SPECIAL REPORT: No End in Sight to Beer Industry Consolidation

10 Oct 2016 --- Anheuser Busch’s (AB InBev’s) acquisition of SABMiller is creating a beer colossus though the new entity could “box out” smaller independent players, while analysts are predicting further M&A activity across the sector.

Dubbed “megabrew,” the $103bn takeover marries the world’s two biggest beermakers, who will now account for one in every three beers sold globally and brings together brands such as a Stella Artois, Beck’s, Foster’s and Castle under one roof.

The Belgian brewer, itself created through a number of mergers and acquisitions-, plans to cuts around three percent of the enlarged company’s workforce- and is ditching the SABMiller name- as it looks to generate $1.4bn of annual savings.

Further consolidation ahead
While AB InBev is selling off parts of the enlarged business, such as its 58 percent stake in MillerCoors to Molson Coors for $12bn to satisfy regulators, the deal clearly presents food for thought for rival global companies, such as Heineken, and whether they should respond by themselves acquiring companies or wait and see if the deal flops.

Speaking to FoodIngredientsFirst, Philip Gorham, an analyst at US investment firm Morningstar, said there is scope for further consolidation in the sector.

He said: “There is still plenty of consolidation left to do, but the big deal has now been done, so I would expect future consolidation to be smaller and more bolt-on in nature, unless the controllers of Heineken or Carlsberg suddenly relinquish control. Asia and parts of Europe are still fairly fragmented so there could be M&A there.”

There has been speculation in the market that Heineken and Molson Coors could tie-up, while there has also been suggestions that Diageo, the wine and spirits giant, could offload Guinness.

Bart Watson, the chief economist at the Brewers Association, said: “The other global beer companies, like Carlsberg and Heineken, are going to think about their place in the world differently, so that may lead to implications in the US.”

“You may see some of the other global companies looking to get into the US or acquire stakes or try to build their global reach as well.” 

Amstel-owner Heineken – for the time being at least – is putting out the message to the market that it’s business as usual.

Questioned about the deal in August this year, Heineken Finance Director Laurence Debroux, said it would not change it approach to selling its brands.

He said: “We have a global brand but we’re selling market by market and we don’t see the merger changing that.”

Will AB InBev be satiated by the mammoth acquisition of SABMiller is another question that experts are asking themselves?

Watson said it could acquire further small craft beer brands in the US, a fast-growing category.

He said: “This is a global company that makes over 500 million barrels of beer now, so craft-brewer deals are small potatoes to them. But I do think they’re interested in continuing to play in the US market, and the growth section of the US market is in craft and imports beer right now.”

“It’s hard to play in that market without acquisition because what craft [beer brands have] stood for is hard to replicate by bigger brands.” 

Why is AB InBev buying SABMiller?
Central to AB InBev’s move for SABMiller is the company’s aim of establishing itself in new markets, particularly Africa and Latin America. This is helping to offset its performance in more mature markets like the US and Brazil, which accounts for around half or AB InBev’s sales. Sales in these markets are coming under increased pressure.

Africa has the world’s largest working age population and the bulk of the drinkers coming of legal drinking age within the next 10 years will be in Africa. So the attraction for AB InBev to establish itself in this market is obvious.

AB InBev Chief Executive Carlos Brito has said that Africa would be a “critical driver of future growth for the combined company.”

SAB’s best performing market is Africa, where is has been brewing beer since the late 19th century and has a presence in South Africa, Tanzania, Mozambique and Nigeria.

Gorham said: “ABI is facing a structural decline in some mature markets (US in particular) and this gives them access to a whole new market that will reinvigorate their top line growth, with high single digit growth.”

On top of that, AB InBev clearly see opportunities to eliminate costs by culling overlapping functions, particularly in head office and back office, as it looks to improve profitability.

What will AB InBev’s strategy be?
According to Caroline Levy, managing director at CLSA,AB InBev’s tactics when entering new markets is to lift profits by slashing costs and moving consumers to more expensive beers.

Speaking to the Wall Street Journal, she cited that AB InBev has purchased regional brewers in China, seen off challenge of local beers, and then guided consumers towards Budweiser, which is around three times as expensive as Chinese local beers.

She said its strategy is based on “trying to move everyone up the value chain.”

What is certain is that AB InBev and SABMiller’s already huge purchasing power will be even more influential as a combined unit, whether it be its relationship with retailers or through its distribution networks.

Theoretically, should there be a shortage of a raw material such as hops, then this could spell bad news for smaller rivals.

Experts also believe that there will be changes now to AB InBev’s branding and marketing strategy, as it looks to ramp up activity and snatch market share from rivals.

Impact on craft beer category?
Craft beer is now big business in the US and Europe and AB InBev has tapped into this market with a number of acquisitions – Los Angeles-based Golden Row Brewing is one of five craft brewers it has bought in the past five years – to sit alongside it established brands. 

Yet for some the notion of a big global beer business owning smaller, independent craft beers doesn’t sit easily with some.

Speaking to FoodIngredientsFirst, Bob Pease, CEO of the Brewer’s Association, said consumers may be unaware that there local craft beer is owned by AB InBev and feel duped.

He said: “Many beer drinkers in the US choose craft beer because they want to support their local independent business.”

So incensed by the potential detrimental ramifications that the deal may have on the craft brewing industry, Pease wrote a hard hitting Op-Ed in the New York Times, highlighting the dangers that the new entity could squeeze out competition. 

The Brewers Association also made a number of requests to the Department of Justice, including reducing the number of wholesaler AB InBev owns and probing its craft brewery acquisitions.

The Justice Department appears to have heeded some of these concerns and has now stipulated, for instance, that AB InBev now has to discontinue its controversial incentive program which rewards its independent distributors for limiting sales of their “high-end craft and import beers.”

However, Pease believes that AB InBev still has the muscle to “box out small and independent brers” from getting access to its distribution network.

Questions remain
With a deal the size of this, much still remains in the air, but there is little doubt that rivals and stakeholders, such as retailers, will be concerned about the power this gigantic business will wield in the market. 

by John Reynolds