Because they take $7 out of every $10 of beer sold in the United States, it’s hard to feel bad for AB InBev and SAB Miller.
Millions of American’s inexplicably drink Bud Light Lime and Coors Light Summer Brew, while marketing campaigns corral consumers into some sort of bizarre lifestyle choice, rather than focusing on the product itself.
This has become a winning strategy – for every $1 spent on Sierra Nevada Pale Ale (to editorialize: the highest quality mass-produced beer), $26 is spent on Bud Light.
For comparison, if Bud Light were Barry Bonds, with 755 career home runs, Sierra Nevada would be journeyman infielder Jack Hannahan, he of 29 career home runs.
1) The Herfindahl Index
The American beer industry is top heavy. The top two American beer sellers, AB InBev and SAB Miller, will make up about 70% of the market (using 2015 sales figures for the top 20 beer brands – both AB InBev and SAB Miller have brands beyond those listed above, but for the calculation of the HHI Index, their impact, at less than 1% of all beer sales, would be negligible).
However, it gets pretty fractured from there – no other brewer makes a beer that has above 1% of the total American beer market. An HHI number of 2,500 is the cutoff between moderate and high concentration, and the combined entity’s HHI is just above 2,500. It’s easy to imagine both companies shedding some domestic assets and easily pushing the HHI below that 2,500 threshold.
Mergers in potentially highly concentrated industries usually get rejected, and the combined entity is certainly large. However…
2) Large brewers’ market share is shrinking
In the U.S., at least. And this would make it easier for the companies to make a case to merge. The industry is becoming more fractured, and (one could argue) customers are gaining more power as a result. Would regulators be more sympathetic to a the merger of two declining giants? Not only would the two be able to fall below the high concentration mark, but they’re deteriorating business domestically.
3) Small(ish?) strategic overlap
As the Financial Times noted, these two giants only go head to head in two markets, the North America and China. Both companies will have to shed brand in the U.S., for sure, but it looks like they can hang on to their key assets without becoming triggering an automatic FTC rejection. The one possible hang-up – the FTC accounts for sales of items that are “close substitutes,” rather than complimentary. Bud Light and Miller Lite are perfect, yet awful substitutes. However, I’d be interested to see if they can claim complementarity – AB InBev excels at operations and distributions, while MillerCoors has the recipe for an inexplicably popular wheat beer.
4) Recent Transactions
Look at one of the biggest mergers in recent years, ATT and DirecTV. As the Economist wrote right after the merger,
Extra bulk promises extra bargaining power with programme-makers: a similar logic underlies a proposed $45 billion tie-up between America’s two biggest cable-TV companies, Comcast and Time Warner Cable (which also rank first and third in broadband). AT&T and DirecTV should be able to share sales channels, too. In all, claims Randall Stephenson, AT&T’s boss, the deal should yield annual savings of $1.6 billion within three years. By becoming a bigger company with a wider range of services and content, AT&T may also be hoping to squeeze the life out of Sprint and T-Mobile USA, America’s third- and fourth-placed mobile operators, thinks Robin Bienenstock of Sanford C. Bernstein, another research firm.
Basically, this merger had the effect of locking customers into a bundle of products, which as the effect of locking customers out of competitor’s products. This parallels what happens in the beer case at your local supermarket – there is a finite amount of shelf space, and AB InBev will sell you a dozens of variety of brands, in a hilarious variety of packaging (you can enjoy Bud Light in 12 pack cans, 12 pack bottles, 4 pack tall cans, 15 pack special tailgate packaging, and my favorite, 8 pack can-bottles!), which means small brewers can’t find their way to the customer through the biggest sales channels.
In the past few years, the M&A markets are several examples of other deals deals that have created especially dominant players in individual markets. And consumers have taken note – perhaps most vocally with the proposed Comcast-Time Warner merger (perhaps there are synergies in hate for cable companies). The AB InBev-SAB Miller merger most closely mirrors that proposed link-up, and for the sake of beer swigging consumers the best case scenario is that these two back down, just like Comcast did with Time-Warner, before it even gets to review.