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.”

Carlos Wept

Is the consolidation of big brewers going to reduce itself to absurdity? Speculation continues to strengthen that Anheuser-Busch InBev is going to make a bid for SABMiller. Leaving anti-monopoly issues out of it for the moment -- since, well, really: does anyone actually think the U.S. government is going to do anything about one company controlling 2/3+ of the beer market? Of course not; return to work, cogs -- let's think about this.

ABIB has the means to do the deal; they've been slashing costs and raising prices (even though their volume in their most lucrative market -- the U.S. -- is still dropping), they're making more money (not a great long-term state, how long can that go on, eh?)) and the debt from the purchase of A-B is either paid off or close to it; they've got a substantial warchest of almost $5 billion in cash/equivalents that will make a good start towards financing another acquisition.

ABIB probably wants to do the deal. SABMiller has been investing heavily in Africa and Asia, which are still growing beer markets (and ones where ABIB has not been particularly successful). And let's be honest: this is how Carlos Brito and InBev have worked for years. They are not brewers: they are bankers, and they grow their "breweries" by buying other "breweries," which are just counters, money, and markets to them. It's about money and balance sheets, slashing costs and raising prices. Anyone still shocked by that? God, I hope not.

Can SABMiller stop them? Dunno. Finance is not what I do. But judging from the speculation and the effect it's having on SABMiller's share price, it seems like a good guess that the answer is no. Especially since the market seems to "want" this to happen.

That's too bad. For one, the management at SABMiller is pretty sharp, especially in the U.S. part of the company. Sure, head honcho Graham Mackay said that craft beer would inevitably fade -- how's that working out for ya? -- but he's been brilliant on just about everything else. He's probably moving on soon anyway, but he's got some very smart lieutenants...and ABIB would probably dump them all and replace them with bean counters. It seems to be what they do.

This does mean something to you, of course. Consolidation will inevitably lead to more price increases, and when the mainstream beers that are still over 90% of the market take price increases, that's a green light to craft brewers to follow the leaders. Really, they do, because they can, and they want to pay their workers a better wage so that a craft brewmaster can finally make as much as a bottling line worker at a Miller plant.

The upshot? Kinda weird. Like I said here, 2 1/2 years ago, one of these days, Carlos Brito is going to run out of big breweries to buy...and then what happens? Will he start buying spirits companies? Will he start buying into wine? One thing I feel pretty sure about is that he won't suddenly decide to buckle down and make brewing the real focus of his energies. It's just not his style. Or his interest.

MGD 64 Lemonade: I'm not kidding

"MillerCoors Plans Lemonade Beer"

That's an actual headline from the Wall Street Journal. I'm not making this up. Let's get a couple relevant quotes, and then shred this. Here's a  beauty from the Chicago Tribune:

The company expects the brew to attract new consumers to the beer category and to capitalize “on the growing consumer interest in flavored beers,” Andy England, chief marketing officer for Chicago-based MillerCoors, said in a memo to employees Friday.

They better hope something works, because:

Miller Genuine Draft 64, named for the number of calories it contains, got off to an auspicious start after its national rollout in 2008. But sales have cooled. The brand’s unit sales to retailers fell by a double-digit rate in the third quarter, the company said in November, while MillerCoors’s overall sales to retailers declined 4 percent. 

Does that sound familiar? Chillingly familiar? That's right!

MillerCoors, a joint venture of U.K. beer giant SABMiller PLC and U.S.-Canadian brewer Molson Coors Brewing Co., has struggled with another fruit-flavored brand: Miller Chill. The lime-infused light lager enjoyed a strong debut in 2007, but its sales slid after larger rival Anheuser-Busch Inc. unveiled Bud Light Lime the next year.

Hey, if ABIB 'steals' lime (i.e., does it better, which Bud Light Lime did: Chill was poorly executed), just go to lemon! They'll never think of copying that! 

The two/three (your call: is "MillerCoors" one big brewer, or two?) big brewers are having a bad time of it. The economy is clobbering their main consumers, and craft beer has apparently reached a tipping point that has consumers across the spectrum interested, despite higher prices. Mainstream beer is taking an ass-whipping, even light beer sales are down (they're actually up over the last two quarters, I believe...but only because the previous year's numbers were so bad), and the mainstream imports are having their damned lunch eaten (and getting kicked around the schoolyard to boot). 

No, wait...Yuengling is pretty much mainstream -- a bit out of it, but it's essentially a light lager made with a substantial amount of corn, and they do have a light beer -- and they're kicking ass and looking for a new production plant. Could it be that it's actually...the big brewers' marketing that sucks? Oh, man, if the marketing fails...

Here's what happens when the marketing fails. ABIB's sales dropped 3.1% last year (MillerCoors fell 3.4% over that period). But things are not unhappy at the big brewers. Why?

The two brewers, which together account for nearly four out of every five beers sold in the U.S., still have managed to record steady profit growth, offsetting their weaker sales volumes by raising prices and cutting costs. 

Sound business practice, leading to expansion...well, no. What this really leads to is retiring debt, and then going to look for other breweries to buy and ravage -- sorry, lead to new heights of world domination. Rumors are rife that Diageo may finally be ready to unload Guinness (there are even some rumors that ABIB might be ready to just eat Diageo whole), and Grupo Modelo is a likely target. Carlsberg and Heineken are probably safe from takeover because of their ownership structure, but analysts are predicting that the final round of consolidation may at last be upon us, as the signs from the Book of Revelations appear. (It's getting tighter in spirits, too: Diageo, Pernod Ricard, Bacardi, LVMH (who seems more interested in buying up more luxury goods than booze lately), United, and Gruppo Campari are circling like wrasslers in a huge cage match, while Brown-Forman and Fortune hang out in the corners. That one's gonna get bloody.)

Who will win? I guarantee it won't be the consumer, and government anti-monopoly agencies seem to be nowhere in sight.

Meanwhile, that "growing consumer interest in flavored beers"? Like the smartass fish used to tell Charlie the Tuna, consumers aren't interested in flavored beer, they're interested in beer with flavor.
 

Graham Mackay on the global beer industry

SABMiller head Graham Mackay had a major interview in The Times yesterday. This is the man who told us the craft beer surge would fade: "It's inevitable." And after almost every beer blogger and beer website forum denizen had at him, he passed from their consciousness. He's big beer, after all.

Mackay is one of the brightest people in the business, a business that is filled with very bright people, especially at the top. I found the interview -- including a casually tossed-off T.S. Eliot quote -- fascinating.

Especially this, about the global consolidation of the beer market. I've marked the parts I find particularly interesting.

Two decades later the globalised market now looks like a two-horse race, with Anheuser-Busch Inbev leading SAB Miller, and Heineken and Carlsberg trailing behind. Many have made fortunes - the only real doubt is whether consumers have benefited.
Mackay is adamant they have. "It's resulted in better-quality products and more choice. People talk about the dead hand of globalised brand uniformity, but I don't think that's true in beer. Stonking great global brands haven't worked. Heineken is the most global brand and that's under 25% of its owner's volumes." [Bear in mind: despite having a number of large brands, neither SABMiller nor ABIB have a single dominant brand.]
And now, he predicts, consolidation will slow as the key players circle each other. "What stops the biggest groups consolidating is the desire of their owners. Most are in family hands. We are unusual in having an open share register."

That said, Mackay politely refused significant comment on whether SABMiller was interested in buying FEMSA, which is clearly up for acquisition. A guy's got to keep his hand in, after all.

What's it mean? Is Mackay right, is global consolidation about over? Not quite, with substantial pieces like FEMSA and Grupo Modelo still on the board and likely available, but close. As he says, major players like Carlsberg and Heineken are not very likely to be bought because of their ownership. Where to go from here?

The World's Largest Brewers: ups and downs

Just saw some interesting numbers: change in stock prices over the last year on the world's largest brewers from a regular e-letter from www.e-malt.com. Rolling down from the year's best performer to the year's biggest loser:

MolsonCoors -- +4.4%
SABMiller -- -15.7%
Heineken -- -48.2%
Carlsberg -- -60.9%
Anheuser-Busch InBev -- -70.7%

MolsonCoors has been tearing up the pea patch lately, running on big margins from Blue Moon and increased volume on Coors Light, enough to offset losses from the Canadian brands side of the business. Coors has put in place a number of things that are appealing directly to their customers: the 'blue mountain' temperature sensing label, the 'air vent' pouring aid on their cans, and they've done away with the goofy "Twins" advertising and have focused on the beer and the fun.

That all seems silly to most craft drinkers, but you know what? We don't drink Coors Light anyway, so they're not aiming at us. They are aiming at us -- or people who are thinking like us -- with the very understated and smart support they're giving Blue Moon. You gotta be some kind of smart to beat the crap out of the average performance of American/European stocks last year: -42%. Hats off to MolsonCoors.