holland said, adding that there is also a switch in drinking habits, with more consumers turning to drinking beer at home rather than buying high-margin products in bars and restaurants.

Smoking Ban Hits Beer Sales

Western Europe, another traditional market for beer, does not bode well either, with sales lingering because of the combined effect of belt-tightening in the aftermath of the credit crunch and a smoking ban which entered into effect in many countries over the past few years.

"We're not going to get very much growth here," David Liston, senior beverages analyst at Barclays Wealth, said.

In the UK, where smoking was forbidden in pubs and restaurants in July 2007, beer sales have fallen by as much as 10 percent over one year, Liston added.

Eastern Europe, where sales were booming until not long ago and which boasts the country with the largest beer consumption per capita in the world, is quickly becoming saturated, especially in the big cities.

"I think there will be growth but in far-flung areas," Holland said.

Pockets of growth remain in countries like Russia and China, but each has its own risks.

In Russia, the trickle-down effect of oil prices brings profits for brewers, but there is also a high risk associated with a country that has unstable legislation and is marred by political uncertainties.

China looks like the best growth bet, but the advance is taking place from a very low base and the market is unprofitable because of the low selling price, Holland said, adding that a number of European brewers are trying their luck in Vietnam.

No More Mega-Deals

On a difficult market, small and medium-size brewers are likely to struggle and joining forces may be a survival tactic.

With funding for mergers and acquisitions drying up "I don't think the consolidation story has run its course, but we won't see the mega-deals we've seen before," Liston said.

In July, Belgium brewer InBev made an agreed $52 billion cash bid for Anheuser-Busch, the largest brewer in the United States, leaving SAB Miller, its arch-rival, behind to be world's second largest.

"I don't necessarily think SAB Miller will want to become as large as InBev-Anheuser-Busch. Size is not everything," Liston said. "If there are opportunities in emerging markets they will probably look at those."

Another logical step for SAB Miller would be to tie up with Canada-based Molson Coors, Holland said.

Dutch brewer Heineken, Danish Carlsberg, Mexican Modello and Turkish brewer Efes are of interest for a bigger company or may merge among them, he added.

As for Germany, where most breweries still comply with the centuries-old beer purity law originating in Bavaria and notorious for its rigid labor markets, things are likely to remain the same.

"I don't see an awful lot of consolidation in the German market," said Liston.

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