Beer wars: Canadian brewers are competing for market share and investor interest

Abstract:

Both Labatt’s and Molson have introduced several new varieties of their products in the 1990s, hoping to hold market share. Molson Co’s strategic focus now emphasizes diversification, while its already diversified competitor John Labatt Ltd is focussing on its core brewing business.

Full Text:

Tall bottles, stubby bottles, dry beer, genuine draft, lite beer, extra-strong beer and ice beer. Those are just a few of the gimmicks that Canada’s two major brewers have devised to keep consumers interested in their product. This summer will go down in beer history–if it is remembered at all–because of a jowly red bulldog. Red Dog beer is the most prominent new entry by Molson Breweries in the perennial beer war that flares up each year as temperatures soar. But compared with last summer when Molson and John Labatt Ltd. rolled out their ice beers, one of their most successful product launches, this year’s battle has been relatively low-key. With the exception of a high-profile advertising campaign in Ontario, Alberta and British Columbia that began in May with billboards featuring nothing more than a mysterious cartoon drawing of a red dog’s face, the country’s two beer rivals have cooled their new brand introductions. “Consumers have become a little skeptical, a little jaded,” says Dave Perkins, Molson’s senior vice-president of marketing, in Toronto. “After the `genuine draft’ wars and then the `ice’ wars, they’ve gotten tired of the hype. They don’t want things pushed down their throat.” As a consequence, Molson has introduced Red Dog with no direct competition from Labatt.

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But if the battle for consumers is cooler than in the past, the competition for investors has heated up. On that front, the two companies, whose products many people say are basically indistinguishable, look significantly different. While The Molson Companies Ltd. of Toronto, the holding company that owns Molson Breweries, has sold some of its brewing assets and is concentrating on a strategy of diversifying into other industries to offset its reliance on beer sales, Labatt has taken the opposite tack. The London, Ont.-based brewer is planning to buy a stake in a Mexican brewing company and has announced plans to sell many of its non- beer assets. But so far, neither strategy has wowed shareholders who have allowed the stock prices of both companies to drift downward. Even the financial analysts, who benefit from generating investor interest in companies, sound indifferent. “They’re both having a mediocre year,” says consumer products analyst William Chisholm of Loewen Ondaatje McCutcheon & Co. Ltd. of Toronto. “Labatt has been a diversified company that’s now getting back to beer. Molson is going the other way. Both strategies sound OK. It’s just a question of whether either one of them will make money.”

Despite their divergent approaches, both companies face the same problem: the beer industry is mature, beer consumption is stagnant and there are no radical new improvements that can be made to the basic product or its manufacture. With the consumption of beer in decline–the average Canadian drank about 13 less litres of beer in 1993 than in 1983–as the population ages, Molson and Labatt are desperately searching for new avenues of growth. Even though beer is still a highly profitable product, investors favor companies whose growth potential will push up share prices.

In that quest for growth in the 1980s, Molson and Labatt both plowed their brewing profits into a variety of new businesses. Molson’s main investments were in Diversey Corp. of Mississauga, Ont., an international cleaning and sanitizing product company, and in retailers Beaver Lumber Company and Aikenhead’s Home Improvement Warehouse. Labatt stayed closer to home with investments in dairy and food products as well as a variety of sports and entertainment businesses, including the sports network, TSN, and the Toronto Blue Jays baseball team.

To date, however, few of these investments have been as profitable as beer. Molson got 30 per cent of its revenue but 60 per cent of its $125.7 million in profits from beer in fiscal 1994, while beer provided 77 per cent of Labatt’s revenue and 89 per cent of its $155-million profit. Says Andrew Guy, an analyst with Equity Research Associates Inc. in Toronto: “It’s another example of poor performance by companies that have grown away from their core business.” Added Jacques Kavafian, an analyst with Levesque Beaubien Inc. in Montreal: “You can never do a good job of diversification. It’s never a good idea.”

For that reason, experienced investors tend to shun companies that attempt to buy their way into new businesses. Says Guy: “What do guys who work their way up through a brewery know about chemicals–hopefully not much–and what do they know about making rock videos, either? If they’re throwing off a lot of cash and they don’t know what to do with it, they should give it back to shareholders in the form of bigger dividends.”

But Molson and Labatt are ignoring that call. Indeed, Molson says that it has decided to spend even more money on Diversey in an attempt to improve Diversey’s lacklustre profits. “We recognize that you have to spend money to make money,” says Barry Joslin, senior vice-president of corporate and public affairs. “We will invest more in areas of customer service to build the business.” Molson president Mickey Cohen told shareholders at the company’s annual meeting in July that he wants to get Diversey profits up and see an improvement in Molson’s share price. “No one,” he said, “is more impatient than me–but we must manage this company for the longer term.” Diversey, which sells products such as laundry and dishwashing products in North America, Europe, Asia and Latin America, appeals to Molson largely because of its growth potential in developing countries. Says Joslin: “As living standards improve in less developed countries, one of the first things to pick up are cleaning and sanitizing standards.” Still, Diversey’s U.S. operations have lost money for the past two years.

Meanwhile, Molson reduced its beer business in 1993 by selling a 20-per-cent stake in its brewing company to Miller Brewing Co. of New York City. According to market share numbers gathered by Equity Research, Molson is Canada’s largest brewer with 49 per cent of the market. But its share has slipped in recent years, down from 53 per cent in 1990. Since then, Labatt has edged up two percentage points to 44 per cent. The remaining seven per cent of the market is taken by micro-brewers and imported beers.

For its part, Labatt in the past two years has sold its dairy and food products businesses and announced that it intends to spin off some of its $1 billion worth of sports and entertainment interests into a separate public company. Last month, it dramatically increased its exposure to beer, when it announced an agreement to buy a 22-per-cent stake in Femsa Cerveza SA de CV, Mexico’s second-largest brewer. But with a price tag of $720 million, analysts say that Labatt may have paid too much. Says Guy: “It looks to us like the best they can do with that is break even.” Kavafian adds that the high price is only justified if predictions of a boom in beer sales as Mexico’s young population reaches drinking age materializes.

Despite Labatt’s attempt to streamline its operations, the brewer is maintaining some interest in non-beer products. Last month, it emerged as part of a group that is reportedly contemplating a bid for an interest in Madison Square Gardens, the famous sports and entertainment complex in New York that owns, among other interests, the Stanley Cup champion New York Rangers and the New York Knicks NBA franchise. Labatt refuses to comment on the report. The company defends its remaining mix of assets as a natural extension of its core business. “We’re not just manufacturers of beer, we’re also marketers,” says Paul Smith, Labatt’s director of public relations and communications. “A lot of our diversification has come out of beer-related activities.”

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Indeed, selling beer does seem to be what Labatt does best. The company is widely credited with leading the burgeoning ice-beer market, using a new production technology that has received a U.S. patent and which Labatt is now licensing to other beer makers. “Ice beer has been a phenomenal success,” says Smith. “We invented a product here in Canada that has quickly established itself as a permanent fixture in the marketplace.” In Japan, Labatt says that its ice beer is now the second-largest imported brand of beer. But, adds Smith, acknowledging that 1994 is a quieter year for beer than 1993, “it’s not every year that you get an `ice’ story.”

In fact, according to Molson’s Perkins, 1994 is a year when the consumer wants to return to the traditional mainstream beers like Molson Canadian and Labatt Blue. “People are looking for value,” he says. “We are seeing increased price competition.” Perkins claims that even ice-beer sales in Canada will account for only about half of the 12 per cent of the market that they took at the peak of last year’s summer season, as the novelty of the new product wears off. “Consumers are saying don’t give us a bunch of hype,” he said, “give us a good beer.” Now, that’s something to drink to.

SUDS FOR SALE

CANADIAN BEER SALES PER CAPITA (in litres)

1983          83.9 litres
1984          83.8
1985          82.2
1986          81.5
1987          82.5
1988          81.5
1989          80.2
1990          78.2
1991          75.4
1992          71.7
1993          71.1

TOTAL DOMESTIC BEER SALES (in millions of hectolitres, 1 hectolitre equals 100 litres)

1983          20.8 million
1984          20.9
1985          20.7
1986          20.7
1987          21.1
1988          21.1
1989          21.0
1990          20.8
1991          20.4
1992          19.7
1993          19.6

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