Though it’s nearly 25,000 miles around, the world can feel like an awfully small place sometimes.  For the beer drinker, global walls continue their constrictive shifts as breweries band together in a dizzying array of mergers and acquisitions.  Despite extraordinary growth on the part of American craft brewers, global breweries continue to lose market share as drinkers turn their attention to spirits and other beverages.  Based upon recent transactions and industry buzz, 2007 appears poised to be another year where brewing conglomerates and industry titans will further divide and sub-divide the brewing pie in search of elusive profits and market share.
 
The New Face Of Anheuser-Busch

While industry analysts have long predicted that market leader Anheuser-Busch would have to respond to the hurried globalization pace set by other members of the brewing industry, few could have plotted the strategy the company pursued in 2006.  In the lead up to the retirement of A-B’s first non-Busch leader, Patrick Stokes, the brewery single-mindedly pursued strategic distribution agreements and targeted acquisitions of brands and breweries.  Deemed by some as the ‘funnel strategy,’ A-B’s efforts were an obvious attempt to placate the well-covered grumblings of distributors who have been clamoring for higher margin brands. 

In February, A-B announced it would become the exclusive American importer of the Grolsch beer brands, effective April 2006.  Anheuser-Busch quickly followed up the announcement in March with news that it would also take over importation of Tiger Beer, effective May 2006.  The agreements allowed the foreign breweries access to A-B’s network of nearly 600 wholesalers. 

In a well-publicized deal in May, A-B purchased the Rolling Rock brands from InBev USA for $82 million.  A-B managed to keep out of the fracas regarding the future of the historic Latrobe brewery that followed transfer of the brands, which A-B now brews at its facility in New Jersey.  In August, Anheuser-Busch announced an extension of its 10-year alliance with Japanese brewer Kirin.  In addition to brewing, importing, and distributing the Kirin Inchiban and Kirin Light brands in the American marketplace, A-B also assumed marketing and selling responsibility for the brands.  According to the terms of the agreement, Anheuser-Busch assumed full oversight of the Kirin brands in the United States, while Kirin retains trademark rights for the brands.

After completing these deals, the company announced that the next Busch generation would resume control of day-to-day operations in the A-B boardroom.  On November 30, August Busch IV succeeded Patrick Stokes as A-B’s president and CEO.  While it is far too soon to pass judgment on the success of the Fourth’s reign, his leadership has clearly directed the company to reinvent parts of its marketing and distribution lineups.  In the face of continued market pressures applied by the globalization of the beer industry and continued conglomeration, A-B’s new approach appears novel by comparison.  A-B is clearly focusing on distribution and importation agreements, while other big players, including InBev, SABMiller, and Heineken have instead focused on purchasing minority or majority stakes in global breweries.

In early 2007, Busch IV was eager to pronounce A-B’s 2006 distribution efforts a success.  The company recently released early numbers for 2006 that put overall shipments to wholesalers at 102 million barrels, up 1.2 million barrels over 2005.  Wholesaler sales to retailers grew at 1.1 percent in 2006, with the newly acquired and alliance brands contributing half a point of growth to both shipments and wholesaler sales to retailers.  “Anheuser-Busch achieved increased shipments in 2006 due to the success of its initiatives to grow core brands, led by Bud Light, and by expanding its portfolio of products including the addition of the Rolling Rock brands, and imports Grolsch and Tiger,” said August Busch IV in a press release announcing the results.

Despite the flurry of deals, A-B does not appear ready to rest yet.  In late November, A-B announced it would enter into an agreement with InBev to become the exclusive U.S. importer of several premium European import brands, including Stella Artois and Beck’s.  The teaming up of these two brewing powerhouses followed longstanding rumors of merger talks between them.  Instead, A-B will take over importation, sales, and distribution of the brands, excluding the Labatt’s products, starting in February 2007. 

“We are pleased with our sales and marketing initiatives, including the recently announced agreement to become the exclusive U.S. importer of select InBev European brands, and believe these efforts will position Anheuser-Busch for growth in volume and earnings in 2007,” concluded Busch in a press release.  The deal also allows InBev to continue its divestiture of focus of direct oversight of and responsibility for brands in the American marketplace.

Without taking a breath, A-B quickly followed up this blockbuster news by announcing a new production, distribution, and sale agreement with its longtime partner, Grupo Modelo.  The companies announced that A-B would serve as the sole importer of Modelo’s line of beers, including Corona, in China starting in January 2007. “We are very pleased with this association, which offers excellent long-term growth opportunities for Grupo Modelo’s brand portfolio in China, a very important market for our company,” said Carlos Fernández, chairman of the board of directors and CEO of Grupo Modelo in a press release.

Perhaps the most shocking deal was left for last.  In January 2007, A-B and Czech brewer Budejovicky Budvar announced a detente in hostilities between the companies in the form of another exclusive importation agreement.  The terms of the deal give Anheuser-Busch the right to import Budvar’s flagship beer, renamed Czechvar in the United States marketplace.  In return, Budvar gains access to A-B’s distribution network, with the possibility of expanding distribution beyond its present 30-state range.

The deal signals an incredible groundshift from the combative days of August Busch III, who fiercely fought Budvar in courtrooms in more than 40 countries around the world.  While the agreement specifically does not impact existing litigation or trademark disputes between the two brewers in other countries, the partnership clearly represents a changing of the old guard.  “After years of differences, this is a meaningful step for two great brewers to form a relationship that is good for both of our businesses,” said August A. Busch IV in a press release.  “[T]he agreement represents a historical turning point between our companies,” said Budvar’s CEO Jirí Bocek.  “We have managed to move away from discussions between lawyers and towards a practical dialogue, which is going to be beneficial to both sides.”

Where Things Stand

Beer industry experts remain divided over what effects these deals will have on Anheuser-Busch’s overall financial outlook and the American marketplace.  Observers will closely watch A-B to determine whether its new list of brands turns out to be an arsenal or just a confused jumble.  There is clearly some market overlap between the brands, notably between Tiger Beer and Kirin and Grolsch and Stella Artois.  But with the agreements in place, it’s hard not to be impressed with the range of the portfolio A-B can offer wholesalers and in turn the drinking public.  In addition to the brands mentioned above, A-B now either controls or has a financial interest in the following beers:  Corona Extra, Corona Light, Beck’s, Beck’s Light, Bass Pale Ale, Harbin Lager, Hoegaarden, and Leffe.

August Busch IV is right to be impressed with his newly assembled portfolio and the diversity of approaches the newly added beers will support.  In his statement following the InBev announcement, Busch said that “[w]e live in a world with diverse cultures and lifestyles, and this provides additional variety for our consumers. These well-known import brands complement our company’s leading portfolio of American premium beers and enable our company to better compete.  This is consistent with our stated strategy of enhancing our participation in the U.S. high-end beer segment.”

Anecdotally speaking, a recent vacation confirmed for me the power of the A-B portfolio.  While in Florida, I visited several local accounts, ranging from regular taverns to upscale restaurants.  A-B has long maintained a strong presence, if not control, over the flow of beer in the state, but this experience was different.  At several spots, A-B’s local wholesalers were taking full advantage of the portfolio.  In addition to the standard A-B offerings of Bud Light and Budweiser, consumers could try the brewery’s own better beer products, including Michelob AmberBock, choose its craft beer partners, including RedHook IPA or Widmer Hefeweizen, or sample an import beer, such as Kirin or Grolsch. 

It’s easy to see how devastating this approach can be, especially in places where craft beer has yet to gain a true foothold.  Local restaurants can simply rely upon A-B’s handful of products to cleanly cover all the major category angles.  In terms of building a platform for running the American marketplace, A-B has achieved impressive strides in 2006 and early 2007.

–article first appeared in March 2007 issue of Beverage Magazine.

My desire to comment at greater length on the recent purchase of the Old Dominion Brewing Company by Coastal Brewing, a partnership of A-B and the Fordham Brewing Company, is the real reason I started this Notebook. I’ve had a number of conversations over the last few months about Old Dominion’s future as various deals have come and gone. I’m writing about A-B’s efforts in the better beer segment and its effects on craft brewers in an upcoming issue of BeerAdvocate Magazine, where I write the Defending Beer column. But I wanted to expand on the Old Dominion matter specifically.

The situation at Old Dominion is a complicated one. Old Dominion is a ‘sick brand’ as they say in the industry. The brewery’s production has languished in recent years despite record sales in the craft beer industry. The brewery has barely grown in the last five years and in 2006, Old Dominion’s beer sales were down more than 15-percent, with only contracted brands, such as Tupper’s and New River, enjoying growth.

The situation would hardly be surprising if the beer was bad, but Old Dominion has long made a range of well-respected beers. One clear problem has been the omnipresent lack of leadership at the brewery. As early as 2001, Old Dominion’s principal owner, Jerry Bailey, made it known that the brewery was for sale. A number of craft industry players even received sales solicitation memos from Old Dominion. When no one matched his $15 million asking price, according to the Washington Post, Bailey removed Old Dominion from the market.

During the next few years, the brewery continued to plod along on its unsuccessful path. Despite little regional competition and a defined home market, Old Dominion failed to grow. Even in the last six months, the brewery’s beers are nearly impossible to find in places that you would expect to see them. On a recent beer trip to Charlottesville, I found only a single restaurant carrying the beer and it was in the bottle. Writing in the Washington Post in 2006, Fritz Hahn noted that Old Dominion was largely absent even from the Washington DC marketplace.

Problem is, the brewery’s distribution in Washington is often lacking. Outside of a few beer-centric bars that feature the deliciously smooth Oak Barrel Stout or high-octane Millennium Barleywine Ale, you’re lucky to find much beyond the aggressively hoppy Tuppers’ Hop Pocket Ale, the standard Dominion Ale or Dominion Lager, or maybe Victory Amber Lager. For the past decade, the easiest way to peruse the company’s offerings was to drive to Ashburn for dinner and drinks at the Old Dominion Brewpub, a sparsely decorated bar and dining room attached to the brewery.

Fast-forward to 2006. Shortly after the Goose Island deal made headlines, word leaked out that the Old Dominion Brewing Company of Virginia had finally found a buyer. What followed was two failed attempts by an employee, Terry Fife, to purchase the brewery with his partner, Kip Olson. During 2006, A-B was also poking around Old Dominion at the behest of its local distributors.

After the employee deals fell through, the Coastal Brewing partnership stepped in to negotiate a purchase with Jerry Bailey. In March 2007, the group confirmed the long-standing sale rumors. Coastal Brewing purchased Old Dominion for one-third of the original asking price, according to sources with knowledge of the terms of the sale. The A-B/Fordham partnership purchased Old Dominion for nearly $5 million, including an assumption of debt and moneys kept in escrow. Fordham, which runs the Ram’s Head pub chain, largely financed the deal, with A-B simply agreeing to cover the distribution angle. Under the partnership, A-B will own 49-percent of Old Dominion, with Fordham taking a 51-percent share.

With the deal shrouded in secrecy, workers at the brewery and its attached pub were disappointed by news of the sale, which came in the form of Coastal’s application for a brewing license in Virginia. “The staff of Old Dominion has been kept largely in the dark about what to expect after the closing,” says one employee who spoke on the condition of anonymity. “The only thing that I do know is that it won’t be good for those of us that have put their hearts and souls into Old Dominion for many years.”

So what happens now? Much of what follows remains speculation but there are two distinct areas of focus: short and long term. In the short term, things will remain largely the same minus a few notable changes. After the deal became public, the new owners fired three employees, including two brewers, Dave Hennessey and Greg Spradlin, and marketing director Terry Fife, the employee who tried unsuccessfuly to buy the brewery. The Ashburn brewery and pub will retain the Old Dominion name for now. The new owners, including Kyle Muehlhauser, held meetings last week with both the pub and brewery employees. Workers at the pub were told that the pub was closing for a two-week renovation period, effective immediately. Workers were not provided with any interim pay but were offered $10/hour to come in and help clean during the renovation period. When the pub reopens, with a full liquor license, it will also stock the full line of A-B products, including Budweiser and Bud Light. In the short-term, it is unclear whether the new owners will attempt to rebrand the Old Dominion pub as a new Ram’s Head Tavern.

The long-term outlook is very different. To resurrect the sick Old Dominion brand, the A-B/Fordham partnership has its work cut out for it. In January 2007, former owner Jerry Bailey told the Washington Post that he did not believe the new owners would change the beers. “I can’t imagine anybody buying a place like this and not keeping the only thing we got,” he said. “The brand is the most valuable thing we own.”

Privately, A-B and its partners have made clear that they plan to reduce Old Dominion’s portfolio of beers from nearly 30 offerings down to three to five beers. It remains unclear whether the brewery will continue to contract brew existing brands.

The final long-term concern remains what will happen to Old Dominion’s physical space. While Fordham is a much smaller operation, brewing around 6000 barrels per year compared to nearly 27,000 for Old Dominion, the principals have discussed moving brewing operations to Fordham’s Dover brewery. One person with knowledge of the deal expects the partners will eventually move the brewing operations to the Dover brewery and close the Asbhurn operation.

It is beyond question that Old Dominion needed new leadership in order to survive after years of inexplicably failing to grow. The issue becomes whether the A-B/Fordham partnership is the best way to right the ship without losing what Old Dominion’s remaining customers love about the place, namely its eclectic line of beers. This is the major area of concern cited by consumers who have emailed me about the deal. As one customer, Ron Kobus, told the Washington Post, “It would be a shame to see them shut down the brewery or change the recipes.”

Though it has long been rumored, the sale of Old Dominion is now in its final stages.  I have a lot to report on this topic (including some coverage in the next issue of BeerAdvocate Magazine, but for now, here is the press release. 

New Joint Venture, Coastal Brewing Co., To Purchase Old Dominion

ANNAPOLIS, Md. (March 2, 2007) – Coastal Brewing Co., a new joint venture between Maryland-based Fordham Brewing Co. and minority partner Anheuser-Busch, Inc., announced today it will purchase Old Dominion Brewing Co., a Virginia-based craft brewer and brewpub operator with primary distribution in the Mid-Atlantic region of the United States.

As part of the deal, Coastal Brewing Co. will assume ownership, sales and marketing responsibilities for both the Old Dominion and Fordham brands, including Dominion Ale, Dominion Lager, Oak Barrel Stout, Fordham Copperhead, Fordham Lager, Oyster Stout and others. Coastal Brewing Co. also assumes ownership of the Old Dominion brewery and Old Dominion Brewpub, both located in Ashburn, Va.

Bill Muehlhauser, chief executive officer of Fordham Brewing Co., will serve as managing partner for Coastal Brewing Co. Coastal Brewing Co. has hired Scott Zetterstrom as a vice president of brewing operations to oversee brewing of the Old Dominion and Fordham brands. Zetterstrom previously served as head brewmaster for Old Dominion and most recently worked with Fordham as an independent brewing consultant. Coastal Brewing Co. also has hired Barry Newmiller as vice president of sales and marketing. Newmiller previously was a regional sales manager for InBev USA.

Additionally, effective April 1, 2007, Anheuser-Busch will become the master distributor for the Old Dominion and Fordham brands, giving Coastal the benefit of Anheuser-Busch’s logistical expertise in managing distribution and access to more independent and chain retail accounts in the Mid-Atlantic region.

“I’m proud to entrust the wonderful beers we have brewed at Old Dominion since 1990 to Fordham and Anheuser-Busch,” said Jerry Bailey, founder and president of Old Dominion Brewing Co. “Under Coastal’s stewardship, the quality of Old Dominion brands will be protected and there’s no limit to what they can accomplish.”

Coastal Brewing Co. will be led by Fordham Brewing Co., which holds 51 percent ownership, with Anheuser-Busch holding the minority stake of 49 percent.

“We are eager to expand the distribution of our Fordham brands through Anheuser-Busch’s wholesaler network and are looking forward to working with the company through this alliance,” Muehlhauser said. “We are excited about the opportunities Coastal Brewing Co. will provide to both the Old Dominion and Fordham brands and introducing them to even more beer lovers in the Mid-Atlantic States.”

“Old Dominion and Fordham are two of the leading craft brewers in the Mid-Atlantic region, with a strong following among craft consumers and a tremendous opportunity for growth,” said Dave Peacock, vice president of business operations for Anheuser-Busch, Inc. “Together with our partners at Coastal Brewing and our wholesaler network, we will enhance the distribution and sales support for these exceptional beers and continue to provide new, distinctive products to adult consumers.”

Based in St. Louis, Anheuser-Busch is the leading American brewer, holding 48.4 percent of U.S. beer sales. The company brews the world’s largest-selling beers, Budweiser and Bud Light. Anheuser-Busch also owns a 50 percent share in Grupo Modelo, Mexico’s leading brewer, and a 27 percent share in Tsingtao, the No. 1 brewer in China. Anheuser-Busch ranked No. 1 among beverage companies in FORTUNE Magazine’s Most Admired U.S. and Global Companies lists in 2006. Anheuser-Busch is one of the largest theme park operators in the United States, is a major manufacturer of aluminum cans and is one of the world’s largest recyclers of aluminum cans.

Based in Annapolis, Fordham Brewing Co. was originally founded by Benjamin Fordham in 1703, in what would become Maryland. In 1995, it was reborn in the heart of old Annapolis. Rapid growth resulted in the building of a new brewery in Dover, Del. in the spring of 2003. For more information, visit www.fordhambrewing.com.