When Scale Was King in the Beer Business

The first time I heard Bill Smith’s name I was about 10 years old, and my father and I were flying to Milwaukee on one of many business trips he dragged me on when he had me for the summer. I recall my father saying then and repeating later, “with a name like Bill Smith he’s easy to forget.” 

That was unkind. Bill Smith was the chief of Pabst at the time, and according to his obit in the Journal on Friday, he did the best he could given the mandate he was under: save the iconic brewery by cutting costs and then maybe selling at the highest bidder.  

Before that, as president of Pittsburgh Brewing in the late 1970s, he “visited bars several evenings a week. The jovial 6-foot-4 executive, usually toting a cigar, introduced himself and bought rounds.” He revitalized the Iron City brand in Pitts, and then was hired to turn around struggling Pabst.  

Pabst at the time “was in the red and losing market share when he joined in 1981, becoming the fourth chief executive in 13 months, with a mandate to cut costs. ‘Our short-term strategy is survival,’ he told the New York Times.”  

Eventually, in 1985, California investor Paul Kalmanovitz “saved” Pabst with a $63 million bid. And from there it passed to G. Heileman and Strohs and others: All of those owners chasing the same strategy: scale will save them. 

This is not a story about Pabst or even about Bill Smith. This is a story about the beer industry today, and how scale and the lack of it are at a unique tug-of-war. 

Take a look at the largest five market share gainers in ytd IRI scans. Twenty years ago they were either non-existent in their current form or tiny: Mike’s Hard Lemonade, Constellation, Boston Beer, Diageo Beer, and CANarchy. 

Take a look at the largest five market share losers: Anheuser-Busch, MillerCoors, Heineken USA, Pabst, and Yuengling. Been around a while. 

Chasing scale has brought the top two brewers profits through the accompanying cost cuts (although not Yuengling, for the record, that’s another story), but they are coming to the end of that game. At the bottom, there is also an end game: nary a day goes by where a packaging craft brewery doesn’t close up shop, or regroup as a stand-alone brewpub (ie. a bar and grill).  

And herein lies the undeniable indisputable immutable economic laws of package brewing: Low barriers to entry, but high fixed costs.  

The first draws every dude with a beard (and doctor parents with $200k to spare) to the industry, and the second strangles them to death. And running a restaurant besides ... which has been described to me multiple times, by friends who have owned restaurants, as the hardest job in the world? Well, then you've got high fixed costs no matter how much you sell, high taxes (if you’re paying them), and running a restaurant on the side. And if you’re “lucky” enough to have packaging lines, it’s even more fun with simple daily engineering and mechanical and plumbing challenges, plus dealing with distributors and retailers. Sounds like a great time. Sign me up.

On the other hand you’ve got somebody like poor Marcel Marcondes, chief marketer at the largest division of the largest brewer in the world, ABI, and you’ve got enormous scale. Fixed costs and packaging lines and distributors are all taken care of. But you’re bleeding volumes and there’s no end in sight. What to do? How to break through the marketing clutter to move the needle on such large brands, when the amount of marketing spend doesn’t necessarily equal incremental sales (ask White Claw, who spent comparatively little to become the largest share gainer overnight). How to balance between monster Bud Light and tiny BonV!v? Like old Bill Smith, he’s got a nearly impossible job.

Both of these brewer examples have immutable economic shackles that cannot be easily broken, unless there is a major re-capitalization. For the small brewer, it means taking a write-down on the packaging equipment and jettisoning field sales employees and becoming a bar and grill, with fresh beer onsite.  

For large brewers, it means writing down failed acquisitions, cutting costs to the bone (which has already been done), and investing in higher-priced brands (which has also already been done).  

But that likely will not be enough. I suspect the top two or three brewers will have to go through a major recapitalization event: A merger, acquisition, or stock spinoff, to survive this era. 

The one thing the major brewers have proved since 2008, if nothing else, is they ain’t very good at the organic growth game. And even if they were, it still likely wouldn’t be enough, except for a surprise unicorn-like White Claw. They’re not built for it. They’re built for control of the market. But that can’t last forever, as even retailers these days are starting to break ranks with the top category captains and set shelves according to actual consumer demand. 

-Harry  

@beerbizdaily