Strategy Process Blog

Miller, Coors to Shake Up U.S. Beer Market
By DAVID KESMODEL and DEBORAH BALL
The Wall Street Journal, October 10, 2007; Page A1

The U.S. beer business, battered by a shift in consumer tastes, faces a further shake-up with plans by SABMiller PLC and Molson Coors Brewing Co. to merge their U.S. operations.

With top sellers including Miller Lite and Coors Light, the two are taking aim at long-dominant Anheuser-Busch Cos. They would have about $6.6 billion in annual revenue and a roughly 30% market share in the U.S., second to Anheuser's 48%.

North America's largest brewers are struggling as consumers reach for small-batch "craft" beers, imported brews, wine and spirits. The number of barrels of beer sold in the U.S. is expected to grow only 1.5% this year, according to the Beer Institute, an industry group.

That has set off a merger rush to cut costs. SABMiller and Molson Coors, themselves products of recent mergers, said their tie-up in the U.S. will yield about $500 million in annual cost savings by the third year. The prospect helped drive up Molson Coors shares more than 10% on the New York Stock Exchange, while SABMiller was up 1.4% in London.

"This transaction is driven by the profound changes in the U.S. alcohol-beverage industry," said Pete Coors, who is vice chairman of Molson Coors and will be chairman of the new venture.

The deal, which is likely to face antitrust scrutiny, could increase pressure on Anheuser to pursue a merger outside the U.S., where it has a relatively small presence and where greater opportunities for growth lie. World-wide, Anheuser is the No. 3 beer maker by volume and market capitalization after InBev SA and SABMiller. An Anheuser spokeswoman declined to comment.

In a message to employees, Anheuser Chief Executive August A. Busch IV said the brewer must capitalize on the "significant transition confusion" that he predicted will occur when Miller and Molson Coors blend their U.S. operations. There will "likely be great concern within the SABMiller/Coors field sales and wholesaler organizations as people attempt to determine if they will have a role in this new structure," he said.

Mr. Busch said Anheuser employees "must not lose sight of the fact" that the new venture is "an attempt by these companies to better compete against us." Anheuser shares were down 0.9%.

From its roots in South Africa, the former SAB PLC has grown rapidly over the past decade by expanding into fast-growing economies such as China, Eastern Europe and Latin America. SAB acquired Miller Brewing Co. in 2002, but the U.S. business remained a weak link as the combined company struggled to combat Anheuser's power in marketing and distribution.

Under the agreement, SABMiller will have a 58% economic interest in the joint venture. Molson Coors will have 42%. They will have equal voting interests, and each company will have five representatives on the venture's board. Leo Kiely, chief executive of Molson Coors, is set to become CEO of the joint venture, with Tom Long, CEO of Miller Brewing, becoming president and chief commercial officer. The deal, subject to shareholder approval, is expected to close next year.

SABMiller and Molson Coors discussed a deal on and off for about a year, executives at both brewers said yesterday. The venture "creates a much more robust business, which has the ability...to be much more competitive no matter what the future may throw at us," said Graham Mackay, chief executive of SABMiller, in an interview.

Critical to the alliance, Mr. Mackay said, will be the opportunity for U.S. beer distributors to become "one-stop shops." He said distributors could save time and money by dealing with one company instead of two. About 60% of Miller's volume is distributed by wholesalers also selling Molson Coors brands. U.S. federal law dating to the repeal of Prohibition generally requires beer to be sold through wholesalers.

"I think we'll sell more and our costs will go down, so we should benefit," said Phillip Terry, chief executive of Monarch Beverage Co., a big distributor in Indiana selling 15 million cases of beer annually, including both Miller and Molson Coors products. He said he hopes the merger savings will be "translated into additional market spending, more promotions around the brands."

Anheuser remains a powerhouse in the U.S. beer market, where its top-selling brand is Bud Light. Its U.S. operating profit margin is about 23.6%, compared with margins of less than 10% for both Miller and Molson Coors, according to Mark Swartzberg, an analyst with Stifel Nicolaus in New York.

For years, the nation's beer giants thrived by peddling beers that are relatively light in taste and don't offend Americans' diverse palates. That era has faded. Just as vitamin-infused waters and gourmet coffees have caught fire, more beer drinkers are choosing brews with distinct tastes.

These beers are typically sold by independent local beer makers, although the big names are getting into the act. While craft beers are still a small slice of total revenue -- about 5% of the U.S. market -- they're the fastest-growing segment. Sales of craft beer rose 11% by volume in the first half of this year against year-earlier levels, according to the Brewers Association, a craft-beer trade group in Boulder, Colo. Molson Coors's hottest brand in the U.S. is Blue Moon, a Belgian-style wheat beer.

One potential drawback of combining Miller and Coors under one roof is cannibalization. Both Miller Lite and Coors Light are in the premium light-lager category. While executives for the companies argued yesterday that the brands have different attributes and complement each other, it's unclear whether beer drinkers will recognize the distinctions.

Mr. Mackay said the geographic strengths of the two companies are complementary. Miller is strong in the Midwest, with the leading market share in Chicago, while Coors has a big footprint in the West.

Molson Coors was formed by the 2005 merger of Colorado's Adolph Coors Co. and Canada's Molson Inc., both family-controlled companies. A person familiar with the deal said the Molson and Coors families didn't want to sell their entire company to SABMiller or another buyer. The joint venture allows them to keep some control. Molson Coors, with dual headquarters in Montreal and Denver, has major operations in Canada and Britain that will remain independent of SABMiller.

The companies said the projected $500 million in annual cost savings would come from streamlining production, reducing shipping distances and consolidating corporate staff. The companies haven't decided where the headquarters of the new venture will be. There could be job losses among corporate staff in Denver or Milwaukee, where Miller is based.

The deal could make it easier for the companies to raise prices as they wrestle with higher costs for aluminum, grains and other commodities. It could make them less vulnerable to pricing decisions by Anheuser. Several years ago, price cuts by Anheuser damped profits for its chief competitors.

The deal is likely to get a close look by the Justice Department because it combines the second- and third-largest U.S. brewers. But antitrust lawyers said it appeared unlikely to draw a challenge, given vigorous industry competition and the dominance of market leader Anheuser. The Bush administration has shown reluctance to block mergers.

Analysts speculated about what mergers might be left in the rapidly consolidating beer business. Rob Mann, an analyst with Collins Stewart in London, said Anheuser might be interested in Scottish & Newcastle, an Edinburgh-based brewer that is strong in the U.K., France and Russia. "We are approaching the final round of consolidation," Mr. Mann said. "Most markets have been consolidated at a local level by now."

With the exception of stakes in China, India and Mexico, Anheuser has largely stuck to the U.S. Some analysts think Anheuser may ultimately merge with InBev, based in Belgium. Anheuser imports InBev's European brands, including Stella Artois and Beck's, into the U.S. under a partnership begun this year. A spokeswoman for InBev declined to comment.

Another possible beer acquirer is Diageo PLC, one of the only companies to have significant shares in beer, spirits and wine. Its beer business largely consists of Guinness. Diageo Chief Executive Paul Walsh has said he's interested in a beer takeover, but deal prices are too high.

Spirits companies have raised the pressure on beer giants by rolling out sweet cocktails and other drinks to lure younger drinkers. Premixed bottled drinks such as Smirnoff Ice have seen sales triple in the last decade, according to Merrill Lynch.

SABMiller was advised on the deal by Lehman Brothers Holdings Inc. and J.P. Morgan Cazenove Ltd. Molson Coors was advised by Orbin & Co., Deutsche Bank AG and Morgan Stanley.