Major breweries experience record-high M&A

Merger and acquisition (M&A) activity has long been a fixture of alcoholic beverage industries. Recently, major producers, particularly breweries, have begun consolidating their operations more frequently than previous years. The effects of these consolidations have radically transformed the market for alcoholic beverages throughout the 21st century.

Due to the pervasiveness of alcohol consumption, alcoholic beverage producers will play an indefinite role in the global economy. Many consumer goods industries experience rapid growth only to be quickly replaced by new technologies or innovations. However, alcoholic beverage manufacturers will maintain stability as long as alcohol consumption remains engrained in cultures across the world. Nevertheless, this built-in stability also presents challenges for the industry’s leading manufacturers.

Many beverage producers experience occasional surges in popularity resulting from various trends, such as the emergence of light beer in the late 1970s, martini and cocktail culture in the 1990s and the recent craft beer boom of the 2000s. Historically, however, alcoholic beverage producers have exhibited sluggish growth.

This is primarily due to unchanging alcohol consumption patterns, particularly in the United States. IBISWorld estimates that per capita expenditure on alcohol in the United States will increase at an annualized rate of 0.9% in the five years to 2016. Conversely, it is expected to contract at an annualized rate of 0.2% over the next five years. Because US consumers’ alcohol consumption patterns provide alcoholic beverage producers with little opportunity for organic growth, many companies have expanded across the globe through major mergers and acquisitions.

The Breweries industry was not a highly concentrated industry throughout the 20th century. St. Louis brewer Anheuser-Busch, Milwaukee’s Miller Brewing Company and New York breweries Ballantine and Rheingold only held significant market share in their respective regions of the United States, until waves of acquisitions ultimately consolidated these brands under the corporate umbrellas of national brewing companies. By the early 1980s, 92.0% of the industry’s production was generated by six major players, Anheuser-Busch, Miller, Heileman, Stroh, Coors and Pabst, thereby enabling the industry’s most dominant brewers to stretch production and distribution channels into previously untapped regions of the United States. Despite this rapid consolidation, industry leader Anheuser-Busch realized that minimal organic growth opportunities in the United States would create the need for overseas expansion. In 2008, Brazilian beer manufacturer InBev, a company based on a major merger between international beer giants Interbrew and AmBev, purchased Anheuser-Busch. Similar international deals continued throughout the United States and Europe, and in 2016, the Global Beer Manufacturing industry is currently dominated by four major breweries, which accounts for 73.8 per cent of all global production.

The recent popularity of craft beer in the United States placed even greater competitive pressure on large US beer manufacturers.

The Craft Beer Production industry has grown at an annualized rate of 17.8 per cent over the five years to 2016, compared with the larger Breweries industry, which is anticipated to grow at an annualized rate of 5.8 per cent over the same period.

In response to this uncharacteristically high growth in sales and surging popularity of alternative beer products, major brewers have pursued small regional breweries that once had been regarded as too insignificant to threaten the sales and profit margins of major beer manufacturers. In 2011, Anheuser-Busch InBev exhibited one of the first signs of Big Beer’s interest in craft breweries when it acquired Chicago-based brewer Goose Island for $38.8 million. Since then, some of the most successful niche craft brewers, including Blue Point Brewing, Elysian, Lagunitas and Ballast Point, have been scooped up into the brand portfolios of the world’s largest beer behemoths.

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With the Global Beer Manufacturing industry expected to grow at an annualized rate of just 1.4 per cent over the five years to 2016, rapidly growing craft brewers are in high demand. According to The Wall Street Journal, Goose Island, at the time of its purchase in 2011, sold about 127,000 barrels of beer per year before its $38.8 million acquisition. San Diego craft brewer Ballast Point reported in 2014 that it produced a comparable 123,000 barrels of beer annually, yet it sold to international alcoholic beverage producer Constellation Brands for a staggering $1.0 billion in 2015. The explosive growth in valuations for popular craft brewers demonstrates the increasingly urgent need among major producers for new growth opportunities, as well as the small number of craft brewers willing to relinquish control of their operations. For major brewers unsatisfied with the limited availability of craft breweries that are willing to sell their operations, the next step has been global consolidation. In November 2015, Anheuser-BuschInBev and SABMiller, which respectively represent the largest and second-largest beer manufacturers in the world, announced plans for a projected $104.0 billion merger that would represent the biggest alcoholic beverage merger in history. Pending the approvals of various governmental antitrust bodies, IBISWorld estimates the combined company would generate 53.0 per cent of the Global Beer Manufacturing industry’s total revenue.

Massive craft beer valuations and international beer mergers represent the culmination of a global industry’s decades-long effort to expand despite minimal organic growth opportunities and the crowded landscape for alcoholic beverages.

Rather than compete for the slim profit margins that come from traditional premium and light beer brands, reducing competition has been the industry’s last hope to maintain strong growth. Over the five years to 2016, IBISWorld estimates that the average industry profit margin for the Breweries industry has fallen from 8.7 per cent to 6.9 per cent. The next logical step for international brewers to maintain growth is to acquire and expand beer production, distribution networks and the pre-existing brand portfolios of its competitors at a global scale. If the Anheuser-Busch InBev and SABMiller merger prevails, odds are that 53.0 per cent of consumers’ next green St. Patrick’s Day beers will come from the same company.

Beer Piece

 

This article was posted on IBISWorld. See the original here.