Views

Mega Mergers Ahead?

In the United States, there has been 2 unbelievably large mergers announced.  Staples wants to buy Office Depot and Anheuser-Busch wants to buy SABMiller.

The government has already announced plans to block the Staples deal but nothing so far on the beer mega-company.  Their challenge is to convince government that the merger would not reduce competition in the marketplace.

Mergers are often a good course of action when the market is mature with marginal growth or declines and large operating infrastructure costs to serve.  In a quick, but not exhaustive summary, you buy a big competitor, streamline operations (e.g. 2 sales forces become one, plant rationalization, etc) and you become stronger to maintain what share you have or alternatively or simultaneously, you increase price to improve profitability.

Anheuser-Busch InBev have announced a new plan to reverse declining volumes in the U.S.—by rewarding distributors who focus on brands like Budweiser and Bud Light.  The world’s largest brewer, has introduced a new incentive program that could offer some independent distributors in the U.S. annual reimbursements of as much as $1.5 million if 98% of the beers they sell are AB InBev brands.

In addition, Distributors whose sales volumes are 95% made up of AB InBev brands would be eligible to have the brewer cover as much as half of their contractual marketing support for those brands, which includes retail promotion and display costs.

What about all the small craft brewers?  How will they benefit from this mega-merger?

The fear is that distributors will drop competing brewers and the new incentive program will discourage them from stocking new brewers.  By restricting distribution, small brewers would be at a great disadvantage.

Could something like this happen in Canada – only time will tell.  Thinking beyond beer, what other industries in Canada are mature facing declines in consumption and are over-regulated?