In the Shadow of Giants

Australia's Indies Carve Out a Niche

July 1, 2000 By Martin Morse Wooster

The regional independents occupy the healthiest niche in the brewing industry today. While micros and brewpubs are folding almost as fast today as they popped up in the early and mid-1990’s, and while big commercial breweries scramble for gimmicks to boost flat sales, the regional independents continue to grow, though carefully.

Australia is a country marked by unfair stereotypes. Aussie beer drinkers are often seen as cowboys who spend their nights in dusty country bars, chugging giant cans of bland lager. Truth is, most Australians are city-dwellers, and the big “oil cans,” while still sold overseas, were abandoned in Australia decades ago.

What is true is that Australians do tend to prefer international-style lagers. Walk into a typical Australian beer store and you’ll find lots of brands—Victoria Bitter, Carlton Cold, Foster’s Ice, Toohey’s New, Swan Lager—but very little difference in taste.

True, in the US beer market, the big three brewers produce 80 percent of the beer, most of it in the international style. That still leaves 20 percent of the market available for over 1,000 small breweries to launch the American beer revolution.

But the Australian picture is extreme: just two mega-brewers, Foster’s and Lion Nathan, produce nearly 95 percent of all beers sold.

In the past five years, a rising number of independent brewers—both Australians and a surprising number of expatriate Americans—are struggling to make Australia’s beers more interesting. These little brewers face formidable obstacles but they are slowly introducing Australians to the global beer revolution.

Nine decades of consolidation

Australians have been consolidating breweries ever since six Melbourne breweries joined forces in 1907 to form Carlton and United Breweries, or CUB. One of the six breweries was Foster’s. Over the past two decades, Foster’s Brewing has used Foster’s as its international brand name while calling its Australian division CUB.

In 1983, Foster’s was taken over by Elders IXL, a farm equipment manufacturer. Under Elders’ control, the firm went on a global buying spree, purchasing Courage in Britain in 1986 and Carling O’Keefe in Canada in 1987. (When Molson merged with Carling O’Keefe, the deal gave Foster’s control of 50 percent of Molson.) The company grew to be the world’s fourth largest brewer, and Foster’s chairman boasted that he would “Fosterize” the world. But the stock market crash of 1987 left Foster’s overextended and bleeding red ink. By the time Ted Kunkel became Foster’s CEO in 1992, the company’s future was in doubt.

It’s fair to say that the company had hit desperate times,” Kunkel told The Bulletin (an Australian news magazine) recently. “We were fighting for our very survival. With the debt load we had, we virtually had to ask our shareholders to save us.”

Under Kunkel’s leadership, Foster’s split off from Elders and issued new shares to help pay off its debt. It also sold several foreign subsidiaries, earning A$2.2 billion (US $1.6 billion) from its sale of Courage to Scottish and Newcastle and A$1.1 billion (US $750 million) from selling Molson the 50 percent of its stock that it owned. The result is that, under Kunkel’s leadership, Foster’s stock price has tripled and its debt has been sharply reduced.

Australia’s second big brewer didn’t come into existence until 1985, when financier Alan Bond, who already owned the Western Australian Swan Breweries, purchased Castlemaine Toohey Breweries (which owned breweries in Queensland and New South Wales).

The stock market crash of 1987 put an end to Bond’s brewing ambitions. His personal financial collapse left his breweries alive but suffocating from debt. In 1990, he sold his properties to the New Zealand firm of Lion Nathan, whose best-known brand is Steinlager. In 1998, Kirin purchased 45 percent of Lion Nathan.

Both Lion Nathan and Foster’s have been buying steadily in the 1990s. Lion Nathan’s purchases in this decade have included South Australian Breweries, a well-established regional brewery, and Hahn Breweries, a Sydney-based firm started by an expatriate American. Foster’s has purchased both Tasmania’s Cascade Brewery and the Northern Territories’ Darwin Brewery.

Foster’s and Lion Nathan have tried to keep some distance from these recent acquisitions, much in the same way that Miller keeps Leinenkugel as a distinct division. This ensures variety in the Australian premium beer market. Cascade products tend to be hoppier and more assertive than other CUB products; South Australian Breweries produces a stout that the Beverage Testing Institute names as one of the 10 best imports of 1999. And Michael Jackson praises two other Lion Nathan products: Hahn Premium and Toohey’s Old Black Ale.

In 1999, Foster’s controls 56 percent of the Australian market (up from 48 percent a decade ago), while Lion Nathan has 38 percent. Two surviving Australian independent regional brewers—Coopers in Adelaide and J. Boag and Son in Tasmania—each control 2 percent, leaving the remaining 2 percent for smaller brewers and imports.

The Obstacle Race

Lots of people have tried—and failed—to break the dominance of the Australian Big Two. Five brewpubs and one craft brewery have failed in Sydney in the past decade, while another six have failed in Melbourne. In late 1999, Sydney only had one brewpub and one craft brewer, while Melbourne also only had one brewpub.

Moreover, lots of obstacles stand in the way of new brewers. Talk to Australia’s small brewers, and you’ll find out that the two things they complain about most are bottles and taxes.

Australia’s beer taxes are among the world’s highest. Customs and Excise (the Australian equivalent of the BATF) charges a duty, based on the amount of alcohol produced, that averages 44 percent. And unlike in America, there are no breaks given to small brewers, who have to pay the same rates as their larger counterparts. (Small winemakers, by contrast, are given tax rebates.) Should the brewer sell to any account, he then has to pay a manufacturer’s sales tax of 37 percent.

In 2000, Australia will introduce a system of value-added taxes, and the manufacturer’s sales tax is to be replaced by a 10 percent goods and services tax. But some small brewers speculate that Customs and Excise will then boost the alcohol duty even more.

Whatever happens, it’s clear that small Australian brewers will have to pay hefty tax bills. Bob Wessler, an American expatriate who created Sydney’s Harbour Beer, calculates that his tax bill is five times higher than it would be in America. “My beer,” said Geoff Scharer, creator of Scharer’s Little Brewery in Picton, New South Wales, “is made of malt, hops, tax, tax, tax, and tax.”

Bottles are also inordinately expensive. A new brewer can’t just order standard bottles from a manufacturer. In Australia, it’s much more complicated.

There’s only one manufacturer of beer bottles in Australia, a company called ACI. ACI allows the big brewers to reserve molds for their bottles and deny them to competitors. Even homebrewers are affected. Since there are no bottle molds reserved for them, most homebrewers have to use recycled green 400 ml soy sauce bottles from Thailand.

As a result, a new brewer has to find a bottle mold that hasn’t already been reserved and then must pay very high prices. “A new guy buying his bottles from ACI will pay three times as much as Foster’s does,” said Philip Adkins, managing director of J. Boag and Son.

Bob Wessler knows this process well. When he was creating Harbour Beer, he discovered that it would cost almost as much to buy beer bottles from the United States and ship them to Australia as it would to buy them from ACI. And when he decided to pay ACI’s prices (and found a bottle mold that hadn’t been reserved), he then had to spend A$100,000 to buy the equipment his contract brewer, Cooper’s, needed to alter its bottling line to fit his bottles.

“Buying bottles,” Wessler said, “is one of the most difficult things about being a brewer in Australia.”

The Cooper Dynasty

Even with all the obstacles, a rising number of entrepreneurs are trying to add choice and variety to the Australian beer scene.

The brewery that has done the most to provide Australians with choice and diversity is Coopers of Adelaide. But even when given clear directions, it’s a hard brewery to find. It’s quietly nestled in the shady Adelaide suburb of Leabrook, hidden beneath towering jacaranda and lilly pilly trees. For a brewery that’s been making beer on its site for over 100 years, it’s an amazingly quiet place.

The Coopers story begins in 1862, when Thomas Cooper, a British emigrant, decided to make some ale to help his ailing wife Ann deal with a fever. Ann Cooper came from a brewing family, and Thomas Cooper used her recipe. In south Australia’s relatively hot climate, Cooper had to adapt the British recipe, making his ale bottle conditioned to last longer and adding sugar to spark the secondary fermentation. The result was a style known as “sparkling ale.”

Cooper then followed with Coopers Extra Stout. Like the ale, the stout is bottle conditioned and can age for a long time. The Lord Nelson Hotel in Sydney serves five-year-old Coopers Extra Stout⎯when it mellows and develops port-like notes.

Thomas and Ann Cooper had 10 children; when she died in 1874, Thomas Cooper married Sarah Perry and had 10 more children. Eleven of these children survived into adulthood, ensuring that there were lots of Coopers to continue the family name. Coopers is the only Australian brewery controlled by descendants of its founder. “We wouldn’t want to be the generation that sold the brewery,” says marketing director Glenn Cooper.

Like most family-owned breweries, Coopers has gone through hard times. Coopers refused to adapt to changing times; it did not make lager until 1968, and until 1982, secondary fermentation for its ale and stout still took place in giant wooden casks called “puncheons.” While many younger drinkers thought that the cloudy beers were something only grandpa drank, Coopers stubbornly stuck to its traditional ways. The result was that, even when Australian beer was at its blandest, consumers knew that a good beer didn’t have to be a lager.

Coopers paved the way for us,” said Blair Hayden, managing director of the Lord Nelson Hotel, Sydney’s only brewpub. “It showed Australians that there was something else to drink besides lagers.”

What saved Coopers was homebrewers. Homebrewing was legalized in Australia in 1973, and Coopers at first sold sacks of wort that could be fermented with the addition of yeast. But customers found the sacks cumbersome, so in 1977 Coopers was the first brewery to market malt extracts for homebrewers. Coopers engineers also built the canning equipment needed to mass produce the extracts, and created a special lid to ensure that the Coopers yeast packets were securely fastened to the cans.

According to Glenn Cooper, Coopers currently has 35 percent of the world market for homebrew kits and 80 percent of the Australian market. Sales, he says, are largest in countries with high beer taxes, such as Canada and the Scandinavian nations.
In the 1990s, Coopers has diversified into many other areas. In the early 1990s, it began to enter the honey business through its Leabrook Farms subsidiary. Why honey? “Like malt extract, it’s a heavy, viscous substance,” Glenn Cooper said. Another Coopers division makes gourmet vinegars.

The core of Coopers business remains its beers. Under the leadership of head of brewing operations Tim Cooper (who abandoned a career as a cardiologist to work in the family brewery), Coopers now has 10 beers, adding several filtered beers and a dark ale to its portfolio. In 1998, the company released Extra Strong Vintage Ale, the first vintage-dated beer ever issued in Australia. Production of the ale, which is designed to age for up to 18 months, is limited to 25,000 cases, for sale only in Australia.

Production, Glenn Cooper says, is increasing by 18 percent a year. And Coopers beers are becoming more available in America. They are available in most Outback Steakhouses, and, repackaged under the Old Australia label, are also sold in most Trader Joe’s stores.

From Banking to Brewing

Australia’s fourth brewery, J. Boag and Son, has a convoluted history. It was founded in 1881 in Tasmania’s second-largest city, Launceston. In 1922 it was bought out by Tasmania’s other brewery, Cascade, and the two were jointly operated as Tasmanian Breweries. In the 1980s, this firm was twice acquired by two New Zealand companies who saddled it with heavy debts. In 1991, Boag and Cascade were acquired by Cadenza International, a London-based investment banking firm whose principal partner, Philip Adkins, is an American.

Adkins may be a globe-trotting investment banker but his love of beer began in 1980 when, as a Japanese major at Columbia University, he was appointed the Bud Man on Campus. His job was to make sure that the students had plenty of Anheuser-Busch products. “Every Friday afternoon,” Adkins recalled in an interview, “I met a guy named Wellington Faulkner, who took me to Harlem and taught me how to sell beer. It was a wonderful education.”

Adkins moved to Tokyo and started a banking career, eventually heading his own company. But he always wanted to run a brewery, and he bought Boag in 1991, even though the company was “$300 million in debt and about to go down.”

When Adkins first visited Launceston, he found that Boag had tremendous brand loyalty in southern Tasmania but was unknown in the rest of the country. At the first meeting, he found that many Boag employees had never left Tasmania and were suspicious of working for an American. The meeting “was one of those big, painful moments,” Adkins recalled. “I said, ‘If you work with me, we’ll make the best beer in Australia.’ Then I said, ‘Let’s have a beer! Does anyone have any beer in this place?’ We broke the ice over beer.”

For most of the decade, Adkins has been working at paring Boag’s debt. Selling Cascade to Foster’s helped, as well as getting rid of aging Queensland hotels. By 1997, Boag was profitable, and last year, profits nearly doubled.

Much of the turnaround was due to salesmanship; the sales force has risen from four to 28, with Adkins as chief salesman. (“I just really like selling beer,” Adkins said.) He launched a portfolio of new beers, most notably J. Boag’s Premium Lager. He also acquired the rights to distribute foreign beers, including Samuel Adams. And when Scottish Courage wanted someone to distribute Newcastle Brown Ale in Australia, they chose Boag over Foster’s.

Adkins sees vast potential for growth, particularly among “the 20 percent of the market who really love beer.”

“The Australian beer market is a sloppy duopoly,” Adkins added. “The Foster’s people have had it too easy. They can’t do anything that is radical or revolutionary.”

Another American Transplant

Bob Wessler is another American who sees great potential in the Australian beer market. He had spent years working for Boston Beer, and five years as head of Samuel Adams’ West Coast operations. But he wanted to run his own brewery, and at one point nearly opened one in Portland, OR.

In 1995 Wessler and his partner, Jennifer Colosi, visited Sydney, where Colosi’s mother and sister live. Wessler saw a market where consumers would pay A$12 for a six-pack of Toohey’s New or Victoria Bitter, and A$20 for an import. That left plenty of room for a craft brewer who could sell a fresh premium beer for A$15.

Wessler and Colosi spent two years in product development. They decided to call their company Harbour Beer after Sydney’s harbor. They named their brand Full Sail, both to reinforce the maritime theme and to quietly tell consumers they were getting a full-bodied beer. (Despite the name, the company has no connection with the American micro, Full Sail.)

Look at a bottle of Harbour Beer’s Full Sail and you’ll see something that strongly resembles Samuel Adams. Like Boston Beer, most of Full Sail’s production is contract-brewed, with a small facility in the Sydney suburbs to handle draft accounts and⎯an Australian first⎯to be open for tours. The labels are somewhat similar, and there’s even a guy with a periwig on the bottle—the explorer Captain James Cook. (The beer has a small amount of molasses, as a tribute to the beers Cook and his men consumed in their 18th-century voyages.) The recipe, using five malts and two hops, is, Wessler admits, patterned after Samuel Adams Stock Ale. But the result is something uniquely Australian. “What we’re trying to do is make something that has a lot of hops and malts, but is well-balanced,” he said.

Full Sale Amber Ale was introduced in May 1998, and Wessler now has about 80 to 100 accounts as well as some bottled sales in Sydney and its suburbs. In September 1999, Harbour introduced its second product, Full Sail Lager. Wessler plans to add about one new brand every year for the next few years.

According to Wessler, Full Sail beers are enjoying rising popularity among discerning beer lovers. “People are now regularly going to bars and asking, ‘Do you have Full Sail?’” he said.

Future Trends Down Under

What will happen to Australian breweries in the future? Two trends are clear: Boag will get bigger, and brewpubs may at last become common.

Philip Adkins says that he has substantial lines of credit from both British and American venture capitalists and is looking to buy a large brewery. He tried, but failed, to buy Lion Nathan. He then was in negotiations with Stroh to buy Blitz-Weinhard, a company that he saw as similar to Boag. Had those negotiations been successful, the Blitz-Weinhard brewery would have remained open. Now, Boag is mentioned as one of the breweries bidding to purchase Britain’s Bass, worth up to 100 times Boag’s own value.

As for Bob Wessler, his ultimate goal is to run the first successful Australian brewpub chain. (Earlier attempts failed.) He plans to open his first brewpub in Sydney after the 2000 Summer Olympics, and then open four to five other brewpubs in other big Australian cities in the next few years.

Australia, Wessler adds, is finally experiencing the global beer revolution. “Three years ago, Australia was 10 to 12 years behind everyone else. Today, they’re 4-5 years behind. Two years from now, they’ll be even.”