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Friday, February 08, 2013

Is Beer One Market?

Note: If you're not in the habit of reading comments, have a look at the discussion on this post.  It's especially well-informed and interesting.

Which of these is not like the other: craft beer, national-brand light lagers, liquor?  In case you missed it, the Beeronomist reflected on the Modelo/InBev merger, and not in the vague, half-assed way I did.  One of the most important--and largely unexamined--aspects he raises is this:
[You first] have to define the market. By all accounts the macro brewers are losing market share much faster to spirits than to craft beer, so shouldn't you include them when you are measuring the amount of competition?  AB InBev will certainly argue that they should.
For example if a decrease int the price of vodka creates a sizable drop in Bud sales you could make a convincing argument that vodka is a real competitor to Bud and that vodka distillers should be counted as in the same market as ABInBev.
Patrick doesn't say this directly, but implicitly raises this possibility: "craft" beer (broadly defined) may not actually be in the same market as Bud, Miller, and Coors--but those companies could be in a market with, say, vodka or tequila.  I would love to see data on the kind of example he cites.  In a way, I can see how this may actually be true--not just a legalistic excuse.  The motives people have for drinking vodka seem to align more closely with the reasons people drink Bud--and differ from the reason people drink IPA.

There's more in Patrick's post and if you're at all interested in the subject, go have a look.


  1. This is something that I've been saying for quite some time. It's believed that people are drinking less, but better beer, but it's wrong. People are drinking (overall) less beer, period. The growth of the "craft" segment is to a great extent thanks to a wider availability and also because wine drinkers are shifting some of their drinking towards beer. The idea that the average Bud Light chugger will "convert" to craft beer from one day to the next is quite preposterous, if you think about it, at most, they will become like those many people who drink alternative beers more or less frequently without giving up on the big brands...

  2. I have still to meet anyone who is really drinking less but better. And most people drink IPA for the same reason people drink. Where are the stats backing this claim, this craft fiction?

  3. I think what Patrick is saying is a huge threat to craft beer.  If ABI convinces the DOJ that their competitive market is actually the entire alcohol market, not just beer, it also means that craft brewers are in the alcohol market not the beer market. Then ABI can happily buy all the coronas and goose islands they want, and leverage those buyouts to push independent craft brewers off of distributor trucks and retailer shelves and it won't be anti-competitive because hey their real competition is all those other liquor and wine guys. If you walk into a typical alcoholic beverage store you can see that more space is devoted to liquor and wine than to ABI's beer sections so they're clearly not a monopoly in the alcohol market thus their practices against other brewers is clean, wholesome competition against fellow alcohol producers not anti-competitive because those activities it will not make them significantly bigger in the overall alcohol market.  Letting ABI combine the beer pond with the liquor/wine pond gives them room to grow by acquisitions, the ultimate goal being to  be in the beverage market (sodas, juices, etc) so that they can one day safely merge with Pepsi and SAbMiller can merge with Coke.  They need to be kept in the beer pond where there is clearly not enough for them to eat and while they may not be starving to death, they are losing weight.

  4. Sam,

    Diageo happens to already have gotten into the wine & beer business to go along with liquor:

    Why would ABInbev be any different?

  5. One more point... I got into an argument with an old neighbor way back in ~2006 about the then-proposed merger between XMRadio and Sirius.

    He claimed that it should be blocked on antitrust grounds because it was clearly granting a monopoly.

    I claimed it wasn't a monopoly because although they'd be the only folks in the *satellite* radio space, they were competing (in the auto entertainment market) with free terrestrial radio, internet radio (then becoming popular even for mobile via services like Pandora), and even competing to a point with CD's and MP3 players. If they raised prices or dropped programming, they weren't forcing users to pay more, users had plenty of other options.

    That said, I think a very credible argument can be made that the beer, spirits, and wine markets are all one big market. But those who fear the "monopoly" power of ABInbev should realize that the reason the US had <90 breweries in 1978 and has >2000 now has nothing to do with the market power of ABInbev, it has to do with the fact that the biggest granter of monopolies in society -- the government -- had made homebrewing illegal until 1978. Once that cap was lifted, the craft beer boom started, and no mergers of macro lager brands will be able to stop it. At the end of the day, ABInbev and SABMillerCoors will be looked at the same way as Franzia and Gallo -- yeah, they sell a lot, but you don't want to be seen drinking it.

  6. Alan, I've heard you credibly make the point that alcohol is one of the reasons people drink beer. That point is a valuable tonic to the self-congratulations people give themselves over the wholesomeness of beer. Your point strains credulity when you try to argue it's the only reason people drink beer. Some breweries pitch their beer overtly as a party drink--the way to get lubed fast. Others pitch flavor.

    As for drinking less but better? I could introduce you to bunches and bunches. And I'm one. Unless I'm out with friends, I drink one or two beers--which is the amount my body absorbs before the alcohol affects my mind. Most of the beer I drink I drink for the flavor.

  7. Sam, I have an instinctive attraction to your argument, and I'll be alarmed if the Feds okay the merger. But it's also true that craft brewing entered the scene at the moment that the major companies had their greatest vertical integration from barley farmer to publican. And it didn't slow craft brewing down. Sometimes I have to temper instinct with data--and I'd like to see some first.

  8. And Brad, you point to the same kind of thinking Patrick made me do.


  9. Jeese, quoting me back at me. That stinks. My point is no more people are drinking less but better. People always drank just a few. Most of my craft pals drinks as much as they did - taking into account the arc of aging. I am always impressed how hosed people get at craft brew fests. And I never said only as I don't think people drink Bud only to get loaded (another necessary "crafty beer myth" being perpetuated). But they drink good beer like they drink popular beer because it hits the spot. Bully for you but I can introduce you to more younger folk than you and I who do exactly what any generation did with the drink of choice. There is no moral superiority in the craft beer drinker.

  10. The trouble is, we have vastly different sample sets. Different coasts, different countries. But I do want to disassociate myself from any notion that I exalt the morality of the craft beer drinker. I didn't say it, didn't mean to imply it, and I don't believe it.

  11. I suspect we would find as many craft dispos and pop-beer moderates on each coast. But fair enough. We deal in small circles and make assumptions. Yet I do think the myth of the bad Bud drinker has been foisted since Papazian and think it's as wacko as they come.

  12. Supple arguments aside, the ABI acquisition of Modelo is a bad deal for beer fans. Why? It's bad for macro fans because the end result will be less competition and higher prices. It's bad for craft fans because ABI will do everything it can to restrict choice by dominating tap handles and store shelves. The deal should be killed.

  13. On the contrary. I think that in the long run the ABIB-Modelo deal will be good for everyone. ABIB's business is not beer, is growing, beer is simply the means for growth, once they can not grow anymore the company will eventually collapse under its own weight.

    People who make a good living out of sales of alternative beers won't be easily swayed by big brands, same goes for the consumers of such beers. Imagine this, if your favourite bar suddenly replaced the beers you like with some ABIB's brands, would you keep going there? Probably not, and you wouldn't be the only one. The owner of that bar knows that, or should.

  14. Brad - I know Diageo quite well, and they do not have as big a beer market as Corona.  Based on their clout in the big alcohol pond though, I'm sure the DOJ would have some issue if they wanted to buy their way into the beer pond via ABI or SABMiller rather than organic growth of their brands or smaller acquisitions.  

    Jeff - I don't have data, but I can point to most shelves in the grocery store.  The sea of brands on their shelves are typically only from a small range of companies...retailers would prefer to deal with 2-4 brewers  than 2000 small brewers all with completely different ordering systems and contacts because that complexity costs the retailer money.  ABI is planning long term, if they can do more beer acquisitions without scrutiny and push the beer crafty vs craft debate so that the common refrain from consumers is that big brewers can brew great flavorful beer too (having worked for SAbMiller I know they can), and thus from a taste perspective it doesn't matter who you buy from, they will be golden. They will then give discounts to the retailers/consumers and reestablish themselves as the one stop shop in the next decade and push independent brewers off the shelf, and then raise prices.  Once they have proven to investors they can get growth and control of the beer market back on track they will  start the expansion to other alcohols & beverages. I say trust your instinct.

  15. Sam said:

    "The sea of brands on their shelves are typically only from a small range of companies...retailers would prefer to deal with 2-4 brewers than 2000 small brewers all with completely different ordering systems and contacts because that complexity costs the retailer money."

    You're correct that they only deal with a small number of companies, but for the most part they're dealing with distributors, not directly with the breweries. With the exception of a handful of small breweries underneath the 5,000bbl cap, every brewery doing business in Oregon is sending their beer through one of a few distributors, most of whom have dozens of breweries and hundreds of beers in their portfolios.

    Even then, it's not very complex for the big stores because the distributor's sales people write the bulk of the order themselves by looking at depletion reports and empty holes on the shelves, leaving the store's buyer free to focus on monthly sales, other promotions, and planning rearrangements to their set.


    "They will then give discounts to the retailers/consumers and reestablish themselves as the one stop shop in the next decade and push independent brewers off the shelf, and then raise prices."

    Thankfully, one of those wacky three tier laws (you know, the ones everyone hates without understanding) prevents that in most states. There are absolutely no discounts given on an account-by-account basis. If a brewery or distributor wants to put a beer on sale they have to print it in their monthly price books and make that deal available to everyone, regardless of how many cases they order. Some may see this as anti-competitive, but I can almost guarantee that you wouldn't be seeing a nationwide proliferation of specialty bottle shops if this law wasn't in place because the big purveyors like BevMo, Kroger (Freddies, Albertsons, etc) and Walmart would be striking huge deals and offering discounts that no independent can match.

    As an example of how drastically they can push pricing, look at soda. It's actually cheaper for a small retailer to go to CostCo and buy soda off their shelves than it is to order it directly from one of the soda distributors because costCo's insane volume (combined with razor thin margins) leads to their "retail" price being lower than the distributors' own "wholesale" price.

  16. Chris I'll first just point to the space analyst piece in Jeff's other post...the big guys hold close hands with their retailers even if the three teir system requires them to sell through a distributor middle man.

    Secondly I should have been clearer. I'm not talking about account by account discounts, I'm talkin about across the board price reduction. Currently both ABI/MillerCoors(in a non-agreed to way) are raising prices to cover volume loss (which they have successful done for their bottom line). The DOJ suit points out Corona has not followed suit and has thus gained volume and is why ABI wants to buy them, to bring prices up, slow volume loss, and reduce competition. That's for now, my argument is that long term in the craft space, if ABI can get the conversation to be that big brewers brew as well as indepent guys and thus who you buy from doesn't matter they will then begin to price their "crafty" products below that of independents at level that many small independents will not be able to compete at. Many small guys will lose volume and go under, and others ABI will buy. Of course some will survive on their ownstrength, but ABI could regain control of the direction of the beer market. And none of it is necessarily anti-competitive, but I'd rather not see it come to pass an if DOJ blocks the buy-out it will make it harder for ABI.