A-B InBev's Desperate, Diabolical Plans Come into Focus

Building a Death Star to destroy small rival breweries was considered by
A-B InBev's management but ultimately nixed by the company's legal team 

It was the dominant story in the beer industry to close out 2015. Anheuser-Busch InBev (A-B InBev) went on a brewery shopping binge a week before Christmas, picking up Arizona's Four Peaks Brewing, London England's Camden Town Brewing, and Colorado's Breckenridge Brewing in just five days. Considering A-B InBev has already acquired a collection of other craft breweries including Goose Island, Blue Point, Elysian, 10 Barrel, and Golden Road, what should we make of this buying frenzy?

The first take away is this is good news, in that A-B InBev sees craft beer as the future and so is investing heavily into it. This makes sense, given craft beer's annual 15% growth rates which show no signs of slowing, while the overall beer market is in slight decline. The second take away is that A-B InBev has decided they can't get into the craft beer game on their own and have decided to buy their way in. This isn't for lack of trying on A-B InBev's part as they've made several efforts to tap into the craft beer market with decidedly lackluster results.

Remember Budweiser American Ale? What about Budweiser Black Crown?  And who recalls Project 12?  All were attempts by A-B InBev tap into craft beer's popularity that flopped. Some of these brews were well received by beer critics and all of them were arguably more flavorful and more "craft-like" than Bud. Looking back in hindsight, it's not surprising there were few takers with these releases.  Loyal Bud drinkers were fine with the usual Bud. Craft beer drinkers were not persuaded to try anything associated with A-B InBev.  There's been lot of derisive comments from the craft beer community directed against A-B InBev of the variety "They could brew craft beer if they really wanted to!". This totally misses the point.  A-B InBev actually tried to brew craft beers and it didn't work. While technically, A-B InBev could come out with "Budweiser IPA" or even "Stella Artois Dubbel", ask yourself, would you really spend your hard earned money to buy these products? Didn't think so.

There's the other problem of a company structured to brew and sell beer at hundreds of thousands of barrels at a time reorganizing those efforts towards craft beer, which is still a niche' brewing product in the grand scheme of things. To put things in perspective, a highly successful IPA like Bear Republic Racer 5 might sell at a rate of about 50,000 barrels per year. That 50,000 barrel of beer is what A-B InBev sells in a little over five hours. A-B InBev simply doesn't have the skills, experience, or business structure to introduce and distribute beers in small batches at bars or beer festivals to launch niche' beers, something craft breweries do effortlessly as part of their business.

Given the decline of mass market lagers and their failure to break into the craft beer market, A-B InBev was basically left with two choices:  Suffer a long, slow painful death or start buying up craft breweries. Not surprisingly, they chose the latter. A-B InBev also seems to appreciate the importance of regional loyalty in the craft beer market, as beer writer Jeff Alworth and economist Patrick Emerson pointed out in this recent Beervana podcast. Rather than buy one or two breweries and attempt to turn them into national brands, they are buying several well established craft breweries to build up several strong regional brands throughout the United States.

Perhaps A-B InBev learned from their first acquisition, Chicago's Goose Island Brewery, which they've attempted to turn into a national brand. While Goose Island has been modestly successful nationally, it hasn't turned into the craft beer juggernaut A-B InBev may have been hoping for. Here in the Bay Area, Goose Island does a decent business but most likely trails many strong Northern California breweries like Anchor, 21st Amendment, Lagunitas, Sierra Nevada, and Anderson Valley.

The final piece of A-B InBev's puzzle is an attempt to create a network of distributors devoted exclusively to A-B InBev's beers through a controversial incentive program which rewards distributors if 98% of the beers they sell are A-B InBev brands. For those not familiar with America's three-tier system, most breweries cannot sell beer directly to stores, bars or restaurants. Instead, they are required by law in most states to sell to distributors who then resell it to businesses where consumers finally buy it. Only a few short months ago, it was highly unrealistic to expect distributors to agree to 98% exclusivity with A-B InBev, given that craft beer was already 10% of the beer market, and growing rapidly.

For small breweries, this was a particularly ominous development, given Anheuser-Busch's notorious history of using their considerable leverage with beer distributors to stifle competition. They began losing this power as consumers began shifting tastes to smaller breweries, and distributor found they could make good margins with craft beers. Now, with A-B InBev picking up several regional breweries and most likely on the hunt for a few more, they can reassert themselves with distributors with an array of both national and local beer brands to pressure them to go exclusively with A-B InBev. Given that the number of beer distributors in the United States has significantly declined and some markets are served by a little as a single distributor, small independent brewers have plenty to be concerned about.

How this all plays out is an open question. Will A-B InBev be successful is setting up a vast network of exclusive distributors and shutting out their competition?  Can small breweries continue to prosper in this new environment? Will the brewing revolution in America come to an end? Personally, I see beer consumers benefiting from recent developments, although for certain breweries, things will get more difficult. There's no way this country is going to revert back to a time when the overwhelming majority of the beer was a tasteless, indistinguishable product, that last century being a historical anomaly of beer's 5,000+ year history. I sincerely believe the coming years could easily be the most vibrant times in the American beer scene although things may start looking differently than it does now. This coming Thursday, I'll further elaborate on these thoughts and discuss how the beer industry might look years into the future.