SABMiller in Joint Venture with Molson Coors

question 5

Essay

SABMiller in Joint Venture with Molson Coors
On October 10, 2007, SABMiller (SAB) and Molson Coors (Coors) agreed to combine their U.S. brewing operations into a joint venture corporation. The stated objective was to create a rival capable of competing with Anheuser-Busch, the maker of Budweiser beer. SAB and Coors, the second and third largest breweries, respectively, in the United States in terms of market share, have equal voting rights in the newly formed entity. Each firm has five representatives on the board. In terms of ownership, SAB, the larger of the two in terms of sales and profits, has a 58-percent stake and Coors a 42-percent position. The combined operation, named MillerCoors, has about a 30 percent market share versus Anheuser's 48 percent. Leo Kiely, chief executive at Coors, became the chief executive officer of MillerCoors and Tom Long, head of the SAB business in the United States, became the president and chief commercial officer. Peter Coors, vice chairman of Coors, was tapped as the chairman and Graham Mackey, SAB's chief executive officer, the vice chairman of MillerCoors. Both Coors and SAB continue to operate separate global businesses.
From its roots in South Africa, the former SAB PLC grew rapidly over the previous decade by expanding into fast growing economies such as China, Eastern Europe, and Latin America. SAB acquired Miller Brewing Company in 2002, but the U.S. business failed to gain significant market share in competing with Anheuser-Busch's pervasive brand awareness and distribution strength. Molson Coors was formed by the 2005 merger of Colorado's Adolph Coors Co. and Canada's Molson Inc., both family-controlled companies. The families were unwilling to sell their entire companies to another firm. The JV allows them to keep some control. Molson Coors, with dual headquarters in Montreal and Denver, has major operations in Canada and Britain that would remain independent of SABMiller. Reflecting its larger market share, brand recognition, and negotiating clout with distributors, Anheuser-Busch has operating profit margins of 23 percent, double SAB's or Coors's margins. SAB is larger in terms of both revenue and profit than Coors.
The major U.S. breweries have been experiencing growing competition from wine, specialty beers, spirits, and imported beers. Spirits companies have raised the pressure on beer giants to merge by rolling out sweet cocktails and other drinks to lure younger consumers. Premixed bottled drinks such as Smirnoff Ice have seen sales triple in the last decade. The U.S. beer market is largely mature, with consumption growing at an annual rate of about 1.5 percent.
MillerCoors anticipated annual cost savings to reach $500 million by the third year of operation and be accretive for both parent firms by the second full year of combined operations. The cost savings result from streamlining production, reducing shipping distances between plants and distribution sites, and cutting corporate staff. Shipping costs represent a significant cost, given the nature of the product. By producing both firms' products in the eight plants geographically distributed across the Midwestern and western United States, MillerCoors should realize significant savings in meeting customer demand for both products in the immediate proximity of each plant.
SAB and Coors hope to become one-stop shops for distributors, allowing them to save time and money by dealing with one company instead of two. About 60 percent of Miller's volume is distributed by wholesalers also selling Molson Coors brands. U.S. federal law dating back to the repeal of prohibition requires beer to be sold in many states through wholesalers. The resulting savings to distributors could increase MillerCoors overall market share.
By combining their U.S. advertising budgets, MillerCoors expects to have more clout at the bargaining table with U.S. media outlets, enabling the combined firm to get lower prices and better sports marketing deals. Such deals are viewed as critical to marketing beer in the United States. MillerCoors will find it easier to negotiate for better placement for its ads and compete more effectively for ad rights to major sporting events. The two firms are also geographically complementary. Miller is strong in the Midwest, while Coors has large market share in the West.
Immediately following the joint venture announcement, Anheuser-Busch's CEO August A. Busch IV said in a message to employees that the brewer must capitalize on the significant transition confusion he predicted would occur when Miller and Molson Coors blend their U.S. operations. Such confusion, he predicted, would create great concern within the SABMiller/Coors field sales and wholesale organizations, as people attempt to determine if they will have a role in this new structure.
-How did the combination of the U.S. operations of SABMiller and MolsonCoors meet the needs of the two parties? Why was a JV viewed as preferable to a merger of the two firm's global operations?

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