Lion deal with Beck looks like fine brew

Between The Lines

Joe Helm


Lion Nathan appears to have got things very right in signing a provisional licensing agreement with Brauerei Beck and Co of German for Lion to brew and market Beck's beer in China.

The agreement ends months of speculation while Lion patiently talked with several international brewers to try to secure a licensing and distribution deal for a premium international brand for its Suzhou brewery.

The deal seems set to solve three issues hanging over Lion's Chinese strategy. Having invested $200 million in building a big brewery at Suzhou near Shanghai Lion needed to achieve economies of scale, wide distribution of its products and have a top international brand it could sell at high margins.

Much of the importance of the agreement, whatever its final shape, lies in economies of scale at the brewery and in a national marketing operation which is part of the agreement and offers Lion huge potential.

Lion will take over the marketing and distribution operations of Beck's beer through most of China, allowing Lion to push its own German sounding brands such as Steinlager and Rheineck through the same national system, breaking them out of their base in the Yangtze River delta.

Adding Beck's to its portfolio is important to Lion because it gives it an international brand at the high margin, top end of the beer market for the first time in competition with the likes of Heineken and Budweiser.

In fact, Anheuser-Busch, producer of Budweiser beer, was long considered a front runner for a deal with Lion but talks between the two collapsed late last year.

Jim O'Mahoney, managing director of Lion's Chinese operations, yesterday said talks with other parties were on hold now the provisional licence had been signed with Brauerei Beck.

Mr O'Mahoney said the preliminary pact was for three months to gave the two parties some breathing space while the final details of the partnership were worked out. Those details are expected to be made public before Lion announces its half-year profit at the end of the month.

The possibility of a joint venture of some sort between the New Zealand and German brewers cannot be discounted. Mr O'Mahoney yesterday referred to the relationship between the two as a "partnership". So it seems they are moving far beyond an arrangement under which Beck would pay Lion a fee for contract-brewing its beer.

The timing of the deal is also very favourable. Lion will start producing Beck's beer almost immediately, at the start of the peak beer drinking summer period.

With the Beck's deal, Lion's patient approach to China appears to have taken another step towards elusive financial success. But final judgment from analysts must be withheld pending further details, perhaps as soon as next week.