If you can’t beat ‘em…buy ‘em out. That’s the approach Big Beer is taking in combatting the rise of microbrewing. Anheuser-Busch Inbev OTC (OTC:AHBIF) announced last week it would be buying 10 Barrel Brewing Co., a microbrewery based on Bend, Oregon. This follows BUD’s move earlier this year to buy Blue Point Brewing Co.
It’s easy enough to see BUD’s rationale. Americans are drinking less beer than they used to, though they’re trading up in the craft beer they do buy. While total beer sales were down 2% last year, craft beer sales rose 17%.
Will this strategy work for Big Beer?
Let me answer that question with a question of my own.
Do you remember Killian’s Irish Red? I used to love that beer. It was a trendy craft brew about 20 years ago…before any of us had ever heard the term “craft brew.”
You never really see Killian’s any more. When drinking independent craft brews became the defining image of hipsterism (well, that and growing a luxuriant beard), Killian’s association with Molson Coors Brewing Company (NYSE:TAP) made it distinctly unhip. The brand has slid into irrelevance.
And then there is my favorite go-to beer: the Spoetzl Brewery’s Shiner Bock. In the late 1990s, no self-respecting college boy in Texas would be seen drinking Bud Light. It was Shiner Bock or nothing. (Ok, so maybe I went to a snobby school—TCU. I can’t speak for the unwashed masses at Texas A&M or Tech.)
The popularly of Shiner led to imitations—most notably BUD’s Ziegenbock, marketed as “for Texans by Texans.”
Ziegenbock isn’t a bad beer. But it’s always been seen as a cheap imitation…and that is marketing death when marketing an upscale product.
This brings me back to the problem facing Big Beer. BUD, TAP and SABMiller (SBMRY) can compete based on quality and variety. Hiring new brewmasters and letting them experiment like mad scientists could easily create beers that rival Boston Beer (SAM), Spoetzl and the legions of brewpub startups across America.
The problem is one of marketing and—to a lesser extent—economies of scale. Craft beer has become a luxury good subject to the changing whims of fashion, and brand reputations are fragile. When your brand is associated with the common proles, it loses its cachet and it’s hard to convince the fashionable to pay up for them. And this doesn’t just apply to blue-blooded patricians. The bearded hipster wearing “vintage” clothes from a thrift store can’t be seen drinking a Bud Lite either. It violates their anti-establishment ethos.
Another issue is economies of scale. The beauty of Big Beer operations is their massive and efficient production and distribution. But this goes completely out the window when you buy a locally-produced microbrew. Mass producing it and selling it nationally—or globally—kills the “buy it local” vibe that made it popular to begin with. But keeping it local neutralizes Big Beers marketing and distribution power.
Could BUD and the rest of Big Beer take a play out of Warren Buffett’s book; buying a company outright but leaving its management in place and maintaining a low profile? Maybe. But it’s hard to see regional microbrews having much of an impact on the bottom lines of companies with tens of billions in annual sales.
So, what are investors to do here? From the tone of this article, you might think I was a Big-Beer bear. Nothing could be further from the truth. I’m actually a major long-term bull in Big Beer because of its exposure to emerging markets. As I wrote in July, BUD gets about half its sales in Latin America, while Sabmiller (LONDON:SAB) and Heineken NV (OTC:HEINY) get a disproportionate amount of their revenues from emerging Africa.
This year, exposure to emerging markets has been a major negative, particularly since the dollar began to aggressively rise late this past summer. But if you believe, as I do, that emerging markets represent the better long-term bet, then Big Beer remains one of best long-term investments to make on any significant pullbacks.
Disclosures: Long HEINY.