Summary
Over the past couple of years, global consolidation has been increasing among the beer brewers. Think MIller and South African Brewing Co. Think the purchase of Rolling Rock by Anheuser-Busch. This trend has continued pace and even the top 4 brewers are signing joint ventures with one another in an attempt to grow their business. Think Heineken and Carlsberg. The reasons behind the consolidation can be divided between economic costs, market share, and access to key markets. The future of beer brewing is going to get rocky.
Analysis
What we are seeing is that as developing markets continue to grow, such as China and India, these new markets begin demanding new products and services. What this means is that naturual resources are being consumed faster than ever. As a result of China's building of its infrastructure the cost of things like plywood and concrete have doubled over the past two years. It has also increase the price of beer brewing inputs such as grain, glass bottles, aluminum cans, etc. as a result of the increase consumption in emerging markets. Since many beer brewers are in established markets in the US and Europe, an increase in operating costs has a negative effect on operating margins. Couple this with the competition popping up in established markets like the US where brewpubs and regional brewers have been increasing market share and the big companies are seeing their market share dwindle in established markets that were their bread and butter areas and are also seeing operating costs rise.
Thus, these companies are trying to consolidate with others in order to lower operating costs. Buying larger quantities leads to lower unit prices and relocating beer brewing to a few key plants increases plant utilization thereby lowering manufacturing costs.
What they are also doing is looking to broaden access to emerging markets where beer sales are growing such as Russia and Eastern Europe. Since the biggest challenge to any beer manufacturer is distribution, the companies are looking to companies that have a presence in key markets and have an ability to distribute. Consolidation also means the company has exclusive rights to distribute the beer and those rights are worth a fortune. The reason is because it can also lock competition out of a market since it is extremely costly to build a distribution network. Thus, buying this access eliminates the possibility that you're competition will do it and makes it more expensive for them to compete. One of the reason that there are so few large beer brewers and lots of regional brewers in the US is because of a lack of access to the distribution network. Even as large as Sam Adams is, its still a regional brewerer and the same with Anchor Brewing. Their growth is limited by the ability to get products distributed and the faster large companies consolidate it locks out more of the competition.
Since beer brewing is fragmented is most emerging parts of the world, consolidation is going to expand global brands like Heineken, Miller, and Budweiser and local brands will at best remain regional and at worst disappear. I really hope emerging markets like yellow fuzzy water because consolidation is bringing it to them at a fast pace. It'll be interesting to see if homebrewing picks up in emerging markets once people figure out that only a few beer giants make a beer that isn't yellow fuzzy water.
