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Monday, February 4, 2013

Behind the Move to Block AB/InBev

As most who follow the beer world know, the big boys at AB/InBev (InBev or InBud, for short) are attempting to acquire Mexico-based Grupo Modelo. The sordid story behind this takeover reminds me of the old Merle Travis tune, Sixteen Tons, where coal miners owe their soul to the company store. But never mind.

InBud, which has owned a 50 percent stake in Modelo for a number of years, announced in June that it intends to purchase the remaining 50 percent. There are a variety of reasons they want complete control of Modelo, which I'll get to. First a little review.

Size and brands
AB/InBev is the largest brewing company worldwide. It sells more than 200 brands, including Becks, Bass, Goose Island, Kokanee, Labatt, Lowenbrau, Michelob, Natural Light, Rolling Rock, Spaten, as well as the portfolio of Budweiser brands. It also distributes a number of craft brands, including Widmer, Kona, Redhook and Ninkasi.

Modelo is the sixth largest brewing company in the world. Corona, its best-selling beer, is first in Mexico and in the top five worldwide. Corona has been the top selling import in the United States since 1997, when it replaced the faltering Heineken. Modelo markets a number of brands, some only in Mexico. Export brands include Corona, Pacifico and Modelo. The company imports and sells the Budweiser brands into Mexico. 

AB/InBev controls 39 percent of the U.S. market. Modello, largely via its ownership of Corona, has a 7 percent share in the U.S. Should the acquisition of Modelo be completed, InBev would control 46 percent of the U.S. market. Combined with the 26 percent controlled by competitor MillerCoors, the two global beer behemoths would control 72 percent of the American beer market. Now we're talking company store.

Driving the acquisition
There are several reasons InBev wishes to fully acquire Modelo.
  1. The craft beer spurt of recent years has put AB/InBev in a bind. There are more than 2,200 craft brewers in the U.S. today and they are steadily gaining market share (although they control less than 10 percent). At the same time, Budweiser shipments are in decline. For the first nine months of 2012, shipments fell 6 percent by volume.
  2. Modelo has been putting a beating on Bud and Bud Light in some markets, threatening to push the AB brands out of the premium category. They've done this with pricing... keeping the price of Corona low has enticed people to buy it instead of Bud or Bud Light. This is difficult to understand, given the 50 percent stake AB/InBev has in Modelo, until you understand how Modelo markets its beers in this country.
  3. The Modelo portfolio is sold in the U.S. by Crown Imports, a 50-50 venture between Modelo and Constellation Brands (while Modelo is part-owned by AB/InBev, Constellation is completely independent). In effect, this arrangement means that AB/InBev does not control the price of Modelo brands in the United States, a growing problem for them.
InBev's full acquisition of Modelo would boost its market share 7 percent instantly, shoring up its appearance vs. craft and import brands. Just as important, they would theoretically gain control of pricing for Modelo brands in the United States, allowing them to extract greater profit via increased prices. This is arguably the backbone of the buyout and also its greatest risk

The DOJ suit
The Department of Justice has sued to block AB/InBev's acquisition of Modelo. The basis of the DOJ case is that the acquisition of Modelo represents a threat to competition and would lead to fewer beer choices and higher prices. The DOJ is concerned that a 46 percent share of the market is too large. They also worry that once InBev has control of Modelo, it will undermine the Constellation/Crown arrangement and impose price increases in the name of protecting AB brands.

The corporate lawyers at InBev will construct supple arguments with respect to the DOJ challenge. They will say they do not intend to use greater market share to thwart the growth of craft brands; they will argue there is no real relationship between Corona pricing and Budweiser's declining volume; finally, they will say they intend to bust up the Crown arrangement by selling Modelo's interest to Constellation, thus creating an independent distribution company for the Modelo portfolio. 

Unfortunately for InBev, internal documents collected by the DOJ reveal they are up to something other than what they say. It's quite common for gigantic entities like AB/InBev to claim they are doing one thing while actually doing just the opposite. The privileges of power and money are nearly absolute in this country.

Although they officially say they have no ax to grind with the growth of craft beer and imports, the evidence in one internal document suggests otherwise: "We must slow the volume trend of High End Segment and cannot let the industry transform."

While they publicly say there is no relationship between Corona pricing and Budweiser's dropping market share, documents say otherwise: "Because of aggressive pricing of the Modelo brands, AB's Bud and Bud Light brands have reported heavy share losses to Modelo's Corona and Modelo Especial Brands [in California]." Also, "While the relative price [of AB brands] to MC [MillerCoors] has remained stable, the lack of price increase in Corona is increasing pressure in Premium."

Finally, while the idea of an independent Constellation sounds great, internal documents suggest a potential problem: Modelo and Crown historically pushed for more aggressive pricing than Constellation. With Modelo/Crown out of the picture, the DOJ believes Constellation will likely follow InBev's lead on pricing, probably to the disadvantage of consumers.

The Big Picture
You have to hope the DOJ wins this case. Because InBev's acquisition of Modelo is a bad deal for American beer consumers. It is intended to further their dominant position and limit access to competing brands wherever possible. They may talk about letting the market sort things out, but they routinely use their power to make sure their products dominate in stores, restaurants, bars, etc. These guys wear black hats and they need to be stopped.

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