MegaBrew Needs to Think Small: Rani Molla

The biggest beer merger in history needs to think small to succeed. 

Much of the focus on the union of AB InBev and SABMiller has been on the massive numbers involved: The new company -- call it MegaBrew -- will have a $284 billion combined market valuation, with $68 billion in global beer sales, or 31 percent of the total market. Joining forces will let the two behemoths squeeze more profit from economies of scale: Combined, they will have 26 percent profit margins, according to Euromonitor International. 

Less attention has been paid to what the new company should do with all that extra profit: Namely, buy up small craft breweries, the only source of volume growth in the U.S. beer market.

Craft beer production in the U.S. jumped to 22 million barrels in 2014, up 18 percent from 2013, according to data from the Brewers Association, a craft beer trade group. Non-craft beer volume stagnated. Total volume is a combination of U.S. production and imports.

Note that the Brewers Association restricts its definition of craft breweries to those that are truly small, traditional and independent. Breweries must have less than 25 percent ownership by a non-craft company to qualify. So Blue Point Brewing and Elysian Brewery, recently bought by AB InBev, wouldn’t count toward this total. That means growth in craft beer might be even higher than the Brewers Association numbers suggest.

The craft beer market is still dwarfed in size by the non-craft market in the U.S., which was nearly 146 million barrels in 2014. Craft beer might seem too small to have much impact on the top line for MegaBrew.

But there is also little risk for the conglomerate in picking off small craft brewers, and plenty to be gained by craft beer’s market growth. Some loyal craft drinkers will probably abandon labels swallowed by MegaBrew. But such losses can be offset by wider distribution, as Bloomberg Businessweek’s Devin Leonard noted in June. And so far, AB InBev and SABMiller have also focused on Africa and Asia, where the beer-drinking population is still expanding.

While both AB InBev and SABMiller were buying up craft brewers before the deal, their mega-merger could temporarily distract them. That could give smaller rival Heineken -- which recently bought a 50 percent stake in Lagunitas -- a chance to pick up some craft-beer makers without worrying about competition, Brooke Sutherland recently noted.

They’ll need to get back in the small-beer game quickly.

(This column does not necessarily reflect the opinion of Bloomberg LP and its owners.)

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