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Get Ready for a U.S. Beer Duopoly

July 27, 2008

By Jeremiah McWilliams, St. Louis Post-Dispatch

Jul. 27–Peter Heimark, a California distributor of Anheuser-Busch beer, was tired of his competitors gloating over the imminent takeover of Anheuser-Busch by Belgian brewer InBev.

Miller and Coors distributors have “some undeserved grins on their faces about what they might perceive as confusion with our sales force and your sales force,” Heimark told August A. Busch IV, chief executive of Anheuser-Busch, in a July 15 conference call.

Busch responded, “If there is a grin on anybody’s face, it should be ours.”

Which big brewer has the upper hand in the U.S. beer industry? In the wake of a month of unprecedented change, it’s a matter of serious debate.

SABMiller and Molson Coors combined their U.S. operations to create MillerCoors on July 1. Twelve days later, Anheuser-Busch agreed to be purchased by InBev to form Anheuser-Busch InBev, the world’s largest beer company.

With wrenching transitions anticipated at both MillerCoors and Anheuser-Busch InBev, big questions remain: Which brewer is more distracted? Which will capitalize?

“Both sides think the other side will be distracted,” said Eric Shepard, executive editor of trade publication Beer Marketer’s Insights. “There’s going to be some worried folks on both sides.”

The combination of Miller and Coors — previously tooth-and-claw competitors — presents a more formidable domestic rival than Anheuser-Busch has faced in a long time.

MillerCoors has about 30 percent of the U.S. market, and Anheuser-Busch InBev controls close to 50 percent. The market share of Chicago-based MillerCoors is closer to Anheuser-Busch than any brewer in the past two decades. MillerCoors boasts 70 million barrels shipped annually, $7 billion in sales and a network of eight major breweries. Measured in barrels, its U.S. sales are about two-thirds as large as Anheuser-Busch’s.

MillerCoors plans to save $500 million annually by pooling distribution resources, marketing dollars and breweries. Coors, for example, could make beer in up to eight breweries, up from two, slashing the cost of fuel to transport Coors beer to market.

“Our logistical service times are going to be a lot faster. It’s going to be fresher beer,” Leo Kiely, now CEO of MillerCoors, told the Post-Dispatch last year. The merger is “a giant step forward” for both companies, he said.

But meshing Miller and Coors — the No. 2 and No. 3 U.S. brewers, respectively — requires job cuts in marketing and other areas. Keeping staffers motivated and focused as the two companies combine — and move their headquarters to Chicago from Milwaukee and Colorado — will be a major challenge.

Last October, that dynamic prompted August Busch IV to publicly exult over the chance to take advantage of MillerCoors while it was enmeshed in a transition period. But InBev’s planned takeover of Anheuser-Busch may have dampened that opportunity, if not canceled it completely.

Several analysts said the short-term beneficiary of InBev’s takeover will be MillerCoors, because of the culture shock awaiting the historically independent A-B.

MillerCoors has the advantage over the next year or two because Miller and Coors have done big combinations before, said Morningstar analyst Ann Gilpin. South African Breweries bought Miller Brewing in 2002, and Coors merged with Molson of Canada in 2005.

Also, the tie-up between Miller and Coors was a mutual decision to fight what Kiely, in an interview with the Chicago Tribune, called the “common enemy” — Anheuser-Busch. Neither Miller nor Coors backed the other into a corner, as InBev appears to have done to Anheuser-Busch.

Anheuser-Busch directors initially resisted InBev’s overtures before reaching an agreement. Employees “are not exactly eager for this change,” said Gilpin.

Still, A-B executives insist the dislocation facing MillerCoors is more dramatic than that inside Anheuser-Busch, because Miller and Coors will have to merge two U.S. businesses. A-B, by contrast, will be trimmed down but will not have to combine with a U.S. competitor.

“The opportunity is ours to get,” August Busch IV told the Post-Dispatch on July 15.

SUMMER AND BEYOND

The rapid flux in the brewing industry occurs against the backdrop of summer, the key season for brewers. In the short term, Anheuser-Busch is trying to soothe the backlash from loyal drinkers who may be put off by the imminent foreign ownership of Anheuser-Busch.

“We do not anticipate any significant consumer backlash in St. Louis due to the change in ownership,” said David Stokes, chief executive of Maryland Heights-based Grey Eagle Distributors, one of Anheuser-Busch’s largest wholesalers. “Budweiser will still be brewed the same way as always by the same St. Louis workers who live in our community and count on our support.”

For good measure, Anheuser-Busch vice presidents recently sent a memo giving distributors several talking points for drinkers and retailers, including that the same Budweiser recipes and brewing traditions will endure.

The coming months will be crucial as MillerCoors and Anheuser-Busch InBev try to rev up their respective distributors — middlemen who get beer from breweries and truck it to bars, restaurants, convenience stores and grocery outlets.

One Missouri distributor who handles Miller and Coors brews said the MillerCoors combination will be “very much a positive.” For example, it will streamline the process of ordering beer, posters and other items, he said.

Before the merger, Miller and Coors competed for the attention of distributors, who in turn worried about “pleasing two masters,” said the distributor. Now, the company’s distributors can have a sharper focus.

About 60 percent of Miller and Coors beer volume flows through combined distributors, who have muscled up to compete against Anheuser-Busch distributors, who outnumber them. MillerCoors wants to boost efficiency by persuading more distributors to merge.

“As far as competing in the marketplace, I don’t expect much to change,” said a Missouri A-B distributor who competes with combined Miller and Coors wholesalers in four of five counties.

Anheuser-Busch’s beer distributors don’t expect InBev to swoop in and immediately disrupt the system of benefits that rewards wholesalers.

Much of that money gets reinvested in marketing — drinks for bar patrons, for example. The thinking goes: InBev would presumably not want to shoot itself in the foot by slashing incentives for wholesalers.

MillerCoors and Anheuser-Busch InBev “would be pretty smart to just leave those folks alone,” Edward Jones analyst Jack Russo said of beer distributors.

With the U.S. beer market now containing two big players instead of three, analysts anticipate a more stable industry. They hope brewers will stay “rational” on beer prices — gradually raising prices to stay ahead of spiking costs for barley, hops, energy and packaging materials. Several years ago, big brewers slashed prices to steal or protect market share, but those profit-eroding moves were mutually harmful.

“Nobody’s real motivated to start a price war right now,” said Harry Schuhmacher, editor and publisher of Beer Business Daily.

One challenge for InBev will be avoiding the massive disruption among Anheuser-Busch’s executive ranks that often follows mergers and acquisitions.

On average, companies lose 40 percent of their top managers within two years of being acquired, draining critical knowledge from the top offices, said Jeffrey Krug, associate professor of strategic management at Virginia Commonwealth University.

The churning “has a very strong negative effect on performance,” said Krug. If InBev disrupts A-B’s executive team too much, the new parent company “could really mess things up.”

jmcwilliams@post-dispatch.com — 314-340-8372

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