The MegaBrew Hearing: Washington Theater

FILED DECEMBER 8, 2015

Dear Client:

This morning MegaBrew got a vet amid Congressmen who each opened their rounds of questioning with anecdotes about their local brewers (yes, even the teetotalers). That speaks to the very nature of this hearing, held by Senators Mike Lee (R-UT) and Amy Klobuchar (D-MN), the chairman and ranking member of the Senate Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights, on Anheuser-Busch Inbev's proposal to purchase SABMiller.

Remember, it's for the DOJ to approve such a merger. This sort of hearing is "Washington Theater," as one source put it: It helps Senators and the like show they're trying to keep the price of a local six-pack down.

And while that may be true, there was enough hullaballoo about craft brewer access to market that we believe the powers that be will vet the points raised thoroughly.

HARRY'S CLIFF'S NOTES. If you just want the basic summary, this subhead section is for you. Anheuser InBev chief Carlos Brito stressed that the deal should have "no impact on the U.S." throughout the hearing so often, the press table almost started a drinking game. Molson Coors chief Mark Hunter's corollary was that MillerCoors will simply go from two operators to one. (He also promised they had no intentions of buying any other distributors besides the one they already own.)

But skeptics from Brewers Association chief Bob Pease, to Iowa Brewers Guild representative J. Wilson and NBWA president Craig Purser, continually brought distribution tier and commodity concerns in wake of deal. Both Bob and J think A-B's divestiture of wholly owned distributors should be a condition of deal approval, besides curbing distributor incentives programs that they say can cause wholesalers to drop other craft. Meanwhile, Craig wants assurances the DOJ will "prohibit termination of any independent distributor" as result of tie-up. Sen. Klobuchar added in her open that the MillerCoors divestiture in U.S. would need to be "nearly perfect" to satisfy litmus, while the American Antitrust Institute's Diana Moss said it still leaves "major sources of uncertainty."

At one point Chairman Lee asked how ABI involvement in the middle tier would be any different the day before the transaction from the day after. Indeed, this point seems a linchpin for at least public sentiment approval at the moment.

For his part, Brito was slippery as a minnow in a bass net when pressed after testimonies whether he'd commit to a 10% ceiling on volumes going through their owned distributors. Indeed, an exchange between Brito and Connecticut Senator Richard Blumenthal was particularly representative of the sometimes comical hearing:

Sen. Blumenthal expressed his "high degree of skepticism" about the MillerCoors divestiture as sufficient remedy, "despite representations that there will be no impact on the U.S. market," he said. "Maybe not on day one," he acquiesced. "But on day two and three and year two and three, the ramifications could be huge. We've seen this movie before in the airline industry, and it may not end all that happily for consumers. 



"So let me be very direct: Brito, You heard [NBWA chief Craig] Purser say what he's looking for … that there 'be no termination of independent distributors.' Will you commit to this Committee that there will be no termination of distributors as a result [of the tie-up]?"


Brito answered: "That's a very good point, Senator, thanks for the question. ... Again, this transaction is not about the U.S., it's about the rest of the world and therefore, nothing that relates to this transaction … will impact any distributor."

Blumenthal was not satisfied with that answer. So Brito rejoined: "I can commit [that] as a result of this transaction there will be no such thing [independent distributor terminations]."

"…And," Blumenthal continued, "ABI intends to own, you said, no more than 10% of its distribution. Can you commit to maintaining no more than 10%?"

"That's correct," Brito said. "That's our commitment out in the marketplace … around 10%. … Today, by the way, Senator, we are between 7%-8%. So we said 10%. Could be 7%, 8%; could be 11%, 12%, but it's going to be around 10%."



"Well, 11 or 12% is different than around 8," Blumenthal said.

Brito answered, "that's why we said around 10%."

 Then Blumenthal asked about retail penetration: "Can you commit that there be no effort to penetrate the retail market?"



Brito answered that there are "50 states" and "50 sets of regulation … So in some states, for example, 15 states, brewers can own wholesalers; in others we can't. In [some] states we can own brewpubs, in others we cannot."

Ultimately he said they play in this tier, as they do in the second tier, because it provides them knowledge. We didn't really hear an answer to the retail question in that.

BRITO TESTIMONY: THIS IS FOR OUR FRIENDS IN AFRICA, ASIA AND THE (NON-U.S.) AMERICAS. But let's back up to the opening testimonies; Brito kicked them off. He stressed ad nauseum that the deal should have no impact on their market concentration in the U.S. where "Molson Coors will acquire 100% of SABMiller's interest in MillerCoors, including all brands, breweries, intellectual property and other assets." The "business rationale" for the transaction is rather to better serve their "friends" in markets like Africa, Asia and Central and South America.

Of course, craft brewers have voiced concern over distribution and access to commodities in wake of deal. But while about 500 of some 3,300 wholesalers are A-B distributors, most carry competing brands. And "only" 21 are owned by A-B. Brito reiterated: "it's our intention that approximately 90% of our volume be distributed by independent wholesalers."

As for commodities: He says aluminum cans and barley are mostly domestically produced and sourced, and as such their needs shouldn't change in the U.S. as their concentration won't either.

He gave some numbers: "Anheuser-Busch uses approximately 1.2 million metric tons of barley, representing just 25% of the U.S. market." And of America's roughly 90 billion cans, "Anheuser-Busch uses about 18 billion. It is worth noting that aluminum cans are a minor input for most craft brewers," he said. As for hops, which are more globally sourced, "our footprint in the market is and will remain modest due to the fact that our beers require far less hops than those of our craft competitors." He suggested that the hops industry has been "highly responsive to the needs of craft" and anyway, "AB InBev purchases approximately 8.1% of the total U.S. production."

BOB'S PEASE'S TURN: DOJ SHOULD MAKE A-B DIVEST OF WODS, ALTER INCENTIVES PROGRAM AS CONDITION OF MEGABREW APPROVAL. Brewers Association CEO Bob Pease followed Brito's testimony. He highlighted the plight of craft brewers trying to get to market via an increasingly consolidating second tier.

He touched on MillerCoors and ABI's influence over the beer distribution system in America. "State laws in many places effectively mandate the use of beer wholesalers and prevent a brewer from changing wholesalers absent extraordinary circumstances," he said. Further, "Over the last three decades, the Federal Trade Commission has repeatedly called out states for enacting or refusing to change blatantly anticompetitive distribution laws, most of which are still on the books and are aggressively enforced through private and government action." Sure, self-distribution laws have been granted in some areas, but Bob argues "those exceptions are insignificant in terms of the overall market and totally inadequate to address the imbalance that currently exists."

Then he got into the meat of it: Wholly Owned Distributors. "In 15 states, large brewers such as Anheuser-Busch InBev are allowed to own wholesalers. At present, ABI is the largest beer supplier and one of the largest beer wholesalers in nine states," where in big metro areas "ABI controls one of the two routes to market that craft brewers must use." Many remarked during hearing that ABI is the fastest-growing distributor in the nation, having bought 12 independent distributors in nine states since 2012.

Bob also asserted that A-B has "further diminished the independence of the wholesalers that it does not own" through the likes of incentive programs we've written so much about, which "provide millions of dollars to wholesalers that severely limit sales of competing brands."

Therefore "as a condition of approving the ABI acquisition of South African Breweries, the BA strongly believes that the Department of Justice should require ABI to:

"Divest its company-owned wholesalers; and

"Modify its anticompetitive financial assistance and incentives to wholesalers to refrain from distributing other brands of beer," he said.

NBWA'S CRAIG PURSER: DOJ NEEDS TO PROHIBIT TERMINATION OF INDEPENDENT DISTRIBUTORS POST-DEAL. Then NBWA chief Craig Purser testified. For this purpose he made a somewhat unlikely bedfellow with Bob Pease and J. Wilson (indeed Sen. Klobuchar at once remarked that "Pease, Purser and Wilson" sounded like the name of a law firm).

Independent distributors provide access to market for brewers of all sizes, Purser said after outlining craft's quick growth, which he said is unparalleled in other industries. But many have expressed concern "how [MegaBrew] it could reduce access to distribution … reducing choice."

How's that? He outlined in written testimony: "If the proposed deal closes, 57% of the world's global beer profit would fall within the ABI and SAB combination. By comparison, Heineken, the next largest global competitor, is at 11%" and Molson Coors in the U.S. "would be just under 3% of that same global profit pool.

"The resulting concentration could upset the equilibrium of the current U.S. beer market, which today can be fairly characterized as a 'consumer pull' marketplace, where the consumer possesses the power to create market demand for popular beer brands," he said. "The scale and market power being proposed in this merger could lead to a 'supplier push' method, where brewers possess the scale and market power to dictate brand choices and beer sales."

So the "DOJ needs to ... protect independent distribution by prohibiting termination of any independent distributor" as result of tie-up, and the DOJ must "ensure these independent distributors are free to provide their best efforts to all brewers and importers," he repeated twice in closing.

Iowa Brewers Guild rep. J. Wilson picked up Pease's arguments in his testimony. He touched on access to raw materials concerns. But his smoking gun was demonstrating how A-B's shopping in the second tier has effectively cut off non-AB craft distribution. He pointed to Krey Distributing Company, with upward of 70% market share in Missouri's St. Charles and Lincoln counties.

That distributor made headlines in the St. Louis Post-Dispatch, J testified, "in March of 2013 when it dropped six craft breweries from its portfolio - the craft brands had come into Krey hands a year prior when Krey took control of the Grey Eagle and Lohr distributorships in a so-called alignment deal. While Krey asserted that these brands were underperforming, Wolfbrau House of Beer owner Ryan Wolf indicated in the article that Krey wouldn't deliver the craft beers he ordered."

He added that state regulators in California are currently examining A-B's recent purchase announcement of two wholesalers in California. "And just last week, I was contacted by the Iowa Attorney General's office, as they are also scrutinizing this proposal's impact within our state," he said.

President and CEO of Molson Coors Mark Hunter rounded out testimonies. He said, and he would repeat throughout the hearing, that the only thing to change in the U.S. for them as result of MegaBrew is that Molson will now be the single U.S. owner rather than partial owner of MillerCoors.

He also shared that MillerCoors owns only one distributor among their slightly less than 600 U.S. wholesalers. That operation "distributes approximately 625 brands, from 29 suppliers, and nearly 67% of them are craft brands. To be clear, we have no intention of purchasing other distributors," he said.


BUT WHAT'S 'BREW GOT TO DO WITH IT? But "Isn't it true that AB InBev's negotiation leverage will be no greater the day after this deal closes than day before?" asked Chairman Lee of A-B's U.S. tactics in the second tier. 

Bob answered first. "This is the fourth largest merger of all time," he said. "Our biggest concern would be that a company like this will use increased market power to further greatly influence independent distributors that ABI interacts with." He invoked the distributor incentive programs, which the BA believes "are more designed to encourage distributors not to sell products of independent, smaller players."

Purser echoed Bob's sentiments, going back to MegaBrew's potential 58% global share and supplier "push" tactics. "But I also think you've gotta look at recent behaviors. … There's lots of talk about carrots and sticks - [it's a] very fine line with the incentive program. That incentive can switch and become a stick."

Later Purser would hammer a related point: "I think the acquisition itself could trigger terminations. That's one of the things we're [addressing]… no terminations of either company's independent distributors. … That ought to be, as a minimum, something guaranteed as condition of approval of transaction.

So Sen. Klobuchar put this question to Brito: "If it turns out divestiture creates an opportunity to alter relations with wholesalers, are there conditions you would agree to that would assuage some of these concerns?"

"In terms of our transaction, the company that will change its ownership is SABMiller, because we're going to be acquiring them," he answered. "Therefore, [there's] no trigger of any contracts in the U.S. market. Because again, this is about the rest of the world, not the U.S."

MOSS ON "MAJOR SOURCES OF UNCERTAINTY." Diana Moss of the American Antitrust Institute also testified at the hearing. She focused on "major sources of uncertainty" surrounding the MillerCoors divestiture in the States, particularly with a tumultuous backdrop in U.S. beer as outlined throughout hearing. Her agency thinks more specificity is needed.

Among questions she raises in deal's wake: How will distribution contracts be handled? And MillerCoors's Eden, North Carolina, plant closure raises questions: By withdrawing capacity from the market, "could this affect post merger incentives and dynamics?" (Mark Hunter was later pressed on the closure; he insisted the timing had nothing to do with MegaBrew.)

Still, Diana said: "pre-emptive closures of capacity - those types of closures are highly suspect given timing."

"This merger is not over until a remedy is in place," in her opinion. The very fact that companies have stepped forward to offer a fix, according to her, "is evidence that this deal does have potential anti-competitive implications."



So the remedy is "critical" and there are "open questions about that," she said. There's "quite a bit of murk"; the "devil will be in details."

Besides questioning fate of certain distribution contracts, she'd like to see as result of this deal no supply agreements; and "no contract brewing should be included."

"I think the DOJ had a good approach [with] Grupo Modelo; I think that's a template, but will [need] close scrutiny," she said.

Next issue Thursday, Harry

"I'll sleep when I'm dead."
- Warren Zevon

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