Brew battle: Mega beer merger could tap a war in the suds market

The world’s two biggest beer companies want to join forces. Could this be the first major salvo in an epic battle against craft breweries, whose meteoric rise is capturing a growing chunk of the market?

On Oct. 13, Anheuser-Busch InBev reached a tentative agreement to purchase SABMiller for $104.6 billion, and they have until Wednesday to finalize the terms. If the deal goes through, many of America’s most recognized labels – Budweiser, Bud Light, Miller, Corona, Becks, Stella Artois, Coors, Michelob, Fosters – will be made by a single gigantic producer.

When asked to comment on the pending transaction, AB InBev referred the Register to a website with a pre-recorded video statement from its CEO, Carlos Brito.

“Together, we have better growth prospects and an appealing mix of global and local brands that consumers love,” Brio said. “The combined company would have strong growth prospects in key emerging regions such as Asia, Central and Latin America, and of course Africa.”

Curiously, Brito said nothing about the U.S.

Since AB InBev would control about 80 percent of the domestic beer market, the deal will undoubtedly be scrutinized by the Department of Justice. But even if AB InBev is forced to lower its monopolistic ambitions by selling a label or two, many think the new mega-brewer’s size and clout could have far-reaching consequences for all American breweries, including the thriving world of craft beers.

Some local craft brewers are concerned about facing a competitor with such a massive throw weight. Others think the impact on their world will be minimal.

“I just read an email predicting that (large breweries) are going to buy up most of the aluminum cans this year, making it harder for craft breweries to buy cans,” said Kyle Manns, brewery operations manager at TAPS Fish House & Brewery in Brea.

And Manns worries that cans are just the tip of the iceberg. “A large brewer could dominate various raw materials markets,” he said. Manns theorized that such a behemoth could easily snap up the national supply of hops if it decided to make a hop-driven beer – a style that craft brewers have popularized in the last few years.

“I absolutely believe that it’s their plan to put the squeeze on us,” Manns said. “They see us as a threat, and this is part of their response.”

Trevor Walls, head brewer at Pizza Port in San Clemente, has noticed that small craft breweries are already finding it hard to find shelf space in supermarkets. “Walking into any grocery store, it’s all about the big names and the larger craft breweries. There isn’t a lot of room for new brands,” Walls said. The marketing and distribution power of a brewing giant could make the situation worse, he added.

Not everyone in the craft beer industry shares Manns’ and Walls’ concerns.

“I really don’t think (the merger) is going to have that much of an impact on us,” said Aaron Barkenhagen, brew master at Fullerton’s Bootlegger’s Brewery. “The two markets are separate. It all comes down to the independent brewers staying on top of their game and introducing new things. Also, we need to appeal to new customers constantly.”

Barkenhagen thinks the big brewers are making a fundamental mistake about beer fans’ shifting tastes. “People are drawn toward a diverse variety of flavors,” he said. “They like the range of choices. That’s something we can do better than (the mass-market brewers) can.”

Trend lines point to changes in taste

Recent trends have undoubtedly given large beer makers the jitters.

In March, the Brewers Association, which represents the craft beer industry, reported that small brewers had attained an 11 percent share of the domestic suds marketplace by volume, a sharp increase from the 7.8 percent share it held in 2013.

In 2014, craft brewers produced 22.2 million barrels, a 17.6 percent rise in production over the previous year and a tenfold increase over the last decade. Since craft beer tends to be more expensive than mass-market beers, the retail dollar numbers in 2014 were even rosier: $19.6 billion, representing a 19.3 percent market share – up 22 percent from 2013.

And the craft beer explosion shows no signs of abating. The number of operating breweries in the U.S. grew 19 percent in 2014 to 3,464. There were 615 brewery openings last year and only 46 closings.

This growth contrasts sharply with domestic beer consumption overall. In 2013, the total volume of beer sold in the U.S. fell 1.4 percent to 2.8 billion 2.25-gallon cases from 2.84 billion in 2012, according to market tracking firm Technomic. It inched up only 0.5 percent in 2014.

Why this disconnect between the number of breweries and the amount of beer sold?

Craft breweries produced an average of 6,410 barrels each in 2014, a tiny fraction of the major breweries’ numbers (almost 295 million cases of Bud Light were sold in the U.S in 2013, for example).

Many of the little guys were operating at near-capacity output, according to the Brewers Association. That means the big producers are bearing the brunt of the weakening consumption numbers, as more beer drinkers turn to craft brews.

Still, Walls’ worries about shrinking shelf space could be well-founded. The U.S. Justice Department is probing allegations that Anheuser-Busch InBev wants to squeeze competitors out of the marketplace by buying retail beer distributors and dominating shelf space with its products, according to a story by Reuters published Oct. 12.

The company purchased two large distributors in Colorado, raising eyebrows in that craft beer-crazy state.

“Antitrust regulators are also reviewing craft brewers’ claims that AB InBev pushes some independent distributors to only carry the company’s products and end their ties with the craft industry,” Reuters reported.

The big brewers are fighting the craft-beer upstarts in other ways, too.

One powerful weapon: infiltrating their ranks. Since 2011, AB InBev has purchased several craft beer makers, including Golden Road, Blue Point Brewing and Goose Island Beer Co.

Of course, why buy a craft brewery when you can invent one?

According to its website, Blue Moon Brewing was the creation of a Belgian-trained beer lover named Keith Villa. But dig a little deeper and you’ll find the company has always been a subsidiary of MillerCoors, owned by SABMiller. In May, Zach Rabun, owner of Denver’s Mockery Brewing, sued Miller-Coors for labeling Blue Moon a craft beer.

Shock Top is another faux-craft beer; it’s made by AB InBev.

Those moves are part of a long-term strategy.

“We want to create a company that can stand the test of time and create value for shareholders, not only for the next 10 to 20 years, but for the next 100 years,” Brito wrote in a recent letter to shareholders.

Though the mega-brewers might describe their merger plan as a return to the status quo, it’s not. Market consolidation of the American beer industry is a relatively recent development.

For most of this country’s history, our thirst for beer was slaked by small to medium-sized brewers that served their communities and regions. But improvements such as pasteurization and better distribution systems changed the equation, allowing beer to be shipped long distances without spoiling.

From 1947 to 1981, the five largest American brewers increased their domestic market share by volume from 19 percent to 76 percent. In 2014, that number stood at 84 percent.

‘The battle has already been won’

Evan Price, brew master at Noble Ale Works in Anaheim, believes his brewery’s small size is an asset. “We don’t sell to any distributors other than Whole Foods and Gelson’s,” he said. As is the case with many craft breweries, most of Noble Ale’s sales come from the tasting room, making the company impervious to changes in the distribution network.

Like Barkenhagen, Price thinks the markets for craft and big-brand beer don’t intersect much.

“A lot of those macro-beers are light lagers, very watery,” he says. “A lot of the stuff we’re making is big, with in-your-face flavors. People know and appreciate the difference.”

If the mega-brewers want to coax beer drinkers back to their product, they have their work cut out for them. Though some dismiss craft beer as a fixation only for millennials, recent research shows its appeal is much broader.

A 2014 report in the Brookston Beer Bulletin concludes craft beer fans are Gen Xers, for the most part. More than 41 percent of craft beer fans are 35 to 49 years old. Most of the rest are split evenly between millennials (25-34) and baby boomers (50-65).

They’re also well educated. More than 21 percent of them have graduate degrees, and 8.5 percent have doctorates.

Those numbers suggest the craft beer movement is part of the larger gourmet trend that has swept the worlds of food, wine and spirits, creating a separate market for people of all ages with curious palates and sufficient disposable income.

Price agreed with that assessment. “The battle has already been won,” he said. “Our fans are smart, and they know what they want.”

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