Pint/Counterpint: No, AB InBev buying craft breweries is not a good thing
A few days ago we posted Barly COO Craig Vermeyen’s take on big brewers acquiring craft breweries. Our Chief Tech Officer, Hunter Knight, adamantly disagrees. We’re glad to keep this debate going. Here’s Hunter’s rebuttal, with Craig’s original post in block quotes:
I think AB InBev acquiring craft breweries is a good thing. There, I said it.
It’s going to be very difficult to quantify what counts as a “good” thing when it comes to acquisitions like this, but I think you can draw some parallels between independent brewing and independent music (e.g. “punk” a few decades ago). Once the big boys (in this case, major record labels) find something that is increasing in popularity, they will quickly throw money at it to cash-in on what they see as a trend. Is it good for major record labels to sign independent musical acts, or should we be very suspicious of how the musical product might be affected?
AB InBev has no reason to start making bad beer at these craft breweries, or run them into the ground in any other way. Let’s face it. AB InBev has some smart business guys making these acquisition decisions. They are making these decisions because they are scared. They are scared because they see the shift from their crap to better beer. The craft beer market is expected to hit 20% of all beer sales by 2020, so if AB InBev doesn’t want to go the way of AOL, they need to change with the changing market. In order to succeed in the changing market, they need to have beers to sell that appeal to the craft demographic. Therefore, we craft beer lovers will continue to get a tasty product from the breweries AB InBev owns.
I feel that InBev has every incentive to increase the margins on their newly acquired asset. This will be done by reducing the cost of ingredients, while keeping prices at the low end the range of craft beers with which it will compete. Lower cost ingredients will almost invariably degrade the quality of the product, but any losses here can easily be overcome by the marketing department and guaranteed shelf space, by a long shot.
Every fiscal quarter, there will be pressure to increase profit margins, the only metric for which the acquired brewery will be responsible. As much as any pre-acquisition staff may want to maintain quality, and as much freedom as they will purport to have, the continued improvement of their product’s profitability will be the only thing between them and a board meeting leading to their ouster or liquidation of the brewery.
These aren’t “Acquihires” like you hear about in Silicon Valley, where a tech giant is really buying a startup’s “intellectual capital”: its key personnel. Rather, it’s actually “Acquibranding”, where the Big Beer label is looking to cash in on the “branding capital” amassed by the acquired brewery. The continued excellence of their product is practically irrelevant. If you’re on the East Coast and you’ve heard nothing but good things about Sculpin, and maybe you’ve never had it or only had it once, you will be extremely excited once the increased post-acquisition distribution plops a six-pack on your local store’s shelves. You will relish in the victory of securing such long-sought loot. Then you will go home and quickly pop open your first bottle. You will love every drop of it, because this is Sculpin! Never will it enter your head that this Sculpin has adjuncts not present in the old recipe, and the hops were swapped for another variety that tastes similar, but more importantly costs 33% less (someone got a nice promotion for that, I assure you).
As for the AOL aspect, their technology was outmoded, not improved upon. While the price comparison with dial-up vs. broadband is an apt one, the value proposition is not necessarily so. Much of craft beer’s value over mass-produced comes from its quality, which doesn’t have an equivalent when it comes to internet access. Both dial-up and broadband have roughly equivalent reliability, but the measureable speed can be 100x higher for broadband, at only 2-4x the cost. That’s not an improvement in quality, that’s a game-changer for the majority of users. When it comes to the more ethereal measure of “quality”, I fear that there will always be a plurality of beer drinkers that will gravitate towards the blandest, cheapest, buzz-inducing brews, and the best we can aspire toward is an ever-increasing slice of the total beer-drinking pie.
AB InBev doesn’t make good beer, so I’d rather they at least buy other people’s good beer to sell to us. We all know that AB InBev is not known for complex and flavorful beers. So if they are going to continue to own a big share of the market, why not be excited that some of the beers they can sell us are now complex and flavorful? Sure, they could have just decided to start brewing better beers, but they know that we die-hard craft beer fans would never go near them. With this acquisition model, we get the beer we already love more readily, and AB InBev sees the financial benefits of an established brand with an existing following.
I see a parallel here with the business practices of McDonalds. If McDonalds wanted to make great food, they would! So why don’t they? Profit margins! They, being very smart businesspeople (on that point there can be no doubt), have discovered that if you can create a habit-forming product that maximizes profit, you have a winner. Simply iterate (and innovate!) on that idea into perpetuity. By habit-forming, I mean that by its very consumption it results in dopamine increase in the reward pathway. I will admit that McDonalds smells intoxicating whenever I drive by it or whenever a co-worker brings a bag back from lunch. But knowing that the prime directive of this corporation is to cut as many corners as possible with the presumption that they can still sell me their product, I cannot be bothered to partake.
Now apply these concepts to Big Beer. It really isn’t rocket science creating a great brew. With the right ingredients, the right equipment, and some expertise, you can make a beer that will make the biggest beer snob say “Damn!” The harder achievement may be consistently increasing profitability with only small, incremental hits to quality. As for the McDonald’s-like habit-forming, the intrepid, cost-cutting—er—“margin-enhancing” brewer need not worry, since, as an alcohol-containing product, the dopamine effect is built-in, and effectively independent of any appetizing quality of the product.
AB InBev can get craft beer more places, more quickly. I think everyone agrees that AB InBev can distribute beer better than most craft breweries. Having access to this distribution network will actually help grow the craft beer movement, and bring more exciting beer to regions like China and Russia that are currently essentially untapped markets for craft beer.
There is a reason InBev has better reach than any craft breweries: skirting the Three-Tier system (brewer, distributor, point-of-sale)! This system is integral to the 21st amendment, which ended Prohibition. But more on that in the next section…
If AB InBev is going to launch an incentive program, shouldn’t we be glad some of the beers that will be included are now the exact same beers that could have been forced out of stores by the program? AB InBev is already involved in “questionable” business practices to try and get their beer back on the shelves where craft beer is starting to take over. So why not let them put the craft beer they acquired back on the shelves of the distributors/businesses that have agreed to join their incentive program? If this program is going to catch on, I would much rather AB InBev had some good beer options to include in the program than get stuck with shelves full of Bud Light.
To me this is like being happy that our benevolent overlord, Emperor Palpatine, has graciously decided to handsomely reward planets for giving their Rebel tenants the boot and inviting the Empire to set up a base. “Good for those planets! At least now they’ve secured their protection from the Death Star and profited in the process!” No. You fight against that goddamn Death Star until it turns into pixie dust.
Same idea here. InBev is trying to skirt around the Three-Tier system by providing rebates (up to $1.5 million!) for those distributors that exhibit extreme (95%) loyalty to their products. The Three-Tier system is meant to prevent exactly this type of exclusivity, though for now it seems they have found what I hope is a temporary loophole. It is crucial that the craft beer-drinking public speak with their wallet and stay far away from these shenanigans. Better yet, reach out to your state and U.S. congresspersons and let them know you think what is going on here is wrong!
This $1.5 million is huge, considering a couple factors. Distributors, being intermediaries, are wholesalers, which is fine if you’re Costco and have immense annual volume, but not if your territory is only as large as your trucks can reach in a single shift before returning home. This rebate is a massive windfall, which is likely to become the difference between year-end profit or loss in coming years as these distributors come to expect this rebate and increase their operating cost outlays on enhancements like new trucks and warehouses. At that point, you can bet these distributors will be the most ardent defenders of the rebate (“You’ll be killing jobs!”), making it even more difficult to fix this injustice. As far as I’m concerned, this puts us right back onto a collision course with Prohibition, since it was exactly coercive business practices like these that were a contributing factor to the passing of the 18th amendment.
In summary, I don’t see this being a bad thing for the craft beer industry long term. Let’s be honest, there will always be plenty of craft breweries that decide not to “sellout”, or simply don’t make a smart acquisition choice for AB InBev. There will continue to be plenty of little guys around your neighborhood that you can still support if you choose, but now you will have the additional benefit of better beer being available at Chili’s or Cheesecake Factory next time you get dragged to a family function there.
While I agree that there will always be breweries that refuse to sell-out, I strongly disagree with the notion that Big Beer is the means by which craft beer can reach a broader audience, at least not craft beer as we know it. Just as I wouldn’t expect McDonalds to find a way to make steakhouses more popular, and just as I wouldn’t expect capitulation to the Galactic Empire to be a great way to spread freedom throughout the Galaxy.
Do you work for a craft brewery that’s been acquired? Had a favorite beer go downhill after being bought? We’d love to hear your thoughts in the comments.