AB InBev: The Pangaea of Beer
Here’s a fun fact: about 2 billion people in the world drink beer. Imagine what an Oktoberfest you could have if every beer enthusiast in the world attended – Ironically, an unforgettable one. What is also ironic is that in the month of October this year the largest merger in the brewer business took place.
And here is a fact that sounds like it starts as a joke but is nothing but a contextually impressive statistic: “A man walks into a bar. There is a one in three chance the beer he orders will be made by a single company.” (article, Financial Times)
The plans of AB InBev to acquire SABMiller quickly caused a surge of global media coverage. Following the announcement by the world’s second-largest brewer, SABMiller, on the 16th of September of this year, articles were releasing updates so frequently it resembled the live commentary of your typical Saturday night football derby. The final proposal for the deal values SAB’s equity at £68 billion and amounts to £75 billion including net debt, as well as a partial share offer for 41% of SAB’s stock, worth £39.03 per share.
Now to the two most interesting questions:
How is this affecting the structure and composition of the beer market, from the producer perspective?
What does this mean for us, the consumer?
Let’s first take a look at the market and the main actors involved and affected…
According to McKinsey, one of the world’s dominant consulting agencies, the brewing industry
has come to face “its greatest challenge in 50 years”. As a socially enthusiastic university student for example, this ‘challenge’ may come to a surprise as beer consumption in the more established markets, Europe and the US, has been slowing. This can mainly be attributed to a recently trending shift in consumer preference, where many have switched to craft brews, wines and spirits. The craft brew ‘buzz’, particularly in the US, has seen volumes boosting by 18% in 2014, despite total beer sales remaining level. Due to the nature of the brewers’ environment a natural response to compensate for reducing consumption has been consolidation. AB InBev, headed by CEO Carlos Brito, is exemplary of this behavioral development in having successfully increased their revenues fivefold over the past 10 years through close to $100 billion in acquisitions. What a sobering result for Brito and his company. However, it is being predicted that AB InBev’s growth will slow over the following 5 years. Therefore, SAB’s presence in the faster-growing emerging markets quickly caught the attention of AB InBev.
But what does this merger mean for other brewers in a numerical context?
The so-dubbed ‘megabrew deal’ of the two largest brewers in the industry has been seen as “the endgame for global beer mergers”. With SABMiller, headed by CEO Alan Clark, becoming part of the AB InBev empire, this would give AB InBev access to over $7 billion in revenues in the African market, including Castel lager, and close to $4 billion sales in Asia. What does that mean for AB InBev? It means that it can leverage out its current dependence on the sales in the US and Latin America. #winning
SABMiller, enjoying the largest market share in Latin America with its popular brands Cristal and Aguila, would facilitate a larger presence for AB InBev in countries such as Colombia, Ecuador and Peru.
Although the prospects sound attractive and the future for AB InBev’s continued growth with a further acquisition appears secure, the world is not all rosy. With a merger of this magnitude, follow dozens of juridical complications due to the regulatory risks involved. While some analysts have argued that both brewers have a “distinct geographical split in their businesses”, the deal is likely to take 1 year to completion. The Bank of America Merrill Lynch and Banco Santander are leading the deal, which is expected to have 7 to 11 investment banks working on it in total, along with a number of advisors consulting both companies.
Finally, how is this merger affecting our perceptions as consumers?
There are several methods of analyzing the consumer perception on such a merger, and one in particular originating from a recently-published article in the Harvard Business Review, suggests a novel conceptual framework, which studies brand positioning in respect to two essential marketing dimensions by “mapping markets and drawing strategic implications from relative positions of competitors” (Bagga, C. K. & Dawar, N., 2015). The following video explains how the framework works:
While the article focuses on the US market and many American beer brands, the European market, viewed as equally established, possesses similar environmental characteristics and the hypothetical effects of the merger are universal. The result of such a brand positioning analysis from consumer perception offers valuable insights about the implications of the merger. AB InBev would be the only player in the mainstream beer quadrant. Consequently, the new megabrewer would own the majority of all high volume brands in the mainstream and aspirational quadrants. Due to the comparatively higher distinctiveness of Ab InBev’s brands, this facilitates a stronger pricing power. The synergies that could arise from the deal would allow for AB InBev to increase the distinctiveness of SAB’s brand portfolio, expanding their “pricing latitude, and the contribution margin from SABMiller’s portfolio” (Bagga, C. K. & Dawar, N., 2015). There are a number of further interesting implications explored in the article, which can clearly outline the tremendous control AB InBev can amount over the beer markets on global and regional levels.
Ultimately, reporting from the CEO of AB InBev himself, Brito commented the takeover would essentially give consumers more choice because the new group would start selling the brands of both companies across the world.
On behalf of all beer enthusiasts around the world, cheers!
Harvard Business Review