Consolidation continues to wash away the number of brewing companies in the global beer market as the largest brewers in the world have adopted the mindset that bigger is better over the past decade. As a result, four megabreweries (Anheuser Busch InBev (BUD), SAB Miller, Heineken International, and Molson Coors (TAP)) have emerged and account for roughly half of the world’s beer sales. Certain developments have spurred this consolidation and, consequently, the rise of these four goliaths. Most notably, the infiltration of small-batch craft beers into local markets and the rising popularity of wine and spirits have led the megabreweries to search for ways to increase their volumes. What’s more, by tacking on smaller operations, these brewers create economies of scale, which offer cost advantages (costs go down as scale increase) that are tough for their craft competitors to replicate.

The best way to understand how consolidation has affected the beer business is to take a look at some of the largest acquisitions in recent years. One of the best examples is the creation of Anheuser-Busch InBev.  It started with Belgian brewer Interbrew which gained control of the Latin American outfit AmBev to form InBev in 2004. The combined entity was the world’s largest brewing operation. Over the next few years, InBev continued to add other smaller breweries to its business. Then, in 2008, it made headlines with its acquisition of one of America’s most renowned businesses, Anheuser Busch. This deal created Anheuser Busch InBev, which further cemented this entity’s position as the worldwide market leader. 

Another powerhouse, Molson Coors, was also created via mergers. In 2005, the strong Canadian company, Molson, teamed up with the prominent American operation, Coors, to form an entity with more clout in the North America beer market. Two years after these businesses joined forces, the North American operation decided it needed to further bolster its capabilities in order to better compete with domestic-leader (then) Anheuser Busch. Consequently, Molson Coors combined its U.S. assets with rival SAB Miller in 2007 to create MillerCoors. Most recently, rumors of Molson Coors potentially buying Foster’s beer business have intensified. The potential deal would bolster the North American brewer’s presence Down Under and help it better compete with its global competitors.

European giant Heineken International’s transformation into one of the world’s largest brewers through two acquisitions is another example. In 2008, it purchased, with Carlsberg, British brewer Scottish & Newcastle. Heineken then followed that purchase with a takeover of Formento Economico Mexicano, which is commonly known as FEMSA, giving it a strong foothold in the Western Hemisphere. This resulted in a global brewing operation that can compete with the likes of SAB Miller and Anheuser Busch InBev.

The pace of the mergers and acquisitions in recent years suggests that the four largest brewing companies have entered into something of an arms race. Indeed, these global breweries continue to search for new markets to enter and breweries to add to their ever-expanding businesses. As a result, emerging markets have increasingly become a focus due to their enticing growth potential. Strong sales in Asia, Africa and Latin America have helped these businesses offset weakening volumes in their primary markets. Small breweries that have strong brand loyalty in their home market are the most likely targets. Large-scale brewers can take these relatively unknown brands and use their vast distribution and marketing networks to give the small brands greater reach in the hopes of driving up sales.

The primary example of this trend has been in the Chinese beer industry. China, the world’s largest beer market, remains fragmented, which has piqued the interest of the aforementioned global beer titans. For example, Molson Coors is hoping to build on its success in China by expanding its footprint via a joint venture with Hebei Si'hai Beer Co. Looking ahead, we expect merger and acquisition activity to pick up in China over the coming years as the larger brewers try to further tap this lucrative market. Moreover, the world’s largest brewers will likely continue to search for acquisition targets in other promising markets around the globe, such as India and South America, for the foreseeable future.

Indeed, this industry has been moving from a slew of national oligopolies to a few global conglomerates.  In fact, the most recent wave of mergers has swallowed the majority of the publicly traded breweries. Accordingly, the number of publicly traded takeover targets has declined. What’s more, many of the remaining brewers have complex organizational structures (trusts, poison pills, etc.), which often include the founding families, which would further complicate any purchase. Still, while consumers tend to identify with their local beer brands, which traces back to the days when beer couldn’t travel long-distances, a new trend is emerging where beer drinkers are more willing to abandon their local allegiance and try different brews. These megabreweries will likely continue to try to take advantage of this trend by focusing on expanding their diverse portfolio of suds.

While the giants continue to focus on extending their portfolios and extending their reach into new markets, small-batch craft brewers have found a profitable niche focusing on quality over quantity. The beer business remains, on a certain level, a local business. As the big guys work on growing their volumes worldwide, an opportunity for smaller players to come in and find a geographic region to which they can appeal and call their own is created. This strategy appears to be working as the craft beer industry continues to register healthy growth. Most recently, it saw sales rise 7% in 2009, while overall beer sales in North America declined 2%.

Boston Beer (SAM) remains one of the most well known success stories in this growing segment. It has grown from a small New England brewery in the 1980s to the largest American Brewer (the recent wave of international consolidation had a heavy hand in eliminating its previous competition, thereby pushing it up to the top spot domestically). The company continues to work to expand its operations as demand for its wide slate of beers remains strong. This success has not gone unnoticed and, as a result, some people on Wall Street believe Boston Beer could become part of the very acquisition trend it has benefited from. However, founder Jim Koch retains a strong voting interest, which should help him fend off any unwanted offers.

The craft beer segment has not been immune to the effects of the beer industry’s consolidation, though.  In 2008, Widmer Brothers Brewing Company and publicly traded Redhook Ale Brewery joined forces to create the Craft Brewers Alliance (HOOK) under Redhook’s symbol, HOOK. Since then, the company purchased Kona Brewing, which was based in Hawaii, and Goose Island Beer Company, which started its business in Chicago. Anheuser-Busch InBev distributes the outfits’ beer nationally and owns a minority stake. Craft Brewer’s Alliance hopes combining four established regional beer brands that are known for quality into one business will help strengthen its marketability and reputation in the domestic beer market.

This industry’s consolidation trend will likely continue in the near term, as the economies of scale from building a global operation are far too great to ignore. Some challenges along the way will include a constantly evolving landscape and a more difficult deal environment. Still, megabreweries will be sure to find a way to tap new markets despite these hiccups. Accordingly, we would not be surprised to see another big deal go down in the not-so-distant future – but it may take place on foreign shores.