I. Introduction

On Tuesday, October 9^th, 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 brewers.[6]

The 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 Anheuser-Busch.[11] 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]

However, 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 2006.[25] 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 brewer.[29] 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.