Molson Coors fights for share of shrinking beer market

The North American beer market is shrinking fast. Is iced-tea-flavoured beer really the answer?

Paul Brent 0

Every spring, Canadian brewing executives gear up for their big season by introducing a new label or two and praying for a long, hot summer.

Molson Coors’ summer of 2012 will uncap Coors Light Iced T, a made-in-Canada tonic, it hopes, for flat North American beer sales and the feeling that beer’s best times are behind it.


 

Blending beer with a mix of tea and lemon has been done before. Mill Street Brewery of Toronto brought out its own version two years ago. Molson tested 150 different versions before coming up with this summer’s signature brew. Still, the world’s fifth-largest brewer has a lot riding on Coors Light Iced T. It announced the product at a March investor conference in New York, where CEO Peter Swinburn lamented beer’s losses to wine and spirits. “Someone else is eating our lunch in the alcohol space,” he said.

These are not heady times for Molson Coors, the Denver- and Montreal-based combination of two of brewing’s proudest families. Molson got its start in Canada in 1786, supplying British soldiers with their daily rations of beer. More than two centuries later, its fate is still tied to Canada, the United Kingdom and, with the merger with Coors, the United States—three countries where it is struggling to keep a share of an ever-shrinking beer-drinking market.

Molson Coors’ desire to break out of its stagnant core markets is what led to its US$3.5-billion purchase in April of eastern European brewer StarBev, producer of a tongue-tying lineup of beers such as Staropreman, Kamenitza and Ozujsko. Molson Coors touted the deal with the Czech-based company as a ticket to the fast-growing markets of Romania, Hungary and Croatia.

Investors viewed the StarBev deal with scepticism, sending shares down 5% the day the purchase was announced. Among their concerns: Had Molson Coors paid too much? Would eastern Europe deliver the growth it needed? And how would this solve the company’s problems at home? After all, Belgium-based Anheuser-Busch InBev, the world’s largest beer company, had once owned the Czech brewer. “It is somewhat telling that [A-B InBev] had the opportunity to buy that stake back and chose not to. I think it is a signal that they are not too terribly excited about the prospects of those brands,” says Eric Shepard, executive editor of Beer Marketer’s Insights.

Analysts and investors may have also recalled Molson’s disastrous foray into the Brazilian market in 2002 with the US$765-million purchase of Cervejarias Kaiser. That South American gamble was declared a failure soon after the merger of Molson and Adolph Coors Co. in 2005. Molson Coors sold most of its stake in Kaiser a year later for just US$68 million.

Arguably, Molson fared better than its homegrown arch rival, Labatt. It too made an ill-fated international purchase when it bought Mexico’s Formento Económico Mexicano SA (FEMSA). The deal not only raised investor ire, it led to a hostile takeover that resulted in Labatt’s sale to Belgium’s Interbrew in 1996. (Interbrew later merged with Brazil’s AmBev and, in 2008, bought Anheuser-Busch of St. Louis to create Anheuser-Busch InBev.)

A comparison of A-B InBev with Molson Coors quickly reveals how global the beer business has become, and how much catching up the U.S.-Canadian outfit has to do. A-B InBev had sales last year of US$39-billion, earned US$5.86 billion and holds first or second position in nine of its top 10 markets. In Canada, it operates as Labatt Breweries and owns nearly 41% of beer sales—virtually a tie with Molson Coors. A-B InBev also has a strong roster of “global brands” in Budweiser, Beck’s and Stella Artois.

Molson Coors had sales last year of US$3.5 billion and profits of US$674 million. Prior to the StarBev purchase, Molson’s international division accounted for just 3% of sales.

If Molson Coors aims to become an international player, it will have to do it the hard way. Most of the attractive foreign brewers have been snapped up—StarBev was one of the last. But it lacks the ammunition to crack new markets through organic growth. Of its portfolio of 65 regional and partner brands, only Coors Light has the potential to become a global brand.

“There are very few brands that, in my view, can travel. Beer is largely a local-branded business, and I think Coors Light is one of those that can,” says Kaumil Gajrawala, an analyst with UBS Securities in New York.

Gajrawala says he would rather see Molson Coors turning its focus to its core markets. “While it is interesting to be in emerging markets, I would like to see that incremental dollar go back in the United States first.” StarBev, he notes, is not generating the high sales growth typically associated with an emerging-market player, and that should be a concern for its new owner. “It will be a challenge for the management team at Molson Coors to turn that around.”

Against this international backdrop, Molson Coors is facing bigger problems at home. Data from the Distilled Spirits Council of the United States show beer’s share of alcoholic beverage sales fell to 49.8% in 2010, from 55.5% a decade earlier. The situation is not much different in Canada, which is fast changing from a nation of beer swiggers to wine sippers. Statistics Canada reports beer’s share of alcohol sales has fallen from 52% in 2000, to 45% in 2011. Most of that share has gone to wine, which accounted for 30% of alcoholic beverage sales in 2011, up from 23% the previous decade.

As consumers age and opt for more sophisticated, “healthier” beverages, the switch from beer is predictable. Yet, beer’s decline is also a result of being out-innovated and out-marketed by spirits and wine producers. “You used to buy plain vodka and now you go to a bar and there are 15 different flavours,” says Brian Yarbrough, an analyst with Edward Jones in St. Louis. Mainstream beer brands such as Coors Light and Budweiser are also losing drinkers at the top end of the market to craft and specialty brewers. “Craft volumes have been up over 10% for the last four or five years straight. That is really eating into their share, and I don’t see anything that stops that,” says Yarbrough.

Molson Coors has wrung all it can from innovations such as cold-activated labels or the US$546 million in efficiency savings that came with merging its U.S. operations with SABMiller’s to create the MillerCoors U.S. joint venture. Now it comes down to marketing magic and hot new products. In the United Kingdom, hit by a smoking ban and a recession, Molson Coors is launching three female-focused beers. In Canada, it has more girl appeal with the launch last summer of Molson Canadian Sublime, an extension of the Molson Canadian 67 light brand. Coors Light Iced T is another product aimed at female drinkers.

Molson Canada president Dave Perkins says these new brews are also intended to win back sales from wine and spirits. “Products like Coors Light Iced T play a really important role in that,” says Perkins. At least half of Molson Canadian 67 sales are from customers who don’t typically drink beer.

Coors Light Iced T is getting plenty of attention from the company. Perkins says it is one of only three brands that will be part of a new, as-yet-unannounced packaging innovation; the other two are Coors Light and Molson Canadian.

“The industry has not been as active as it needs to be in innovation, I would totally agree with that,” says Perkins. He rhymes off a list of new products designed to counter that, such as Molson M, Miller Chill, Canadian 67, and new styles in the Rickard’s line. “It is actually a pretty aggressive agenda over a two-year period.” New products account for about three points of Molson’s 40% Canadian market share, he says.

This summer will tell whether Coors Light Iced T will be the magic potion to tear drinkers away from their fancy vodka concoctions and craft brews. “I think we were asleep at the wheel,” the British-bred Swinburn admitted recently. Molson Coors management is thirsty for a turnaround.

It may already be too late. Far behind when it comes to industry consolidation and international growth, Molson Coors looks to be consigned to a slow-growth future based on a static Canadian duopoly, an up-and-down U.S. business, and a mature U.K. beer market. As for its international aspirations, the huge size advantage of A-B InBev or SABMiller—the world’s No. 2 brewer—make expensive StarBev deals seem chancy. And, can Coors Light really become a household name in the emerging world? Some say one long-term scenario has Canadians making a final toast to the 200-year-old brewer, as the Molson and Coors families turn their back on generations of tradition and sell out to one of the giants.

SABMiller Iced-T Light anyone?

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