With SABMiller Deal Complete, ABI Takes Aim at Craft Brewers
Photo from Flickr user quinnanya.
Anheuser-Busch InBev is angling to control every shelf of your local beer store, and they’re doing it behind the scenes. That may seem surprising, given that the Belgian company has made headlines this year with its nearly complete $108 billion acquisition of SABMiller, the second-largest beer company in the world. But many in the industry see control over distribution, even more than deals, as the real source of ABI’s growing market power. And though the Department of Justice’s July approval of the merger seems to promote competition and place checks on the company’s pursuit of growth, those checks may not prove strong enough to rein in the beer giant.
ABI currently commands a 45% share of the U.S. beer market by volume, and 20% of the global beer market. The SABMiller acquisition would bring its global market share to 30%. To comply with the DOJ’s approval of the acquisition, SABMiller agreed to divest its MillerCoors holdings, whose brands comprise 25% of the American beer market. DOJ asserts that this divestiture ensures ABI’s American market power will remain stable despite the acquisition.
But market share is just one way to understand ABI’s control over the sector. Beer industry insiders worry that the giant’s growing power in distribution is perhaps the greater threat to craft brewers and consumers.
Since the end of Prohibition, states have enforced a three-tier system to separate production, distribution, and retailing of alcohol. Brewers or distillers must sell their product to distributors, who then sell to suppliers and retailers. These regulations were put in place to prevent any one company from dominating the three sectors.
In recent years, ABI has pushed the boundaries of these regulations and begun buying up distributors. Today, the company directly owns about 9%of its distribution network. As ABI has expanded into distribution, it has become harder for small, independent brewers to compete with ABI brands on the shelf. While ABI has the resources to control trucks, warehouses, and other large distribution infrastructure, smaller breweries can’t compete on that scale.
“Distribution is important for all brewers,” says Paul Pisano, senior vice president at the National Beer Wholesalers Alliance. “Knowing that ABI could come in at any point and [acquire your] distributor…that’s very disruptive.”
ABI has also grown its distribution power by forming close relationships with nominally independent distributors. According to a 2015 incentive program, distributors under contract with ABI must spend a certain amount of money each year advertising the company’s beers. Most of that money is then refunded if ABI products comprise 98% of the distributor’s sales. These reimbursements can reach $1.5 million annually. This program effectively punishes distributors under contract with ABI for building relationships with and promoting craft or independent brewers. Of 3,300 beer distributors in the U.S., about 1,100 are directly partnered with either ABI or MillerCoors, and 21 are wholly owned by ABI.
The DOJ’s approval of the ABI/SAB deal attempts to address this growing dominance. The Department’s ruling limits favor-currying incentive programs, and allows just 10% of ABI’s product to be distributed through the company’s wholly owned distributors.
These conditions amount to a humble victory for those concerned about the anti-competitive effects of the merger. But “the devil is in the details and in the enforcement,” says Pisano. If the DOJ’s conditions prove toothless, “it’s worse than having nothing.”
The DOJ also requires ABI to receive approval from the Department for future acquisitions. But Diana Moss, president of the American Antitrust Institute, says that because this “behavioral remedy” doesn’t “completely [get] rid of the incentive of the company to exercise market power,” ABI will have “strong incentives to circumvent” DOJ’s monitoring of its future merger activity.
Bob Pease, president of the Brewers Association, which represents craft brewers, warns that ABI’s power in distribution and retail will “continue to get worse” even with the DOJ’s increased oversight. He notes that ABI has completed two acquisitions of craft brewers just since the DOJ’s approval of the SABMiller deal in July, on top of the eight craft brewers ABI acquired over the past five years. Pease says that such acquisitions have “harmed competition in the beer industry,” and have injured the consumer’s ability to decide what she wants to drink.
Another way ABI and SABMiller have compromised the three-tier system is by paying for premium shelf space in stores. ABI and MillerCoors are both “category captains” in many American liquor stores, a designation that allows them to advise stores on which brands to carry. Naturally, the companies favor their own brands and distributors. ABI and SAB’s dominance in category captaining “primarily [serves] to crowd out other emerging brands to the detriment of both consumers and the retailers themselves,” according to an analysis by the Brewers Association.
ABI hasn’t won at every turn in its attempts to move into the distribution sector. State legislators in Ohio, Illinois, and Kentucky all blocked effortsby ABI to acquire major distributors in those states in 2014 and 2015, after stakeholders filed complaints against the buy-ups.
The ABI/SAB deal is currently open to public comment. The deal still requires approval from Chinese regulators, followed by shareholder approval.
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