Beer, Competition, and Emerging Markets

Rarely does a news story address three of my biggest enthusiasms at once, so if I find one I pay close attention. Today’s New York Times reports that the U.S. Justice Department is considering antitrust action against Anheuser-Busch InBev and MillerCoors (itself a joint venture between SAB Miller and Molson Coors), which jointly control about 80% of the U.S. beer market (“Rising Beer Prices Hint at Oligopoly”). To be honest, the article itself only addresses beer and competition; the emerging markets angle is mine alone. It appears, in any case, that both brewing giants are raising their prices, even as the recession makes the average working man need a beer more than ever.

The Justice Department has not suggested that the brewers have colluded to raise prices, only that the concentration of the market gives them inordinate pricing power. Indeed, from 1947 to 1995 the number of brewing companies in the U.S. has dropped by about 90%. Anheuser Busch InBev, SAB Miller, and MillerCoors are themselves the products of decades of consolidation both in the U.S. and worldwide, as big brewers hoovered up smaller ones. InBev, which acquired Anheuser-Busch for $52 billion in 2008, was itself a product of a merger between Interbrew of Belgium and Brahma of Brazil. Interbrew, the long-time owner of such classic Belgian brands as Stella Artois, Hoegaarden, and Bellevue, itself began an acquisition spree in the early 1990s and snapped up Canada’s Labatt, Whitbread and Bass in the UK, Rolling Rock in the U.S., Mexico’s Dos Equis, and a slew of others in Eastern Europe and Asia.

Christine Varney, head of the Justice Department antitrust division, has even suggested the government might re-examine deals approved under the Bush Administration, such as last year’s SAB Miller and MolsonCoors joint venture. What I find puzzling in this is that big companies with dominant market share tend to use their economies of scale to drive prices down to levels at which smaller competitors can’t compete. But no one is accusing the big brewers of doing that.

Companies typically can use dominant market share to raise prices only in markets with high barriers to entry. Big airlines can sometimes get away with it because new competitors on a given route can’t get or have to pay through the nose for landing slots. Tight regulations and restrictions on foreign ownership of airlines in the U.S. and other countries also limit competition from new players. State regulations make it impossible for me, a Massachusetts resident, to buy medical insurance from a company in Texas, and force me to “choose” from among three or four approved insurers. My insurance premiums went up 23% this year, but so did those for every other insurer in the state.

Beer is not like that, at least not in the U.S. The craft or microbrewery industry has grown tremendously since the early 1980s, and the Brewers’ Association reckons that there are now over 1,500 brewing companies in the country, a level not seen since Prohibition was introduced in 1919. Go into almost any bar or pub in this country and you will find at least a half-dozen beers on tap, some of them local and independent brews and others imports. Pabst Blue Ribbon, in 1890 the most popular beer in the U.S., has seen its market share drop to 2.8%, but it has enjoyed a resurgence due to its cheap price, decent taste, and new-found cachet among urban hipsters. Narragansett, once the dominant beer in southern New England, ceased production in the late 1990s, but is now back, after a group of investors revived the brand. It too is a cheap, sturdy brand with a grand history. At the other end of the scale are the craft brewers, whose beers sell at a premium to the big brands. The beer market is completely open. Anyone with a marketing idea and a recipe can get a contract brewery to make the product. Pabst itself contracts out all its production to other breweries, and has become, in effect, a “virtual brewery.”

Emerging markets tend to be less open. Many of their brands have been acquired by the multinational giants, though some of them, like the Czech Pilsner Urquell now  owned by SAB Miller,  have kept their identities  and been left to make their beer as they have done for the past 700 years or so. Developing and frontier economies have bad infrastructure, so the dominant national brewery, which tends often to own the national Coca Cola bottling plant as well, reinforces its dominance by controlling the entire distribution system. It owns the fleets of trucks that carry the beer to remote villages, and it provides financing, signage, and refrigerators (sometimes propane-powered in areas with unreliable electricity) to the shops that distribute the product.

Just four companies – SAB Miller (the SAB stands for South African breweries), Heineken, Diageo (owner of Guinness), and Castel (a French company that operates breweries throughout francophone Africa) control the bulk of beer production and distribution in Africa, and the four companies have various joint production and marketing agreements in many companies (Heineken and Diageo, for example, own about a third of Namibian breweries, one of the few remaining independent brewers on the continent, and distribute its flagship Windhoek beer and other brands in South Africa). Castel and SAB Miller, in turn, have joint ventures in 32 African countries, including Algeria and Morocco. In some of the bigger African markets two, or sometimes three, of these companies will compete head to head. In smaller markets, such as Sierra Leone, there is only one game in town (Heineken, in this instance).

African governments don’t seem to mind this concentration in the brewing industry. Even when countries are engulfed in civil war or suffering famine, the breweries keep operating, and they are usually among the largest taxpayers, along with the mobile phone companies, providing something that everyone needs. The multiplier effect throughout the big breweries’ production and distribution chains has created jobs, increased incomes and wealth, and given countless small business people a start. Facilitating competition may not be a big priority in these places.

As for the United States, any beer drinker can find a beer to his or her tastes at almost any price point. The government already runs the car industry and will soon run the health industry. I can accept that, even if I don’t like it. But I would like the government to keep its hands off my beer.

I’m not in the business of recommending stocks. If you’re looking for emerging markets exposure in this industry, Castel is privately owned, SABMiller (SMBRY) generates 64% of its revenues from emerging markets in Latin America, Asia, and Africa, and jointly owns Snow, the Chinese brand said to be the best-selling beer in the world. Emerging markets, especially in Asia, look to be recovering much faster and more vigorously than the rest of the world, and breweries’ profits are higher in Africa than in other regions. A-B InBev (NYSE:AHBIY) is, of course, the biggest brewing company on the planet and owns the dominant brands in the U.S. (the biggest) and Brazil (big and growing fast) markets. Though less regionally diverse than SABMiller, it earns 45% of its revenues in emerging markets. Molson Coors (NYSE:TAP) is concentrated almost entirely in Canada, the U.S., and the U.K., mature markets with lower growth prospects, and its joint venture with SABMiller is only for the U.S. market. Diageo (NYSE: DEO) is a much more diversified drinks company, with big spirits and wine businesses in addition to the Guinness brewing operation, but Nigeria is Guiness’s second largest foreign market after the U.K. Heineken (OTC:HINKY)  is especially strong in Africa and the Middle East, and owns the number one or number two brand in almost every market it is in, including Egypt and Nigeria. It also has a big presence in Eastern Europe and the former Soviet Union, Southeast Asia, and Latin America.

I leave on August 28 for a three-week business trip to Egypt and Papua New Guinea, where I expect to rely on Heineken product (Sakhara Gold in Egypt and South Pacific Lager in PNG). I will keep on posting from the road.

(Disclosure: No Positions)