Image: Beer for sale
Tim Boyle  /  Getty Images file
Just because there are a lot of choices doesn't mean there is a lot of competition in the American beer market.
By
updated 9/4/2009 9:47:46 AM ET 2009-09-04T13:47:46

Big Beer looks as if it's testing President Obama's tolerance. Both Anheuser-Busch InBev — purveyor of the president's preferred brew, Bud Light — and MillerCoors, a joint venture between SABMiller and Molson Coors, are raising prices at the same time, during a recession, and while beer demand is slumping. With an 80 percent market share between them, it almost begs for an antitrust review of the industry.

While the increases are not unusual or unexpected, they still raise a red flag. Both companies typically readjust the price tag on a six-pack every year to reflect changes in the cost of, say, barley or hops. But the ability of the two big brewing groups to do so now, while their customers are hurting most, highlights the tremendous pricing power that has accompanied consolidation in the industry in recent years.

While Anheuser-Busch, acquired last year by Belgium's InBev, has long held a dominant share of the American market, the number of big players in the industry has steadily decreased over the years. From 1947 to 1995, the number of beer companies fell by more than 90 percent. Though a surge in craft brewers like Samuel Adams, Sierra Nevada, and others followed, few of them tried competing directly with mass-market suds like Budweiser and Miller Genuine Draft.

That state of affairs was fine so long as the big three — Anheuser, Miller, and Coors — were still at one another's throats. And boy, were they. After South African Breweries bought Miller from Philip Morris in 2002, it set out to nab market share, primarily from Bud, which years earlier had taken the crown in the light segment that Miller practically invented. Its bigger rival responded by slashing prices aggressively, despite the hit it meant for Anheuser's bottom line.

But Bud's gambit worked — it forced Miller and Coors to match its price cuts or risk losing ground to Bud, which held a nearly 50 percent market share. While a drag for shareholders, this competition fostered a better outcome for consumers — indeed, the summer of 2005 was a beer drinker's dream. Some retailers were offering coupons for as much as $5 off the price of a six-pack.

The trend wasn't sustainable, however. That fall, Anheuser reported lower-than-expected earnings, as the higher volumes failed to compensate for the lower margins. Anheuser shares slid from around $48 at the beginning of the summer to $40. They never fully regained their value until talk of a bid from InBev gave them a lift, and the Belgo-Brazilian group launched an unsolicited takeover bid in 2008.

That competitive landscape is no more. Miller and Coors kicked off a joint-venture last year that combines the market powers of the second- and third-largest players. InBev, meantime, has no stomach for a price war following its $52 billion debt-financed splurge on Anheuser. So despite slumping appetite for beer and tough times, prices are going up. Company executives even deemed the conditions "favorable."

In many other areas, the Obama administration is taking a tougher line on corporate behavior it considers monopolistic. The new Department of Justice antitrust head Christine Varney has even signaled a willingness to re-examine deals that were approved under the previous, more permissive, Bush administration.

Taking on Big Beer might be politically popular, not least because the three big brewers are now, for all intents and purposes, foreign-owned. Moreover, there's precedent for doing so: The DOJ has already dismantled a number of beer deals in the past. Anheuser was the target of one of the first cases in 1958, when it purchased Miami-based American Brewing Company. The government forced it to divest the purchase and refrain from buying any other brewery for the next five years without court approval.

A similar verdict was reached in the case of then-No. 2 Schlitz, which was challenged in court in 1966 after having bought California's third-largest brewer, Burgermeister, in 1961 and a 40 percent stake in Canada's Labatt in 1964. The company was ordered to sell off both holdings and refrain from acquiring new plants anywhere in the country for the next 10 years.

In 1959, the DOJ sued to prevent the merger of Pabst, then the 10th-largest brewer, with the 18th-biggest, Blatz. The suit was first filed in the District Court of Milwaukee but wound up in the Supreme Court, which in 1966 ruled the deal was anti-competitive and forced Pabst to divest Blatz. The justices' opinion noted that "if not stopped, this decline in the number of separate competitors and this rise in the share of the market controlled by the larger beer manufacturers are bound to lead to greater and greater concentration of the beer industry into fewer and fewer hands."

That may well describe the situation today, but a Pabst/Blatz outcome is hardly something Molson Coors, SABMiller or AB InBev shareholders would toast with pleasure. Beer drinkers, on the other hand ...

Copyright Washington Post.Newsweek Interactive

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.74%
$30K home equity loan FICO 5.25%
$75K home equity loan FICO 4.56%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.91%
10.91%
Cash Back Cards 16.36%
16.36%
Rewards Cards 15.96%
15.94%
Source: Bankrate.com