Creature Comforts Brewing Company

Why Is A-B Buying Craft Breweries?

hris Herron, the CEO of Creature Comforts Brewing Company, has an explanation for why Anheuser-Busch is acquiring craft breweries.

Herron, who worked in finance in the beverage industry, starts by explaining that goodwill—the value of a brand above its physical assets—makes up more than 50 percent of A-B’s assets, $136.5 billion to be exact. However, if A-B’s flagship brands, Budweiser and Bud Light, continue to lose market share, A-B will have to take an “impairment charge” to reflect the brands’ loss of value. That charge would amount to tens of billions of dollars, which would clobber the company’s stock price.

Impairment charges are looming because A-B positioned Bud and Bud Light as “premium” brands, which commanded a higher price and were perceived as superior to competing brands. However, with the growth of the craft beer sector, Bud and Bud Light are no longer considered “premium”. Nor can A-B restore those brands to premium status by raising prices, because doing so would cause them to lose even more market share, this time to Miller and Coors.

Back to the craft brewery acquisitions. Herron believes that A-B bought them for two reasons. The first is to capture some of craft beer’s growth and, at the same time, slow it down. The acquisitions help capture growth; meanwhile, A-B’s sheer size allows gives it an advantage over independent craft breweries. It can use its buying power to secure raw materials, push its craft brands through its distribution network, and spend heavily to market those brands. A-B’s second objective is to regain the goodwill associated with the Bud and Bud Light brands. Aggressive competition by A-B’s craft breweries will force independent craft brewers to cut prices; that, in turn, would narrow the price gap between craft and A-B’s brands, and diminish the perception that those brands are no longer premium.

Herron sums up A-B’s strategy:

The impairment charges AB InBev could face are worth billions more than any craft brand they have purchased, and those purchases would be a small price to pay to save a legacy brand. These craft brands, whether they realize it or not, may just be pawns in the AB InBev game of chess. AB InBev is not a collaborator, they are a competitor, and a damn smart one. If one of these craft brands they buy is a successful long-term brand, great, but more important to AB InBev, is the vital role they play in the short-term of ensuring that their premium brands retain long-term value.

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