How The Global Beer Business Operates Like Private Equity

Politicians and many economists extol the virtues of competitive markets.  This article is about the largest seller of beer in the US, and in many other regions.  It has not grown in the old fashioned way by producing a better mouse trap.  It has grown by acquisition.  It owns major brands from Europe and Mexico.  It purchased the maker of Budweiser, and it acquired 50% of the maker of Corona which gives it more than 50% of the US beer market.  It also acquires micro brewery's when their sales become significant.  There are significant advantages that derive from market share in the beer industry.  The advertising cost per barrel of beer is a barrier to entry into the national beer market.  Firms with large market share also purchase shelf space at large beer distributors.  Micro brewers may provide higher quality beer, but it is hard for them to expand beyond regional markets, and they are acquired when the reach a significant size. 

The business model for the firm that acquired the Budweiser brand is much like that of a private equity firm.  It cuts costs in the acquired firm, and it is able to raise prices in markets where it has dominant share. It is willing to give up market share in order to increase increase earnings margins, even when cost cutting includes the substitution of lower quality ingredients for higher quality ingredients.  Its biggest competitor in the large California market is the Corona brand.  It owns 50% of brewery but it competes against a domestic distributor.  It decided that the best way to maintain market share, without lowering its price, is to purchase the remaining share of the Corona brewery.  That gives it control over the pricing policies of the Corona importer in California.  (The government has brought an anti-trust suit against the firm to block the acquisition)

The behavior of this firm provides an another example of the financialization of industries.  This firm has little interest in the product that it sells.  It does whatever is necessary to increase its stock price and the stock options available to the executive team.  It is a financial engineering firm, rather than a product engineering firm.  That means revenue growth via acquisitions, and higher margins through cost cutting. This strategy has worked wonders for the top executives and shareholders.  It is only limited by the number of acquisitions it can make and the size of the global beer market.