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Don’t Sweat a BUD Monopoly

Consumption depends on a lot of factors -- price is just one of them

By Kyle Woodley, InvestorPlace Managing Editor

Far be it from me to question one of this nation’s greatest protectors, but c’mon, DoJ …

Antitrust concerns in beer? Really?

According to the New York Post, the Department of Justice might be stepping in the way of Anheuser-Busch InBev’s (NYSE:BUD) $19 billion deal to take over Grupo Modelo (PINK:GPMCF). The big worry? Critics say that by adding Corona and Grupo’s 11 other brands, the Budweiser parent will have too much pricing power.

Were it any other industry, I’d be on board. But it’s not, and I’m not.

Market Share

One concern is that the Bud-Grupo deal would vault InBev’s U.S. market share to 53%. That’s a majority — so, sure, that sounds like the path to monopoly.

After all, look at what happened to AT&T (NYSE:T) and its attempted takeover of No. 4 wireless provider T-Mobile in 2011-12. Based on the chart below, an AT&T merger with T-Mobile would have resulted in a carrier with roughly 40% of the country’s market share — not a majority, but certainly bigger than Verizon’s (NYSE:VZ) 30%.

Market Share -- Telecom

So it seems logical the feds would blink at InBev’s merger.

If it weren’t for the fact that InBev already commands 47% of the market.

Herfindahl-Hirschman Index

You can read the definition and calculation methods of the Herfindahl-Hirschman Index here, but in short, it’s a figure used to gauge market concentration. Drew Jaglom of Tannenbaum Helpern Syracuse & Hirschtritt took a look at the potential InBev-Grupo deal back in June 2012 (via BeerNet), and calculated that…

  1. The beer market’s HHI is 3,067, which indicates it’s already a “highly concentrated” (read: anticompetitive) market.
  2. The Bud-Grupo merger would jack that up by more than 500 points (a 200-point change for a merger in such a market is considered anticompetitive).
  3. Thus, the Bud-Grupo deal is unlikely to go through without some concessions.

Of course, Jaglom then notes: “This analysis assumes that beer is a relevant market for antitrust purposes.” He says there’s “an argument that the relevant market should be all alcoholic beverages.”

I agree … though I don’t even think you need to include wine and spirits.

The Disconnect

The problem with these numbers is they make one really awful assumption — that pricing is the end-all factor in the U.S. beer market.

If the banker quoted by the Post is to be believed, BUD might be willing to play ball. And writer Josh Kosman conjectures that’s because InBev’s biggest prize isn’t U.S. market share — where imports also are ceding ground to craft brewers — but Modelo’s excellent international share.

I think that’s because Bud knows a 6-point market share gain won’t do much for its pricing pressure; and that said pressure is only useful against other companies that compete on price. Namely SABMiller (PINK:SBMRY) and Molson Coors’ (NYSE:TAP) joint venture Miller Coors and its 30% market share.

But the real long-term enemy is craft brewers, who are proving impervious to price pressure.

In the past five years, the market share of craft brewers — whose products usually span from pricey to outrageous — has steadily risen by about 2 percentage points to 5.7% as 2011 … at the expense of InBev and joint venture MillerCoors. (Read about that and a host of other promising figures in this Brewers Association infographic.)

That’s because the American consumer is slowly turning over from a blue-collar worker who had five options growing up to a white-collar worker who’s willing to spend an extra buck or two to drink something that doesn’t taste like tainted water.

Don’t believe me? Ask Boston Beer (NYSE:SAM), which has seen its stock double annually since 2009, and whose success was so pivotal to pushing the Brewers Association’s cause that the BA lifted its production ceiling to keep the Sam Adams brewer under the fold. Or ask the nearly 2,000 other microbrewers, or the 250 new brewers from the past year that fully believe they have a shot to make their mark.

Pricing pressures might matter to the extent that a 50-cent Bud Light might topple a $2 Miller Lite every time, but a 50-cent Bud Light won’t topple a $4 Great Lakes Christmas Ale any more than a $1 or $2 Bud Light would. That’s because the market is increasingly about taste, and to an extent, sheer variety.

Bottom Line

Maybe this will change. InBev’s new Budweiser Black Crown is a clear nod to the quality trend. And should it and the other superbrewers continue to aggressively buy craft brewers or launch line after line of experimental new beers, the little guy might have a fight on its hands.

Heck, maybe I’m not even giving the DoJ enough credit. Maybe the department is predicting exactly this future — and if the Post‘s “well-placed” source is right that it’s about to call shenanigans, the department would be doing so with incredible foresight.

But that’s a lot of maybes and ifs. As of right now, the beer market is as competitive as it’s ever been.

Kyle Woodley is the Deputy Managing Editor of As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @IPKyleWoodley.

Article printed from InvestorPlace Media,

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