Beer Mergers: Are The Micro Brewers Doomed?
Is your favorite beer doomed? The wave of mega brewer mergers is changing the market for investors and for beer drinkers. As the large brewers acquire each other, they are consolidating the market for national brands. Does this mean smaller brewers are in trouble? Will the consolidation of brewers reduce the choice for consumers? We'll look at what all this M&A activity in the beer industry means for investors and beer drinkers? (Learn more about friendly and hostile takeovers in our Mergers And Acquisitions Tutorial.)
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Stella Meets The King
A number of major beer company mergers have taken place, the largest being Belgian-Brazilian InBev's purchase of Anheuser-Busch for $52 billion in 2008, giving InBev about 25% of the world's beer sales. In response, Heineken purchased FEMSA, the brewer of about half of Mexico's beer including Dos Equis, Tecate and Sol. With this recent acquisition, Heineken emerges as another dominant international player in the industry. Although many of these companies have a solid base in beer-loving nations in Europe and North America, the focus is switching to emerging markets where consumption per capita has room to rise as the general wealth increases. (If you want to learn how to profit from emerging markets, check out Broadening The Borders Of Your Portfolio.)
Brewing Up Efficiency
Another goal of these mega mergers is to develop economies of scale as the merged company cut costs through optimal production procedures. While mergers drive out redundant expenses, they risk alienating their customers. The merger of Molson Coors with Coors Brewing Company in 2005 caused a consolidation of a number of distributors. Fewer wholesalers mean fewer choices for the small brewers to represent their brands. On the other hand, the consolidation among the majors encourages the remaining distributors to seek new products to take to market. This opens the door for the micro brews to get their products out there.
Liquor stores want their shelves to look varied and well stocked. While large brewers are paring down their product lines to the best sellers, micro brewers are filling in the gaps with unique brews that can demand a higher mark-up - and therefore profit margin - for the distributors. If you're fond of a floundering beer from one of the giants, you may be out of luck. However, within the micro brews you can find a beer that's similar, if not better. A quick meander through a liquor store will show you just how experimental some of these brewers have become, producing beers incorporating everything from red rice to white chocolate. It's every beer drinker's dream - the popular brands are getting cheaper because of streamlining and the overall variety is also increasing.
According to Beer Marketer's Insights, overall U.S. beer sales fell about 2% in 2009. Craft brews were up 5-6%. Again, with more craft brewers, beer drinkers have more choices. More beer lovers are choosing to consume the small brewers every year. This creates an advantage for the local brews as they capture the imagination and taste approval of the local customers.
According to David Corkindale, a professor of marketing at the University of South Australia's International Graduate School of Business in Adelaide, Australian men claim they wouldn't drink any other than their favorite brand. However, data on their actual behavior show that only 10% of these men are loyal to a single brand. This indicates beer drinkers willingly consume different beers creating an opportunity for the micro brews to become a part of beer drinkers menu. Additional data suggests that many beer drinkers favor the local brews, due to freshness and overall taste.
Have It Your Way
In the U.S. craft brewing sales share in 2009 was 4.3% by volume and 6.9% by dollars from 1,585 breweries. Similar statistics for many other beer-drinking countries hold as well. Geographer Wes Flack has hypothesized that the growth of such establishments is a prime illustration of people buying local products as they reject the universal affect of globalization. More likely than not, this rejection is less a conscious rebuke of large beer mergers than a preference for a customized drinking experience. When consumers find that perfect beer, they're usually willing to pay more for it and less prone to fall back on the cheaper, more generic international brews. (Read more about this controversial topic in The Globalization Debate.)
If You Can't Beat Them...
Does this mean the mega brewers will go after the micro brewers next? The prospect of buying into a growing market makes business sense. Yet, one of the largest micro brewers, Boston Beer Company holds only 1% of the U.S. market. For 2009, Boston Beer reported revenues of $415 million net of excise taxes, and net income of $31 million. This is minuscule compared to the global market share of the mega brewers. InBev reported $36.7 billion in revenues and $4.6 billion in profit. Essentially Boston Beer is 1% of InBev. And the aficionados probably would not even classify Boston Beer as a micro brewer.
Leave Them Alone
Even if the mega brewers acquired all of the craft brewers, including Boston Beer, it would have minimal affect on their sales. Moreover, their ability to scale up a micro brew would run counter to the desire of many beer drinkers to buy a local beer rather than one of the nationally distributed mega beer brands.
This does not preclude the largest brewers from acquiring micro brewers. However, anyone who enjoys a locally brewed beer should be confident their favorite beers will remain local. Investors should not expect the beer mergers to follow the trend set by the pharmaceutical companies, buying biotechnology companies to fill out their product pipeline - there's very little in it for the mega brewers. Besides, unlike medicine, people don't need encouragement to take their favorite beer in regular doses. (To learn more about how big pharma works, check out Stocks On Drugs: What It Takes To Get High.)
Still feeling uninformed? Check out last week's Water Cooler Finance to see what's been happening in financial news.