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Monday, June 25, 2012

Big Brewers Continue Same Old Dance; Can't Hear the New Music

Update: this just happened, it's all up to the anti-monopoly agencies now.

As beer drinkers in America continue to abandon light bland lagers for more interesting and varied beers (at a small but growing pace), the folks who run the world's largest breweries continue on as if nothing had changed. There is news today (in the Wall Street Journal) that ABInBev -- the Brazilian-Belgian behemoth that is inexorably swallowing everything beer-related -- is nearing a deal to purchase Grupo Modelo, the Mexican brewer of Corona and Modelo Especial. (if you didn't know, these are two very light, bland lagers that sell in huge amounts in America).

Anheuser-Busch InBev NV is close to taking control of Corona Extra beer maker Grupo Modelo, according to people familiar with the matter, in a deal that could be valued at more than $12 billion and would end a contentious history between the two companies. It would also consolidate the Belgian brewer's ownership of Corona Extra, one of the world's top beer brands.
AB InBev currently owns a 50% noncontrolling stake in Modelo, Mexico's largest brewer. The timing of any deal is uncertain, though two of the people said it could come as early as this week. It's also possible that the talks could break down before any deal is reached.
This, against a backdrop of shrinking sales of light, bland lager in the U.S.; although it must be said, that while ABIB's volume sales continue to drop, their profits continue to climb as they ratchet up prices and cut costs. Buying a huge Mexican brewery that makes a fairly high-priced brand -- Corona -- and one of the few strongly-growing light, bland lager brands -- Modelo Especial -- must make these guys salivate. A new company to cut fat out of, and two huge brands (three, really; Corona Light does okay too) ripe for the jacking up of the prices! It's like Christmas morning.

And it's happening around the world, as the WSJ article points out. 
London-based SABMiller agreed to acquire Australia's Foster's last year for some $10 billion, and Dutch brewer Heineken NV paid roughly $7 billion for Femsa Cerveza, Mexico's No. 2 beer maker after Modelo, in 2010.
More recently, Molson Coors Brewing Co. (like SABMiller and ABIB, the merged product of two colossal brewers) this year agreed to buy the Central and East European brewer StarBev LP for $3.5 billion, the biggest purchase ever for the company. The business had been owned by AB InBev, which sold it as part of its post-Anheuser deal retrenchment.
To what end? Well, come on: there's still stellar tons of money to be made in the light, bland lager business. You must know that, even if you spend all your waking hours in a brewpub. But what's the foreseeable end? I still think it looks something like this. I don't see any change in direction, though I have noticed that financial analysts have finally caught on: instead of urging the bigs to focus on their reliable core business -- the light, bland lagers that are losing steam -- they've reversed course and are telling them to get on this craft beer thing

If they do, in a big bold way...that could be a game-changer. Because as current sales figures prove, most Americans don't care that they're buying their beer from a big, soulless, foreign-owned corporation, and if that corporation makes a beer that tastes different, and celebrity chefs talk about it, and it has cool ads...they're probably going to buy it. That day's coming closer, and it's going to be a challenge for small brewers to survive against it.

I could be wrong. But I keep thinking of that Damon Runyan line from Guys and Dolls: “The race is not always to the swift, nor the battle to the strong...but that's the way to bet.


jp said...

in addition to the revenue growth these markets are seeing for light lager which look quite good compared to mature markets of Europe and North America, Gross margins for breweries in South America and Africa are ridiculous. The forseeable end is free cash flow plus a huge option on emerging market growth, the only bright spot in the global growth story these days.

jp said...

From ABIBB's q1 12 10k
Q1 12 organic volume growth in (1000 hls) YoY
North America 29,778 1.2%
Latin America North 30,520 4.8%
Latim America South 9,836 3.2%
Western Europe 6,553 -5.1%
Central Europe 4,783 3.2%
Asia Pacific 10,914 5.0%

looking at these numbers it's a no brainer (to me) where the growth (thus future) of the global Brewing industry lies and it ain't in American/ European craft beer

Lew Bryson said...

Volume vs. dollars, JP. Does it make a difference?

When does craft growth slow down? What's the end there? I guess what I'm asking is how you can ignore such a fast-growing segment of the North American beer market, the market that has the best margins in the world. I'm not saying it's going to take over, but ignoring it seems like a bad idea.

JP said...

The Craft beer market of North America is a very important and will remian so as time goes on given its margins and I imagine they will evenutally try to roll up some brands. But I think you are wrong to say the folks who run the world's largest breweries continue on as if nothing had changed. Transactions such as today's deal make it very clear to me that they are quite aware of the changing world and realize the future of the global brewing industry lies outside of the US.

Lew Bryson said...

Not really looking globally, I guess, JP; I tried to get that across in the post. I'm looking at the North American market, and that's most definitely a changing one, and the change is accelerating.

Still, what's the endgame, globally?

jp said...

I was thinking about your point about US craft beer market having the best margins in the world and looked at some numbers over lunch. Using Boston Beer Co’s 2011 stated operating margins as an example I am going to make an assumption(albeit a large one) that professional craft brewery's operating margins are in the area of 16%. Granted there are surely some higher and some lower but I think a professional brewery like Boston is a fair example of an industry average. Actually on second thought, I think it is too aggressive, when you consider all the micro breweries out there that operate at a loss depsite their volumes, but for the sake of being conservative (from my point of view) let’s use it. BBC sold about $525 million of beer in 2011 generating a pre interest and tax profit of about 80 million after accounting for 20m in settlement proceeds which were a onetime non reoccurring item. According to BBC's FY 2011 statement they produced about 2.5 million barrels, around 23% of all craft beer sold in the US in 2011. This equates to earnings before tax and interest of $32 per barrel of beer sold, pretty impressive. Looking at ABIB’s Latin American North operations they produced 120,340,000 hectoliters. That production generated an operating profit of $5.118 billion. Now one hectoliter equals .85 barrels so a further conversion shows that the like for like ratio to be around $50 in pre tax pre interest earnings per barrel sold. Feel free to critique this, as I put it together in a hurry and might have missed something big as I am apt to do. But at the wholesale level does not seem to have the best margins although at the retail level, I would guess it certainly does. This is indicative of the leverage ABIB has over retailers and distributors in emrging markets as compared to craft beer producers in the states who are much more dependent on their 'partners' to move product, would be my guess.

Lew Bryson said...

If ABIB is making $50 a barrel pre-tax on this stuff in Latin America, what are they making in North America? Have a number on that?

Please keep in mind that the notion of North America as the best margin pool in the world for beer is one that I did not come up with myself. I've heard it from any number of analysts, and for that matter, from Augie Busch III himself, back in 1996. There may be some difference in what everyone means by that, and in how I interpreted it.

But how much does beer SELL for in northern Latin America (before taxes)?

jp said...

Yeah I thought about that too, and eyeballed it and North America EBIT per barrel also comes out well north of $32 which leads me to believe there is something I am not accounting for(all this data is in the annual), I am guessing that there are some discounts and px reductions that are accounted for at the corporate level in the $8.5bln of distribution, sales and marketing line items. But even though I get a ton of things wrong, one thing I learned in this business, never take any wide sweeping announcements form analysts or mgt as automatic truth, trust but verify

Anonymous said...

There are two annual beer festivals in St. Louis. I tend to go to both each year, but only went to the Microfest in May and skipped the Heritage Festival that was held this month.

As you might imagine, the Evil Empire always has a couple of booths in the tents and does brewing presentations that, I must say, can be quite interesting. Let's face it, this is their home town and they WILL have a presence at any brewing get together.

Anyway, getting to my point. This year they presented a barleywine that weighed-in at 12% ABV and an Imperial IPA that was probably around 9% ABV as experimental brews. Many of you may not like this (I know I don't), but both of these brews were absolutely delicious - - smooth and well balanced. Those of us who appreciate craft brews have much to fear from these guys. They have the bucks to hire ANYONE they want (there are several former craft brewers on the brewmaster staff at AB) and the technology to make it taste better than anything else. Scary.


The Professor said...

You characterize the big brewers (AB/InBev, I assume) excellent results re their experimental barleywine and Imperial IPA as something to fear. Why?
Those of us who love good beer have whined for 40 years that the big brewers weren't delivering distinctive products...and now that they are starting to do just that, its a bad thing? Really?

"Craft" brewers are, in reality, more in competition amongst themselves than with the bigs (whose primary focus will continue to be producing the light fizzy lagers that make them money, and which the vast majority of beer drinkers still prefer).

Besides, those "craft" brewers that do it well will still have plenty of support, and the ones that do not do it so well shouldn't be given a free pass anyway, and they will eventually shake out.

Personally, even though I think that the big brewers main focus will for many years to come continue to be on light lagers, the prospect of them also turning out excellent IPAs and Barleywines will have the effect of everyone stepping up their game.
I just don't see it as a bad thing.

Lew Bryson said...

Pretty much agree 100%, Professor. Competition is good, and both sides have some innate advantages.

Bill said...

I'm not worried about small brewers. Pepperidge Farm doesn't compete witrh the local bakery even though both sell bread -- scale is paramount here. So it doesn't matter whether the giants start selling awesome barleywine, say. Your small brewers are worried about selling all they can make, which could be 2,500 barrels, or 5,000, or 10,000, or... and maybe making enough money to expand. The giants compete with the giants. Sierra Nevada and New Belgium and others near that size might be seen as competing with one another, but as long as the pie grows or they're still somewhat regional, we're not talking vicious competition. And the smaller ones are just trying to sell all they make. Much like a small family restaurant doesn't view all other restaurants as competition, these breweries don't view all other similar breweries as competition.

Further, we've seen the rise (well, I guess PA hasn't!) of smaller distributors who don't mind handling the thousands of SKUs and can get the smaller breweries' beer to on- and off-premise accounts -- so the tiny breweries' needs are met by a strengthening middle tier. The market is solidifying.

If you want to buy solely from the little guys, you'll be able to do that no matter what the big guys do. If you want to buy purely based on taste, you'll be able to do that, too.

Lew Bryson said...

Also agreed, Bill. And I don't think PA has seen that rise of small distributors (though there are Shangy's, and Bella Vista, and Stockertown...) because we've only recently begun the round of consolidation that has already strongly taken hold in most other states. You will see it, I'm sure; and the dance will continue as the successful ones are courted and absorbed as divisions of bigger houses...

George Esslinger said...

Those who dont remember history are doomed to repeat it. The big boys can and may drive out smaller brewers like they have done in the past. I should know more than anyone. To pretend they dont want to or will not is naive.

As they say nowadays in your time, Drink local, think global

Anonymous said...

Ab-Inbev are just like the greedy beer wholesalers who sell their beer sorry Lew.Taking profits and investing as little as possible.They will of course invest in the business but just not as much as if there were more upside potential.Abi will sooner than later divest themeselves or the if the price is right making lots of money in U.S. is a nice thing but has little upside potential.It already has high market share in a low growth market.Where are they going to go.Many high share Abi and Millercoors wholesalers in the Pennsylvania market ask themeselves the same question.
Cheers Pumpkin Head

Lew Bryson said...

Surprise, PH: you made a comment that wasn't blazingly offensive, so I let it go up. If you could learn punctuation and how to write a paragraph, someone might actually be interested in reading this.

Steven said...

I thought he was calling you Pumpkin Head. ;)

Lew Bryson said...

Hard to say with old Dopey Sox...

jp said...

looking at the equity of ABIB, market really likes this deal, this also push any talk of a SAB acquisition way down the road is it the end game? I think quite possibly we are in the final stages of consolidaiton and that would definitely be the crowning piece. But this modelo consolidaiton will keep them busy for the next couple of years

Anonymous said...

Just a thought, but what if AB tries to put a strangle on the commodities side of things here in the US. If they outbid microbrews when purchasing various hops, then there will be a shortage for the craft brewers, correct? I don't like the sounds of that. It seems to me they can always outbid any of the small guys for commodities if they ever feel the need.