This month saw the biggest craft brewery sale to-date as Tony Magee sold half of Lagunitas to Heineken, one of the largest brewing corporations in history. To most U.S. drinkers, Heineken seems somewhat benign compared to the near-duopoly of Anheuser-Busch and MillerCoors, both of which are the result of massive mergers and spin-off joint ventures between US companies and international conglomerates that require ownership changes and Department of Justice reviews to avoid actual monopolies. The upcoming AB-Inbev attempt to take over SABMiller is another chance to watch and learn. And while Heineken is third among them in terms of size internationally, it’s actually the most wide-spread brewer in the world, with over 165 breweries in more than 70 countries, 176,000 employees, and 250 different brands. Now, with Lagunitas’ portfolio among them.
In his defense of the sale, which he knew would seem hypocritical to many fans, as well as industry folks he’s denigrated over the years for their own deals, Magee describes the company as “family owned,” which is somewhat true. Just over 50% is owned by Heineken N.V, a publicly-traded investment vehicle owned by the Heineken and Hoyer families, which in turn is 51% owned by Charlene de Carvalho-Heineken (her grandfather started the company 150 years ago). And that ownership stake has proven resilient as she and CEO Jean Francois van Boxmeer defended Heineken from an SABMiller takeover proposal in recent years, even as they gobbled up brands like Dos Equis and Bohemia for themselves — the best defense against a takeover is a high stock price of one’s own.
But that has little to do with operations. About 12.5% of Heineken is owned by FEMSA, a multinational beverage and retail company headquartered in Monterrey, Mexico where they operate the largest independent Coca-Cola bottling group in the world as well as the largest convenience store chain in Mexico. In Mexico, there are no three-tier laws that force separation between producers, distributors, and retailers, enabling a completely legal domination of the entire value chain. And in Mexico, that value chain is nearly 100% owned by Heineken and Grupo Modelo, now owned by AB-Inbev. Most recently, that duopoly battle includes craft brands from the U.S. being used as strategic entires to premiumize the market in Mexico, benefiting from the same inroads and pay-to-play tactics (completely legal ones) that brands like Corona, Stella, and Tecate have used to stay dominant.
“They have a fairly complex system of incentives,” explains Esteban Silva of Cerveceria de Colima, one of the region’s craft breweries on the Pacific coast at the foot of a volcano. “If you sell a certain number of cases of any beer, they give you back cash or free cases. The same is applied to new beers in the portfolio. Lagunitas and all the beers under the portfolio for Heineken will likely be part of the incentive packages of these companies as well.” In the U.S., this is the definition of pay-to-play, but in Mexico, it’s part of the fabric of the beer industry, and part of why the top two players have controlled it for nearly 70 years. “It’s difficult to make an argument that incentives should be illegal, it’s part of what companies have to offer to buyers here, and its something that will be hard to defend a prohibition on,” says Silva. "It’s something that we will have to live with."
It’s not just the little guys that get shut out of the market. The duopolies are so incredibly dominant, that even SABMiller couldn’t get in. According to Rodolfo Andreu of Cerveceria Primus in Tlalnepantla de Baz, Mexico, two years ago, SABMiller actually tried to sue. "They weren’t able to get in to the market because of these exclusivity contracts,” he explains. "Another brewery, Minerva, and us joined in the lawsuit as well, and it was with the anti-trust agency in Mexico. The resolution gave SABMiller nothing, but craft brewers were allowed to sell their beer anywhere they wanted after that. The exclusivity contracts were legalized in that resolution though, which shouldn’t be legal, but they can maintain 25% of their exclusivity contracts. And you know how it goes, 20% of the accounts sell 80% of the beer.” And as far as those incentives go, it’s not just case discounts. “Incentives include refrigerators, tables, chairs, and money. They call them anticipated discounts. That’s how it works."
Legal separation of the value chain in the U.S. is part of what made the last 30 years of craft beer possible, enabling small producers to gain access to market and compete. While the laws are inconsistently enforced, differ from state to state, and are easily skirtable at times, they create a playing field that might not be level, but at least has a workable tilt. Likewise, Mexican craft brewers are working hard to gain any inch they can on the miles ahead.
The integration of the Mexican beer value chain is a major advantage to U.S. producers and international corporations who may see a chance to exploit a soft craft market still in its infancy. Silva was inspired by what he saw in the U.S., and they were among the first the 5 or 6 craft breweries to open in the area in the past few years. It’s a precious, formative time for craft beer in Mexico, only accounting for about 0.5% of all beer sold. But it’s also optimistic. “In a few years, we hope to be about 1-2%, but in a country with 120 million people, that’s still lot of craft beer,” explains Silva. To get his beer to market, he’s partnered with a variety of distribution channels, including a small percentage with Grupo Model and their new craft and import platform, Beerhouse.mx. "Beerhouse began as a online store in Feb 2015, but is quickly expanding its reach to the traditional on-premise market," says Silva. "That's a game changer: if Beerhouse efficiently jumps into Modelo's distribution network, it will have the potential to be the largest distribuitor for craft beers in Mexico. Considering that the least developed stage in Mexico's craft beer market is distribution, the big advantage is that Mexican craft beers, in general, would be more available to Mexican consumers. The downside is that Modelo will control a strategic piece of the value chain."
For small brands like Silva’s the limited anti-trust legislation was a critical step toward a viable business future, but the battle for fair competition is still quite steep. "The two big guys are actively trying to distribute more beers in their portfolios, and adding new ones. Sometimes they own these brands — Grupo Modelo is importing Goose Island [owned by AB-Inbev who purchased Grupo Modelo last year], and Belgian beers, plus they’re distributing beers that are Mexican craft, including ours. They are using incentives to pour their whole portfolio in those places. This new law makes it easier for us to present our beers directly, but if we sell our beer at $2 and Heineken is selling one of their craft beers like Lagunitas for $2 and providing incentives, we will have to compete on other things, like flexibility in our commercial strategy, more knowledge of the local markets, and a better 'story' to sell. Otherwise, everyone will choose the incentives. This is a serious area of risk for us."
Silva is a guy who understands how markets, risk, and competition work in Mexico. He’s a former McKinsey consultant, working primarily in the public and social sector. McKinsey is a management consulting firm that works with huge companies and organizations to help them find new paths for growth. In the work that I myself performed as an innovation consultant, McKinsey is the company by which all of us were often measured against. As a strategic thinker, Silva is already starting to shake up his distribution agreements to gain an edge against incentives, which he can’t afford to pay. In some of the most active markets in Mexico, he’s in talks to switch from Grupo Modelo to a smaller, more independent distributor. “Our biggest issue is how Grupo or Heineken will play those incentives,” explains Silva. “We’re small and Grupo is not offering incentives for our beers in other areas where they distribute. So their incentives for those other brands will be working against us. For us, it’s about having an extremely good product, and betting that even though other brands may have incentives, people will demand our product."
Silva has a historical understanding of his current role in Mexican craft beer — he’s in on the ground floor. But he’s not blind to the disruptive factors of a raging U.S. craft scene making its way south. His approach to the introduction of major brands like Lagunitas coming in through incentivized, pay-to-play channels in Mexico with one of the world’s largest, and fully integrated brewing corporations is alert, to say the least. “Right now, we’re like Ken Grossman with his Pale Ale 30 years ago,” explains Silva. “We are improving our flavors and aromas. We imagined competing with both the big guys over time, but now we’re competing also with premium beers like Lagunitas. So for a Mexican consumer, they'll have extremely good U.S. beer at the same price as a Mexican craft beer. So we need to be much better than our American counterparts 20 years ago — our learning curve has to be much faster, our window of opportunity is much smaller."
The way beer is handled and priced in Mexico is a major complication for U.S. craft import brands as well. The “keep it cold” ethos of American craft is non-existant in Mexico, which has no infrastructure to support such precious handling of fresh, unpasteurized, often code-dated craft beer. And draft is only recently being implemented for craft brands. Andreu sees this as a major hurdle for U.S. breweries — one that local brand are gradually making better. "The market is mainly bottled beer. If you want to go draft, you have to buy the retailer the kegerators to serve the beer. So it’s much more expensive for us to do that. We’re going slow, but we’re doing it."
Andreu also cautions against a sudden influx of American IPAs, but is interested in their ultimate impact. "IPAs are not a well-received style in this area. Maybe in the north, closer to the U.S., but not here. Stouts and pale ales are good, but nothing as extreme as an IPA. If they bring us IPA, that can change things. Lagunitas will have to change the market and the palate of Mexican drinkers. They have a Pils and other things they can bring to Mexico."
And pricing. U.S. drinkers are used to paying high prices for sought-after Belgian beers, but the Mexican market might not be wired to see American craft as a premium import to the same extent. “There are some beers being brewed in Mexico now that are competitive to beers brewed around the world, and they’re cheaper,” says Andreu. "Our beer at a store cost 26 pesos (~$1.50 USD), Goose Island is about 33 pesos (~$2.00 USD), which they take a smaller margin on so they get volume, but the Rogue and BrewDog that we import are 56 pesos (~$3.25 USD) and we don’t want to make another buy of those beers because the prices are a problem. Mexican drinkers are not so loyal to brands — they drink whatever costs a little less."
By any measure, the Mexican beer market is a major new territory for American craft. It’s why AB-Inbev is shipping Goose Island's beers south, and it’s why Heineken wants to aim their own American craft brand, Lagunitas, over the Rio Grande. How fast the market can develop is anyone's guess, but it certainly has more headroom. Like the U.S. 20 years ago, people need to know they have options, palates need to develop, the market needs to open up and create access for small brands, and legislation needs to enable fair play. That’s no small task. But the upside of 120 million people and a legal duopoly for brands like Lagunitas to ride in on is enormous.
But the big questions is, could Lagunitas have gone it alone, like its founder, Tony Magee encouraged so many others to do? It’s unlikely he could have gone as big, as fast. Andreu tried to help, but his small import business probably wasn't a long-term solution. "Lagunitas could have come through an importer like us. We were in rounds with several breweries who wanted to come to Mexico, and they were still deciding who they were going to go with. Coming in as partners with Heineken means they can get in everywhere. But I wonder how their requirements will be met.” Andreu has seen new brand introductions before, and they’re akin to a blitzkrieg in the market. He recalls the introduction of Stella Artois to Mexico as a likely example of what’s to come: "In the course of one year you saw posters and publicity everywhere at restaurants and bars and it was easy to get the beer into these places. If Heineken wants, they can do the same."
It’s not really fair to assume that any U.S. craft brewer on their own, even one with the momentum of Lagunitas, can influence another country’s laws, culture, and help disrupt the near duopoly of a market the way they did in the U.S. over the past two decades. But damn if it isn’t part of what makes me excited about American craft leaving our shores. American craft beer isn’t just beloved the world over as a flavor from a faraway land — it’s paired with an ethos and an alternative to business-as-usual. That’s what the world admires so much about our breweries. And in that way, Lagunitas riding in to Mexico on Heineken’s hip doesn’t seem like the great moment for American craft that Magee seems to think it is.
Rather, it might one day represent craft the way Guinness represents Ireland. Or Amstel and Heineken represent the Netherlands. Or Corona represents Mexico. Or hell, it's what McDonalds means to Europe and Asia. Iconic and ubiquitous, to be sure. It’s a certain kind of success. But it's hardly what I'd call a legacy. Those are brands with almost zero connection to their original intent or place in the world. It’s all nostalgia on one hand, and pricing wars, duopolies, and efficiencies on the other. They’re brands that get bought up, moved around, and used as chess pieces in the global game of market share. And perhaps Magee wanted that kind of future all along — it just took awhile for him to realize it. As Ray Daniels, director of Cicerone and Magee's brother-in-law is accustomed to saying “the only difference between Anheuser-Busch and Sierra Nevada is 150 years.” There's a ring of truth to that. But I bet Lagunitas can do it much, much faster.
Disclosure: as I often note, I do strategic and creative work with breweries of all sorts. Of the breweries mentioned in this article, I have on ongoing relationship with Goose Island, who as I state above, follows similar channels in to Mexico as Lagunitas will and benefits from the same rules, or lack thereof. They have not been spared any criticisms here — in fact, they are used as examples of what's to come. Also, I recently visited with a host of start-up craft brewers in South America to provide insights from U.S. craft brewing trends and brands as they ready themselves for the market — this presentation was developed and given for free, although they did cover a portion of my travel expenses through their association.