M & A’s- I’ll Drink to That

by Gary Klinger April 10 2009, 11:32

I.                      Introduction

Amidst the economic downturn over the world, many industries have seen a stunt in growth.  In fact, during recessions, often consolidation among competing businesses within an industry is the only alternative to extinction.  This is evidenced in the banking industry (i.e. Merrill Lynch sold to Bank of America in order to avoid bankruptcy) [1] as well the auto industry (i.e. Government gives Chrysler thirty day deadline to merge with Fiat). [2] Yet, in recent years, it is the beer industry that has seen more mergers and acquisitions than arguably any other sector.  This article will discuss the reasoning behind the consolidation within the industry, examine the strategic approaches taken in the industry when merging with or acquiring a competitor, and finally, the future of mergers and acquisitions (M&A’s) within the brewing industry.

II.                   Discussion

The increasing consolidation within the beer industry is attributed to a multitude of factors.  One of the primary factors is the rising costs of key commodities like grain, glass and aluminum, all of which results in a lower profit margin for the producer.[3]  Consolidating companies believe a larger share in the market will allow them to use this as leverage in negotiating more favorable prices for the commodities.[4]  Perhaps even more compelling than the rising costs of commodities, is the falling demand for beer in Western Europe and the U.S. which has caused many struggling companies to seek consolidation in order to remain viable.[5]  The falling demand for beer in these countries has been caused by   rising competition from wines and spirits.[6]  These shifts in beer drinking habits over the globe, coupled with rising costs, are why some of the largest breweries in the world have decided to merge in the past few years.  For instance, in 2007 SABMiller and Coors Brewing Companies, the United States second and third largest brewing companies respectively, decided to merge operations to become a  more fierce competitor with rival number one brewer Anheuser-Busch.[7]  However, these mergers are also taking place on a global scale.  In November of 2008, Anheuser Busch announced its own merger with rival Belgium brewer InBev to form the world’s largest brewing company.[8] 

Mergers and acquisitions are currently the ongoing trend within the beer industry.  As mentioned earlier, the leading competitors in the industry have consolidated to their advantage.   Why have these leading companies been so successful with this method of operation?   The strategic approaches taken by leaders like SABMiller and InBev can be accredited to their success.  These approaches are broken down into a three phase acquisition strategy.[9]  The first phase of the strategy is what Malcolm Wyman,  CEO of SABMiller,  refers to as “land grab.”[10] This strategy consists of acquiring as many companies as possible, particularly in emerging economies, where privatization is beginning.[11]  The next phase of the strategy  involves a merging of companies on “equal grounds.”  For SABMiller, it was merging with rival brewing company Peroni.[12]  Similarly, Anheuser-Busch merged with European beer titan, InBev.[13]  Finally, the last phase of the strategy is to buy out joint-ventures.[14]  Before Miller was a part of South African Breweries (SAB), it was a domestic joint venture with Coors in the United States.[15]  SABMiller has also purchased partnerships in Latin America and India as well.[16]  It is approaches like the three-phased strategy referenced above that have led  Anheuser-InBev and SABMiller to be the first and second largest brewing companies in the world, respectively.[17]

 

So what does the future hold for M&A’s within the beer industry?  I believe brewing companies will look to expand by establishing themselves in emerging countries like India, China, and Russia.   For instance, beer sales in India are forecast to grow at an annual growth rate of 17% over the next few years due to strong economic growth resulting in disposable incomes.[18]  These forecasts have caused top brewing companies like SABMiller and Anheuser-InBev to establish production facilities in that region.[19]  Some analysts have predicted that by 2010, China and Russia will amass half of the world’s beer market.[20]  Since 1997, China’s beer consumption has risen by 40%.[21]  In fact, Carlsberg, another leading brewer in Europe, has confirmed its plans to shut down roughly half of its European breweries in order to focus on the rising market in the East, specifically China.[22]  The beer market in China will become even more competitive.  A booming economy, as well as foreign investment have led China to emerge as the largest national beer market in the world, surpassing even the United States.[23]  China is already the worlds’ biggest producer of beer.[24]  However, the Chinese beer market remains dominated by domestic brewing companies.[25] Accordingly, analysts believe that although there is clearly room for international investment, it will be done via joint ventures between brewing titans like Anheuser or SabMiller along with some of the more local breweries already established in the Chinese markets. [26]  In 2002, Anheuser followed this strategy by acquiring roughly 30% of Chinese brewer Tsingtao Beer.[27]  As the economies of countries like India, China, and Russiaa expand, these types of acquisitions will only increase. 

III.                 Conclusion

The brewing industry is changing constantly.  It appears the trend of consolidation is becoming more and more prominent as the world’s brewing rivals combine forces.  Reasoning behind such consolidation is to cope with rising commodity prices, as well as the opportunity for these businesses to operate with a larger cash flow in order to compete with other rivals.  However, the international landscape of brewing consumption is increasing rapidly.  Countries like India, China, and Russia are becoming major targets for investment and expansion within the industry.  It seems evident that M&A’s will play a heavy role for major brewing companies looking to establish themselves within those markets.  Therefore, as long as the world continues to consume beer, M&A’s will always play a significant role within the brewing industry.  There are a few driving factors behind this trend.  Some experts believe it is rising costs.  Others believe it’s because of factors like marketability and name recognition.    Whatever the reason, most believe these mergers will help to drive down prices for consumers, and I believe that’s one result to which we can all raise our glasses.

 End Notes

 

  1.  Matthew Karnitschnig, Carrick Mollenkamp, & Don Fitzpatrick, Bank of America Reaches Deal for Merrill, WALL ST. J., Sept. 14, 2008, available at http://online.wsj.com/article/SB122142278543033525.html?mod=special_coverage.
  2. Jimmy Peterson, US Government Gives Chrysler 30 Day Deadline to Strike Fiat Deal, TOPNEWS.IN, Mar. 30, 2009, http://www.topnews.in/us-government-gives-chrysler-april-30-deadline-strike-fiat-deal-2145459.
  3. Jason Singer & David Kesmodel, Why Consolidation Storm Is Brewing In Beer Industry, WALL ST. J., Oct. 18, 2007, available at http://online.wsj.com/article/SB119262856498561983.html?mod=todays_us_marketplace.
  4. Id.
  5. Id.
  6. Id.
  7. Andrew Martin, Merger for SABMiller and Molson Coors, N.Y. TIMES, Oct. 10, 2007, available at http://www.nytimes.com/2007/10/10/business/worldbusiness/10beer.html?_r=1&ref=worldbusiness.
  8. Join Together, Anheuser-Busch, InBev Merger Approved, http://www.jointogether.org/news/headlines/inthenews/2008/anheuser-busch-inbev-merger.html  [hereinafter Anheuser] (last visited Nov. 14, 2008).
  9. SABMiller Drinks to Decade of M&A, WALL ST. J., Mar. 30, 2008, available at http://online.wsj.com/article/BT-CO-20090330-706248.html.
  10. Id.
  11. Id.
  12. Singer, supra note 3.
  13.  Anheuser, supra note 8.
  14. SABMiller Drinks to Decade of M&A, WALL ST. J., Mar. 30, 2008, available at http://online.wsj.com/article/BT-CO-20090330-706248.html.
  15. Miller Coors Officially Launches Tuesday, ST. LOUIS BUS. J., July 1, 2008, available at http://www.bizjournals.com/stlouis/stories/2008/06/30/daily17.html.
  16. SABMiller Drinks to Decade of M&A, supra note 14.
  17. Jessica Hall & Martinne Geller, Takeover will result in world’s largest beer company, PROVINCE, July 14, 2008, available at http://www2.canada.com/theprovince/news/story.html?id=90f0f33b-cbc7-4e25-98f7-062ca763278d.
  18. Research and Markets, The Beer Market in India-Forecasts to 2011, http://www.researchandmarkets.com/reportinfo.asp?report_id=450612 (last visited Mar. 2007).
  19. Id.
  20. Chris Mercer, Carlsberg plans for China’s beer dominance, BEVERAGE DAILY Oct. 3, 2005, http://www.beveragedaily.com/Industry-Markets/Carlsberg-plans-for-China-s-beer-dominance.
  21. Kevin Phillips, China’s beer market anything but fragile, AP-FOOD TECHNOLOGY, June 4, 2004, http://www.ap-foodtechnology.com/Industry-drivers/China-s-beer-market-anything-but-fragile.
  22. Mercer, supra note 20.
  23. China’s beer market: still room for investment, BEVERAGE DAILY, Aug. 6, 2004, http://www.beveragedaily.com/Industry-Markets/China-s-beer-market-still-room-for-investment.
  24. Mercer, supra note 20.
  25. China’s beer market: still room for investment, supra note 23.
  26. Id.
  27. Phillips, supra note 21.
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