Friday, February 14, 2014

Reality Check

You may not like the big boys of brewing, but you have to admit, they are great at making money.

Goldman Sachs' analyst, Robert Boroujerdi, looked at the past ten years of merger trends in the global beer industry (among other industries) this month, and sent a cheery little note along to his clients:
The global beer industry has undergone a steady process of consolidation. Ten years ago the global beer industry was highly fragmented with Anheuser-Busch’s 8.5% market share enough to make it the global leader. Since then, a steady process of consolidation via M&A (Merger and Acquisitions) has taken place – often focused around cost-cutting opportunities (e.g. the $60 bn merger of Anheuser-Busch and InBev completed in 2008) or geared towards acquiring attractive emerging market assets (e.g. Heineken’s $24 bn acquisition of Asia Pacific Breweries completed in 2012).
Today’s AB InBev, with an estimated 21% market share, has been the driving force behind much of this consolidation. Interbrew’s acquisition of AmBev in 2004 created a new global leader, InBev, with 11% share and the subsequent Anheuser-Busch/InBev merger in 2008 again created a global leader, AB InBev, with 20% market share. Today’s top 5 companies represent more than 50% of the global market (versus 32% for the top 5 players in 2003), and the industry’s HHI* has risen to 725 in 2013E from just 276 in 2003.
As fun as it is to read all that jibber-jabber, Business Insider's Matthew Boesler, was kind enough to compare the merger trends and market share for the industry, between 2003 to 2013, in two handy-dandy, pie charts (Yea pie!) 

That's not very many companies on the right side of the 2013 map.

We've all heard that craft beer is booming in the U.S. It's production was up 15% in 2012, and sales were even higher at 17%. But, let's jump back to a line from Mr. Boroujerdi's note, "… or geared towards acquiring attractive emerging market assets." In light of ABInbev's most recent acquisition—Patchogue, New York's, Blue Point Brewery—that snippet takes on a slightly different meaning, doesn't it? 

Guess what. 

The craft beer industry in the U.S. is an "attractive emerging market." As much as everyone might not like it, this is the reality. ABInbev, is going to continue to "merge or acquire" as many craft breweries—or at least as many of the profitable ones—as they can. 

Guess what, again. 

The idea of brewery consolidation in the U.S. isn't all that new—it's been happening in our beer market since the 1890s—and probably earlier.

Guess what—one last time.

It's a two way street.

*"HHI" stands for Herfindahl-Hirschman Index, a common measure of industry concentration

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