KNOW THINE ENEMY

SABMilBevWhen Aleheads was still in its infancy, we brandished our muckrakes over the news that the Terrapin Beer Company had sold off a minority stake to MillerCoors (more specifically, Tenth and Blake, the craft beer “wing” of MillerCoors). With Goose Island’s contemporaneous absorption into the AB InBev empire, the sale of a chunk of Terrapin to the “other” member of Big Beer’s duopoly* seemed a harbinger of bad things to come. There was some gnashing of teeth (mostly by yours truly) about the craft beer industry becoming the battleground between the big boys.

*While SAB Miller and MolsonCoors are two separate companies, in the US they operate as a joint venture called MillerCoors. Ostensibly, this domestic merger occurred in order for the two also-rans to combat the behemoth that is AB InBev.

Four years later, the battlefield has become fascinating. At the time of the Terrapin investment, Tenth and Blake’s CEO, Tom Cardella, had stated that buying up interests in craft breweries was a “key pillar of our strategy”. But that strategy seems to have failed. For whatever reason, Tenth and Blake has become a bit gun-shy in regards to investing in craft breweries. Cardella retired at the end of last year, but in the four years between the Terrapin investment and his retirement, Tenth and Blake more or less stood pat with their “crafty” line-up of macro beers in micro clothing (like Blue Moon and Leinenkugel).

Last year, Pete Coors, Chair of MillerCoors noted in a candid interview that “We bought a craft brewery in Georgia, Terrapin. [It] isn’t working out the best. So we are learning about that.”*

*In the interview, Pete also expresses bewilderment that “in this economy” people would pay more money for craft beer than his cheap swill. As is often the case amongst the olds, he blames “the millennials” for this inexplicable (to him) economic trend.

Ignoring Pete’s amusing Freudian slip about buying Terrapin (technically they own just under 25% of the company which allows Terrapin to remain a craft brewery under the Brewer’s Associations oft-maligned rubric for what constitutes craft), this quote was quite surprising. There’s precious little information on-line about how exactly MillerCoors has been involved with Terrapin. Other than the original sale and the follow-up stories on Aleheads, there has been zero on-line chatter about the situation in 4 years.

For whatever reason, the Terrapin “purchase” has not gone as MillerCoors hoped. Perhaps the minority stake didn’t give them the influence they had hoped? Or perhaps the company’s vaunted distribution network and marketing expertise simply didn’t matter in the more grassroots, “locavore”-centric world of craft? Whatever the case, the Terrapin investment put a scare into Tenth and Blake and they’ve remained remarkably quiet ever since.

Instead, MillerCoors has ramped up production of their “crafty” beers. Blue Moon and Leinenkugel are huge sellers and the company has added a number of new offerings under those labels. They’ve done the same with the less popular Henry Weinhard label and have also added the cleverly disguised “Batch 19” to their line-up (supposedly brewed from a pre-Prohibition era Coors lager recipe). They’ve even added cider to their roster through the Crispin label.

MillerCoors has also been MUCH friendlier to craft from a wholesale perspective. While AB InBev has often threatened their distributors for adding competitive craft beer labels to their rosters (note the keyword “often”…many Bud distributors are actually extremely craft-friendly), MillerCoors has taken the opposite tack and has, for the most part, encouraged their distributors to diversify their craft line-ups. The takeaway (to this writer, anyway) seems to be that MillerCoors knows that craft isn’t going away. Rather than try to limit their competition, MillerCoors seems to believe that if their distributors have a robust, diverse line-up of successful craft brands, it only helps them in the long run. A rich, successful MillerCoors distributor (even if they got rich and successful through selling craft brands) has more opportunity to put MillerCoors products on shelves.*

*I have anecdotally seen this play out through a cousin. He represents a distributor that sells MillerCoors products along with a HUGE line-up of craft brands. Thanks to the success of these craft labels, his company absolutely dominated AB InBev in the package stores, grocery stores and bars in his region. Miller and Coors products absolutely own the light and macro segment of his market thanks, in large part, to the success my cousin’s craft brands have had.

AB InBev has, perhaps not surprisingly, gone a different route. With far greater resources than MillerCoors, InBev has continued snapping up investment stakes in craft breweries. For years they have owned a large stake in the Craft Brew Alliance, an umbrella company made up of Redhook, Kona and Widmer Brothers. And, of course, there was the infamous sale of Chicago-area darling Goose Island a few years back. Since that warning shot was fired, AB InBev has also snapped up Blue Point Brewing out of New York, Elysian Brewing out of Washington and 10 Barrel Brewing out of Oregon. While this is just a drop in the bucket, clearly AB InBev is still VERY interested in playing the craft game.

While the company is far more invested in the “buy into” strategy…they’re still toying with the “crafty” approach of MillerCoors. AB InBev’s Shock Top has been one of the most successful new brands in recent memory. Developed to directly compete with Blue Moon, Shock Top is thoroughly impressive in its ability to be an even more watered down version of a Belgian White than the beer it’s battling. While AB InBev has a few other minor “crafty” options, Shock Top is really the only label the company has truly put marketing money into. It’s obvious from their business approach that they’d rather own “real” craft breweries than keep churning out “fake” craft labels.

Most consumers understand that the macros are refining their craft strategy because that segment is growing while the sales of their flagships have been either stagnant or declining. But there’s another crucial reason the companies are buying or inventing craft labels. Both MillerCoors and AB InBev are keenly aware that there is a ton of money to be made in so-called “crossover” drinkers. These massive, international conglomerates know that beer-snobby Aleheads (like your dickish blogger here) will eschew any beer with the taint of Big Beer on them…that battle is unwinnable. But there are far more crossover drinkers out there than obsessive, dyed-in-the-wool Aleheads. These are the drinkers who are just starting to move away from their tried-and-true Bud Light or Miller High Life. Their friends are drinking more flavorful, more varied beers and the crossover drinkers are interested in joining them, but are a little skittish. MillerCoors and AB InBev help grease the skids by flooding the market with such crafty beers as Blue Moon and Shock Top. Maybe that’s all it takes and these crossover drinkers stop there. But what if they like expanding their horizons and decide to explore even more? Then perhaps they look at the tap handle next to Blue Moon and see a brew from Blue Point or Terrapin. The labels may change, but the money is still going into the coffers of Big Beer.

And sure, that crossover drinker may eventually become a true Alehead who will someday ignore all offerings from Big Beer, but in the meantime, the macros have made a ton of money during the crossover drinker’s conversion. Craft may be growing while the sales of adjunct lagers remain stagnant or declining, but there’s a HUGE market in the difficult-to-define space in between. The macros are in the business of making money for their investors and one of the key ways they are doing this of late is by targeting crossover drinkers. MillerCoors clearly believes the best approach is to control distribution and to invest heavily in the “crafty” segment. AB InBev, with its far greater resources, is mostly just buying up stakes in popular craft breweries.

In other words, the battle we were so fascinated by four years ago IS still raging…just not quite in the way the Aleheads anticipated. MillerCoors got burned by the Terrapin deal, so they’re staying involved by making money on the wholesale side of things and continuing to push their big crafty brands like Blue Moon and Leinenkugel. AB InBev is fighting back with their Shock Top brand and their ever-expanding portfolio of former craft outfits. It’s an interesting fight and it will be both compelling and frightening to watch how it all plays out. Will AB InBev’s craft portfolio be ignored when consumers find out who is “really” brewing their beer? Will MillerCoors more magnanimous approach to sharing distribution channels with craft brands pay dividends in the long run? We will see…

Of course, it should be noted that there are FAR more than just two “big-money” players when it comes to craft beer. Obviously we harp on MillerCoors and AB InBev because of their history and dominance of the American beer industry. But in recent years, a number of craft breweries have sold large stakes of their companies to mid-range private equity investors or huge multi-national conglomerates.

Anchor Brewing, one of the granddaddies of craft beer was sold to the Griffin Group (helmed by the brain trust behind Skyy Vodka) back in 2010. Mendocino Brewing is owned by the UB Group out of India. Pyramid, Magic Hat and Portland Brewing are all part of the North American Breweries umbrella which is owned by Cerverceria Costa Rica. Aleheads fave Southern Tier sold a chunk of their company to Ulysses Management, an NYC-based investment firm and then named a former AB InBev VP as their CEO. Uinta out of Utah sold a percentage of their business to The Riverside Company, another NYC-based private equity firm. Founders Brewing…one of the best craft breweries in America, sold a large stake to Mahou San Miguel, a massive Spanish brewing corporation. Duvel Moortgat, the mega-Belgian brewery owns both Ommegang out of New York AND Boulevard out of Kansas City. Finally, SweetWater Brewing, Georgia’s “other” big brewery (even larger than Terrapin) sold a minority stake to TSG Consumer Partners…a private equity group that has also invested in Pabst, Muscle Milk and Vitamin Water. The brewery recently named a new CEO (their longtime CFO who also formerly worked at Spanx and Coca-Cola) as well as a new CFO (the erstwhile Chief Strategy Officer of Molson Coors). A few days ago, they announced that they would be seeking an IPO which would make them one of just a small handful of publicly traded craft breweries (along with the Boston Beer Company and the aforementioned Craft Brew Alliance).

That’s a lot of information to take in for an Alehead. Seemingly everywhere you look, small craft breweries are selling out to larger breweries or giving up investment stakes to equity investors. The current craft climate makes that inevitable. There will shortly be over 4,000 (!) breweries in the US and they can’t all continue growing indefinitely. Many brewers have seen the writing on the wall and rather than continue their slow growth, they’ve decided to get a quick influx of cash to jump to the next level immediately. Most of us would do the same thing. If your competition is getting millions of dollars to expand from outside firms, it must be pretty damn tempting to follow suit. Otherwise, you put yourself at the risk of falling behind as your rivals grow.

It can be hard as an Alehead to decide where your loyalties lie. If it’s just to the beer on the shelves, then it’s easy. Buy what you like. But if you’re more concerned about the organic, thoughtful growth of the industry you should be more wary. That’s not to say you can’t enjoy a Founders KBS because a Spanish brewery owns a chunk of them or that you should never consume a SweetWater IPA after their IPO. This post is more of a “public service announcement” to craft beer enthusiasts. As in any industry, consumers should be informed about the products their buying.

Maybe you despise AB InBev’s cutthroat business practices. You may want to avoid Elysian beers. Perhaps you’re deeply offended by MillerCoors’ sexist marketing. You should probably steer clear of Terrapin. Or maybe you like to buy American as much as possible. You might consider eschewing Boulevard’s beers with the knowledge that a good percentage of their sales are going to their Belgian headquarters. Finally, you might be the kind of person that likes to support your truly “local” breweries. In that case, you may consider NOT buying beers from breweries that have sold large investment stakes to “out-of-towner” private equity firms that are giving said breweries an influx of capital that other local breweries can’t compete with.

I’m not saying ANY of these approaches are better or worse than another. Every consumer has the right to decide what matters to them both ethically and economically. I’m a meat-eater and my personal philosophy towards food allows for that. Other people are vegans or vegetarians and their philosophies are quite different. I don’t love Apple products for a variety of reasons…but many, many people obviously do. The key is to be informed and try to mesh your approach as a consumer with your personal beliefs. At Aleheads, we’re just trying to keep you all up to speed.

Me? I’ll continue drinking Founders and Southern Tier. Personally, I’m OK with private equity investment in breweries. If I had access to $100 million, I would likely sink a percentage of it into a willing craft brewery myself. Hell, it’s a growth industry and it’s something I actually know a little about…it would probably be fun! But I still don’t drink Terrapin or Goose Island…and I won’t drink Elysian or 10 Barrel anymore. I don’t like AB InBev or MillerCoors. Their marketing is atrocious, their flagship beers are embarrassing, and for years they tried to curtail the growth of craft through duplicitous political and economic means. I think those two companies are “bad” for beer and I have no desire to support them. As such, I don’t drink beer from breweries aligned with them. Every time I mention this (by my count, this is the infinity-ith time I’ve brought it up), I’m called an idiot in the comments. I anticipate this will happen again.

All I ask is that you stay informed, my friends. Know your beer. Know your breweries. Know the industry. A little knowledge can go a long way and as consumers we can help keep the industry healthy by keeping abreast of this thing we all love…beer.

Barley

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14 comments

      1. I’d love to know the challenges Coors have faced with Terrapin. Rather baffling he would come out and say something publicly…

        1. His full quote from that interview (after his slip-up about “buying” Terrapin) was “We are a minority interest, which isn’t working out the best.”

          I take that to mean their purchase of a minority stake didn’t give them enough control over the brewery to ultimately determine brewing/marketing decisions. I may be reading too much into it, but unlike AB InBev with their investments, MillerCoors doesn’t own enough of Terrapin to truly run the show. I’m sure they have influence, but a company as big as MC doesn’t want influence…they want control.

          While I don’t drink Terrapin anymore, I’m actually pleased with the way the brewery is handling the investment. I presumptuously assumed it would play out like the Goose Island acquisition with MC making a loan, converting it to equity, and then eventually leveraging their ownership stake into a true takeover. Instead, Terrapin used the investment to expand the brewery, but they seem to be keeping MC at a distance in terms of major company decisions. I still think there’s a good chance MC buys them out in the long run, but for now Terrapin seems to be holding the big guys at bay.

          Of course, there may be a LOT more to that Coors quote than we know (I’m sure there is). That interview seemed to exist mostly to make Pete Coors look like a doddering, old fool.

  1. GREAT read!!!

    1. Awesome link, Chip. I had never heard of Not Your Father’s Root Beer until very recently. It sounded like some new version of Mike’s Hard Lemonade to me so I’ve been ignoring it, but it’s been blowing up beer blogs of late.

      No surprise that it’s just a shell for the erstwhile Four Loko manufacturer. Sounds like just another in the long line of “malternatives” that have popped up and flamed out over the years. See also Zima, Tequiza, etc…

  2. Danner Kline · · Reply

    I am curious about the meaning behind your sentence: “MillerCoors got burned by the Terrapin deal, so they’re staying involved by making money on the wholesale side of things and continuing to push their big crafty brands like Blue Moon and Leinenkugel.”

    Not with regards to how they got burned by Terrapin, as I think your assessment is probably correct. But how you think they are making money on the wholesale side. Are you referring to the notion that by not interfering with their wholesalers’ craft portfolios MC brands benefit in a “me too” sort of way?

    1. I’m thrilled that you think my sentences have any meaning. I generally type by throwing darts at a word-board…

      You’re the distro maven, so I would certainly bow to your expertise. My cousin who is a wholesaler in the Northeast reps for MC (and a ton of craft labels). He’s told me many times that AB InBev strongly discourages their reps in his region to pimp their craft lines. MC seems to have a more laissez-faire take on it and as craft began exploding in my cousin’s market, MC actually began dominating that region. I assume this is because their local distributors were making so much more money and were able to leverage their success across all their brands (craft and macro).

      John Conlin, the distro industry blogger, has mentioned this numerous times in the past as well. He’s even talked about some “unwritten” rules from AB InBev regarding punishment doled out to their distributors for pushing their craft lines.

      Now, I know you work for a local Bud distributor that also happens to be famously hospitable to craft beer. I was actually thinking of you when I put in my disclaimer about not all Bud wholesalers being anti-craft. But I’ve heard enough through the distribution grapevine that I felt comfortable making that claim.

      As for MC getting burned by Terrapin…I actually have no proof of that. But since Pete Coors claimed that in an interview, I assume there’s some truth to it.

      1. Danner Kline · · Reply

        Here is what I think is at the root of what you’re describing. Up until 2007ish (different date for each wholesaler) nearly every A-B wholesaler in the country had an exclusivity agreement with A-B, and sold only A-B malt beverage products (some also sell wine, which put them in a different exclusivity tier). To achieve this, A-B offered the wholesalers a few cents for every case they sold as long as they remained exclusive. It wasn’t much, but if you sell ten million cases a year, a few cents a case is a few hundred thousand dollars. Back when craft was only one or two percent of the market, this was a good deal for the wholesalers financially.

        THAT is what drove the situation you’re describing with your cousin’s market, in which the MC wholesalers signed all the craft brands. Literally all of them, since the AB guys were exclusive. Except in a handful of cases where wine wholesalers signed a few. So when bars and retailers wanted to be a part of the growing craft trend, they were buying craft beer from everyone but the A-B wholesalers, which no doubt gave the MC guys a big advantage. Since the craft market was much more advanced in the Northeast in the early 2000s than here in the Southeast, that was a big deal.

        But as you can imagine, there came a point when all the A-B wholesalers realized the math wasn’t going to keep making sense on exclusivity. A large wholesaler can make more than a few hundred thousand dollars a year on craft beer. I’m not aware of any wholesalers that are exclusive any more.

        And here in Alabama, the A-B wholesalers all ditched exclusivity before craft really began to take off. They had the advantage of seeing what was going on in more advanced craft markets and knew what was coming. Those years of exclusivity still cost them some big players in the likes of Sam Adams, Sierra Nevada, Yuengling, and some others. But it’s been open season for several years now and there is fierce competition among all wholesalers to sign any brewery of note, locals most of all as local breweries now dominate the craft segment everywhere in the country.

        No doubt A-B has ways in which they try to dominate their distributors’ share of mind, but in terms of “punishing” them, there’s not much they can do of consequence without shooting themselves in the foot. The franchise laws that craft brewers hate so much are exactly what protects their interests with the distributors. Since there is no way for A-B to switch to any other distributor in a market if they are unhappy with their current one, and it is illegal for them to self-distribute or own a distributor in most of the U.S., those distributors have complete freedom to put as much resources as they want into selling craft beer. The people who own the distributors just want to make money from their businesses, and they’ll sell anything that’s feasible and profitable. Craft fits the bill.

        1. Ah…great recap, Danner. Thank you!

          What you describe sounds like the likely scenario in the Northeast with its older, more established craft scene. The macros are so massive that they’re clearly slow to respond to changes in the industry and it seems like AB InBev lost some market share by not appreciating the threat of craft in the early days. Clearly they are making up for that now…

          I’m curious…do you see any room for breweries under a certain size to self-distribute here in Alabama? I recognize the issues inherent in a truly “open” distribution system where the economies of scale inherent in the big breweries would give them complete domination of the supply chain. But is there a place for a smaller brewer…say under 5,000 bbl/year to be able to handle their own local distribution here?

          Presumably many would still use a wholesaler since there are numerous expenses inherent in distribution that few small brewers which to sink their meager profits into. But an enterprising small brewer could probably reap some serious rewards with self-distribution if they were smart and efficient about it.

          It does seem that states with a license to self-distribute (Oregon, Colorado, North Carolina, Massachusetts, etc.) have more “robust” beer cultures than states that don’t (Alabama, Mississippi, Georgia, etc.). There are many potential reasons for this and obviously the laws vary widely from state to state, but I’d love to know your thoughts on self-distribution and what it adds to (or detracts from) a state’s beer culture…

          1. Danner Kline · ·

            I am personally supportive of the legalization of self-distribution for small brewers. I don’t know the minds of the people who own the large wholesalers in the state, although based on their history, my educated guess is that they are opposed to it. With any change of that type, they usually don’t fear the change being suggested (small brewers self-distributing), they fear a slippery slope that leads to the mega breweries self distributing or owning distributors. Craft brewers should fear those things, too, as it would be bad for them. The question is whether there is actually a slippery slope to slide down, or it’s just baseless fear. I don’t really know the answer to that.

            Some other states allow small breweries to self-distribute, but that alone is not evidence that more states allowing it would not ultimately weaken support for the three-tier system and ultimately lead us to a place where the mega breweries own all the distributors and make it impossible for craft breweries to get widespread distribution outside their home markets.

            Craft brewers should be terrified of anything that weakens the American three tier system, which is the foundation upon which our craft beer revolution was built. Without a nationwide network of independent wholesalers free to sell any beer brand they want, we wouldn’t have a bunch of widely known and beloved craft brewers producing barrelage in the six and seven figure range today.

  3. Bummer, I got so excited when I saw Elysian down in NJ so I picked up 3 of their highest-rated beers. Never had a chance to try them and I guess I forgot where the money came from.

    That said, you know I’m a bit more liberal with which brands I choose to consume. Knowing this slight taint on Elysian certainly makes the find less thrilling, but I’m not disappointed that I’ll get to drink (hopefully) delicious beer. I guess for me it comes down to how good the beer actually is. Pyramid, Blue Point, Red Hook – I just don’t really like their beers all that much so it’s not just about the ownership groups when I’m making a choice. Southern Tier? If they get bought out today by fascist tobacco-firearm-oil conglomerate, I’ll still scoop up every iteration of Unearthly I can find. I’m disgusting, what can I say?

  4. SickOfBeerSnobs · · Reply

    While I can appreciate everyone is welcome to their own opinion, I disagree with the robustness of the disgust directed at MillerCoors and ABInBEV. There are brew masters at craft breweries that got their start brewing at these large breweries. Where would the equipment and technology be if the MillerCoors and AB, over the last 100 years, did not drive equipment suppliers to be creative, make their equipment efficient, and develop equipment sanitary standards? When you drink a light lager, you know the quality control is at the highest level because you cannot hide flavor mistakes like you can when you have a big hop/flavor profile. In my opinion, even if you prefer other beers to those from MillerCoors and AB, you should at least respect them for what they have done for the beer industry.

    Smaller does not always mean better.

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