With Modelo, Will AB InBev Have a Monopoly?

The impending merger of Grupo Modelo and Anheuser-Busch InBev has aroused certain anxieties:

[T]he $20 billion buyout of Grupo Modelo, which has an estimated 6% of the U.S. market, would push AB InBev’s share to well over half of all U.S. beer sales....  It’s now the world’s largest brewer, controlling about a quarter of the global beer market with its 200 brands.... The volume of beer produced by the companies would increase from 300 million to 350 million barrels annually with the deal, which would also make the company bigger than SABMiller and Heineken — AB InBev’s two closest competitors — combined.

For the average American beer drinker, the growth of InBev could be bad news. Competition within the beer industry is slowly eroding, and anytime there’s less competition, higher prices are likely to follow.  AB InBev could also decide that it ultimately wants to own fewer brands so it can reduce its marketing costs, and that could give customers fewer mainstream beer options.

I don't know how economists define monopolies, but I'm not particularly concerned about InBev's rapid gigantism.  The danger with monopolies is that, absent competition, they can fix prices or lower quality and the customer has no recourse.  There are several forces at work in the beer industry that make me think this is unlikely.

• Prices.  Bud's going to have to do a lot better than 53% to affect prices.  Mass-market beer is very price sensitive, and if AB raises its prices on Bud Light, it will give the number two and three beers in the country a big leg up.  (Particularly given that the companies aren't competing on flavor.)
• Brands.  Yeah, AB could dump Natural Light or Bud Ice or something, but it really doesn't control that many brands.  A lot of InBev's portfolio includes foreign beers that don't sell a huge amount in the US (but do well elsewhere).  And regulators should stop AB from dumping Natty Light?  Nyet.
• Distribution.  AB's secret weapon used to be a very powerful network of distributors who could control the flow of beer in a city.  That's why Redhook and Widmer originally signed up with AB--to get easy access to markets in other states.  But craft brewing on the one end and market consolidation on the other have weakened AB's distribution.  They are no longer gatekeepers, and even small breweries have access to the market.
• Changing market.  This is probably the biggest issue.  As I argued earlier, the reason for this consolidation is market weakness, not strength.  People are consuming ever less industrial pale lager, and diversity in the craft market is insane.  If InBev could somehow snap up Boston Beer, Sierra Nevada, and New Belgium, it would destabilize the craft market.  But unlike the macro segment, craft beer is very profitable, and these companies have no reason to sell.  They can see the potential five years down the road as well as InBev can. 

Some folks are worried that InBev will keep gobbling up craft breweries, but even this isn't especially worrisome. Craft brewing is a different market.  A big part of its success is born from the fact that consumers believe it's handmade with care and attention.  When InBev bought Goose Island, it didn't buy the brands and shift them to an AB plant; that would have defeated the purpose.  Instead, Goose Island must compete in the competitive craft market, where flavor is paramount.  Investments and growth will give Goose Island a price advantage, but only to a point.  And in any case, this is no model for replacing lost market share.  When AB's brands slide a percent or two in a year, that means millions of lost barrels of beer.  You can't easily replace that with a patchwork of 100,000-barrel craft breweries.

So let 'em merge.  There's no monopoly and no immediate threat to the status quo--which is exactly InBev's American problem.