Beer's Biggest Acquistion (Wasn't the One You're Thinking Of)
Stan Hieronymus points us to a little-noticed milestone that passed on Friday--the tenth anniversary of InBev's purchase of Anheuser-Busch for $52 billion. The St. Louis Post-Dispatch long, detailed reconsideration of beer's biggest acquisition. But what I found fascinating was that, even after 3,500 words, very little about the deal changed much about beer. Anheuser-Busch, the American division of the company, went through some minor changes, and along the way there have been some newsworthy moments. But the activities at the brewery barely changed and the trajectory of the company's products followed the trends that afflict domestic mass market lagers as a group: down, down, down. This is the most telling paragraph from the entire piece.
Annual U.S. shipments have steadily decreased every year over the last decade, from 107 million barrels in 2008 to just under 90 million last year, according to data from Beer Marketer’s Insights, an industry publication. Domestic market share, too, has shrunk each year since 2009, [from 50%] to 41.6 percent last year, the BMI data showed.
A lot of people have been fired for this trend, and a lot of people have been hired to reverse it, but there's not an ad man on the planet clever enough to reverse structural factors in the market: mass market lagers can't hope to hold 90% of the market like they did in 2008, and the declines will continue until we hit a point of equilibrium.
By coincidence, Michael Tonsmeire has been working on a graphic illustrating all the small breweries owned by larger ones, an updated version of which he posted today. The initial version went wildly viral (150,000 views), and sparked a landslide of commentary. (People do really care about ownership!) And it's on this graphic we can see the truly monumental acquisition, which was made for less than a 1/1000th the price InBev paid for A-B. That came three years later, when ABI picked up Goose Island for a relative song ($38 million).
Goose Island hasn't begun to replace all that lost barrelage, nor have all the breweries in the High End. But it was the pivotal purchase that tested a theory that had been the prevailing belief for decades: people wouldn't buy beer from craft breweries owned by big breweries. This belief was at that point more than a decade old and went all the way back to Anheuser-Busch's minority investments in Redhook and Widmer Brothers.
This was one of the most fascinating discoveries I made in researching The Widmer Way (available March 2019--mark you calendars). I spoke to two people with knowledge of these deals, Mitch Steele, who would go on to become Stone's brewmaster and found New Realm, but who at the time was doing new product development at A-B in St. Louis, and Tony Short, an A-B executive during this period who sat in on the key meetings as the discussions unfolded.
At first, A-B responded to the craft trend by trying to replicate it in-house. “I got involved in this because we were trying to do our own kind of craft brand at the time,” Steele said. They just weren't selling. “Some of them were really good beers. Some of them were just amped up Budweiser lagers, but some of them were really quite good.”
The company wanted to dip its toe in craft, but wasn't sure how to proceed. Short describes what their own internal research revealed. "At the time, the market research that Anheuser-Busch was doing indicated that consumers viewed craft-like offerings from big brewers differently than they viewed craft products produced by small breweries, microbreweries."
In the mid-1990s, Redhook and Widmer were both bite-size breweries Anheuser-Busch could have purchased with pocket change. Instead, they decided to take a minority stake in them, thinking that if they stayed out of the breweries' operations, they would retain their craft status, but A-B would have brands to offer their wholesalers across the country. Short describes the company's thinking:
“At the time, what we believed was that ... by taking minority stakes with firm minority contractual minority rights and board representation, we were able to effectively claim—and it was true, of course—that, look, we’re not running the company. These are still craft brewers and all of the romance and consumer perception and benefit that comes with being small craft was maintained. That was the whole premise. If we buy a majority of the company, then those consumers are going to look at them as though they sold out, they’re big beer now, and we’ll lose a large segment of the consumer base. That was the cornerstone of the strategy; it was anchored in that belief.”
The story has an ironic two-part ending. Of course, there was backlash against Widmer and Redhook. It took awhile, but they were eventually thrown out of the Brewers Association and had their official status of "craft" revoked. There was a consumer backlash as well. Although it continued to grow over the next decade, Redhook was crippled by the association with A-B and would teeter on the edge of insolvency for years. Widmer Brothers was more insulated because sales of Hefeweizen remained strong in the Northwest, but to this day many people believe the brewery is wholly owned by A-B. By the time A-B got around to buying Goose Island outright, passions had settled somewhat. The acquisition provoked an enormous reaction--allow me to pitch Josh Noel's Barrel-Aged Stout and Selling Out again--but in a concrete way, it proved something critical. Goose's production skyrocketed, even when production was shifted to Bud plants.
The original Widmer/Redhook deals could be read as a failure on a couple of levels. A-B was trying to insulate itself from backlash that came anyway, and as thanks, they only got a minority stake and no control of the breweries. “The philosophy was, ‘Let Widmer and Redhook brew what they want to brew,” Steele said. “Let them make the decision on what to brew. We’re here as a resource, and that’s it.”
Within a few months of the Goose Island purchase, it was pretty clear people would buy corporate craft (a term I use descriptively, not derisively). And this time, ABI got it all--full ownership (and resultant profits) and full control, with just a little tarnish from the corporate ownership. That opened the floodgates to the era of acquisitions. Nearly every craft logo on Michael's graphic represents a brewery purchased after Goose Island demonstrated these deals were viable.
Since the Goose deal, big beer has made an aggressive move into craft, and in mature markets like the US, see it as their long-term plan for survival. The upshot? When InBev bought Bud, the checks just went to a different address. Very little changed structurally. When ABI bought Goose Island, however, it changed the stakes in beer permanently. The landscape we've inherited is a result of that small Goose Island purchase--and the acquisition of America's largest brewery hardly registers anymore.
COVER PHOTO: St. Louis Post-Dispatch