With Super Bowl Sunday approaching, let’s take a look at an industry dear to the hearts of many an American male: Beer.
Since 2008, Anheuser Busch/InBev, an international conglomerate, has announced more than 15 takeovers of competing breweries. As a result of that buying spree, it now controls some 39 percent of the American beer market, and it wants more.
The company now has its eyes on Grupo Modelo, the makers of Corona Extra among other brands. Although it has only 7 percent of the U.S. market, Modelo is also the nation’s third biggest beermaker, which says a lot about just how concentrated the beer industry has become.
Anheuser already owns 35 percent of Grupo Modelo, and now wants to purchase the remaining shares. The U.S. Justice Department announced this week that is suing to block the deal.
According to the Justice Department, ABI and MillerCoors have established a nice, profitable little system.
“As the two largest brewers (a combined 65 percent of the market), ABI and MillerCoors often find it more profitable to follow each other’s prices than to compete aggressively for market share by cutting price,” the department claims. “Among other things, ABI typically initiates annual price increases in various markets with the expectation that MillerCoors’ prices will follow. And they frequently do.”
Modelo, however, refuses to play along with the game, much to ABI’s frustration. In California, for example, the giant ABI “rescinded a planned September 2010 price increase because of the share growth of Modelo’s Corona brand,” DOJ claims.
Internal ABI memos confirm that situation. For example, they complained that Modelo was “eating our lunch” in California, with ABI’s vice president of sales concluding that “California is a burning platform” thanks to “price compression” between ABI and Corona.”
ABI’s preferred solution to the problem was not innovation, such as the creation of better products. It also chose not to compete on the basis of price. Instead, its solution was to do what it has done so often in the recent past: Make the competition go away by buying it, and then raise prices to consumers to cover the additional cost.
If the deal goes through over DOJ objections, ABI will control 46 percent of the national beer market and considerably more than that in specific regional markets. As DOJ also points out, those regional markets are critical in setting beer prices, because local consumers can’t go outside their areas to buy lower-priced product.
So, is this further evidence of an intrusive federal government sticking its nose where it doesn’t belong? Should ABI be allowed to continue to buy up market share and thus reduce competition?
Or is this a legitimate use of government authority, needed to prevent the drive toward monopoly warned against by Adam Smith when he wrote that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”?
– Jay Bookman