26th February 2016    4 minute read

The Craft Beer Industry May Be In For Some Tough Times

The Craft Beer Industry May Be In For Some Tough Times

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The craft beer industry is booming. Last year, US craft beer sales rose by 11% which was promising until AB InBev finalised its $106 billion merger deal with SABMiller, putting a strain on a small  and fledgling industry. The news of this monolithic global beer company, selling one in 3 beers worldwide is raising significant antitrust concerns. Selling SABMiller’s stake in MillerCoors to Molson Coors was not enough to calm U.S. regulators. They’re also concerned about the merger’s effect on the fast-growing U.S. craft beer industry.

The beer giant is also fighting a battle on another front, as craft brewers and wholesalers oppose its proposed incentives program. To boost its declining US volumes of Budweiser and Bud Light, AB InBev which has more than 500 distributors nationwide, is planning to offer financial incentives of as much as $1.5 million to some US independent distributors if 98 percent of their beer sales are AB InBev brands, according to the Wall Street Journal.

AB InBev unveiled the plans at a meeting with distributors in St. Louis and estimates an average annual benefit of $200,000 for each participating distributor. The three-year incentive program plans to restore AB InBev’s volume growth in the US. It also includes additional marketing and sales obligations of about $150 million next year. AB InBev says the merger and incentive will have little effect on the craft beer industry.

“Nothing in these agreements will alter the explosive growth experienced by craft brewers over the past five years, nor will it affect beer distribution in the US.” tweet

But this is not what US craft brewers believe. In using the same distribution networks as AB InBev, they worry there will be less shelf space for their products. Some fear being dropped altogether.

“This incentive will encourage distributors around the country to drop competing craft brewers and discourage them from stocking new brewers.” tweet

Bob Pease, CEO, Brewers Association

Craft brewers are also worried about losing access to raw ingredients such as hops and barley which are essential to making their beer, according to Senator Patrick Leahy. To put AB InBev’s strategic move into perspective, we need to go back in time, specifically to 1933 when the 21st Amendment to the US Constitution ended Prohibition. The then US government introduced a three-tier system to limit the market power of brewing companies. The way it worked was that beer must be sold by brewers to distributors who then sell it to retail companies before the beer reaches customers.

With the loosening of restrictions, the old regime is not that much enforced anymore. In many states, it’s possible for small brewers to sell beer directly to their customers through brewpubs. But the fact is distributors still can’t be owned directly by brewing companies. To get around that, beer companies have tried to get exclusive agreements with independent distributors. Today, about 80 percent of the market is dominated by rivals AB InBev and MillerCoors whereas independent craft brewers account for 11 percent of the US market.

But the problem remains for big companies. Small craft breweries keep on popping up across Europe and North America and eat into their sales. According to Rob Hill, author of ‘The Total Guide to Beer’; In the US alone, there are over 4,000 breweries which breaks the record standing since the 1800’s. AB InBev can see the potential which is why the beer behemoth is aggressively adding to its craft beer bar tab. Just recently it acquired five craft breweries. The most recent was of Golden Road Brewing, the largest craft brewer in Los Angeles County.

AB InBev is determined to get back its most profitable market which may explain why it’s falling into its old habits of offering financial rewards to distributors to favour its products.

Just in 1997, Anheuser-Busch’s incentive system called “100% Share of Mind” was under investigation by the US Justice Department for deterring distributors from carrying small brands. But no legal action was carried against them.

Will History repeat itself? Or will we see a different outcome to AB InBev straining the craft beer industry?

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