Molson Coors: Crafting Breweries of the Future
The First Sip
Molson Coors Beverage Company (Molson), a leading multinational brewing company, was formed by the merger of Molson and Coors in 2005. The company’s flagship brands include household names like Miller, Coors, and Molson Beer. On a volume basis, Molson is the seventh largest brewer in the world and controls 24 per cent of the North American beer market. Despite its dominant position, traditional beer brewing volumes have been declining as consumer preferences have shifted towards more premium, health-conscious alternatives over mass-produced beers. This trend has led to a rise in the popularity of craft beers and coolers, and a subsequent industry-wide diversification to reduce reliance on household name-brand beers. Despite past efforts to enter the craft beer and hard seltzer markets, Molson’s revenues have continued to decline, with a 2.5-per-cent decrease from 2018 to 2019. Going forward, the company does not have a clear solution to conquer the craft beer market; Molson’s strategy of building new brands from scratch takes considerable resources with little guarantee of a return on its investment, and its acquisition strategy requires a lengthy due diligence process requiring significant up-front capital.
While the broader alcohol market has seen moderate growth, beer sales have declined slightly. In 2018, overall U.S. beer volume sales were down 0.8 per cent, compared to craft beer sales, which grew by 3.9 per cent and now comprise 13.2 per cent of all U.S. beer volume. The rise in popularity of craft beer has led to a surge of new breweries across the country, growing from 1,447 in 2005 to 7,450 in 2018. These smaller craft breweries specialize in niche products with unique tastes, ingredients, and a focus on higher quality. Currently, 98 per cent of U.S. breweries are considered craft breweries. Despite the industry’s lower volume, craft beer has captured 24 per cent of the market’s revenue due to premium pricing and growing demand.
While craft brands are more profitable than their mainstream counterparts, craft brewers struggle to get their products into the hands of the end consumer. Following the end of Prohibition in the U.S., a three-tiered system was established to regulate the alcohol industry. Producers, such as Molson, must sell to distributors, who then sell to retailers, who in turn sell to the end consumer. The three-tiered system gives the states more control over alcohol sales as each participant at each step needs a state license to run their business. When deciding to sell new products, distributors consider aspects like price, quality, packaging, and marketing plans—things that craft brewers cannot execute as well as established brands. Furthermore, these profit-minded distributors naturally gravitate towards the larger players in the industry, with some distributors going as far as labelling themselves as “Anheuser-Busch” or “MillerCoors” distributors. The lack of volumetric discounts for craft breweries relative to larger players creates a strong barrier to entry. With over 3,000 independent distributors in the U.S., craft breweries are forced to navigate a complex network if they wish to get their products on shelves across the country. Significant cash flow must then be allocated towards internal marketing efforts to convince distributors to sell to retailers, increasing the pressure for craft breweries.
Unfortunately, craft brands also lack something else very important: customer loyalty. 70 per cent of craft beer drinkers tend to make purchasing decisions at the shelf, meaning most customers do not have a brand in mind when buying beer. Without a stable base of customers, craft brewers must constantly innovate to win consumer interest. This forces craft brewers to reinvent the wheel rather than focus on efficiency, and it shows; about 2.7 per cent of craft breweries closed in 2018. Without a reliable product to fall back on, craft beer’s ability to appeal to the new consumer has also become its vice, generating a hyper-competitive environment driven by high innovation and marketing costs. This lack of loyalty reflects why Molson continues to struggle even after acquiring major craft brands, such as Blue Moon and Creemore Springs.
In the age of craft beers and coolers, traditional brewing giants must find new ways to compete. While a few alternative alcohol brands like White Claw and Mountain Man are experiencing sustained growth, Molson should not look to introduce their own imitations of these products, but rather grow through partnerships with up-and-coming craft brewers.
To gain access to smaller brands, Molson should start a brewing incubator that leases brewing capacity to craft breweries and offers consulting services, similar to Y-Combinator—helping aspiring brewmasters avoid the traditional start-up costs associated with opening a brewery, providing Molson’s expertise in the alcoholic beverage industry, and sharing its existing distributor relationships. In exchange, Molson would take an equity stake in each of these craft brewers. Due to Molson’s scale, smaller breweries could leverage Molson’s distribution network to gain access to a much larger market by expanding outside of their own region. These craft brewers could scale with Molson, renting additional capacity when needed, or terminating contracts when unsuccessful. Molson’s suite of executives would also offer unrivaled expertise in product development, business development, marketing, and mentorship to these budding brands. By providing consulting services, Molson creates an attractive platform for potential partners. These new brands can eventually supplement Molson’s decline in sales, while sheltering them from the direct risk of launching new brands.
For those craft brewers with established manufacturing that are struggling with capacity and distribution, Molson should offer production capacity and access to their supplier and distribution relationships. Without the help of Molson, a craft brewery trying to enter California from Michigan would have to find a beer distributor in the area and convince the company to distribute its low-volume beer. Then, the craft brewery must dedicate a sales team to convince retailers to buy its beer since distributors are not inclined to promote beer that cannot be sold in high volumes. All of this could be overcome if craft breweries leverage Molson’s existing distributor relationships. In exchange for these services, Molson would receive a convertible debt note. If partner brewers achieve certain benchmarks, Molson would have the option to convert its debt to equity in the company and participate in future growth. This agreement would offer downside protection for Molson while ensuring that the company benefits from the growth of the partner brewer. The partner brewer is also ensured that Molson is heavily invested in their growth. Otherwise, the agreement remains a standard contract brewing agreement.
Tapping into the Future
As the second largest brewer in the North American market and an experienced contract brewer, Molson is the best positioned firm to capitalize on this opportunity. Declines in sales volume have opened capacity for this venture and Molson’s recent equity investment in L.A. Libations, a non-alcoholic beverage incubator, demonstrates its willingness to explore new diversification strategies. The incubator will increase its exposure to the growing craft beer market, while overcoming pervasive issues of brand loyalty.
This also provides a natural path to acquisition. When craft brands have enough growth and momentum, the established partnership over many years will increase the likelihood of Molson being able to acquire its most-proven brands instead of launching its own. To further incentivize acquisition, contracts for the incubator should mature and require renegotiation. Molson could then use its size to force the dependent craft brewery to join the Molson brand. Given the fragmentation in the industry, a diverse portfolio of brands is the best way to capture market share. The incubator program allows Molson to seek out successful brands and expand its portfolio, without the risk and start-up costs associated with launching new product lines. These partnerships will also streamline traditionally long and cumbersome due diligence processes as Molson will have gathered the transaction information throughout the lifetime of the partnership.
A potential partnership could be formed between Molson and East Coast craft giant, Great Lakes Brewing Company. With $45 million in revenue and a presence in 14 states, Great Lakes represents a successful craft beer brand that has made a name for itself. However, expansion is difficult since additional brewing facilities require large upfront investments. For example, Stone Brewing’s new facility in Virginia cost $74 million and has a capacity of 500,000 barrels per year. In exchange for equity, Molson could provide capacity for Great Lakes’ main brands that is magnitudes greater than what it is currently capable of producing. The partnership will also let Great Lakes bring its signature beer to the West Coast. If Great Lakes can capture only 0.1 per cent of the $9 billion California craft beer market, its revenues would increase by 11-per-cent.
Molson only owns four craft brands between Canada and the United States. Given that larger craft breweries will sell around 500,000 barrels per year, Molson would only have eight per cent of the craft market under optimistic assumptions. If Molson could increase its market share by just two per cent, that would translate to a $552-million increase in revenue for Molson. Given its 24-per-cent share of the overall beer market, Molson could likely achieve this growth through its incubator program.
Drunk Off Success
By leveraging its scale and expertise, Molson can create and capture value through its incubator program in a growing market segment. These partnerships will allow Molson to tap into the craft brewing market at minimal cost and grow its product portfolio with successful brands. This formula can be applied all over the U.S. and Canada, since most craft breweries remain regional. With the incubator program, Molson can then share in the upside of its craft brands, giving it a new avenue for growth and keep its taps running.