The Beer Tap: Miller Coors and Distribution

A very big announcement in the beer world today! SAB Miller and Molson Coors have created a new joint venture to produce, market and sell their brands here in the US. The deal helps the two companies gain scale while delivering an estimated $500 million dollars in annual savings according to the press release. They will produce a combine 69 million BBLs which still trails A-B and their US sales of over 100 million BBLs. I do not usually report too much news on the larger brewers, but I think that this could have an effect on the craft and micros of the brewing world.

Part of the rationale behind completing the deal is the desire to improve distributor relations and generate efficiencies in distributor operations. As it is now, a good number of distributors carry both Miller and Coors products while most A-B distributors are exclusive. With two of the big three in the same house, Miller and Coors end up competing for distributor attention and resources. If the deal closes, the new Miller Coors will contribute a large portion of the profitability to a distributor. Add in the fact that a few of these distributors also carry Heineken, Sam Adams and some Mexican imports and its starting to get crowded. Yes, all of these brands were there before, but on average none of them was the completely dominant player. With one big supplier and several other important brands needing attention, what happens to a small volume craft or micro? Will they still be able to get the support they need? As long as the craft category continues to grow at over 10%, I think that there will be room for these brands. Some have even established themselves as a solid player in a number of markets. However, what happens when the category slows down? While I think that overall craft/micros are here to stay, the growth we are currently witnessing is probably not sustainable. Just recently, the Wall Street Journal reported on increased hop and malt costs that are having a greater impact on the craft segment. Using more hops per barrel means a greater effect on costs. Avoiding corn and rice in favor of using all malt also means that rising malt costs hurt the small guy as well. The smaller breweries cannot afford to eat these increased costs because their margins are not huge to begin with. Their only real option is to pass on the increased costs through price increases which may stall some of the growth.

So how will all of this shake out? I think that only time will tell. It will be interesting to see how growing brands weather the change. Will they be able to find new distributors to take their product into new states and regions? I certainly hope so! I for one enjoy added variety even if it does mean paying a little more. I rarely let price stop me in the beer isle because I place great value on enjoying a full flavored, hop filled, malt loaded beer.

Another key thing to note is that each distributor is ultimately their own business. Brewers do not have the ability to force changes or limit the brands they carry unless they have agreed to limits as part of their operating agreement with a brewer (typical for A-B). Most of the time, a brewer's and a distributor's interest aligns so suggestions from a brewer are taken into careful consideration by a distributor. However, in the end they need to do what is right for their business and portfolio to ensure long term profitability and success. The rationale may exist for certain houses to aggressively pursue new brands as part of their overall strategy, while not in others. Especially with an increased reliance on a single supplier (OK...bad joke here but I can't help it. Porter's 5 forces in action! See also Porter if you need help with the pun.)

Should be an interesting year to see what changes do take place. My comments are certainly at the aggregate level and generalizations. Each market and distributor will shake out in their own way with a number of overarching trends describing the change. I'll be sure to report back if I hear of any developments.

In the meantime...pop the top off of your favorite beer. I'm headed to open a Lagunitas IPA right now.