bmiheader

Our Weekly Digest is Live!

Public Archives Search

Keyword Search

STOCKS

Market quotes are powered by TradingView.com
11/07/2012

5 Senators Say an ABI-Modelo Deal Would be "Risk to Competition," Limit Access for Craft, Harm Consumers

The Oct 2 letter from 5 US Senators to US Atty Gen Holder warning against proposed AB InBev purchase of Modelo, and Reuters' recent follow-up article, make some pretty stark claims about the pending purchase. Deal would "extend [ABI's] market share leadership" in US, give ABI "increased leverage to reduce competition" by "enhancing ABI's ability to either acquire more" wholesalers or "pressure" independent distribs to sever relations with "rival brands," i.e. craft, the letter charges. Ultimately, consumers would face less choice and higher prices, the Senators also suggest. Their concern "motivated" by ABI execs' statements about distrib loyalty in recent yrs. Letter points to comments from a yr ago at AB distrib mtg where AB execs stressed distribs should focus on ABI brands and laid out notion of "anchor wholesalers." Senators describe anchors as "partners that have agreed to limit or cease distribution of rival brands." Letter also quotes ABI ceo Brito from 2d qtr conference call this yr saying ABI expects distribs to devote "most of if not all of their share of mind" to AB brands. ABI's attempts to prevent distribs from "associating freely" with competing brewers "strikes at the heart of competition" in US beer, they advise. "Constraining access" for small brewers in turn harms consumers. With this policy, the Senators believe, ABI intends "to use its dominant position" to prevent competition with craft brewers, rather than compete on price or quality. Letter also links back to 1997-98 when AB execs talked about "100% share of mind." That notion is more dangerous now, Senators say, since ABI's mkt share is higher via subsequent acquisitions of Rolling Rock, InBev's import brands, Goose Island and the stake in Craft Brew Alliance. Then too, ABI has added its own new brands. The Modelo acquisition will add Corona, Modelo Especial, etc, they point out. So they ask AG Holder/DoJ to consider deal's potential impact on "competition, consumers and the livelihoods" of those employed by distribs and craft brewers.

Raising Craft Brewers' Profile; ABI-Modelo and Craft Access Letter is another sign of craft brewers' growing participation in policy debates. Notable that 5 Senators, including 2 from Del and 1 each from Vt, Colo and HI, would reach out to the Justice Dept on this issue. That's in addition to Brewers Assn hiring a top DC law firm to provide input to DoJ. Can't hurt craft brewers tax position to be considered a go-to voice on other matters. But, do craft brewers really have a serious access concern with this deal? The Senators' letter leaves out some salient issues. First, if the deal goes thru, Crown Imports will continue to sell the brands in the US, not ABI. Crown and ABI insist Crown will have full control over sales, marketing, pricing and distribution here. The letter does not mention Crown. But just last week, Brooklyn founder Steve Hindy told Reuters that even tho ABI would be telling DoJ that it would have nothing to do with Modelo distribution here, "if you think AB InBev doesn't have huge influence on Crown, I have a bridge to sell you." Then too, while the letter says ABI will be adding share via the Modelo portfolio, ABI (and some financial analysts), argue that ABI is actually relinquishing US share, since its current 50% holding of Modelo will no longer own 50% of Crown. Importer will be 100% owned by Constellation. Reuters, and others, have noted that DoJ may balk at ABI's option every 10 yrs to buy out Crown at 13X EBIT, an option that may have to be dropped to get deal done.

Also on the access issue, hard to see any significant impact of ABI-Modelo deal on ABI's ability to add branches. More important, AB's earlier 100% share of mind and current anchor approaches have so far thoroughly failed to prevent craft from growing to 6 share in 2011 and continuing the march to 10+. Nor have they deterred the addition of 1000+ new competitors in recent years and many more in planning stages. Some craft brewers clearly faced few distrib options in past yrs, but AB distribs started breaking exclusivity years ago and there's been no sign that recent rhetoric has slowed this development. Quite the contrary. If AB could not constrain craft when it ostensibly had more influence over its distribs, why would it be able to accomplish that via the Modelo purchase?

A more significant issue may be ABI's continued influence on US pricing, for imports, mainstream and craft beers. Neither the Senators, nor Reuters points out that, at least to some extent, ABI would still influence the price consumers pay for Modelo brands via the prices it charges Crown in the first place. There is some indication that ABI prices to Crown will follow a fixed formula, but many believe ABI would still have influence. And there is interplay between import, mainstream and craft pricing. Most industry players closely watch the "gaps" between the segments.

AB Share Eroding As Craft Builds Craft brewers may have little to fear from yet another perspective: competition. AB's US market share in 1998 was 46.8. In 2011, after the acquisitions cited by the Senators it was 46.9. Actually, AB's share grew to 49.6 in 2003, before all of those deals, then pulled back and ABI has lost share each of the last 3 yrs, including yr-to-date 2012. Since 2003, craft share doubled, from 3 to 6+.

Publishing Info

  • Year: 2012
  • Volume: 3
  • Issue #: 58
Read 3022 times