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Head to head: New beer giants plan for sharp competition

This article first appeared in the St. Louis Beacon, March 3, 2009 - Two new companies are continuing a decades-old battle for dominance in the U.S. beer market.

There's the "new" Anheuser-Busch InBev, created by the November takeover. And there's the new corporate structure for the Miller and Coors brands, created in mid-2008 through a U.S.-operations joint venture by Molson Coors and SABMiller.

Despite the new looks, don't expect any drastic changes in the near term.

"My expectation is that consumers won't be affected by either of these corporate combinations," says Stanley Slater, professor of business administration at the Colorado State University College of Business, who worked for Coors from 1980 to 1984 in brand management and planning.

Slater and other beer business experts interviewed by the St. Louis Beacon say the brewers won't mess with the products, won't cheapen ingredients and won't create beer versions of New Coke.

The companies won't cut prices to gain market share; and they won't venture outside of their marketing comfort zones, even as they fight over a stagnating U.S. beer market. Anheuser-Busch InBev controls about 50 percent while the Miller and Coors brands hold just under 30 percent. Prior to the joint venture, Miller had about 18 percent and Coors had about 11 percent of the U.S. market.

"I don't think they'll reposition the brands, and I don't think there'll be price competition," says Slater, when asked about the possibility of lowering costs to the consumer. "Price competition will be the last thing on the brewing executives' minds. Once you cut prices, it's hard to raise them again."

Consumers, wholesalers and retailers will get a clearer picture about Anheuser-Busch InBev on Thursday when the company issues fourth-quarter 2008 results and discusses 2009's prospects.

Last month, the Miller-Coors joint venture reported that net sales -- revenue minus excise taxes -- rose to $1.74 billion in the October-December quarter from $1.69 billion for the same period in 2007. The 2007 quarter reflects results when the Miller and Coors U.S. operations were run separately.

The joint-venture's net income dropped to $54.1 million in the 2008 fourth quarter from $90.7 million for the year-ago period. Excluding one-time items linked to establishing the joint venture, net income rose to $135 million from $116 million. Beer volume fell to 16.1 million barrels from 16.84 million barrels.

A Steady Strategy

As they continue combining their respective corporate cultures, the brewers will be conservative because their most immediate, important goal is cutting expenses.

Anheuser-Busch InBev has done "exactly what they said they would do," says St. Louis business-strategy consultant William Finnie. "They are very disciplined." Finnie worked for Anheuser-Busch from 1965 to 1991, specializing in marketing research and analysis.

When InBev romanced Anheuser-Busch, the Belgian-Brazilian brewer promised to squeeze $1.5 billion in annual costs from the St. Louis company over three years.

"In our discussions with management, it is clear that the integration [of Anheuser-Busch and InBev] is proceeding faster than expected," says a recent analysis by UBS Securities.

UBS says a faster pace could yield more savings -- $1.85 billion vs. $1.5 billion. UBS speculated that some of the extra savings could be reinvested into marketing against the Miller-Coors joint venture.

Marc Swartzberg, who follows the beer industry for Stifel Nicolaus, told clients in a March 3 report that Anheuser-Busch InBev "is meeting or exceeding its internal financial targets" since the takeover.

When SABMiller and Molson Coors courted each other, they said a U.S. joint venture could reduce expenses by $500 million over three years and create a stronger corporate force against the St. Louis beer giant.

"The joint venture made a lot of sense especially for distribution and manufacturing," says Ann Gilpin of the independent financial research firm Morningstar. One way the joint venture can save money is to reduce shipping costs, she explains.

Previously, Coors shipped most of its beer from its Colorado home. Now, the beer also can be made and shipped from any of the six Miller breweries in the U.S.

Making Adjustments

Miller-Coors and Anheuser-Busch InBev "will not tolerate anything less than major increases in brewer profitability and distributor efficiency," said Swartzberg of Stifel Nicolaus. "We do not, however, subscribe to the view that relationships must take a backseat if big profit targets are to be achieved."

Although analysts use impersonal terms like "synergy" and "cost savings" to praise the new corporate structures, there's no doubt that mergers and acquisitions cause painful changes.

The joint venture "is a shock to the system" for Molson Coors and SABMiller employees, says Benj Steinman, editor and publisher of Beer Marketer's Insights. The new Anheuser-Busch InBev "will be a radical remake."

Just a few weeks after the Nov. 18 completion of the takeover, the new management announced the firing of 1,400 white-collar workers mostly in St. Louis. In addition, the company said it wouldn't fill 250 open jobs and that it would eliminate 415 contractor jobs.

Many top executives of the old Anheuser-Busch have departed, including Patrick Stokes, the former chairman; Bob Lachky, the chief creative officer; and Tony Ponturo, the sports marketing director. August Busch IV, who had been CEO, has joined the non-executive board of the merged company. He has no daily management responsibilities.

The people who make, distribute, market and sell Budweiser and other Anheuser-Busch InBev products are still getting used to the way the new management does business.

In recent months, for example, the Post-Dispatch has reported that Anheuser-Busch InBev will take longer to pay suppliers and that the company had replaced top executives at several U.S. breweries. Advertising Age recently wrote that Anheuser-Busch InBev no longer will pay major advertising agencies on a retainer basis but will pay them by the project.

"In the short-term, mergers create a loss of focus," says Finnie. "There's all sorts of complexities and distractions in the marketplace. In the end, you will have a leaner, more efficient company with more purchasing power."

That's the sales pitch to investors offered last month by Leo Kiely, CEO of the Miller-Coors joint venture. "Our early progress with integration ... is helping us to accelerate the timing of our 2009 synergies," he said.

What Price Beer?

Finnie and some beer industry experts believe Anheuser-Busch InBev and the Miller-Coors joint venture might raise beer prices this year to improve profitability even if it means losing a small amount of market share.

Raising prices during a severe recession for a flat U.S. beer market might sound like a strange idea, but there are reasons why it might make sense.

Because Anheuser-Busch InBev and the Miller-Coors joint venture control nearly 80 percent of the U.S. market, they have little incentive to cut prices. They have learned that price wars can be Pyrrhic victories.

Former Anheuser-Busch CEO August Busch III had a reverence for market share that Carlos Brito, CEO of Anheuser-Busch InBev, doesn't embrace with equal fervor. "He's not worried about market share," says Morningstar's Ann Gilpin. "He wants a more profitable company."

If the profit that is gained outpaces the volume that is lost due to a price increase, Finnie says, then Anheuser-Busch InBev will have achieved its financial goals. "I think you could expect price increases in most of the U.S., by Anheuser-Busch InBev and by the joint venture, he says.

Executives will carefully evaluate balancing higher prices versus reduced volume. If a price hike works for one company, the other will probably raise prices. If consumers reject one company's price increase, the other will back off.

The companies know that price increases can work. "While the U.S. beer category softened in the fourth quarter, we increased pricing and net revenue," the Miller-Coors joint venture reported last month.

In September and October 2008, when it was still independent, Anheuser-Busch raised prices for a majority of its U.S. markets. It predicted higher prices would lead to a 4 percent increase in revenue per barrel in 2008.

UBS Securities says the merged Anheuser-Busch InBev could try for a modest 2 percent global price increase this year. Even if it doesn't act, "the 2008 pricing effect will roll over to drive 3.5 percent [higher] pricing in 2009," UBS says. The firm also notes that the Miller-Coors joint venture reported an 8 percent revenue per barrel increase in the fourth quarter of 2008.

Marketing Money

How the new corporate structures will affect marketing is a question that may never be answered; marketing is a mixture of art and science that requires adjustments to competitive and economic changes.

And despite the former InBev's reputation for ruthless cost-cutting, a recent Stifel Nicolaus report said "we understand that total marketing dollars [for Anheuser-Busch InBev] are entirely untouched versus budgeted amounts prior to the acquisition."

The big brewers have multiple products to accommodate varying tastes. In ascending levels of price, the categories include economy, popular, premium and super-premium.

Marketing in a deep recession presents an added challenge. If consumers have less money to spend, they may buy less beer and/or buy cheaper brands.

"For the time being, the consumer will be trading down," says marketing professor and former Coors executive Stan Slater.

Cheaper beer provides lower profit margins; but if beer drinkers do trade down, beer makers want to make sure the consumers stay within the respective corporate families.

Companies must resist the temptation to cut prices because "the cost of growing market share is hard to justify," says Michael McCarthy, associate professor of marketing at the Farmer School of Business at Miami University in Oxford, Ohio.

McCarthy counsels against a proliferation of brand extensions because they "risk diluting the brand name in the minds of consumers." The Anheuser-Busch InBev brands have a stronger "brand marketing muscle," he adds. "I doubt the Miller-Coors joint venture will gain market share. They have a lot of weak brands."

While reinforcing its Budweiser brands in the U.S., Anheuser-Busch InBev is trying to expand the Stella Artois brand in the U.S., says Michael Lewis, assistant professor of marketing at Washington University's Olin Business School.

Although Stella Artois is viewed as a popular-priced, mass market brand in Europe, Anheuser-Busch InBev is positioning it as a more upscale product in the U.S. with an ad campaign describing the "perfect pour," Lewis says.

At the other end of the image spectrum, Morningstar analyst Ann Gilpin points to the "Tell The Recession Where to Go" campaign for the popular-priced Miller High Life brand. The Miller-Coors joint venture also has expanded distribution of the lower-priced Keystone light brand.

"However, the recession is going to end," she says. "You don't want to be associated with cheap beer."

Looking beyond the individual brand decisions and the new corporate structures, it's clear that the U.S. beer market will retain its sense of combat, says William Finnie. "Both will fight aggressively," he says.

Robert Steyer is a freelance writer.