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Can the Czech Beer Industry Learn Anything from its Belgian Brothers? Entress, Alec 2016

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This document is brought to you for free and open access by Lehigh Preserve. It has been accepted for inclusion by an authorized administrator of Lehigh Preserve. For more information, please contact [email protected]. CAN THE CZECH BEER INDUSTRY LEARN ANYTHING FROM ITS BELGIAN BROTHERS? Alec Entress

Introduction export volumes between the two countries: (1) domestic consumption, (2) historical economic The Czech Republic boasts one of the growth in relationship to globalization, and highest beer consumption rates globally and is (3) differences in beer styles. Finally, I offer famous for pioneering the world’s most popular the following three recommendations to help style, the pilsner lager. The Czechs even joke bring Czech beer into international markets: that one of their national heroes, Good King (1) developing specialty beer styles and Wenceslas, got his title by convincing the organizations, (2) change in tax structure, Pope to end the decades-long ban on brewing and (3) reacquisition of major segments of the (“Prague Experience”). It is surprising, market. therefore, that despite this rich history, Czech beer makes only a small appearance in the Historical Context global beer market. In this article, I explain the technical, economic, and cultural reasons The modern history of brewing in the for this phenomenon and compare the Czech Czech Republic starts in the nineteenth and Belgian beer industries to identify future century, when communities of small projections for how Czech brewers may increase homebrewers found they could increase the their presence in international markets. quality and quantity of their beers by having I discuss the relevant beer history of both a few dedicated breweries in the community. the Czech Republic and Belgium and lay out a It was during this period that the Republic’s set of criteria to determine what makes a beer five best known breweries were started, “belong” to a certain country. I also discuss including the now famous in the following three reasons for the disparity in 1842. Over time, these community breweries 69 were consolidated into larger industrial beers with coriander and other spices. As productions; the 1,052 small breweries of the discussed later, although hops are now used early nineteenth century were reduced to just liberally in many Belgian brews, the legacy of 260 medium-sized breweries in 1946, two this can still be found in the wide range of beer years before the beer industry was nationalized styles offered by popular Belgian brewers today (Kozák, p. 130). During the communist period (Persyn et al., p. 80). of nationalized beer production, there was little One main historical difference between growth and consolidation, resulting in about 77 the two countries’ beer industries is that breweries in a country with around 10 million Belgian brewers were able to capitalize on the people at the time of market liberalization in growing world economy much earlier than the 1993 (Kozák, p. 131). However, because of the Czech brewers. In the 1960s, Brouwerij Artois, lack of capital for investment during this 55- maker of the now famous Stella Artois, started year period, these brewers were still using the purchasing smaller breweries, culminating in same technologies and processes that they had the former Interbrew purchasing Canadian in the 1940s. As such, when the breweries were Labatt, forming what was one of the first privatized by means of a public voucher system international brewing companies, InBev. to a relatively impoverished population during Importantly, however, despite its international the privatization of the 1990s, the market was presence today, AB InBev is still headquartered ripe for foreign investment and procurement. in Belgium (“Interbrew S.A History,” p. 3). Foreign companies have come to dominate the Czech beer industry. As of 2016, 81 percent The Current State of Each Industry of the beer produced in the Czech Republic is made by three of the four biggest brewing The comparison between the two companies in the world: SABMiller, Anheuser- countries is significant not only because of Busch (AB) InBev, and Heineken N.V. Table 1 their shared brewing history but also because shows the market share and prominent Czech of the similar scales of both industries today. brands owned by these multinational brewers. The Czech Republic and Belgium are similarly With the purchase of the biggest national sized, with populations of 10.6 million and 11.3 breweries by large multinational corporations million, respectively. As seen in Figure 1, both (MNCs), the Czech beer industry had access countries produced about the same amount of to new brewing technology, huge marketing beer in 2013, with Czech production around potential, and, arguably most importantly, 1.82 billion L compared to Belgium’s 1.81 well-established global distribution chains. billion L. Expressed in per capita terms, the This positioned the industry for rapid growth, Czech Republic produces 172 L per inhabitant not only within its own borders but also with while Belgium produces 160 L (Van de Walle, huge potential for export. However, as I show, p. 11). The point of departure for the rest of this potential has not been realized. this article, however, is that Belgium exports 1.1 billion L per year compared with the History of Belgian Beer Czech Republic’s 336 million L. My goal is to determine why Belgium exports more than The Belgian beer industry is also one of three times as much beer as the Czech Republic rich tradition: brewing in the country has been and to identify ways the Czech beer industry documented since at least the Middle Ages. In can break into international markets. fact, the history of Belgium’s beer industry was generally comparable to that of the What Makes A Beer? Czech Republic’s until modern times, except that much of the early brewing was done in It is important to define what is meant by monasteries instead of community breweries. either a Czech or Belgian beer. After all, if I limit Interestingly, many of the monasteries in the definition to brews produced by companies Belgium were not allowed to use hops, which owned in a target country, there would be only were outlawed by the Church and considered one major Czech beer in international markets, the “devil’s plant,” and instead flavored their the state-owned Budweiser Budvar. Nor would 70 Table 1 Owners of the Major Czech Brewers

Brewery Owner Market Share Annual Production Major Brands Sold in by Volume Volume Czech Republic (%) (Million Liters) SABMiller 50.7 922 Pilsner Urquell, Staropramen, Birell, Frisco, , , Kozel, Klasik Heineken N.V. 15.1 275 Starabrno, Krušovice, B ez ák AB InBev 15.2 277 No brands exclusive to ř ň Czech Republic Other/privately owned 19.0 346 Budweiser Budvar, Bernard, Svijany Total 100 1,820

Sources: “Beer in The Czech Republic”; Kozák.

Figure 1 Per Capita Consumption and Total Production of Czech Republic and Belgium

Sources: Balach; “Czech Republic…”; Persyn et al. Note: Data are only available per decade between 1930 and 2000.

71 it make sense to define each beer by the location L in 1900 to 93 L in 2004. The most often cited where it is brewed; Stella Artois, traditionally reasons for this include a change in consumer thought of as a Belgian beer, is brewed not only tastes toward sweeter drinks (such as soft in Belgium but also in the United Kingdom, drinks), a lower tolerance for alcohol abuse, Australia, Brazil, and Ukraine. Lastly, a beer’s and a shift away from the low-alcohol table country certainly cannot be attributed to its beers that traditionally accompanied every style, because Lagunitas, a California-based meal. Others argue that as Belgium became brewer, makes a fairly accurate Czech pilsner. wealthier, consumer tastes shifted from beer For the purpose of this article, a beer “belongs” to wine (Persyn et al., p. 85). Whatever the to a certain country when it fulfills these three causes, the Belgian beer industry had to seek criteria: new customers to survive as early as the 1970s 1. The brewery on the label has and started exporting beers mainly to other its historical origins in the European countries. This shift was rapid and geographic region currently part pronounced: 60 percent of Belgian production of the target country. was exported in 2009 compared to less than 20 2. At least some portion of the brand percent in the early 1990s. Interestingly, from is produced in the country from 1975 to 1995 the volume of exports increased by which the brewery originates. almost exactly the same amount that domestic 3. The beer must be sold, at least in consumption dropped, meaning that the total part, in the country in which it is production of each brewery stayed relatively brewed. constant. As I discuss later, it was only after These criteria eliminate from analysis 1995 that Belgium began to increase its total a foreign brewer that simply uses the target production capacity and become the world’s country as a manufacturing plant. For brew house (Persyn et al., p. 88). example, I exclude the possibility of examining In the Czech Republic, however, beer SABMiller opening a brewery in consumption has been consistently very high the Czech Republic for distribution across the throughout most of this same time period, Central and Eastern European countries. I do around 160 L per capita. It is only in the last not, however, exclude craft or microbrews or 20 years that consumption has started to the possibility of new brands introduced by fall to around 130 L per capita (Balach). In existing breweries, while also allowing for large comparison, Belgian consumption started at brands, such as Stella Artois, that are brewed in 160 L per person in the late 1930s and, despite multiple locations. Lastly, these criteria allow a peak in the 1980s, has been steadily falling for the current marketplace ownership mainly until 2013 (Figure 2). by MNCs in the Czech Republic. Refer back to Put simply, Belgium had to figure out Table 1 for a non-exhaustive list of some of the how to make up sales of this lost volume most prominent beers that fit these criteria. In several decades before the Czech Republic and the following section, I discuss three factors had the luxury of relatively unsaturated beer that explain why the Belgian beer industry export markets. It is unclear to what extent exports far more beer than does the Czech the centralized markets of the communist Republic. era influenced the exports of beer. The Czech economy has always been dependent on Reasons for the Difference in Exports exports and during this era most of these goods between Czech Republic and Belgium were sent to other Eastern Bloc countries. However, there are no data on the location of Breweries Respond to Drops in beer exports from Czechoslovakia during the Domestic Consumption communist era.

One reason that Belgian beers have such Globalization and Timing a strong export presence is a combination of necessity and good timing. Per capita beer The 1960s saw the beer industry begin consumption in Belgium fell from around 225 to adapt to the quickly expanding global 72 Figure 2 Per Capita Consumption of Czech Republic and Belgium

Sources: Balach; “Czech Republic…,”; Persyn et al. Note: Data are only available per decade between 1930 and 2000.

Table 2 SAB Miller Czech Beer Brands by Class

Economy Line Mainstream Super Premium Klasik Kozel Pilsner Urquell Primus Gambrinus Radegast

Source: “Quarterly Divisional Seminar Series.” economy. This included a market shift away 20 percent of the global beer market in terms from smaller local breweries to the dominance of production volume but 40 percent in terms of national beer brands. Economically, this was of the industry profit pool. It is also the largest accomplished by two mechanisms: increased single player in the world beer market (Stern, capacity and demand for national beer brands p. 2). It is a major player in the beer markets (driven largely by television advertising), and of both target countries, accounting for 55 a rapid succession of mergers and acquisitions percent of the beer produced in Belgium and by the leading brewers. By the late 1980s, these 15 percent of that in the Czech Republic. brands had exceeded the confines of their The Czech beer industry, on the other domestic markets and through these same hand, had been liberalized for only two years mechanisms began to form the giant brewing by the time InBev had made its international conglomerates that dominate the beer market debut and was severely lacking in capital and today. As discussed earlier, Belgian-owned AB technologies that would allow for the same InBev was one of the first to become a large economies of scale (Kozák, p. 130). Instead of international player. As of 2016, AB InBev owns growth through mergers and acquisitions of 73 other Czech breweries, the biggest and most beers being made in each country. The Czech popular breweries today grew through being Republic is the mythic birthplace of the almost acquired by foreign MNCs. Pilsner Urquell, ubiquitous pilsner-style lager that is brewed the country’s most famous beer, was bought and sold around the world, and 92 percent of by SABMiller in 1999, and Staropramen has all the beer produced in the Czech Republic been taken over by three different owners conforms to this style. Indeed, nearly all of the since 1991 (Kozák, p. 131). This is evident in international brands made by the MNC-owned the breakdown of the Czech Republic’s beer breweries are pilsner-style lagers. Here the market as of 2016; 81 percent of the market is Czech Republic is in a bit of an ironic position: owned by three foreign companies. the beer that it invented has become so popular I argue that the importance of this that its version of the style is not unique. ownership cannot be overstated. In order to Consumers are looking for different styles, or enter markets, brewing MNCs typically prefer at least different tastes from what is available acquiring domestic breweries instead of trying domestically. And although historically the to penetrate the market with their own brands. Czech beers may have been different or of It is easier to buy a brewery than it is to change sufficiently high quality to compete with consumer preferences. As these corporations another market’s domestic version, this may control larger proportions of the world market, no longer be the case. Some Czech brewers are they have to be strategic about positioning crediting eurobeer, the pale lagers resulting and branding their beers so that they do not from large-scale brewing operations run by the compete with each other. This results in very brewing giants, with bringing down the quality specific pricing, taste, and marketing schemes of Czech beers (Kozák, p. 136). Even if quality for each “class” of beer, which, although is not the issue, the numbers do not lie. In the different by name in each country, follows United States in 2014, only 10 of the 45 brands the exact same market makeup. For example, that gained market share were yellow lagers, a 2014 seminar presented by SABMiller to and two of those were largely driven by a drop investors described its section of the Czech in pricing. As Harry Schuhmacher wrote in beer market by the class system (Table 2). a recent trade magazine, “...Yellow Pilsner All but Pilsner Urquell, which is dubbed a marketers face the reality that...clear yellow “global premium” brand, are beers specifically beers are out” (p. 77). Therefore, if the Czech designed to be sold only in the Czech Republic. beer industry seeks to expand outside of its Each fills a specific niche of higher-priced and domestic market, it might do well to look into higher-quality beers and seeks growth only in producing styles different than the traditional domestic markets. Therefore, one simple and wares. direct answer to the question, Why does the This is exactly what Belgium has done Czech Republic export less beer than Belgium? and to a large degree it explains its success in is that the Czech brewery owners do not want exporting around the globe. About 26 percent to export. After all, these same owners have of Belgian production is non–lager-style economy, mainstream, premium, and super- brews, with 19 percent of total production premium lines in every other country in styles that are almost exclusive to Belgium Central and Eastern Europe, not to mention (Abbey, White, Blonde, Lambic, Trappist, and their own global brands that they seek to table beers). Even as domestic consumption export. For example, it would be detrimental for MillerCoors to spend time and money trying to of pale lagers decreases, these styles, in export an economy line beer to Slovakia since particular Abbey and Lambic styles, are it owns the brands with which this exported increasing their market shares quite quickly. beer would compete. This has effectively divided Belgium into two separate beer markets: moderately priced Specialty Beer Styles Do Better in pale yellow lagers and a plethora of higher- Export Markets than Pilsner Lagers priced specialty beers. The most famous of these specialties are the Trappists, which are A third factor to examine is the type of produced by seven monasteries and are some 74 of the most highly rated beers in the world. uses darker roasted malts, the flavor profile These breweries, which were started to give is not as toasty as other dark beers, such as the Cistercian monks a livable income, trace porters or stouts. This, at least in part, is due their roots and recipes back to the mid-1800s. to the fact these other dark beers are most Today, in order to preserve their heritage and often top-fermented ales, whereas the black market segment, beers labeled “Trappist” must lager uses traditional lager bottom-fermenting conform to the criteria set by the International yeasts. Overall it has a very clean and balanced Trappist Organization. This essentially dictates flavor profile accented nicely by the subtle Saaz that Trappist beers must be produced within hops. So too does it have a rich history and or near the abbey and that the monks must tradition, the marketing fodder so important to have control over the production. Production both the Trappists and the big Czech brewers. of all these beers is small, between 500,000 L As the Czech beer industry attempts and 12 million L annually, which due to their to increase its international presence, I popularity allows producers to charge very recommend that brewers capitalize on this high prices. More commercialized versions history and unique style for a robust marketing of these beers, dubbed Abbey-style beers, are campaign focused on this style of beer. Right essentially larger-scale spin-offs of the Trappist now, however, U Flek ’s beer is sold only within style without the control of the monks. They the brew house, although a few other dark are subsequently often priced considerably lagers can be found ůin Czech bars and stores. lower. This is just one of the many options that Czech brewers have to explore creating higher-priced Recommendations for the Future specialty beers. Keeping this analysis in mind, I have Specialty Organizations identified a number of recommendations for how the Czech beer industry might increase As the volume of high-quality specialty its export volume in the future. These include beers increases, small Czech brewers, like specific opportunities for styles and marketing, their Belgian counterparts, are likely to find legislative and organizational options, and an competition from the large-scale operations. ambitious restructuring of the entire market. This is not necessarily a bad thing because these international organizations can use Increase Production of Specialty their marketing muscle and well-established Beers distribution channels to bring these styles of beer into international markets. In much the As part of my research, I had the pleasure same way that the commercialized Abbey- of traveling to the Czech Republic and, of style beers likely improve the Trappist’s course, doing my due diligence tasting as many position rather than diminish it, the Czech different beers as possible. Apart from some of specialty beer market would have room for the lovely microbrewed pilsner lagers (which both small-scale and large-scale operations. stood as a testament to why that often-copied As consumers become aware of this style and rarely reproduced style has become the through the international brewe’s offerings, world’s beer), I was struck most with a number they will begin to seek out higher-quality niche of different black lagers that I found in small products. However, in order to differentiate breweries around the country. Perhaps the their products, micro-scale brewers may wish most popular example of this beer can be found to establish an organization that certifies at the brewpub U Flek , which, founded in their authenticity as independently owned 1499, boasts an impressive history as the oldest microbrewers. This organization could be brewpub in the country. ů specific to a style, or more of a catch-all for any U Flek ’s popular black lager retains type of specialty brewer in the Czech Republic. many of the common aspects of the traditional Of course, with the lack of a clear historical lager, such asů similar carbonation levels and lineage, such as that enjoyed by the Trappists, heavy use of the native Saaz hop. Although it this organization will have to devise its own 75 criteria for acceptance. Expanding beyond this requires significant One possible candidate is the already investment, both in bottling and packaging existing Czech Beer and Malt Association, which machinery and marketing. The tax increase according to a trade presentation “represents during this expansion phase may, at least in interests of breweries, malt houses, and other part, be a determining factor in why the Czech suppliers and partners in the beer sector” Republic has so few medium-sized breweries (Balach, p. 23). In fact, the Czech Beer and Malt poised for export. Association has already instituted a “Protected Geographical Indicator” for beers that use the Czech Brewers Reacquire approved types of malt and hops. However, the Large Breweries because this organization currently represents large, medium, and small breweries, a specific The last and most ambitious subset or group would have to be established recommendation of mine would seek to within the association. This sort of distinction capitalize on very recent events. In November is key to the “super-premium” stature of these 2015, SABMiller accepted a bid for acquisition exported beers and should be sufficiently from AB InBev for about $108 billion. If this deal exclusive to differentiate the highest-quality is allowed to go through, more than 30 percent products from their competitors. of the entire world’s beer would come from one company. Though both companies have Changing the Tax System to agreed and the price has been accepted, there Incentivize Growth in Small are many regulatory hurdles that must first be Breweries sorted out before the brewers are allowed to combine. Essentially, both companies will be A recent polling of Czech brewers and required to sell off assets in the United States, restauranteurs showed that an increase in excise EU, South Africa, India, and other countries to taxes for beer, passed in 2011, was rated as the receive regulatory approval. There is a lot of principal cause for the rapid decline in Czech uncertainty in what will be sold and what will beer consumption (Kozák, p. 133). Currently, stay and, therefore, a lot of opportunity (Mickle the beer excise tax rate in the Czech Republic and Chaudhuri). is determined by production volume, which The Czech Republic is strategically posed is common practice around the world. Larger to make an ambitious and potentially profitable producers pay a higher tax whereas smaller move. As AB InBev decides which assets to sell producers enjoy lower tax rates. Although the off, the Czech government or private investors actual monetary values of the tax are specific may make an offer to buy back the breweries to each country, more important is the relative and brands that are controlled by both AB tax per unit of production. The United States InBev and SABMiller. The Czech government Alcohol and Tobacco Tax and Trade Bureau already has a track record of running breweries more than doubles its tax rate once a brewer and still operates the Budvar brewery today. If exceeds 60,000 barrels, approximately 7 private investors control these brands, I expect million L. This means that microbrewers face that we will see a market structured more a significantly smaller relative tax burden than like Belgium’s and with a greater capacity for do medium-sized brewers. The Czech code, on exporting beer. the other hand, has more tax brackets based on production and increases the tax rate for small Conclusion and medium-sized breweries, which is common in about half of the EU countries (“Excise Duty Despite its rich history and high Tables”). While intuitively this seems to make production volume of beer, the Czech Republic sense, it may actually act to disincentivize is currently underrepresented in international microbreweries from expanding. Indeed, most beer markets due to a combination of social, microbrewers in the Czech Republic currently economic, and consumer taste factors. Moving rely on sales onsite and focus exclusively forward, however, the Czech brewing industry on their local markets (Lajksnerova, p. 12). is poised for growth of its exports through 76 changes in beer styles produced, tax legislation, the rest of the world at the beginning of the independent trade organizations, and twenty-first century, I suspect that it will move reacquisition of market segments. Although toward the front of the global beer market in the industry had been playing catch-up with the near future.

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