Analyzing the Beer Market

I. Introduction

On Tuesday, October 9th, London-based
SABMiller and Denver-based Molson Coors announced they would be
combining their brewing operations in the United States, creating a
brewer called MillerCoors.[1] This move is the latest in a growing
consolidation trend among the brewers of the world’s beer. In 2002, South African Breweries purchased
Miller Brewing from Philip Morris, forming SABMiller.[2] Molson Coors was formed in 2004 when Molson, a Canadian brewer, merged with Adolph Coors.[3] Earlier this year, Anheuser-Busch announced that it would be importing Czechvar Beer, brewed by the Czech state-run brewery
Budejovicky Budvar NP[4] into the United States despite a century-long legal battle over the Budweiser name.[5] Most recently, Scotch & Newcastle, the U.K.’s largest brewer, is receiving numerous takeover bids from other major

first part of this article will examine the SABMiller and Molson Coors
United States brewing operations merger in some detail, including its
history as well as possible consequences for consumers in the United
States. The second part of this article will examine the current
business environment for brewers, including an analysis of how this
merger will help MillerCoors overcome problems that arise out of this
environment. The final part of this article will attempt to project the
future for breweries and consumers of beer.

II. MillerCoors: Great Taste and Less Filling

Before exploring the SABMiller/Molson Coors U.S.
distribution merger more in-depth, some background to the formation of
the two companies is necessary. Starting on May 30, 2002,
South African Breweries purchased Miller Brewing from Philip Morris for
$5 billion, at the time the largest beer acquisition in history.[7] At the time, this sort of consolidation among beer companies was a rarity.[8] In 2004, there was speculation that SABMiller would purchase Adolph Coors, as both companies seemed to complement one another
well in terms of their relative strengths and weaknesses.[9] However, Canadian brewer Molson eventually claimed the winning merger bid, which cost roughly $3.4 billion and was
approved in February 2005.[10] This merger formed Molson Coors.

At the time of the announcement of the United
States distribution merger between
SABMiller and Molson Coors, the two brands were the second and third
largest brewers in the United States, respectively, behind
Budweiser had roughly a 50% market share in the US, while Miller had
about 18% of the market and Coors had about 11% of the market.[12] Molson Coors’ Coors Light is ranked as the United States’ fourth largest brand, while Miller’s Miller Lite is the third
largest brand in the US, behind Bud Light and Budweiser, both of which are
brewed by Anheuser-Busch.[13]

Clearly, this merging of the brewing operations of
Molson Coors and SABMiller in the
United States was done in order to provide stronger competition against
Anheuser-Busch’s strong grip on the US market. One positive aspect of
this agreement for both companies is that it will result in cost
savings of $500 million for MillerCoors.[14]
Moreover, this merger will result in Coors and Miller gaining access to
each other’s distributors across the United States, allowing their
beers to have more exposure. While Coors Light and Miller Lite are both
popular and widespread brands, niche beer offerings will be able to
reach a broader audience.[15] Since craft beer sales increased between 11% and 12% last year,[16]
this increased access to distributors could pay tremendous dividends
for craft beer offerings from MillerCoors, such as Blue Moon[17] and Leinenkugel’s.[18]

this brewing operation merger is not yet final. While the deal is expected to close in mid-2008,[19]
these companies must first overcome antitrust hurdles in the United
States. This merger will not only unite the second and third largest
brewers in the United States, but it will also consolidate roughly 80%
of the total United States beer market into two companies.[20] While the FTC and Justice Department have yet to challenge this deal, it is possible that they might either change the terms
of the deal or take the deal itself to court.[21] Two particular points could help or hinder a potential challenge to this deal.

First, with the aforementioned increase in distribution,
MillerCoors’ beers would gain access to a wider audience due to both
brewers being able to use each other’s distributors. This union would
allow a stronger challenge to Anheuser-Busch’s products, giving
MillerCoors great incentives in competing with Anheuser-Busch.
Secondly, because of this increased competition, consumers will
ultimately benefit from the likely lower prices of beers that are
already among
the most popular in the United States.

Responding to the first point, one of the potential difficulties is
that MillerCoors brands might muscle smaller breweries out of their
respective markets. Where craft brewers once had to compete only with
certain Miller or Coors products, they will now have to compete with
broader offerings from MillerCoors, such as Leinenkugel’s and Blue
Moon. This could cause craft brewers to become more competitive in
their markets, but it could also stifle competition from these brewers.
As for the second point, with only two powers controlling about 80% of
the market, price-fixing becomes an obvious hazard. While this could
spur other brewers to take advantage and lower their prices to more
effectively compete with these two companies, if smaller brewers choked
out of their markets, this becomes much more difficult.

III. Hopped Up Demand and Watered Down Supply

Another critical issue is hanging over this
distribution merger. The cost of brewing beer has been increasing
worldwide. In the past five years, the price of a keg has doubled to
roughly $165.[22] This increase is directly attributed to the skyrocketing price of steel.[23] These kegs are critical for brewers to
deliver their products to their customers.

Along with the price of steel and other materials
increasing over the past five years, the price of malt and hops, which
are critical ingredients in brewing beer, has also increased
significantly in recent months due to worldwide shortages.[24] Because hops crops have sold for less than the price of other
highly-sought after goods, thereby making other crops potentially more
lucrative, the worldwide hops acreage decreased almost 51% from 1994 to
Malt, which is a special type of barley, has suffered from a similar
fate. Due to bad weather destroying crops, increasing demand, and the
increased demand for corn in the US and other countries for the
production of ethanol, grains such as barley have seen a dramatic
increase in price.[26]

The newly formed MillerCoors should be able to
offset these costs in a few
ways. First, MillerCoors will be able to use the $500 million in the
cost savings from the merger to help ease the impact of the rising
prices of these materials and ingredients. Secondly, large brewers have
the advantage of being able to negotiate long term contracts with
suppliers, essentially locking in prices over the long term and
avoiding these kinds of drastic price increases.[27] Finally, most Miller and Coors beers use much less hops and malt than craft beers, which are a staple of smaller brewers.[28] Because of this, MillerCoors will not have to worry as much about the rising prices of these ingredients.

IV. A Cloudy, Frothy Future

With the rising prices of ingredients and
materials continuing across the world, cost-saving mergers such as
MillerCoors are likely to become more common. Recently, Dutch brewer
Heineken NV and Danish brewer Carlsberg AS announced the formation of a
consortium to take over
Scottish & Newcastle, despite resistance from the U.K.’s largest
Rumors of other brewers, such as SABMiller and Anheuser-Busch,
launching their own takeover bids for Scottish & Newcastle have
surfaced, but these bids seem unlikely.[30]
Furthermore, the announcement of the formation of MillerCoors could
create a domino effect. Anheuser-Busch, facing pressure from this deal,
could counter this move by merging with InBev NV, combining the two
largest brewers in the world.[31]

This consolidation trend is clearly not ending any
time in the near future. While larger brewers can handle the rising
prices of materials and ingredients better than smaller competitors,
these costs still have an impact on their bottom lines. The rising
demand for wines, spirits, and craft beers only make things more
difficult for brewers such as SABMiller and Molson Coors. Large brewing
companies need to adapt to the changing supplies and demands of the
market. These mergers might be the best way for these brewers to reach
new markets and minimize the losses from these increasing prices.
Consumers will most certainly benefit from increased competition and
more offerings from larger brewers. However, the specter of
price-fixing and choking smaller competitors out of the market still
loom over this consolidation trend. While the future for these
companies is unclear, these potential antitrust issues could leave a
bitter taste in the mouths of consumers.

Carl Gutierrez, A Strange Brew from Molson, SABMiller, FORBES, Oct. 9, 2007,

[2] Id.

[3] Id.

[4] The Czech government is looking into privatizing the
brewery in the future. Karl Janicek, Budvar to Move Toward Privatization, THE
BOSTON GLOBE, February 21, 2007,

[5] Anheuser-Busch and Czech Brewer Budejovicky
Budvar Form Historic Alliance in U.S. Market, Jan. 8, 2007,

[6] Amy
Wilson, Scottish & Newcastle May Get
More Bids
,, Oct. 18, 2007,

Kerry Capell, This Brewer Has an
Unquenchable Thirst
, BUS. WK., June 10, 2002,

[8] Id.

[9] Paula
Moore, Miller-Coors Merger Speculation
, THE DENVER BUS. J., Feb. 27, 2004,

[10] Coors Merger with Molson Approved, THE
DENVER BUS. J., Feb. 1, 2005,

[11] Miller, Coors Join Forces to Battle
, MSNBC, Oct. 9, 2007,

[12] Id.

Tom Daykin, Q&A on the Miller-Coors
, MILWAUKEE J. SENTINEL, Oct. 9, 2007,

[14] Carl
Gutierrez, A Strange Brew from Molson,
, FORBES, Oct. 9, 2007,

Mary Jane Credeur and Amy Wilson, SABMiller,
Molson Coors Merger to Lift’ Chill’ Sales
,, Oct. 16, 2007,

[16] Miller, Coors Join Forces to Battle
, MSNBC, Oct. 9, 2007,

[17] Id.

[18] Mary
Jane Credeur and Amy Wilson, SABMiller,
Molson Coors Merger to Lift’ Chill’ Sales
,, Oct. 16, 2007,

[19] Miller, Coors Join Forces to Battle
, MSNBC, Oct. 9, 2007,

Roger Fillion, Trustbusters Might
Challenge Possible Union of Brewing Giants

[21] Id.

Justin Matlick, Rising Metal Prices Spur
Keg Thefts and Leave Craft Brewers Tapped Out
, MSNBC, Oct. 14, 2007,

[23] Id.

Dan Richman, For Drinkers of Craft Beer,
Prices May Soon Be Hopping

[25] Id.

Sue Kirchhoff, World Events Work Against
Grain Buyers
, USA TODAY, Oct. 16, 2007,

[27] Dan
Richman, For Drinkers of Craft Beer,
Prices May Soon Be Hopping

[28] No Toast to This: Beer Prices Are on the
, SALT LAKE TRIB., Oct. 8, 2007,

Matthew Goodman, A Storm Brewing, The
Times Online, Oct. 21, 2007,

Raji Menon, Scottish & Newcastle Bid
Battle Looks ‘Unlikely’ – Key Investor
, Thomson Investment Management News,
Oct. 18, 2007,

Amy Wilson and Meera Bhatia, Carlsberg,
Heineken in Talks for Scottish & Newcastle
,, Oct. 17, 2007,