Brewery battle: AB InBev and the craft beer challenge

Hackney Brewery says it is doing well because it has eight million people on its doorstep

"When we first started we only had a very small brewing kit because we thought it would be just two guys and a shed," says Hackney Brewery co-founder Jon Swain.

Mr Swain started the brewery with his friend Peter Hills four years ago in Dalston, east London. Today it employs six people and makes up to 228,000 pints per year.

While the guys at Hackney Brewery are very pleased with how their business is progressing, their production figure is a mere drop in the global beer ocean.

By contrast, the world's largest brewer, Anheuser-Busch InBev, which on Tuesday had its $104bn (£68bn) takeover offer for fellow brewing giant SABMiller accepted "in principal", makes 97 billion pints every 12 months.

With 140 breweries in 25 countries, and a 21% share of all global beer sales, senior figures at AB InBev, which has its headquarters in Belgium, have probably never heard of Hackney Brewery.

Yet the problem for AB InBev is that Hackney Brewery is one of thousands of small breweries which have sprung up across Europe and North America in recent years, which collectively are eating into its sales.

These new wave breweries and their so-called craft beers - typically flavoursome ales made with care from natural ingredients - are winning more customers that previously would have been happy with big brand lagers.

As a result, AB InBev's financial results - and that of its other global rivals - have been taking a hit.

AB InBev's net profit fell 32% to $1.9bn (£1.2bn) in the three months to June 2015, from $2.8bn for the same period a year ago. Meanwhile its revenues declined 9% to $11.1bn from $12.2bn.

It is against this backdrop that AB InBev first announced in September that it had made an initial approach to take over its rival SAB Miller, the world's second-largest brewer.

UK-based SAB Miller owns such brands as Peroni, Castle and Pilsner Urquell.

'Perfect sense'

So why exactly does AB InBev want to buy SABMiller, seeing as the latter is also being affected by the big rise in the popularity of craft beers?

Some analysts question whether bigger really is better in the brewing world

Andrew Holland, a beer industry analyst at bank Societe Generale, says AB InBev is attracted to SABMiller's dominance in growing markets in Africa and Asia.

SABMiller, whose history dates back to the foundation of South African Breweries in Johannesburg in 1895, is particularly strong in sub-Saharan Africa.

Mr Holland says: "One third of AB InBev's business is in the US and that's in structural decline, one-third of their business is in Brazil and that's in cyclical decline - and then 10% is in Mexico which is growing.

Consumers are switching to craft beers, says analyst Philip Gorham

"Everything else is either in Europe or Russia, which is ex-growth, or China which is the only 'go go' bit of the business - but China only represents 5% of profits."

So for Mr Holland it makes perfect sense for AB InBev to buy SABMiller.

'Craft beer tsunami'

Yet other beer industry analysts have questioned the planned tie-up.

Spiros Malandrakis, at market research firm Euromonitor International, says the mega-brewers need to do more to tackle the challenge from the craft beer revolution.

"This takeover is going in the direction that the big brewers have been headed historically for the past couple of decades - basically more consolidation and the mantra of 'bigger equals better'," he says.

"In my mind, from the point of view of the craft beer tsunami rising against them, I would have second thoughts about the longer term repercussions of creating the biggest mega-brewing conglomerate on the planet."

However, in defence of AB InBev, SAB Miller and their other large rivals, they haven't been ignoring the growth in craft beer producers in their home markets.

Instead they have been moving to increasingly buy them up.

Last month, Anheuser-Busch InBev announced it would acquire Golden Road Brewing, the largest craft brewer in Los Angeles county.

This is its fifth craft brewery acquisition in five years - an aggressive strategy designed to roll up regional craft brands.

Meanwhile, back in May SAB Miller entered the UK craft beer market after buying London's Meantime Brewing Company.

The Czech Republic's Pilsner Urquell is just one of the many beer brands owned by SABMiller

Yet Philip Gorham, an analyst at investment research firm Morningstar, questions whether the global brewers can hold back the tide of craft brewing.

He says: "The big breweries are off-trend there, volumes are declining but it's still a very small and slow decline - it's only about 1% a year - it's a death by a thousand cuts.

"They think they can stabilise their brands but I'm a bit sceptical about that - I think it's a trend they've got on the wrong side of."

Meanwhile, back at Hackney Breweries, keeping it small is the name of the game.

"I really can't imagine we're having a big effect on them [the big brewers]," says Jon Swain. "We are tiny - what's big growth for us is not a lot for them.

"We're making a unique product using the best ingredients - so at the moment, the plan is to stay under the railway arch forever."