Some U.S. craft brewers are uneasy about plans by Anheuser-Busch InBev (ABI.BR) to buy out Mexican beer maker Grupo Modelo (GMODELOC.MX), fearing the giant’s increased power could make it harder for them to hitch a ride on delivery trucks to stores and pubs.
Brewers, as well as beer wholesalers and members of Congress, have been quietly taking this concern and others to the Justice Department, which is investigating whether the $20.1 billion deal complies with antitrust law. The department has given no sign of being ready to make a decision.
In order to preempt antitrust concerns arising from AB InBev, which is the No. 1 brewer in both the United States and the world, having an additional 5 percent of the U.S. market, Modelo agreed to sell its stake in Crown Imports, the U.S. seller of Modelo’s beers, to Constellation Brands Inc (STZ.N) for $1.85 billion.
“What they’re going to be saying to DOJ is that we (AB InBev) have nothing to do with the distribution of Modelo. But if you think AB InBev doesn’t have huge influence on Crown, I have a bridge to sell you,” said Steve Hindy, a founder of the Brooklyn Brewery.
AB InBev already controls more than 47 percent of the U.S. market with brands including Budweiser, Stella Artois and Beck’s.
The nation’s No. 2 player is MillerCoors, a joint venture between SABMiller Plc (SAB.L) and Molson Coors Brewing Co (TAP.N), with a 28.4 percent market share, according to Beer Marketer’s Insights. Crown, which sells Modelo beers such as Corona Extra, Modelo Especial and Pacifico, is a distant third with 5.3 percent.
SO WHY THE WORRY?
Craft beers account for 6 percent of the U.S. beer market, and are growing swiftly, according to the Brewers Association. The number of craft brewers has grown from eight in 1980 to 537 in 1994 to over 1,600 in 2010.
The biggest of the small include Boston Beer Co (SAM.N), Yuengling, Sierra Nevada, New Belgium and Craft Brew Alliance Inc (BREW.O), which makes beer under the Red Hook and Kona brands and is nearly a third owned by AB InBev.
Post-Prohibition era rules ban brewers in 38 states from distributing their own beers to retailers. As a result, there is a middle tier of largely independent wholesalers, over 3,000 of them. Small craft brewers rely on these wholesalers to get their beers to the market, and they fear that AB InBev’s clout will keep their beer off delivery trucks.
Senators Christopher Coons and Thomas Carper and three others agree. They sent a letter on October 2 to the Justice Department expressing concern about problems of craft brewers’ access to wholesalers.
“ABI’s business practices aimed at preventing its distributor partners from associating freely with competitor breweries strikes at (the) heart of competition in the beer market,” said the letter. “Consumers will ultimately be harmed.”
One of the six lawmakers who signed the letter was from Colorado, home to the rival Coors brand. Two are from Delaware, home of the popular craft brew Dogfish Head, which has “One Hundred Bottles of Beer on the Wall” on its voicemail.
If the Justice Department were to find that the Modelo deal would hurt consumers – such as by leading to higher prices or fewer choices – it could try to stop it by taking the parties to court or requiring sales of assets to dilute the entity’s power.
As is normal practice on a deal this big, the Justice Department has met with players in all areas of the beer market in recent weeks to discuss the acquisition.
Although Modelo agreed to sell its stake in Crown to Constellation, AB InBev would be allowed to buy Crown after 10 years, albeit at a high price. Antitrust experts say the Justice Department could bar AB InBev from exercising that buyback in 10 years time or ask them to remove it from the current deal.
In the meantime, AB InBev will have no control of the brands in the United States, but it will become the leading brewer in Mexico, which is Latin America’s second-largest economy and fourth most-profitable beer market. It also sees a big opportunity in selling Corona around the world.
The global opportunity – rather than the U.S. market – is a big impetus for AB InBev to make the major but difficult purchase, though industry sources say the company has had its eye on Corona for years.
“This combination will create meaningful opportunities to grow Corona globally outside the U.S. and Mexico, given AB InBev’s established platform for distribution worldwide and the resources at its disposal,” said AB InBev spokeswoman Marianne Amssoms.
AB InBev also disputes the notion that it will have influence over Crown, which, according to the companies’ agreement, will control distribution, marketing, promotion and pricing in perpetuity.
“Grupo Modelo’s brands will continue to be imported, marketed and distributed independently in the U.S. through Crown Imports, leaving the U.S. market’s shares unchanged,” Amssoms said. Crown “will continue to manage all aspects of the business, including the selection of wholesalers for Grupo Modelo products.”
The National Beer Wholesalers Association, a trade group, said its members had been contacted by the Justice Department.
“NBWA is committed to ensuring that the independence of beer distributors is maintained, not weakened, as a result of this proposed acquisition,” said the association’s chief executive Craig Purser.
Three beer industry sources said they thought brewers and wholesalers might actually be criticizing the deal in hopes of getting concessions from a giant they fear before it’s too late, given the upcoming presidential election, which they think might change the political leanings of the DOJ, and the fact that this is likely to be the last big beer deal for some time.
“If somebody has a strong point of view one way or the other, this will probably be their last chance to have some kind of meaningful impact on how the industry shakes out,” said a craft brewing executive who declined to be identified.
Another one said brewers might be trying to “get a pound of flesh” they weren’t able to get in 2008 when InBev bought Anheuser-Busch for $52 billion.
As the parties jockey, people who attended two separate meetings at the Justice Department said officials there had few if any questions, and the questions that were asked indicated that they were still deciding if they would have concerns about the deal.