The biggest beer deal of all time appears to be nearing completion, with an “agreement in principle” between Anheuser Busch InBev (ABI) and SABMiller. Analysts expect the deal to go through, based on rumors that SABMiller’s board unanimously recommends the deal. The market quickly responded, with SABMiller and Molson Coors seeing their stock price jump double digits. But despite the widespread feeling the deal will close, several questions remain.
[Editor's note: Nate Micklos was the brand manager for Pacifico during the ABI/Grupo Modelo deal, and will use that scenario as a benchmark for many of the implications and potential consequences here. — Michael Kiser]
First, it’s important to remember that the global market looks much different from the U.S. marketplace. ABI and SABMiller’s geographic strengths vary throughout the world; for example, SABMiller vastly outperforms ABI in Africa and India, two markets with huge growth potential. The merger allows them to strategically leverage one another’s strongest brands in any given market, while also introducing new high-potential brands from one another’s portfolio. But in the U.S., the Department of Justice (DOJ) will likely weigh in with a verdict to protect consumer interest. The DOJ wants to ensure no player can accumulate a level of power that could economically “hurt” consumers – the most tangible example of such hurt would be systematic price increases.
So how can the DOJ protect us? Mainly, by halting ABI from becoming a monopoly in the US. The DOJ will likely force the ABI + SABMiller merger to divest some of their brands in the U.S., with the goal to limit their footprint. This type of DOJ mandate is what caused the ABI + Grupo Modelo merger to undergo multiple iterations before gaining approval.
In that deal, the first proposal was for ABI to simply purchase Grupo Modelo outright; future iterations involved ABI selling Grupo Modelo’s U.S. distribution rights to a third party (enter large wine supplier Constellation Brands, who already owned 50% of the Crown Imports JV with Grupo Modelo); and the final agreement that ultimately gained DOJ approval in 2013 forced ABI to sell Grupo Modelo’s most state-of-the-art production brewery to Constellation Brands, in addition to conceding full U.S. distribution rights of the Grupo Modelo portfolio.
The DOJ wasn’t comfortable with ABI producing Corona in Mexico for Constellation Brands’ U.S. distribution. The U.S. was a market where ABI, with their existing portfolio of Budweiser and Stella, would continue to compete directly against Constellation’s Corona. The DOJ feared that ABI would have unfair early access to Constellation’s innovation pipeline before the new products came to market, or that ABI could alter the taste of Corona through minor formula or raw ingredient changes, or a host of other concerns. Markets perform most efficiently when the various players can remain independent and serve their own interests, which should theoretically serve the best interests of the consumer.
A similar round of DOJ mandates and iterations is likely with the proposed ABI + SABMiller deal. It’s been widely reported that ABI will need to divest the 58% of MillerCoors that SABMiller owns, with Molson Coors the clear front-runner to purchase MillerCoors. Molson Coors already owns over 40% of the MillerCoors JV. However, it’s unclear what would happen to the Tenth & Blake portfolio, or a regional craft brand like Leinenkugel’s. It’s plausible that ABI can maintain ownership of these smaller brands because their volume doesn’t really impact ABI’s total market share, which is the main DOJ consideration. But recent acquisitions like Saint Archer, could quickly become part of ABI as well — a turn of events most craft brewers don't anticipate when considering selling their breweries.
Amazingly, if the deal fails to close for one reason or another, ABI will owe SABMiller a reported $3 billion breakup fee. It’s clearly in ABI’s economic interest to make the necessary concessions in the U.S. marketplace to push this through. Even if that means losing the opportunity to acquire brands in the Tenth & Blake portfolio.
Another big impact from the merger would be on the three-tier system, particularly the distributor network. Most beer distributors in the U.S. align themselves to one of two “houses”, and are referred to as being in the red (ABI) or blue (MillerCoors) network. Independent brewers and suppliers generally choose between one of these two houses in a market. This means that in any given market, a distributor responsible for selling Corona may also be responsible for Bud Light, Goose Island, Stella, Heineken (and many more). The mind-blowing part is that most suppliers such as Constellation align with both houses, and the decisions are often made on a regional, market-by-market basis. Here is an extreme illustrative example: a blue distributor on the south side of Chicago may sell Corona along with Miller Light, but that same distributor could have a branch on the north side of Chicago that doesn’t have the rights to sell Corona, while their direct competitor (a red ABI house) promotes Corona on the north side. It’s all very confusing, and a bit incestuous.
We can’t predict the specifics of what will unfold but we can be certain that change is coming. The implications of this merger on the U.S. distribution network will depend on which brands ABI acquires and divests. Other market dynamics such as distributor consolidation and craft beer acquisitions will further complicate the system and bring more DOJ scrutiny. In any case, when ownership of a distributor changes, a lot of options become available to breweries and a game of musical chairs is likely to ensue. That means that some craft brands could legally leave Miller Houses, depending on state-specific laws and their inclinations, and join another distributor more aligned with their interests. The competitive angles for those distribution houses could also likely change — they could become even more competitive with ABI houses, or lose some of their leverage as the number two player of their market share diminishes. All of these possibilities can change the approach to buying and selling craft brands for better and worse. And ultimately, we could see an increase in the number of independent distribution houses if someone other than Molson purchases the divestiture or some portion of it.
We just learned from Reuters that the DOJ is already investigating allegations that ABI is exerting too much influence on the marketplace through actions intended to reduce competition. According to the report, once ABI acquires a new distributor (a growing trend of late) they are purposefully limiting the distribution and promotion of craft breweries. In some instances, ABI is accused of forcing the distributors to entirely stop carrying certain brands and breweries. As ABI’s footprint grows, they can apply more pressure on the various points along the three-tier distribution system. This likely won’t impact your favorite local beer bar, but it can have a big impact on what you’ll find at larger retail accounts and chains. And that’s where most of the volume is being done.
The initial everyday impact to any of us will be surprisingly small despite the massive size of the deal. Most of the impact will take place outside the public eye in areas like DOJ investigations, stock market trading implications, distribution network changes, three-tier system debates, and so on. One area of potential impact is craft brewery acquisitions. We’ve lately experienced a rush consolidation as large players and craft brewers scramble to align themselves. Several smaller breweries have reportedly taken capital funding behind the scenes, with many others privately putting themselves on the market for an acquisition.
The conversation among most blogs and articles focuses on craft breweries being bullied into an acquisition, but it’s important to remember that every (legal) transaction requires a willing buyer AND a willing seller. By aligning with larger suppliers, craft brewers can gain access to capital resources (financial and human), raw ingredients, quality control and consistency, marketing support, and access to new distribution. This merger could put some of that activity on hold and could eventually impact ABI’s ability to continue snapping up larger regional breweries. Nevertheless, the craft segment will continue to be circled by other suppliers and private equity firms who want access to the fastest growing part of the industry.
One thing we can all do is stay focused on what we can control. By talking with our feet, our wallets, and our throats, we can continue to support our favorite local breweries and demand that retailers make them available to us. Those inside the industry can continue to push for fair competition and regulations that protect our interests as beer drinkers.
Megabrew: Combining AB InBev and SABMiller via Wall Street Journal