Draught-ing a New Plan
By: Rita Zurbrigg & Diana Bucuresteanu
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Macro Suffers
Macro-breweries are facing a crisis. The beer industry, which experienced steady sales growth through the 1980s and 1990s, looks to have a hangover. Shifting consumer preferences towards more sophisticated products has resulted in Big Beer steadily losing market share to innovative craft brewers. Consequently, legacy beer companies such as AB InBev, SABMiller, and Molson Coors have been acquiring regional craft breweries to capitalize on the sub segment’s success. Historically, Molson has attempted to inch into the craft brewery segment with the development of Blue Moon in 1995 and the acquisitions of Creemore Springs, Granville Island and Franciscan Well Breweries in 2005, 2009 and 2013, respectively.
Despite this, Molson Coors’ volume output is declining at a CAGR of 3% over the last three years which illustrates the company’s failure to properly adapt to changing consumer preferences. Moreover, Molson’s CEO, Peter Swinburn, spoke about craft breweries in 2014, stating: “I’m sure the craft owners would say they’re not overvalued, […] we have to generate value from any purchase we make, and we find it difficult to get the returns we want.” As increasing valuations are beginning to diminish the potential returns of purchased craft brewers – and the company’s dependence on the success of relatively few products has overexposed it to emerging threats – Molson Coors will have to develop an organic strategy to begin attracting its previously loyal customers.
Industry
Trends
The Canadian alcohol industry is projected to have a CAGR in sales exceeding 2.5% from 2013-2018. Despite the positive industry outlook, macro-brewers are at risk as consumer preferences shift towards substitute products. Over the past decade, Canadian consumers have shifted their alcohol consumption from beer to wine. Wine consumption per capita has increased over 32%, from 13.2 litres to 17.4 litres, while beer consumption has decreased over 6%, from 83.6 litres to 78 litres. Wine is becoming the drink of choice, threatening the operations of legacy beer producers, like Molson Coors.
Consumer Preferences
Increased sophistication of consumer preferences has resulted in a trend towards premium products that offer a tangible or perceived higher quality – a phenomenon called premiumisation. Millennials are beginning to demand diversity and variety in their alcohol choices and are drawn to new products that have distinct, unconventional brands and flavours. Moreover, changing ethnic make-up of Canadian cities contributed to the popularity of a more diverse product offering across provinces, further segmenting the market. These trends are harming the survival of macro-breweries and have greatly benefited other products, including non-grape wines, imported sakes, whiskeys, and craft breweries.
Regional Differences
The Canadian population is very diverse. This leads to highly variable consumer trends across regions. Different regions vary significantly in their regulation, distribution, and preferences for alcohol. For example, according to Agriculture and Agri-Food Canada, eastern provinces such as Quebec and the Maritimes prefer red wines, where on the West coast, notably British Columbia, white wine is preferred, showing how preferences vary over geography. With beer, this is most notably seen through the proliferation of distilleries in different provinces. British Columbia has notably the largest distillery to population ratio, and is the craft beer centre of Canada. They had 66 craft breweries in 2013, representing around 35% of all Canadian craft breweries. It can be seen that Alberta has the biggest deficit in population to distilleries and only has 18 craft breweries (9% of total).
Molson VS Craft
Unlike legacy brewers, craft breweries or “microbreweries” are smaller batched beer producers that offer unique flavours. Of the 191 craft brewers in Canada in 2013, 95% produced less than 15,000 hectolitres, compared to Molson’s Canadian capacity of 11.5 M hectolitres. Distinct flavours and unique branding of craft breweries were fundamental to the rapid growth in consumption among discernible millennials. Their focus to developing products with shorter life cycles has resulted in maintaining consumer interest through internal replacement of products, as customers have been proven to like change. The craft beer market’s ability to quickly adjust to consumer preferences due to small batch sizes is expected to triple their current 6% market share in the upcoming future.
Historically, Molson Coors has attempted to enter the craft beer segment through acquiring and integrating external distilleries. Between 2005 and 2009, Molson Coors acquired Creemore Springs and the Granville Island Brewing Company. Furthermore, in 2011, Molson Coors announced the creation of the Six Pints Beer Company – a separate division of the company dedicated to seeding, nurturing, and growing speciality beer brands across Canada. After introducing Granville Island lagers into Ontario, the Six Pints Beer Company launched the Beer Academy, a downtown Toronto based brewpub, to advance the promotion and production of company owned craft beer. Despite early interest, Molson is changing over the Beer Academy to a Creemore Springs brewpub in 2015, illustrating a lack of success in the company’s current resource allocation.
Molson’s dependence on the success of relatively few products in several mature markets has overexposed the company to possible threats. The company has specifically cited the underperformance in its premium and an economy portfolio as the significant contributors to its volume declines. As consumers are switching to alternative brands more frequently after adopting an initial beer choice, Molson’s average consumer lifecycle has been greatly reduced, thereby negatively impacting sales. The company admits to being the victims of its own marketing strategy over the past 10-20 years. Its approach to sell a “lifestyle”, wherein the marketing efforts talked about sports and different occasions rather than the product itself, has diminished the firms appeal to maturing drinkers and alienated product conscious consumers away from the Molson brand.
Crafting a Strategy
The perception of Molson’s lack of variety and quality is the biggest obstacle in attracting consumers away from microbreweries and other alcoholic drinks. In the past, an effective way to do this would be to acquire small brands to add to its portfolio. But current M&A demand has increased valuations for the most successful microbreweries, making those acquisitions much more expensive. Furthermore, sometimes a highly publicized acquisition of a well-known microbrewery can damage the brand, further destroying the potential value of the acquisition. Instead, Molson should create new micro brands instead of acquiring them to increase its market share in this segment.
Historically, Molson has had previous success competing with craft brewers as exemplified through its internally developed Blue Moon brand. After achieving multiple accolades including the World Beer Championship’s Gold Medal, Blue Moon began to receive industry backlash as Molson took the brand across the nation (and eventually internationally). This removes the benefits craft breweries get from the exclusivity, small product cycles, and regional brand presence, no longer capitalizing on the premiumisation of the industry that the initial investment was intending. A similar “acquire and expand” strategy was also used in their acquisitions of Creemore Springs and Granville Island, which both had scaled up production and were expanded nationally.
Instead of “acquiring and expanding” and losing the benefits of a craft brewery investment, Molson should adopt a “true micobrewery strategy.” This strategy entails creating micro-breweries and operating them as a regional autonomous unit. Since craft beer consumers are more loyal to the segment rather than to a specific craft brew, Molson has an opportunity to begin recapturing these previously loyal drinkers, by creating new, short-run “craft” beers in the same format as microbreweries.
To implement this, Molson should create local craft brands in Alberta, B.C., Ontario, and Quebec with already owned craft brewery facilities. These provinces represent over 84% of the total Canadian beer industry and increasing its localized presence in those regions would allow Molson to directly target the most established beer regions. This involves created smaller distilleries separate from Molson’s major plants, to allow these craft beers to customize new, unique, and appealing flavours to their respective regions.
Furthermore, by shifting its focus to localized craft brands, Molson could scale back national product launch and begin restoring the firms pricing power. Recently, a number of Molson product launches have been unsuccessful, as it has relied on inadequate consumer understanding before launch. In 2011, the company launched a new brand in the United Kingdom, but discontinued the brand after a year due to unsuccessful consumer adoption. Such failures result in unneeded capacity constraints, manufacturing expenses, and wasted shelve space. Molson has potential to extract more value per volume sold with a regional strategy. From 2009-2014, Molson’s net sales per hectolitre declined by 3.3% annually, compared to Big Rock Brewers who experienced a 1.6% CAGR in net sales per hectolitre. This is a metric that can be met and perhaps exceeded by Molson. Given that typical North American craft brewers generate a 48% premium in net sales per hectolitre compared to Molson, the company can generate substantial incremental revenue through shifted product offerings.
A Toast to the Future
Molson Coors longstanding success, which was built on its Canadian heritage, is no longer appealing to consumers. Wine and craft beers offer unique branding and distinct flavours, which Molson has not provided the expected variation. The company needs to address shifting consumer preferences by engaging in the regional charm associated with craft breweries. Decentralizing production allows for new products to be introduced to the corporation’s regional portfolios. To successfully produce on a regional level, the organization must utilize their existing craft brewery distilleries, to locally test new products, and develop additional brands on a localized basis. By changing its production strategy, Molson can indirectly enter the craft beer market in a way that maintains the appeal of craft beers while also reacquiring their previously loyal consumers.
