[Senate Hearing 114-877]
[From the U.S. Government Publishing Office]
S. Hrg. 114-877
ENSURING COMPETITION REMAINS ON TAP:
THE AB INBEV/SABMILLER MERGER
AND THE STATE OF COMPETITION
IN THE BEER INDUSTRY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND
CONSUMER RIGHTS
OF THE
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 8, 2015
__________
Serial No. J-114-44
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.judiciary.senate.gov
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
52-545 WASHINGTON : 2025
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COMMITTEE ON THE JUDICIARY
CHARLES E. GRASSLEY, Iowa, Chairman
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont, Ranking
JEFF SESSIONS, Alabama Member
LINDSEY O. GRAHAM, South Carolina DIANNE FEINSTEIN, California
JOHN CORNYN, Texas CHARLES E. SCHUMER, New York
MICHAEL S. LEE, Utah RICHARD J. DURBIN, Illinois
TED CRUZ, Texas SHELDON WHITEHOUSE, Rhode Island
JEFF FLAKE, Arizona AMY KLOBUCHAR, Minnesota
DAVID VITTER, Louisiana AL FRANKEN, Minnesota
DAVID PERDUE, Georgia CHRISTOPHER A. COONS, Delaware
THOM TILLIS, North Carolina RICHARD BLUMENTHAL, Connecticut
Kolan L. Davis, Republican Chief Counsel and Staff Director
Kristine Lucius, Democratic Chief Counsel and Staff Director
SUBCOMMITTEE ON ANTITRUST, COMPETITION
POLICY AND CONSUMER RIGHTS
MICHAEL S. LEE, Utah, Chair
DAVID PERDUE, Georgia AMY KLOBUCHAR, Minnesota, Ranking
THOM TILLIS, North Carolina Member
CHARLES E. GRASSLEY, Iowa CHRISTOPHER A. COONS, Deleware
ORRIN G. HATCH, Utah AL FRANKEN, Minnesota
RICHARD BLUMENTHAL, Connecticut
Matt Owen, Republican Staff Director
Kirstin Dunham, Democratic Staff Director
C O N T E N T S
----------
OPENING STATEMENTS
Page
Lee, Hon. Michael S.............................................. 1
Klobuchar, Hon. Amy.............................................. 2
Leahy, Hon. Patrick J............................................ 4
Prepared statement........................................... 38
WITNESSES
Brito, Carlos.................................................... 7
Prepared statement........................................... 39
Responses to written questions............................... 110
Hunter, Mark..................................................... 15
Prepared statement........................................... 45
Responses to written questions............................... 126
Moss, Diana L.................................................... 13
Prepared statement........................................... 51
Pease, Bob....................................................... 8
Prepared statement........................................... 64
Responses to written questions............................... 132
Purser, Craig.................................................... 10
Prepared statement........................................... 87
Wilson, J........................................................ 12
Prepared statement........................................... 105
APPENDIX
Items submitted for the record................................... 137
ENSURING COMPETITION REMAINS ON TAP:
THE AB INBEV/SABMILLER MERGER
AND THE STATE OF COMPETITION
IN THE BEER INDUSTRY
----------
TUESDAY, DECEMBER 8, 2015
United States Senate,
Subcommittee on Antitrust, Competition Policy,
and Consumer Rights,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:01 a.m., in
Room 226, Dirksen Senate Office Building, Hon. Michael S. Lee,
Chairman of the Subcommittee, presiding.
Present: Senators Lee [presiding], Perdue, Tillis,
Grassley, Klobuchar, Coons, Franken, and Blumenthal.
Also present: Senator Patrick J. Leahy.
OPENING STATEMENT OF HON. MICHAEL S. LEE,
A U.S. SENATOR FROM THE STATE OF UTAH
Chairman Lee. Welcome to this hearing of the Subcommittee
on Antitrust, Competition Policy, and Consumer Rights. The
title that we have chosen for this hearing is ``Ensuring
Competition Remains on Tap: The AB InBev/SABMiller Merger and
the State of Competition in the Beer Industry.''
Before we start, I would like to thank Ranking Member
Klobuchar and thank her staff for their attention to this issue
and their assistance in preparing for today's hearing. I would
also like to thank the Chairman of the Full Committee, Senator
Grassley, for supporting this hearing.
A few housekeeping matters before we begin. After, Senator
Klobuchar and Senator Leahy give some opening remarks about
this hearing, we will hear from our panel of witnesses who I
and Senator Grassley will introduce shortly, and then we'll
have a 5-minute--a series of 5-minute question rounds.
The subject of today's hearing is the proposed acquisition
of SABMiller by Anheuser-Busch InBev, the second largest and
largest beer producers in the world, respectively. AB InBev
announced the acquisition for approximately $105 billion on
November 11th. Concurrent with that transaction, the parties
announced a plan to divest SABMiller's stake in MillerCoors to
joint venture partner Molson Coors Brewing Company. That stake
represents the entirety of SABMiller's U.S. presence.
As a result, the parties expect their merger to have
little, if any, impact on the American beer market. If true,
this will obviate the vast majority of the concerns that would
otherwise accompany a merger of this size.
Other market participants, however, have voiced concerns
about AB InBev's influence on distribution channels and the
market access of small craft brewers, alleging that AB InBev is
seeking greater vertical integration and attempting to exclude
craft brewers from the market.
As we examine these central questions today and look at the
overall state of competition in the beer industry, we must
focus that review on how the current competitive dynamics will
be impacted by the deal at hand. This analysis must consider
both components of the transaction--the acquisition as well as
the divestiture of SABMiller's entire U.S. business. Moreover,
we will do well to remember that antitrust analysis is
extremely fact-intensive and not driven by mere speculation or
suggestion.
While legitimate antitrust concerns may exist with respect
to AB InBev's relationship with distributors, this hearing is
first and foremost about its acquisition of SABMiller. Under
the Clayton Act, the relevant inquiry is whether the effects of
the deal, quote, ``may be substantially to lessen competition
or to tend to create a monopoly,'' close quote, not whether
conditions might be attached to the merger's approval to
restructure the market to the liking of the Government or
private plaintiffs.
When, as is the case here, the acquiring party intends to
divest the entirety of the acquired company's U.S. business,
the transaction's effects on competition in American markets
are likely to be negligible. The American beer market is a more
than $100 billion business and delivers a product that in both
its national brand and regional craft brew forms holds a
special place in American culture and hospitality. Today's
hearing will provide a much needed opportunity to assess
competition in the industry as it relates to this particularly
historic deal. I look forward to hearing from our esteemed
witnesses and the productive discussion that their testimony
will no doubt inspire today.
So, Senator Klobuchar will now deliver her opening
statement, and then I will swear in and introduce our witnesses
after we hear from Senator Leahy following Senator Klobuchar.
OPENING STATEMENT OF HON. AMY KLOBUCHAR,
A U.S. SENATOR FROM THE STATE OF MINNESOTA
Senator Klobuchar. Thank you very much, Mr. Chairman. Thank
you. We have worked on this hearing together, as we have on all
hearings, and I appreciate the partnership we have in taking on
these important antitrust matters. I also want to thank each of
the witnesses who have come today to testify.
I do not come to this hearing with a conclusion, but I do
have a goal, and that is to protect and foster competition.
From one perspective, there has been consistent consolidation
in the beer industry. Over the last decade, Anheuser-Busch,
Miller, and Coors all have been involved in major acquisitions.
Today Anheuser-Busch InBev-ABI--owners of what was Anheuser-
Busch, and SABMiller account for 70 percent of beer sales in
the United States. Within the remaining 30 percent, a different
phenomenon is occurring. Across the country, craft brewers have
brought new competition to the United States beer market. In
1978, there were fewer than 50 brewers in the United States. By
one recent count, there are currently over 4,100 craft brewers,
and their sales have grown from 1 percent of the beer market to
11 percent in the last 20 years.
In Minnesota, we now have more than 70 breweries, more than
the entire country had back in 1978 when I graduated from high
school. It was not legal for me to drink beer back then.
Chairman Lee. You were not interested in beer at that
point?
Senator Klobuchar. Yes, I just thought it was a good year.
Senator Leahy. Did you drink it?
Senator Klobuchar. We will not--let's just say you could go
to Wisconsin. Our beers----
[Laughter.]
Senator Klobuchar. Our beers stretch from Schell's
Goosetown to Finnegans Dead Irish Poet to Surly's Abrasive Ale
and everything in between. I will say, that Mr. Chairman, that
this was the first official Senate tour I took that was one of
our breweries that my husband actually asked to accompany me
on.
Craft brewers have succeeded, in part, because of the
three-tier distribution system. Brewers brew the beer,
wholesalers distribute it, and retailers sell it. Most beer
wholesalers are independent but rely primarily on either ABI
products or SABMiller products. Because of their independence,
wholesalers also distribute a variety of smaller independent
brands. As a result, today's beer aisle in any retail outlet is
a cornucopia of choice.
Within this context, ABI, the largest brewer in the world,
seeks to acquire SABMiller, the second largest brewer in the
world. The size of the transaction is not only cause for
concern; the Department of Justice, is--in investigating ABI's
previous acquisition of Modelo Group, found that larger brewers
engage in significant, quote, in ``significant levels of
coordination, and that coordination has reduced competition and
increased prices.''
If ABI were simply acquiring SABMiller, the transaction
would almost certainly be illegal. The merging parties
themselves recognize that fact and have offered to divest
SABMiller's stake in the MillerCoors joint venture to Molson
Coors. That is why we have asked Molson Coors to testify to
understand how it intends to compete in the United States
market. I appreciate that ABI and SABMiller have affirmatively
offered a solution at the beginning of the process.
The question today, then, is whether the proposed
divestiture resolves all competition problems. Because the
market is highly concentrated, the divestiture needs to be
nearly perfect. If despite the divestiture ABI's market share
were to increase even a small amount, the acquisition would
likely be presumptively anticompetitive under the Department of
Justice and Federal Trade Commission's horizontal merger
guidelines.
For the divestiture to be a successful remedy, MillerCoors
needs to be as independent from ABI after the merger as it is
today. We also need to make sure that nothing in this merger
alters either the incentives or the ability for large brewers
to foreclose retail access from craft brewers. Unless craft
brewers have access to wholesalers, they will wither on the
vine. That's kind of an wine analogy, but it is a good one.
Wholesalers make decisions every day on what brands and how
much of each brand to put on their trucks. I want to ensure
that consumer choice and not producer power drives those
decisions.
Mr. Chairman, the beer industry is moving in a good
direction. Small, innovative companies are transforming the
marketplace from Vermont to Minnesota. Although the craft
segment may be beyond its infancy, it is far from mature. We
need to ensure this merger does not stunt competition, and that
depends on the quality of the divestiture. Thank you, Mr.
Chairman.
Chairman Lee. Thank you. Senator Leahy.
OPENING STATEMENT OF HON. PATRICK J. LEAHY,
A U.S. SENATOR FROM THE STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman. I want to thank you
and Senator Klobuchar for having this hearing. I could legally
drink beer in 1978. I am considerably older than my colleague
from Minnesota. But I would say that this hearing on the
proposed merger of AB InBev and SABMiller is important, as we
have pointed out, not only to American consumers, but to craft
brewers and independent distributors--not just to brewers but
to independent distributors across the country.
Now, Vermont was one of the earliest incubators of craft
brewing. We have 40 breweries now. We are a State of only
600,000 people, but we have 40 breweries. Some of them are
award-winning beers, world award-winning beers, and people
travel from all over the country to visit them. And, of course,
they made--they have improved our economy, but I like the fact
that it is just one more thing making Vermont a destination
State. Now, we want to make sure that these craft brewers and
also the brewers of tomorrow in any State can competent and
that consumers will have the choice.
The proposed merger we consider today would join the two
giants of the beer industry. They are 70 percent of the U.S.
market. Seventy percent. The parties have announced that AB
InBev will divest ownership of SAB's stake in MillerCoors,
selling it to Molson. I welcome that effort; it will address
some of the concerns we have. But, I think, when you still look
at the size of what is left, we have to take a look at this
transaction. I want to know how it is going to operate in
practice. Will the merger have other consequences for the beer
market, including given the--given the practice of big brewers
buying up small craft breweries? But we also have to consider
the competition in the market for the hops, the barley, the
glass, and the aluminum. Now, these may sound like prosaic
things, but you are not going to be able to compete if you
can't buy hops, barley, glass, and aluminum because the giants
have cornered the market.
I want to hear about concerns in distribution. I want to
hear especially the concerns we have that the large brewers'
power over distribution is shutting out competitors and
undermining consumer choice. I met with a number of the
independent brewers in Vermont here recently, and they pointed
out that they can only sell their products if a customer can
find it. And if they are being squeezed off the shelf because
of restrictive behavior by the dominant companies, well, that
harms competition and limits consumers' options. So, we have a
whole lot of things in here--the basic material of the beers,
the distribution of it.
Of course, one way for large brewers to influence
distribution is that they buy up the distributors. AB InBev has
indicated that, following this merger, it will not increase its
ownership of distributors above its current level of 10
percent. Mr. Brito, I will ask you during your testimony to
make a formal commitment to that. And Molson has indicated
that, after it gains 100 percent ownership of MillerCoors, it
will not increase its ownership of distributors, nor change its
current practice of giving distributors leeway to showcase
competitors' brands. Mr. Hunter, I hope you'll make a formal
commitment to that today. It will certainly influence how I'll
feel about this merger.
So, the pathway from brewer to buyer is critical if small
companies are going to compete. State laws regulating
distribution vary dramatically, and many small brewers feel
constrained by the current state of distribution. I hope that
is going to remain a subject of close review.
But, anyway, as a Vermonter, as one who is so proud of
these craft brewers in my State--and I see what their
creativity does--I want to make sure they have a level playing
field. If they make a bad product, it does not sell. If they
make a good product, it should sell. But I do not want them
closed out because they cannot distribute or they cannot get
the basic parts that they need. So, thank you, Mr. Chairman.
Chairman Lee. Thank you, Senator Leahy.
I will now ask the witnesses to stand and be sworn. Do you
affirm that the testimony that you are about to give before the
Committee will be the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Brito. I do.
Mr. Pease. I do.
Mr. Purser. I do.
Mr. Wilson. I do.
Ms. Moss. I do.
Mr. Hunter. I do.
[Witnesses are sworn in.]
Chairman Lee. Thank you. Okay. We will now begin
introducing our witnesses. I will start with Mr. Brito.
Carlos Brito is the chief executive officer of AB InBev.
Born in 1960, he is a Brazilian citizen and received a degree
in mechanical engineering from the University of Federal do Rio
de Janeiro and an MBA from Stanford University. He held
positions at Shell Oil and Daimler Benz prior to joining Ambev
in 1989. At Ambev he had roles in Finance, Operations, and
Sales, before being appointed chief executive officer in
January 2004. He was appointed zone president of North America
at InBev in January 2005 and chief executive officer in
December 2005. He is also a member of the Board of Directors of
Ambev and Grupo Modelo.
Bob Pease is the president and chief executive officer for
the Brewers Association. He assumed the role of CEO in August
2014 after serving for 4 years as the organization's chief
operating officer. He worked at the Brewers Association--has
worked at the Brewers Association for over 21 years. Mr. Pease
has a degree in political science from the University of
Colorado. He is a member of the American Society of Association
Executives, a graduate of the Siebel Institute Professional
Beer Tasting and Styles course, and is a certified TIPS
trainer.
Craig Purser serves as the president and chief executive
officer of the National Beer Wholesalers Association. Purser
serves as a trustee for the Alcohol Beverage Medical Research
Foundation and the Center for Alcohol Policy. He also serves as
a member of the U.S. Chamber of Commerce's Association
Committee of 100, the ASAE's Key Industry Association
Committee, the Association Executives Council of the National
Association of Wholesale Distributors, and the Bryce Harlow
Foundation's Board of Governors. Purser has served as a guest
lecturer at the University of North Carolina and the George
Washington University and the University of Oklahoma. A native
of Oklahoma, Purser is a graduate of the University of
Oklahoma.
And now Senator Grassley would like to introduce the
witness from Iowa.
Chairman Grassley. Yes, I am happy to introduce J. Wilson.
He is a constituent of mine. Mr. Wilson is from a small
community, Prescott, Iowa. He represents the Iowa Brewers
Guild, organized to represent the interests of Iowa's craft
brewing industry. Mr. Wilson is a certified beer judge and an
award-winning home brewer. He's a published author and a
freelance writer for several print and online publications. I
appreciate the Chairman inviting Mr. Wilson so that he can give
a small business perspective on the possible impact of the
proposed acquisition on the marketplace and ultimately the
American consumer. Thank you.
Chairman Lee. Thank you, Senator Grassley.
Diana Moss became the president of the American Antitrust
Institute in January 2015. Her work spans both antitrust and
regulation with industry expertise in electricity, petroleum,
agriculture, airlines, telecommunications, and health care.
Before joining AAI, Dr. Moss was a senior staff economist at
the Federal Energy Regulatory Commission where she coordinated
competition analysis for electricity mergers. From 1989 to
1994, she consulted in private practice in the areas of
regulation and antitrust at the National Economic Research
Associates and Putnam Hayes and Bartlett. Dr. Moss has spoken
widely on various topics on antitrust and regulation, testified
before Congress, appeared before State and Federal regulatory
commissions, and made numerous radio and television
appearances. She has published articles in a number of economic
and legal academic journals, including American Economic
Review, Journal of Industrial Organization, the Energy Law
Journal, and the Antitrust Bulletin. She's editor of Network
Access, Regulation and Antitrust. Dr. Moss is adjunct faculty
in the Department of Economics at the University of Colorado at
Boulder. She holds an M.A. degree from the University of Denver
and a Ph.D. from the Colorado School of Mines.
Mark Hunter is a graduate of the University of Strathclyde
and has spent the last 32 years in a variety of sales,
marketing, and general management positions, primarily in
Europe and North America. As president and CEO of Molson Coors
Brewing Company, based in Denver, Colorado, Mark leads one of
the world's leading beer companies with extraordinary brands
such as Coors, Molson, Carling, and Staropramen. The Molson
Coors purpose is to delight the world's beer drinkers, and Mark
is a passionate believer in championing beer and building
respect for the category through responsible drinking.
We will now hear opening statements from the witnesses,
beginning with Mr. Brito. Go ahead, Mr. Brito.
STATEMENT OF CARLOS BRITO, CHIEF EXECUTIVE
OFFICER, ANHEUSER-BUSCH INBEV,
GREENWICH, CONNECTICUT
Mr. Brito. Thank you. Chairman Lee, Ranking Member
Klobuchar, Chairman Grassley, Ranking Member Leahy, and Members
of the Subcommittee, thank you for the opportunity to appear
before this Subcommittee. My name is Carlos Brito, and I am CEO
of AB InBev.
AB InBev is a global brewer and the parent company of
Anheuser-Busch. We have the privilege of continuing Anheuser-
Busch's proud history as a brewer in America since 1852. We
have more than 16,000 U.S. employees across 49 States, and we
committed in June to investing an additional $1.5 billion by
2018 in our U.S. operations. I am proud to say that 98 percent
of our products sold in the U.S. are made in the U.S.
I am here today to discuss AB InBev's proposed acquisition
of SABMiller and our agreement with Molson Coors to divest
SABMiller's interest in MillerCoors conditioned upon completion
of our culmination with SABMiller.
I would like to share with you the rationale for this
transaction and the impact--or more precisely, the lack of
impact--that this transaction will have on our competitive
position in the United States.
The purpose of this transaction is to enhance our ability
to serve new markets, particularly in Africa, Asia, and Central
and South America. It's about bringing more choices to more
consumers around the world, including extending the reach of
iconic American brands such as Budweiser to new markets. What
this combination is not about is changing the competitive
landscape of the U.S. beer market.
The U.S. beer industry is more competitive than ever, with
more than 4,000 breweries in all 50 States and, on average, two
new breweries opening every day. Just take a walk down the
aisle of your local grocery store, and you will see the
incredible amount of choice beer drinkers have, more than ever
before.
This competition is being driven first and foremost by the
growth of craft brewers, which rose from 3.8 percent of the
market in 2007 to 11 percent in 2014, and is expected to reach
20 percent market share by 2020.
In addition to robust competition from craft, the beer
industry itself faces ever-growing competition from wine and
liquor. Nothing in AB InBev's combination with SABMiller will
lessen that competition.
The divestiture of MillerCoors ensures that our market
share in the U.S. will not change as a result of the
combination. Our total beer production will not increase. Our
utilization of beer ingredients and supplies will not change.
Our distribution system will not be impacted. And our
commitment to the three-tier system will not waver.
Beyond the transaction, let me address two other topics
within the industry: distribution, and ingredients and supplies
for beer.
I would like to state very clearly that we do not expect
any changes to the Anheuser-Busch distribution system as a
result of the combination or divestiture. There are
approximately 3,300 wholesalers across America, and more than
35 States allow for some form of self-distribution of beer.
Together, these distribution options ensure that brewers of all
sizes can access the market.
It is our intention that approximately 90 percent of our
volume be distributed by independent wholesalers. Around 10
percent of our volume will be distributed by our wholly owned
distributorships.
In addition to a strong, independent distribution tier, the
industry is supported by broad, responsive markets for the
ingredients and supplies that brewers rely upon, including
aluminum cans, barley, and hops. These ingredients and supplies
are generally produced within large, highly responsive local,
national, or global markets. In none of these markets would the
combined company be in a position to constrain competitors'
access to those ingredients and supplies. The marketplace sets
the prices and terms of ingredients and supplies.
In closing, we are proud of our contribution to the highly
competitive U.S. beer market and excited for the future of
beer--both in the U.S. and around the world. The combination of
AB InBev and SABMiller will bring more choices to consumers. We
look forward to the day when American travelers can find a cold
Budweiser anywhere in the world.
Again, thank you for the opportunity to appear before you.
I look forward to answering your questions.
[The prepared statement of Mr. Brito appears as a
submission for the record.]
Chairman Lee. Thank you, sir. Mr. Pease.
STATEMENT OF BOB PEASE, CHIEF EXECUTIVE
OFFICER, BREWERS ASSOCIATION, BOULDER, COLORADO
Mr. Pease. Mr. Chairman, Senator Klobuchar, Chairman
Grassley, Members of the Subcommittee, good morning. My name is
Bob Pease. I am the chief executive officer of the Brewers
Association. My organization represents over 2,800 small and
independent craft breweries and over 1,100 industry suppliers.
My members are located in every State and in virtually every
congressional district.
At the outset, I would like to make it perfectly clear that
the Brewers Association is not opposed to fair competition. My
members have built thousands of successful small and medium-
sized business from scratch in a very competitive environment.
Many others have failed at great personal loss. My members are
the embodiment of the American entrepreneurial spirit. We
understand that antitrust laws are designed to protect
competition and they are not designed to protect any specific
individual company or any segment of the industry.
The proposed acquisition of South African Breweries by
Anheuser-Busch InBev must be viewed in light of other
developments affecting competition in the beer industry.
To understand the competitive landscape, we need to review
the basic beer industry regulatory framework. Federal alcohol
laws and the 21st Amendment to the U.S. Constitution authorize
each State to regulate beverage sales and distribution within
their respective borders. That's important because the beer
industry does not operate under the normal principles of
interstate commerce. Beer and other alcohol beverages are
subject to 50 different State regulatory systems.
State laws in many places effectively mandate the use of
beer wholesalers and prevent a brewer from changing wholesalers
absent extraordinary circumstances. State laws are generally
intended to protect the independence of wholesalers, which is a
laudable goal. If the wholesale tier of the beer industry is
truly independent of the major brewers, it can then promote
competition. But that goal has been thwarted by other
developments.
Two of largest international brewers now control over 70
percent of U.S. beer sales. They have also actively fostered
the rapid consolidation of the wholesale tier and the evolution
of the multistate wholesaler networks under common ownership.
Today, the 30 largest wholesalers control almost one-third of
all U.S. beer sales to retailers.
Most markets in the U.S. are now served by only two
substantial wholesalers--an ABI wholesaler and a MillerCoors
wholesaler. While the two primary wholesalers are generally
known by the names of their largest suppliers, the wholesalers
will also sell other brands. So, for example, an ABI
distributor will sell Corona, Sam Adams, and dozens of other
smaller brands. But newer craft brewers face significant
challenges in gaining access to retailers and consumers.
States have generally failed to respond to changes in the
beer industry to the detriment of new competitors and new
business models. Over the last three decades, the Federal Trade
Commission has consistently, repeatedly called out States for
enacting or refusing to change blatantly anticompetitive
distribution laws, most of which are still on the books and are
aggressively enforced through private and Government action.
States have granted exceptions to allow limited self-
distribution by craft brewers, but those exceptions are
insignificant in terms of the overall market and total and
totally inadequate to address the imbalance that currently
exists.
In 15 States, large brewers are allowed to own wholesalers.
So, at present, Anheuser-Busch InBev is the largest supplier of
beer in the United States, and in nine States it is the largest
beer distributors. In major population centers in those nine
States, Anheuser-Busch InBev effectively controls one of the
two routes to market that craft brewers must effectively use to
sell their beer to retailers. Moreover, Anheuser-Busch also
enjoys the same privileges--licensing privileges and franchise
protections that were intended to protect independent
wholesalers.
ABI has further diminished the independence of the
wholesalers that it does not own through several different
strategies. ABI has a subsidiary that finances wholesaler
acquisitions and consolidations. ABI also maintains incentive
programs that provide millions of dollars to wholesalers that
severely limit the sales of brands of competing beers.
As a condition of approving the ABI acquisition of South
African Breweries, the BA strongly believes that the Department
of Justice should require ABI to divest its company-owned
wholesalers and modify its anticompetitive assistance and
incentives to wholesalers to refrain from distributing other
brands of beer.
Left unchecked, these practices will further restrict
competition and access to market for the smallest players.
Alternatives such as Government oversight, supervision, and
enforcement would take years of effort.
In conclusion, the Department of Justice must also closely
scrutinize ABI's activities that affect U.S. and global markets
for goods and services used by brewers. ABI is already
vertically integrated through ownership of agricultural and
packaging subsidiaries. Its increasing global presence creates
many opportunities to adversely affect competition for goods
and services in the beer industry.
We applaud the Subcommittee for asking the hard questions
to support aggressive antitrust enforcement and fair
competition in the beer industry. On behalf of the over 4,100
small and independent craft breweries and their 115,000
employees, I thank you for the opportunity to appear before you
today.
[The prepared statement of Mr. Pease appears as a
submission for the record.]
Chairman Lee. Thank you, sir. Mr. Purser.
STATEMENT OF CRAIG PURSER,
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
NATIONAL BEER WHOLESALERS ASSOCIATION,
ALEXANDRIA, VIRGINIA
Mr. Purser. Thank you. Chairman Grassley, Chairman Lee,
Ranking Member Klobuchar, and distinguished Members of the
Subcommittee, on behalf of the Nation's independent beer
distributors and their 133,000 employees, thank you for the
opportunity to testify today.
There is no question that America is in a golden age for
beer, with unprecedented variety and quality offered by more
than 4,000 breweries, compared to fewer than 50 in the 1980s.
Sales by craft brewers grew nearly 18 percent in 2014,
representing more than 11 percent of the beer market. You would
be hard pressed to identify another industry that has
experienced the same explosive growth in such a short period of
time.
The true winner is the American consumer, who enjoys a
broad spectrum of innovative, independently produced beer
products for every taste.
But what makes this consumer choice possible? The answer: a
robust and competitive system of independent distribution.
Independent distributors, or wholesalers, provide access to
market for brewers of all sizes. They create a competitive
playing field, and they keep pricing fair for consumers.
A critical issue before this Committee is how to preserve
America's golden age of beer and the effective system of
independent distribution which delivers benefits to beer lovers
everywhere.
Now, consumer advocates, craft brewers, retailers, and
independent distributors have all expressed concern about the
global transactions around the ABI/SABMiller tie-up and how it
could reduce access to distribution--reducing choice and
potentially raising prices for consumers. Included with my
written testimony is a study by the Boston Consulting Group,
which finds that America's independent beer distribution system
is, quote, ``open, freely competitive, and driven by consumer
choice.''
Independent distributors provide access to capital. They
provide access to scale for mid-sized and small brewers.
Distributors also take on responsibilities, including
warehousing, marketing, promotion, sales, and delivery of a
heavy, perishable product. Distributors have solid, time-tested
relationships with retailers in their markets, from the corner
pub on Main Street to your hometown grocery store. In other
words, distributor interests are perfectly aligned with that of
the American consumer.
Allow me to provide a snapshot of the value that
independent distributors offer and contrast that with other
beverages. Think about walking down the beer aisle in your
favorite store. Think about the vast choice and selection right
on the store shelves, from the most familiar and iconic
national brands to imports from around the world and new,
innovative American craft beers.
Now, head over to the soft drink aisle. You pretty much
have a choice between two suppliers. Quite a contrast between
the beer aisle and the soft drink aisle.
There are concerns that the proposed acquisitions could
result in less craft beer and fewer imported brands getting to
market and on the trucks of independent distributors. For one
thing, consider ABI's recent purchase of some independent
distributors. Anheuser-Busch InBev is the fastest growing
distributor in the country. The very day that the merger was
revealed, it was announced that the Department of Justice and
the California Attorney General were investigating some of the
recent ABI acquisitions of its independent distributors. Some
have suggested that ABI's business tactics could stifle growth
for independent distributors who represent brands that are not
approved by ABI.
It's also worth noting that the Department of Justice
placed restrictions on ABI's previous acquisition of Modelo to
protect distributors and consumers. ABI claims that the
proposed MillerCoors divestiture solves any competitive
problems, yet some have cast doubt that the proposed sale of
SAB's stake in the Molson Coors joint venture would be an
effective remedy.
Recent studies have shown that mergers often fail to
deliver true consumer benefits, and the Modelo deal actually
underscored the limitations even of judicial intervention to
reach a reasonable remedy that included vertical restraints. In
order to ensure that a combination with the size and scale of
this one does not disrupt the American beer market, DOJ needs
to do the following:
Number one, protect independent distribution by prohibiting
any termination of local distributors as a result of this
global combination. Number two, DOJ must make certain that
these independent distributors are free to provide their best
efforts to all brewers and importers.
Let me say that again: DOJ must ensure that these
independent distributors are free to provide their best efforts
to all brewers and importers. I look forward to answering your
questions, and thank you for the opportunity to join you this
morning.
[The prepared statement of Mr. Purser appears as a
submission for the record.]
Chairman Lee. Thank you, Mr. Purser. Mr. Wilson.
STATEMENT OF J. WILSON, MINISTER OF
IOWA BEER, IOWA BREWERS GUILD, PRESCOTT, IOWA
Mr. Wilson. I would like to thank the Subcommittee as well
as my home Senator, Chairman Grassley, for this opportunity. I
speak on behalf over 50 IBG members and perhaps thousands more
small brewers around the country that share our concern over
the proposed Anheuser-Busch InBev, or ABI, acquisition of
SABMiller.
Our disquiet is two-fold. If this deal is allowed to
proceed, growing craft breweries in Iowa and elsewhere fear
difficulty with access to both market and raw materials.
Critical to our success, a licensed and regulated alcohol
beverage distribution system was designed following the repeal
of Prohibition to curtail overly aggressive sales and marketing
practices. With the help of this independent wholesale tier,
our members have created new Iowa brands and helped the U.S.
craft beer industry grow from 0 to 11 percent of the market
since the 1970s.
Our colleagues in the wholesale tier in Iowa and around the
country have embraced the diversity that craft beer offers
their portfolios in a time when palates are shifting, and
consumer knowledge and demand are asking that these beers be
made available to them. Like many brewery owners I have spoken
to, independent wholesalers have also expressed their
apprehension about the power a larger ABI would hold over the
market and especially the distribution tier.
With deep pockets already allowing ABI to hold sway over
many wholesalers on marketing incentives, the amount of
influence a combined company of this magnitude would have over
market access is startling. This is especially the case given
ABI's past actions toward vertical integration in countries
like Brazil and efforts currently to procure wholesalers here
in the U.S.
Currently the United States' fastest growing wholesaler,
ABI has acquired 12 independent distributors in nine States
since 2012. In addition, according to a June 2008 article in
the St. Louis Business Journal, Busch family members personally
own five additional ABI distributorships in three more States,
carving out market shares as high as 74 percent. One of those,
Krey Distributing Company, made headlines in the St. Louis
Post-Dispatch in March 2013 when it dropped six craft breweries
from its portfolio.
While Krey asserted that these brands were underperforming,
Wolfbrau House of Beer owner Ryan Wolf indicated in the article
that Krey wouldn't deliver the craft beers he had ordered, and
I quote: ``I have not had a single case of 2nd Shift in here in
almost a year despite the fact that I ordered three varieties
every week, week after week, for 6 months,'' end quote.
Due to my proximity and friendship with the owners of one
of the affected breweries--Nebraska Brewing Company--I am privy
to how their situation was handled--poorly--and at this time,
they no longer sell their award-winning beers in the St. Louis
market.
Washington State's beer market has been hit especially hard
by ABI's aggressive tactics after ABI acquired Anheuser-Busch
Sales of Washington, or ABSW.
According to Heather McClung, the Washington Brewers Guild
board president, ABSW's hostile tactics have grown so egregious
that they have now drawn the attention of and an investigation
by the Washington State Liquor and Cannabis Board. Please refer
to my written testimony for specific examples of what is
happening in Washington State.
While market access is an ongoing battle that small craft
brewers have infiltrated by offering a wide range of locally
produced, flavor-forward products, the ability to produce or
package them could soon be hindered if the merger is allowed.
This megabrewery would have an even greater impact on brewing
inputs such as malted barley and hops and packaging materials
like bottles and cans. The hop supply is already tenuous, and
while malt production can easily be increased, expansion of hop
acreage is costly and hop plants take 3 years to reach
maturity. If there is a hop shortage, the price per pint will
undoubtedly rise for consumers.
As the craft brewing industry continues to represent true
job and sales growth in an otherwise flat sector, craft
breweries may encounter problems if this acquisition proceeds.
I favor healthy competition, but a merger of this magnitude
could impact supply access and threaten the wholesale tier of
the system. I urge you to protect competition and consumer
choice in the beer market by recommending the divestiture of
ABI-owned distributors, a halt to incentives designed to push
other brands out of ABI distributorships, and a careful
monitoring on how the transaction will impact raw materials.
Thank you.
[The prepared statement of Mr. Wilson appears as a
submission for the record.]
Chairman Lee. Thank you, Mr. Wilson. Dr. Moss.
STATEMENT OF DIANA L. MOSS, PH.D.,
PRESIDENT, AMERICAN ANTITRUST INSTITUTE,
BOULDER, COLORADO
Dr. Moss. I would like to thank Chairman Grassley, Chairman
Lee, Ranking Member Senator Klobuchar, and the Members of the
Subcommittee for holding this hearing. I appreciate the
opportunity to share the American Antitrust Institute's views
on competition in the U.S. beer industry and the proposed
merger of ABI and SABMiller.
My final testimony highlights the landscape of the U.S.
beer market against which this proposed merger will occur.
There have been five major mergers in the last 10 years. ABI
and MillerCoors account for over 70c, if over 70 percent of the
U.S. market. There is now economic evidence of price increases
for beer in the wake of previous mergers even against declining
demand for popular, mass market beer.
These developments pose real challenges for competition and
consumers, particularly in regard to the downstream part of the
supply chain--distribution. For consumers that prefer
traditional mass market beers or the craft beers that have
emerged from a growing entrepreneurial business model, the goal
should be to ensure competitive prices, choice, innovation, and
quality.
We know that the ABI/SABMiller merger would produce a large
increase in market concentration. We also know that the merged
firm would control wholesale distribution that is critical for
smaller rivals to get their products onto retail shelves. If
unremedied, the merger would result in stronger incentives to
exercise market power.
Given what we know, the debate is here not whether the
merger is likely to lessen competition in the U.S. market for
beer. Presumably, if the merger were not potentially harmful,
the parties would not have offered up front to divest
SABMiller's share of the MillerCoors JV. The AAI has,
therefore, focused attention on the substantive debate about
whether this proposal would make for an effective remedy.
For example, it is unclear--excuse me. An effective remedy
fully restores competition lost by a merger. But there are now
multiple examples of failed remedies, especially in highly
concentrated markets. In both Safeway/Albertson's and Hertz-
Dollar/Thrifty, buyers of divested assets proved unviable,
filed for bankruptcy protection, and fully or partially exited
the market. These cases are warning signs. In an ABI/SABMiller
merger, a well-crafted remedy would fully restore competition
lost by the merger at the same time it would promote
competition moving forward.
The parties may well reveal more of their divestiture
proposal to the DOJ when the time comes. Now, based on publicly
available information, it is not clear how or whether the
current divestiture proposal will accomplish this important
objective.
For example, it is unclear how the independent distribution
contracts currently controlled by MillerCoors will be handled
as part of a divestiture proposal. As compared to ABI,
SABMiller has reportedly taken a less adversarial approach to
distributors that carry rival brands. The loss of this dynamic
after the merger is important. It should focus attention on the
distribution policies that Molson Coors will adopt when it
takes control of all the MillerCoors assets and contracts.
There is also concern that the proposed divestiture not be
a moving target. Public announcements regarding the closure of
the MillerCoors plant in Eden, North Carolina, raise questions.
Is it a preemptive attempt to withdraw capacity from the
market? It would change the package of assets that Molson Coors
takes control of. Could this affect post-merger incentives and
dynamics?
It is also unclear what SABMiller brands not currently
imported into the U.S. might be imported after the merger. A
changed portfolio of post-merger brands, particularly one that
includes more craft beers, could change incentives for
strategic conduct by the merged company toward smaller rivals.
These are major sources of uncertainty over the proposed
divestiture. Given the magnitude and implications of an ABI/
SABMiller merger, the AAI believes more specificity is needed.
A fully effective remedy would, at a minimum, address at least
a number of issues.
For example, a remedy would create a fully independent
Molson Coors. Molson Coors would, therefore, not depend in any
way on ABI for contract brewing of former MillerCoors brands or
similar supply agreements for any services.
Equally important is to ensure the independence and
impartiality of the independent wholesale distribution channel.
Policies designed to incentivize independent distributors to be
exclusive or to discriminate against smaller rivals would be
prohibited.
ABI and Molson Coors should also compete head to head in
the independent distribution channel, minimizing any
opportunities for tacit coordination. As such, some thought
should be given to whether distributors can carry both ABI and
MillerCoors brands.
These are just a few considerations that will factor into a
remedy that will fully restore competition lost by the merger.
There are likely to be other considerations should a merger
review proceed to that point. Thank you very much for the
opportunity to testify.
[The prepared statement of Dr. Moss appears as a submission
for the record.]
Chairman Lee. Thank you, Dr. Moss. Mr. Hunter.
STATEMENT OF MARK HUNTER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, MOLSON COORS,
DENVER, COLORADO
Mr. Hunter. Good morning, Chairman Lee, Ranking Member
Klobuchar, and Members of the Committee. My name is Mark
Hunter, and I am the CEO of Molson Coors Brewing Company. We
are a U.S.-listed company principally based in Denver,
Colorado, with a brewing heritage that goes back well over 200
years, and I appreciate the opportunity to explain our role in
serving as the solution to U.S. antitrust concerns related to
the proposed AB InBev/SABMiller merger.
Let me say up front that our transaction does not injure
competition but enhances it. Molson Coors' purchase of the
remaining interest in MillerCoors means ABI gets nothing in the
United States. MillerCoors will remain unchanged after the
merger. The only difference is that Molson Coors would be the
single U.S. owner rather than a partial owner of MillerCoors.
Having played a crucial role in the direction of this
business for the past 7 years, there is no company more
knowledgeable than Molson Coors to operate it going forward.
Now, before I get into specific comments, I would like to
tell you about Molson Coors, the creation of MillerCoors, and
how we help support competition in this increasingly dynamic
beer industry. Molson Coors was created in 2005 and brought
together the family brewing legacies of John Molson in Montreal
and Adolph Coors, who set up his first brewery in 1873 in
Golden, Colorado.
In 2008, we formed the MillerCoors joint venture with
SABMiller to create a more effective number two player in the
U.S. beer market. At that point, all of SABMiller's U.S.
operations were contributed to the joint venture. We have 50/50
governance rights and split the economic interest, with Molson
Coors owning 42 percent and SABMiller owning 58 percent.
MillerCoors has approximately 8,000 U.S.-based employees
and pays more than $1.1 billion in annual compensation and
benefits. We spend more than $5 billion annually for goods and
services and pay more than $1 billion in Federal excise taxes.
MillerCoors goes to market in the U.S. through an
independent network of 569 distributors who know how deeply we
value the three-tier system, and we have received positive
feedback from these distributors because they also know they
can continue to have access to a wide range of beer brands,
including craft brands.
By way of example, MillerCoors owns only one distributor,
which distributes 625 brands, from 29 suppliers, and almost 67
percent of these brands are craft brands. To be clear, we have
no intention of purchasing other distributors. Both MillerCoors
and Molson Coors take seriously our role as an economic growth
engine for our employees, our communities, and the many
businesses that support us. This will only be enhanced through
single ownership of the U.S. business.
For example, growth would allow MillerCoors to boost
production at its nine U.S. breweries, including the
Leinenkugel brewery in Wisconsin. It would open up
opportunities to purchase more barley from the four Western
States and North Dakota and malt more barley in Minnesota. And
it would allow the company to spend more on hops from
Washington as well as corn from Iowa and Illinois.
Although we and SABMiller have been successful in building
MillerCoors into a strong number two player in the U.S., it's
important to note how much the beer industry has changed since
we set up the JV.
The craft brewing industry in the United States has grown
very rapidly over the past few years. As of June of this year,
there were 5,525 active brewery permits registered with the
TTB, and the growth of craft has helped create a renaissance in
beer and has created a far more diverse and competitive
marketplace.
In closing, nothing changes for our consumers, our
customers, our distributors, or our communities as a result of
our purchase of SABMiller's ownership interest in MillerCoors.
It will not change consumer choice, it will not change the
competitive pricing environment, and it will not change our
market share or our longstanding support for the three-tier
system. It will not change our support of U.S. growers and
suppliers, and it will certainly not change the explosive
growth of craft brewers or their access to the market through
the MillerCoors distributor network.
The transaction will allow us to simplify decision-making
and reduce the complexities of dual ownership. It will allow us
to become a more integrated and efficient brewer. In simple
terms, MillerCoors will evolve from two shareholders--SABMiller
and Molson Coors--to one shareholder--Molson Coors. Molson
Coors is a U.S.-listed and domiciled international brewer. It
is still served by our founding families and, despite being the
third largest brewer globally, will have 70 percent of its
profit generated in the U.S.
On behalf of Molson Coors, I thank the Committee for
inviting me to appear and testify today, and I am happy to
answer any questions that you may have. Thank you.
[The prepared statement of Mr. Hunter appears as a
submission for the record.]
Chairman Lee. Thank you very much. Thanks to all of you for
your statements.
I will now start the questioning. I would like to start
with Mr. Pease and Mr. Purser. Gentlemen, the two of you have
each identified concerns relating to the way that AB InBev
interacts with its distributors, suggesting that this
acquisition could make that situation worse.
Now, if AB InBev is not acquiring any assets in the U.S.,
how will this deal have any impact on distribution? And going
along with that, can you identify any way in which--in which
this transaction in particular will lead to any new problems or
any more severe existing problems for distributors? And also
going along with that, along the same vein, isn't it true that
AB InBev's negotiating leverage will be no greater the day
after this deal closes than the day before? We will start with
Mr. Pease and then go to Mr. Purser.
Mr. Pease. Thank you, Senator. Well, I think you have, you
know, to examine that question from a variety of perspectives.
The combined company that could come out of this merger will
now control 58 percent of the global profit pool in the beer
industry. This is a $107 billion deal. This is the fourth
largest merger of all time. Our biggest concern will be that
the company like this will be able to use its increased market
power to even greatly--further greatly influence the
independent distributors that ABI interacts with. The Anheuser-
Busch incentive programs that currently are in place, while we
certainly understand incentivizing your distributors to sell
their products, but it seems to us that at some level some of
those incentive programs are more designed to encourage their
distributors not to sell the products of the independent
smaller players, and we feel that is anticompetitive.
Chairman Lee. Mr. Purser.
Mr. Purser. I would--I would echo the sentiments as it
relates to the increase in the global profit pool. By
comparison, if you look at the distinction of 57 percent of the
global profit pool with a newly combined ABI/SAB compared to
its largest American contributor--competitor right at three
percent, that's a big disparate competitive disadvantage as it
relates to share of the global profit pool.
But I also think you have got to move on and look at recent
behaviors. You have got to look at the recent Modelo
acquisition and the supplier behavior as it relates to what's
being investigated in California. What, I think, you want to do
is ensure that the remedy is sufficient to ensure that you
don't have additional problems.
There's a lot of talk about carrots and sticks and the
whole notion of incentives. There is a very fine line between
an incentive program and when that incentive can switch and
become actually, you know, a stick that is held over an
independent distributor.
Chairman Lee. Mr. Brito, as we have heard, one of the
concerns regarding this acquisition is that the deal will have
some impact on beer distributors right here in the United
States. Can you respond to that concern generally and also
answer the question of whether AB InBev's acquisition of
SABMiller is likely to trigger the renegotiation of AB InBev's
distribution contracts or change those relationships in any
way?
Mr. Brito. Well, thank you, Chairman, for the opportunity
to clarify. This transaction is really about the rest of the
world. It is not about the U.S., so much so that we sold
whatever assets were owned by SABMiller to Molson Coors the
same day we announced the global transaction. This transaction
is really about getting access to markets where today we have
no presence, like Africa, parts of Asia, parts of Latin
America. And, again, because of that, there will be no impact
on the way we conduct our business in the U.S.
Chairman Lee. Okay. So, your response then to these
statements is that with respect to the U.S. market it's not
going to have an impact that is significant for U.S. antitrust
law purposes.
Mr. Brito. No.
Chairman Lee. Mr. Pease and Mr. Purser, how do you respond
to that?
Mr. Purser. Well, I think that the acquisition itself could
trigger terminations, and that is one of the things that we are
seeking, that is one of the things I tried to talk about in my
comments, is assurances that because of this global
combination, there will be no terminations of either company's
independent distributors, because if we all agree that
independent distribution facilitates competition, that ought to
be at the minimum something that is guaranteed as a condition
of approval for this transaction.
Chairman Lee. Okay. Senator Klobuchar.
Senator Klobuchar. Thank you very much, Mr. Chairman.
I think I'll start by following up on that. Both Mr. Brito
and Mr. Hunter have stressed that, due to the divestiture,
there is no impact on the U.S. market. Dr. Moss raised concerns
that under some States' laws a change in ownership structure
could create an opportunity to renegotiate or terminate
wholesaler relationships. There may be other issues that are
raised by the Justice Department with regard to distribution.
If it turns out that the divestiture creates opportunities
to alter relationships with wholesalers, are you willing to
agree not to take advantage of such relationships? Are there
conditions you would agree to that would assuage some of these
concerns to the--from the craft brewers and also from the
distributors?
Mr. Brito. Well, Chairman, in terms of our transaction, the
company that will change its ownership is SABMiller, because we
are going to be acquiring them. There will be no change in
ownership for our company, and, therefore, there will be no
trigger of any contracts in the U.S. market because, again,
this transaction is about the rest of the world, not about the
U.S.; therefore, no impact on the way we operate our business
in the U.S.
Senator Klobuchar. Okay. Mr. Hunter.
Mr. Hunter. Senator Klobuchar, I can confirm that certainly
from a Molson Coors and a MillerCoors perspective, there are no
anticipated changes. It will be very much business as usual at
MillerCoors. All that is happening is, as I mentioned in my
comments, the ownership of that business moves from two
shareholders--SABMiller and Molson Coors--to one shareholder--
Molson Coors. And business continues on a business-as-usual
basis. All of the brands that are currently available to all of
our distributors through the MillerCoors arrangement will
continue to be available. And I think it is very important as
well to just factor in the fact if you consider the Molson
Coors business, we started as a craft brewer in Colorado. We
know what it is like to build your business over the long term
in the United States of America. And we have a policy of
supporting the three-tier system. We only own one distributor.
And we welcome the renaissance in beer that we are seeing
through the growth in craft over the course of the last two
decades in particular.
Senator Klobuchar. The three of you there in the middle,
Mr. Pease, Mr. Purser, and Mr. Wilson, could you--it sounds
like a good law firm.
[Laughter.]
Senator Klobuchar. Could you--could you talk through, if
the Justice Department decides to approve this merger, what
kind of conditions you think would be helpful to you to assure
that the craft brewery industry can continue to grow and that
distribution is open and free?
Mr. Pease. Well, as I mentioned in my opening statement,
Senator, we believe that ABI should be required to divest its
wholesale operations and that they should also be forced to
limit these incentive programs which we feel exist now, which
already we feel are anticompetitive.
Mr. Purser. I would reiterate my concerns about ensuring
that there are no terminations of local distributors as a
result of this global deal, and that independent distributors
be guaranteed the freedom to give their best efforts to
competing brands. That's part of what competition is all about.
And, I think, part of this exercise is so important, and it's
very important for the Department of Justice as they review
this, but the old adage of ``Trust, but verify'' comes to mind
here. We want to provide assurances to help make certain that
we aren't looking a year from now at behavior that is somehow
anticompetitive.
Senator Klobuchar. Thank you. Mr. Wilson.
Mr. Wilson. I will come back to my final paragraph here. My
three asks were basically to protect competition and consumer
choice in the beer market by, you know, the divestiture of the
ABI-owned distributors, halt these incentive programs. We saw
just last Friday in the Wall Street Journal discussion about
some of their incentive programs that feel much less pro-sell
more ABI products and much more don't sell any of those, and
here's the opportunity, the financial opportunity, that you get
in exchange for that. Certainly careful monitoring of how the
transaction will impact raw material supplies, which is also a
concern.
Senator Klobuchar. Very good. And going back to that, being
from Iowa like you are, and as Mr. Hunter noted, there is
barley in Minnesota and there is corn in Minnesota and Iowa,
and maybe some barley, too, but could you talk about just how--
Mr. Hunter made the point he thinks we are going to have
expanded need for those raw materials because of the merger,
just because of the growth, and just how do you see it
impacting those--those products?
Mr. Wilson. Well, I guess maybe I could come back to a
comment that Mr. Brito made in his opening statement,
mentioning that there would be no increase in ingredient usage,
among other things, and to me that sounds like freezing
production and being happy with just exactly where they are in
the U.S. market. I guess, I mean, that's delightful if that's
the case, but that doesn't sound like somebody looking to
compete, I guess. That feels like just a simple statement that
comforts you in my view, I think. So, I guess they are
expecting us to take market share, and we are happy to do that.
Senator Klobuchar. Okay. You know what I think I will do?
Because I want to--I will have a second round here, and I see
our colleagues--and we will get back to this hops/barley
discussion. I know Mr. Brito wants to respond later in the
second round, so thank you very much. I appreciate it.
Chairman Lee. Senator Grassley.
Chairman Grassley. I have a short statement and only one
question now that we have had this discussion by my two
colleagues.
As a result of the growth of craft breweries throughout the
country, Americans are enjoying a tremendous variety of
options. Not only has this trend increased choices for
consumers, it has created new economic opportunities. In Iowa,
for example, the craft industry has grown from just one brewery
in 1985 to approximately 60 breweries today, and that expansion
has generated new businesses and jobs and also has spurred
tourism. So, it is important that we maintain robust and
competitive marketplaces.
We've heard concerns voiced by small and independent
brewers, as you have heard here today, but also from retailers,
independent distributors, and consumer advocates about this
merger to adversely impact inputs and supply chains,
distribution avenues, competition generally is a vibrant
market. Many of the concerns are about the increased leverage
that the combined company would enjoy and what that might mean
for the thriving industry as well as consumer choice and
products.
Obviously, the antitrust regulators will be looking at this
deal to determine whether there are any anticompetitive aspects
that need to be addressed. But it is important that we, in
Congress, have an opportunity to flesh out these concerns.
So, my one question is to Mr. Wilson, which basically gives
him an opportunity to expand on some of the things that he
can't do in those 5 minutes, and I would ask if they have
something to add, Mr. Purser and Mr. Brito, to share a
reaction.
Mr. Wilson, you've indicated in your testimony that small
and independent brewers are concerned about the proposed merged
company's ability to engage in anticompetitive conduct and
aggressive practices. Please give us some more specifics than
you have already expressed about your concerns with the
proposed merged company's ownership of multi-brand beer
distributors in some States and how that could impact market
access.
Mr. Wilson. Certainly. So, we've seen situations where
craft brands have been pushed out of--you know, the St. Louis
example that I gave earlier. If I were to scooch on over to
Washington State in the Seattle market, what we have seen are
some questionable tactics. One, craft breweries are certainly
being squeezed out of those distributorships. ABSW had a really
vibrant craft portfolio prior to the purchase, and now that has
been almost completely diminished, as I understand it.
One of the things that we've seen happen--there is no
problem with buying paid advertisement with, say, the football
stadium in Seattle, but there is terminology that I guess is
better left for somebody at a higher pay grade than me to
determine what that means, but no undue influence, and so the
number of ABI or ABI-sanctioned or approved brands on sale at
the football stadium is awfully skewed toward ABI. There is
another similar deal, not exactly, as I understand it, paid
advertisement but a, quote-unquote, alignment deal with a large
music--most of the large music venues, and they are almost 100
percent ABI products, and that's one that I believe is being
investigated out that way.
Chairman Grassley. Mr. Purser and Mr. Brito, do you have
anything you want to respond to that?
Mr. Brito. Yes, sure. I think in terms of supplies, that's
a very important issue, and I would like to bring to the
attention of this Committee some numbers in terms of supplies.
First, this deal will have no impact in the U.S. business
and, therefore, will have no impact on the amount of supplies
we purchase and procure today. For example, in hops, we
purchase 8 percent of the hops in the U.S. Eight percent. Okay?
On cans, we purchase--we manufacture some, but in the open
market we purchase 12 percent of the cans available in the
marketplace. In barley, we purchase 25 percent of the barley
available in the marketplace, and all those figures will remain
the same pre- and post-transaction. And in terms of bottles, we
purchase in the open market 27 percent of what's out there.
So, all those numbers will remain the same and will have no
impact because, again, this transaction is about the rest of
the world.
Chairman Grassley. I will yield back my time.
Chairman Lee. Thank you, Senator Grassley. Senator
Blumenthal.
Senator Blumenthal. Thanks, Mr. Chairman, and thank you and
Ranking Member Klobuchar for having this hearing on a very
profoundly important topic. I want to thank our witnesses for
being here today, all of you with diverse and different
viewpoints. Mr. Brito, thank you for making the trip from
Connecticut today. We welcome you, and thanks for your
involvement in our community in Connecticut.
I want to say that I am a nondrinker, so I have to disclose
that fact right at the outset, although our four children I
think at various points may have imbibed. And I have had the
privilege of visiting a number of our brewers in Connecticut--
Thomas Hooker Brewing Company, Blackie's Brewing Company--and
have hosted here in Washington, DC, a number of others--Two
Roads Brewing Company, Shebeen Brewing, Stony Creek Brewery. In
fact, I am going to ask, if there is no objection, to enter the
list of Connecticut brewers, which is very extensive, into the
record because I am very proud of them.
[The information appears as a submission for the record.]
Senator Blumenthal. Let me be very blunt. What we have seen
over the past years is a trend toward mammoth beer behemoths in
our market, and the result has not been a happy one for many
consumers. As you remarked, Dr. Moss, what we have seen as
consumers is higher prices. Whatever the complex analyses may
be of the market and the metrics and the legal issues, through
the eyes of consumers, the result has been higher prices. These
mega mergers may have been good for shareholders, but not so
much for beer drinkers.
So, I think we need to be very careful here and to regard
with a high degree of skepticism the kind of conventional
divestiture that is proposed as a remedy. And I would urge the
Department of Justice to think beyond the divestiture that has
been proposed to other safeguards for consumers, because I
think that this merger has tremendous ramifications for
consumers here, despite the representations--and I take them in
good faith--that there will be no impact on the U.S. market.
Maybe not on day one, but on day two and three and year two and
three, the ramifications could be huge. And we have seen this
movie before in the airline industry, to take one, and it may
not end all that happily for consumers.
So, let me just be very direct, Mr. Brito. You've heard Mr.
Purser say that what he is looking for--and I think I am
quoting almost directly--is that there be no termination of
independent distributors. Will you commit to this Committee
that there will be no termination of distributors as a result
of this merger?
Mr. Brito. That is a very good point, Senator, and thank
you for the question. Again, this transaction is not about the
U.S. It's about the rest of the world, and, therefore, and
therefore nothing that relates to the transaction, to this
transaction, will impact any distributor.
Senator Blumenthal. And I don't mean to be impolite, but I
take that as a ``no'' answer. You can commit to this Committee
there will be no termination of any distributor and no
renegotiation that will end contracts with any distributors. Is
that correct?
Mr. Brito. Yes, I can commit as a result of this
transaction there will be no such a thing.
Senator Blumenthal. And let me ask you, ABI intends to own,
you have said in your testimony, no more than 10 percent of its
distribution. Can you commit to maintaining no more than 10
percent?
Mr. Brito. That's correct. I mean, that is our commitment
we have out there in the marketplace with our wholesalers, our
investors, our stakeholders in general, around 10 percent. And
today, by the way, Senator, if I could expand a little bit, we
are between 7 and 8. So, we said 10. It could be 7 or 8; it
could be 11 or 12. But it is going to be around 10. That I can
commit.
Senator Blumenthal. Well, 11 or 12 is different from 7 to
8. If you----
Mr. Brito. That is why we said ``around 10.''
Senator Blumenthal. You said it would be no higher than 10
percent.
Mr. Brito. That is why we said ``around 10.''
Senator Blumenthal. And let me ask, furthermore, in terms
of retail penetration, can you commit that there will be no
effort to penetrate the retail market?
Mr. Brito. Well, what we have done in terms of the retail
market--and I thank you for the question. The three-tiered
system in the U.S. is regulated at the State level, so 50
different States, 50 different sets of regulations. So, in some
States, for example, 15 States, brewers can own wholesalers. In
the others, we can't. In other States, we can own brew pubs. In
some others, we cannot. So, we comply with the law. We have
been owning wholesalers for more than 100 years, and let me
tell you why we do this. The beauty of this is that if you own
a couple wholesalers--and, again, it is 7 to 8 percent of our
volume, and it is going to be around 10 percent; that is our
commitment--you are able to develop people within the company,
our colleagues, that understand the distribution system, that
understand the second tier, and, therefore, are able to talk to
wholesalers on an equal basis because they face their realities
that our wholesalers face on a daily basis in our company-owned
wholesalers.
So, that's the reason why we have been in this business for
100 years, because it provided us the knowledge about being
closer to the market and being able to talk and understand
wholesalers in a much better way.
Senator Blumenthal. My time has expired. I thank you for
that.
Mr. Brito. Thank you very much.
Senator Blumenthal. And I look forward to the second round.
Thanks, Mr. Chairman.
Chairman Lee. Thank you, Senator Blumenthal. Senator
Perdue.
Senator Perdue. Thank you, Mr. Chairman. I appreciate you
guys being here. I just have a couple quick questions.
Look, I appreciate the fact that we are here on an
information basis talking about antitrust and the consequences
on not only consumers but also investors--without one, the
other doesn't exist--and also with your employees, really
fulfill the three stakeholders that you as CEOs have to deal
with. I just have a question for the two people who are going
to make this deal happen, possibly, Mr. Brito and Mr. Hunter. I
would like both of you to respond.
Why is the 10-percent number, Mr. Brito, important to you?
In other words, I know that number just does not come out of
the air. And when you look at going vertical, there is balance
in your own business when you look at the matrix you have to
deal with, going across products and across countries. Talk to
me just a little bit about how that calculation--why that is
important.
Mr. Brito. Sure. Thank you. Thank you for the question.
Again, if you look at the last few years, Senator, our volume
done through our company-owned wholesalers has always been
around 7 to 8 percent. So, we said around 10. And the reason
for having those wholesalers, company-owned wholesalers, I
explained to Senator Blumenthal, is that we can develop people
that understand that business.
But the biggest asset we have other than our people and
brands is our wholesalers in the U.S. These are savvy business
people, independent business people. They carry, by the way,
competitive brands. They can carry whichever brands they want.
They are non-exclusive, totally open, and they are amazing.
They really execute in the marketplace, and they really build
brands in the marketplace.
So, our intention is to continue to have the bulk, that is,
90 percent of our volume, being done by the savvy, independent
entrepreneurs as opposed to our people. Our people, it is good
because we learn about the business, and we can talk to them
and exchange best practices in a more direct way.
Senator Perdue. Thank you. Mr. Hunter, do you have anything
to add to that?
Mr. Hunter. Senator, the only thing I would add is that
currently we own one distributor. It is a local distributor in
Denver. And I can commit that certainly at this stage we have
no plans to extend our direct ownership and distributor
network. We partner with 569 distributors. We rely on them as
business partners. They take our brands to market, and they are
the face of our company in their local markets. We are strong
advocates of the three-tier system, and certainly under Molson
Coors ownership there will be no change at MillerCoors.
Senator Perdue. In one of the recent communications to your
shareholders, you talked about the synergies of this deal. Can
you explain a little bit more in detail about what those
synergies are from your perspective, your shareholder
perspective?
Mr. Hunter. Certainly. Our aspiration is to be a growth
business. We want to be a stronger, more assertive competitor
in the United States, and we believe that under the ownership
of one shareholder, Molson Coors, we can move with more pace,
and we can build our business to be a long-term stronger
business in the United States.
One of the advantages that we have on the back of this deal
is that we can start to look at our network from a North
American perspective. We have a big business in Canada, so when
it comes to breweries, distribution, procurement, shared
services, and our ability to move our brands between markets
more quickly, that will make us certainly a more able
competitor in the marketplace.
Senator Perdue. So, one of the most important pieces of
your business, as I understand it, is procurement of raw
material--the hops, the barley, et cetera. Do you anticipate
any impact, both CEOs, on the agricultural business by this
transaction? And have you heard from any of your primary
suppliers of barley, hops, other agricultural commodity
providers? Do you want to start, Mr. Hunter, since your light
is on?
Mr. Hunter. Sure. I would anticipate an impact, if I am
successful and the business is successful, when we grow our
business on the basis that we go to procure more in the United
States. We have longstanding relationships with barley owners
in a number of States, and Pete Coors still regularly visits,
and we have long-seated personal and business relationships
with those barley growers. Interestingly, the National Barley
Association has said this deal will have no impact in terms of
availability of raw materials.
There is a pinch point at the moment in the hops market.
Craft brewers have been growing very successfully. They are
about 12 or 13 percent of the market. They are using about 50
percent of some variations of hops because they are very
flavor-forward beers. So, clearly, some work needs to be done
there to improve some of the supply chain management and
procurement and forecasting, but generally there's no issue
with availability of hops. And certainly from bottles, as you
heard from Mr. Brito, the glass manufacturers have said that
there is no issue with supply. And aluminium, or aluminum, is
certainly something that is not controlled by us. It is a much
bigger game in the global market, and, interestingly, Bill
Coors, who was 99 back in August, the grandson of our founder,
invented the aluminum can. So, some things that is close to our
heart, but we see no pressure in that part of the market from a
supply point of view.
Senator Perdue. Thank you. Mr. Brito.
Mr. Brito. Yeah. Since this transaction will have no impact
in the U.S. market--it is about the rest of the world--what we
procure today in terms of supplies and raw materials will be
the same pre- and post-transaction. So, for example, today we
procure 8 percent of the hops supply in the U.S. That will not
change. Of course, as we grow the business, yes, but as a
result of the transaction, it will not change. We procure in
the open market 12 percent of the cans because we also self-
manufacture cans. That will not change. We procure 25 percent
of the barley. That will not change. We procure 27 percent in
the open market of the bottles because we also produce some on
our own, and that will not change.
So, there will be no change or pressure in any supply
system in the U.S. as a result of this transaction.
Senator Perdue. Thank you. Thank you, Mr. Chairman.
Chairman Lee. Senator Coons.
Senator Coons. Thank you, Chairman Lee and Ranking Member
Klobuchar, and thank you to all the witnesses for your presence
here today and for testifying on this important subject matter.
Craft breweries are an important part of my home State of
Delaware. From Dogfish Head to Twin Lakes to 16 Mile, we have
got some great craft brewers that are creating jobs and
innovating new products and, frankly, brewing some great beer.
And I think we all want to make sure that we have an open
marketplace in which they can continue to thrive and grow and
where we safeguard their ability to compete on a fair and level
playing field and where we also maintain access to distribution
options and consumer choice. So, I just want to make sure I
have asked some relevant questions on that as we consider this
very large merger.
Mr. Brito, in the wake of increased competition from
independent brewers, ABI has made an effort to acquire craft
breweries and distributors, and some have suggested ABI is
using these acquisitions to constrain some of the distribution
channels of competitors, including craft breweries.
How do you respond to these questions, these allegations?
And will ABI be using profits from the merger to continue the
process of acquiring craft brewers and their related
distributors?
Mr. Brito. Well, thank you for the question. I think the
facts can help us here.
In terms of the 4,000 breweries that we have in this
country and opening two a day, we own five, and we have a
minority stake in a sixth one. So, let us say five plus a
minority stake. So, the reason we do that, just like we do with
our company-owned wholesalers, is that we can learn from those
amazing entrepreneurs who created brands and how they connected
to local constituencies so that we can learn from that. We
build our company by learning from others, so that's one thing.
In terms of--in terms of WODs, out of the 500-plus
wholesalers that are so-called AB wholesalers, we own 21, and
we do 7 to 8 percent of our volume through those WODs. And the
reason for owning those WODs--and we have owned them for more
than 100 years--has been always to learn and develop people
through the WODs so they understand the marketplace.
But what I can say is that, first, this transaction has no
impact on the U.S. market, and the U.S. market has never been
so competitive and so open. I mean, never--if you walk down the
aisle of your grocery store, I bet you'll find more options
than you would 5 or 10 years ago. So, that attests to the fact
that this market is very open, very fragmented, and craft beers
have no issues in finding ways to get to the shelves. I would
like to remind the Committee that 35 States out of the 50
permit or allow some sort of self-distribution of beer. And
other than that, in any market you go, you have at least two or
three or four wholesalers, one being ours.
So, there are many options to distribute. And wholesalers,
let me tell you, 94 percent of our wholesalers carry
competitive brands, and what a wholesaler wants at the end is
to carry brands that consumers want to buy and customers want
to stock. And that's what they do. That's why the craft brewers
have been growing.
I would offer one last comment. When you think about it, we
have been in the business since 1852, so more than 160 years.
And together with our wholesalers, we have built a whole
system--trucks, warehouses--to get products from breweries to
shelves. And the craft brewers have been enjoying that system
that was set by others, and I think that's the beauty of the
American market. It's a very open market, and nothing in this
transaction will change the competitiveness and the openness of
the U.S. market.
Senator Coons. Thank you. Mr. Pease, nobody wants to take a
seat at a bar and discover their only choices are between a Bud
and a Miller. We want to continue the dramatic growth in craft
breweries, in opportunities for consumers, and in the jobs that
they create. And I found the testimony of Mr. Brito
encouraging, but I would be interested in hearing your view on
how these huge international companies and their potential
mergers may or may not impact craft breweries, distributors,
and the impact on consumers. Have your companies faced
competition or challenges due not only to ABI's ownership of
distributors but also due to some of their use of market
pressure on distributors?
Mr. Pease. Thank you, Senator. I think there's--you have
to, again, look at that question from a variety of different
levels. I think fundamentally Mr. Brito and I probably differ
on the degree of independence that currently exists at the
distribution tier. I think everyone has to keep in mind that my
members, by and large, are required by State-based regulation
to use a distributor to get their beer effectively to a
retailer. Self-distribution is an option in some States, but
usually that is very limited.
If you want to grow your business as a craft brewer, if you
want to get your beer into a chain store, if you want to get
your beer into the stadium, you need to use the Anheuser-Busch
distributor or the MillerCoors distributor. Those are the only
two options in most markets that have the horsepower to
effectively bring your beer to the retail market.
If the ABI distributor is a wholly owned distributor, which
it is in nine States, then that option is pretty much
effectively shut off for a craft brewer, so then you are down
to really just the MillerCoors distributor.
So, at the end of the day, we don't feel the existing
playing field is exactly level, and we're very concerned that
the increased market power of the combined entity will be able
to further influence the distribution tier to the disadvantage
of Dogfish Head, 16 Mile, you know, companies like that.
Dogfish Head now employs over 200 people in Milton, Delaware,
and we just want to make sure that those American success
stories are not negatively impacted by this merger.
Senator Coons. Well, thank you. If I might, Mr. Chairman,
could Mr. Purser just comment on that same question in closing?
I know we are running tight on time, but do you agree with that
same assessment about the access to distribution options?
Mr. Purser. I think that there is a scalability that comes
with a more established distribution network, and the
MillerCoors and the Anheuser-Busch InBev distribution networks
are more established. They have got that access to scale. That
is part of the economic reality.
Interestingly, those networks were preceded 50 years ago
with different brewers, you know, with Schlitz or Falstaff or
built on other brand names that once upon a time were more
dominant players. Beer's history was more bifurcated. There
were more regional players, a whole host-we could wax poetic
and open a couple of cold ones and talk about the history of
beer in America. Oh, I see somebody is getting a head start
there.
But in all--but in all seriousness, the outlets and the
access need to be maintained through these independent
channels. And when you do have the presence of a company-owned
distributor, that precludes the ability of some of those
products to get to market. And sometimes, Senator, even the
presence in a State of a small player can limit the ability of
some of those brands to get to market because when some of Mr.
Pease's members want to go into a new State, when Dogfish Head
was growing and getting established, they would decide to go
into a State, and they might make an investment or make a
decision based on an entire statewide network with one of the
legacy brewers. And if one of--some of those legacy brewers are
owned by their competitor, they may choose--they may in their
mind only have one choice, or they may not choose to enter that
State that has a company-owned presence in it.
Senator Coons. Thank you. Dogfish Head is celebrating 20
years, and I recognize that there are other players who are
decades older or a century older. What we're just trying to do
here, Mr. Chairman, is make sure that we preserve
competitiveness, a level playing field, and opportunities for
our consumers and constituents.
Thank you all very much.
Chairman Lee. Senator Tillis is next, but I wanted to
comment briefly. They're about to call a vote in a few minutes,
so I'll be leaving in a few moments to go vote. I'll come back.
Senator Klobuchar will chair while I am gone, and we will sort
of trade on and off while we continue the hearing. Senator
Tillis.
Senator Tillis. Thank you, Mr. Chair. Dr. Moss and
gentlemen, thank you for being here as witnesses.
As everybody has bragged on their States, I have to brag on
North Carolina. We have got nearly 150 microbrews now. In fact,
over about the last 5 or 6 years, we have also added Sierra
Nevada, Oskar Blues, and are about to bring New Belgium online.
So, this is obviously a very important industry to our State.
As a matter of fact, App State is offering now a bachelor's
degree in fermentation sciences.
I actually want to go to a more parochial issue for the
State of North Carolina. I think my colleagues have done a good
job of covering the broader landscape. Mr. Hunter, I would like
to maybe start with you. I have got a letter signed by about
115 of the State legislators and a similar letter from the
Governor that I am going to submit for the record and provide
you with an opportunity to respond to the specific questions.
But I do want to go back and ask one that is a consistent theme
with some of the people I have heard from back in my State.
They feel like that the decision to close the Eden plant--
for those of you who are not familiar, this is a plant that has
been in North Carolina for about 30 years, employs about 500
people, that is going to be closed. Many of them believe that
there is a curious timing between the announcement of the
merger and the announcement of the closing of the plant
sometime next year. Can you explain the timing of the
announcement of the merger and the decision to close the
brewery and when the decision was made to close the Eden plant
and whether or not it had anything to do with the merger
discussions? And, Mr. Brito, I will ask you, just for the
purposes of closing the loop at the ends of the witness stand?
But with you, Mr. Hunter?
Mr. Hunter. Thank you, Senator Tillis, and let me start
with your last question first. The merger discussions that
emerged between SAB and ABI had absolutely no impact at all on
the discussions that had been taking place for a long period of
time within the MillerCoors organization with regard to how we
manage our brewing network and our brewing infrastructure.
So, to get to the specifics, the board and executive team
of MillerCoors had been reviewing our brewing requirements for
quite a significant period of time, at least a year, as they
have been building through their 2015 plan, so through the
middle part and toward the end of 2014 had been discussing and
looking at some of the challenges within the MillerCoors
business.
Since the MillerCoors business was created in 2008, the
business has lost about 10 million barrels in total volume, and
if you look at our brewery network, that meant that many of our
breweries were underutilized, not performing efficiently or
effectively. And the decision was taken that one of the
breweries would need to close to take some capacity out of our
network to ensure that our network was efficient so we can
compete effectively.
As you can imagine, long discussions, because these are
probably the last kind of discussion any business wants because
it affects our people, and we were faced with a decision that
we have a very modern brewery in Shenandoah, about 180 miles
away from Eden, which has been well invested. And we had to
look at routes to market, our geographical footprint and
presence, and the decision was made as we came into 2015 to
close the Eden brewery. And, clearly, something like that then
takes months of planning to ensure that all of our
communication and all of the welfare considerations for
employees are put in place effectively. And it was nothing more
than coincidence, and clearly I am certainly not party to ABI's
intent and their approach to SAB. It was pure coincidence that
our announcement occurred at roughly the same time that ABI
announced that they had approached the board of SAB. It was
further, I think, 4 or 6 weeks after that date before ABI and
Molson Coors connected to talk about a remedy in the U.S. So,
the two events are in no way connected.
Senator Tillis. Mr. Brito, from your side of the
discussions, was there any, to your knowledge, any discussion
between the two entities with respect to the disposition of the
Eden facility?
Mr. Brito. No, never.
Senator Tillis. The only question I would have--and I think
it is very important, Mr. Hunter, that I think if you go at
least in reference to the letter that I received from the
president pro tem, they viewed the Eden plant as a state-of-
the-art facility, that it had had some capital improvements in
the recent past, and so many of the people down there are
wondering what the real differences are between, say,
Shenandoah, which would, I guess, take on some of the capacity
over time as your demand increases. So, it sounds like that at
a minimum there is a disconnect in terms of some of the
communications on the ground, and I think it is something
that's very important for us to look at. It is a significant
economic impact to an area that's already struggling, and as we
move forward, I'll pass on some additional questions I've
because I believe we are about to move to the vote, and the
questions from the legislative leadership, I look forward to
your responses.
Thank you. Thank you all for being here.
Senator Klobuchar [presiding]. Thank you very much,
Senator.
Senator Franken, from the home of 70 breweries, the State
of Minnesota.
Senator Franken. Yes, beer is very important to
Minnesotans, and I want to thank you, the Ranking Member, and
Chairman Lee for holding this important hearing.
Beer is extremely important to Minnesotans, and nothing
illustrates this more than the 2011 State government shutdown.
We faced a--we had a 3-week government shutdown that suspended
critical State services, including transportation construction,
criminal background checks, the issuing of fishing and hunting
and boating licenses, and this was during the summer, and it
had an effect on our lodges and resorts. But Minnesotans really
weren't putting pressure on the State legislature and the
Governor to resolve this. But then the State beer licenses
expired.
[Laughter.]
Senator Franken. And more than 300 bars and liquor stores
were no longer able to sell beer because the license had
expired, the alcohol license had expired, and then the public
became outraged. And this got settled right away.
[Laughter.]
Senator Franken. So, beer is very important to Minnesota,
and this was also obviously about a lot of businesses, too. It
was beer. And the beer industry in the United States has
evolved in recent years, and we have our craft breweries, great
craft breweries in Minnesota. But I want to discuss how, given
the importance of beer to Minnesotans, how we can keep a truly
competitive landscape in the United States. And we really have
to review the impact of this deal at hand.
Now, Mr. Brito, I understand that deals of this size often
involve very complex business decisions, especially when
companies take on a significant amount of debt to complete the
deal. I also understand that you have an obligation to look out
for your shareholders and save money wherever possible.
Unfortunately, those decisions can have harsh consequences
for American families. In 2008, following InBev's acquisition
of Anheuser-Busch, the newly formed entity announced--and a few
weeks before Christmas, I might add--that it would be laying
off 1,400 U.S. workers and over 400 contractors.
This time around, AB InBev is taking on $75 billion in
debt, over $20 billion more than last time, and I know you'll
be facing some tough decisions about where to cut costs.
So, Mr. Brito, my question is pretty simple: What can
Americans expect this time around? Where will you be cutting
costs? Will there be job losses, brewery closing, distributor
terminations? Or will you face pressure to raise prices to pay
back that debt?
Mr. Brito. Senator, thank you for the opportunity to
clarify. This transaction we are proposing here today is about
the rest of the world. It is about getting access to new
markets like in Africa, parts of Asia, parts of Latin America.
This transaction has nothing to do with the U.S. Therefore, it
will have no impact in our operations in the U.S. market. That
I can guarantee.
Senator Franken. So, basically what you are saying is that
this $75 billion of debt is not going to have any effect on--on
decisions that you might have to make in the same way you did
last time.
Mr. Brito. Well, last time, we have to remember, we had an
economic crisis, 2008. Last time, we have to remember that the
transaction in terms of the size of InBev was a similar size.
Today this transaction, as big as it is, is way smaller than AB
was at the time. So, what I am saying is that there is no
impact--there will be no impact as a result of this transaction
in the way we conduct business in the U.S. We are going to
produce the same amount of beer. We are going to have the same
market share. We are going to carry the same brands, no impact
on our distribution system. This transaction is about getting
access to new markets.
Senator Franken. Is anybody here skeptical about that
answer? Would anyone like to speak to that skepticism?
Mr. Pease. Senator Franken, I would comment. I do take Mr.
Brito at his word that this transaction is more about the rest
of the world than it is the United States. The point I want to
make is that it is the small and independent craft brewer that
is the growth segment of the American beer market. Now, it is
the American craft brewer that is creating jobs in every State
and in every congressional district. And we just want to make
sure that nothing arises or is the result of this transaction
that would hinder that. If the American beer drinker is left to
be the deciding force and their access to products from small
and independent breweries is unfettered, then we are going to
be comfortable. But we have significant concerns about how this
deal could impact both access to market for the small craft
brewers and access to raw materials.
Senator Franken. Mr. Hunter, could you just respond briefly
to my question, the question I asked of Mr. Brito?
Mr. Hunter. Certainly, Senator. From a MillerCoors
perspective, it is business as usual. As I tried to explain
earlier, the MillerCoors business currently has two
shareholders: Molson Coors and SABMiller. It will have one
shareholder going forward, which is Molson Coors, and we will
continue to build our business and attempt to be a very
assertive competitor in the U.S. beer business. We need to
invest more in our business because of the changing nature of
the competitive environment. The U.S. beer industry has
probably never been as competitive as it currently is.
Senator Franken [presiding]. Thank you. Thank you for your
indulgence. Senator Blumenthal, as Chairman, I recognize you.
[Laughter.]
Senator Franken. And I deputize you as Chairman.
Senator Blumenthal. I am the last man sitting. And I know
that Senator Lee is going to be returning. I have to leave
shortly to vote as well. We have a vote that is going on right
now.
Let me just ask, Mr. Brito, I take it by your unequivocal
representation to me that there will be no termination of
distributors that you would be willing to incorporate that
commitment in a consent order as part of the resolution of this
merger.
Mr. Brito. Well, that is for the DOJ to decide. What I am
saying is that----
Senator Blumenthal. Well, it is for you to decide whether
you would be willing, since a consent order is dependent on the
consent of the parties, whether you as the CEO of your company
would consent to that condition incorporated in an order that
there be no termination of distributors.
Mr. Brito. Well, what we tried to do here when we draft the
contract of the divestiture is we look at the consent decree
that we had for the Grupo Modelo deal 2 years ago, and we tried
to replicate all the important clauses in that new contract so
as to mirror what we had back then negotiated with them. But,
again, it is their final decision----
Senator Blumenthal. But in terms of--I take that, I hope,
as a yes, because you've made the commitment here, and for it
to be enforceable more easily, it should be part of an order
that the Justice Department would join. And I would just say I
take it at full face value the commitments that you are making
here in good faith. But I think the important lesson of many
mergers is trust, but verify. And verification and enforcement
are critically important in this watershed moment for this
industry. And so, I hope that you will be willing to
incorporate that commitment as part of a legally binding
document. That is essentially what the consent order is.
Mr. Brito. Yes, we as a company, when we commit, we
deliver. And what I would like to remind us here, the fact I
think can help us here, this industry has never been more-the
beer industry in the U.S. has never been more open to new
entrants. When you look at the market share of craft beers in
1997, it was under 4 percent. Last year, it reached 11 percent.
And the trajectory points, according to the Brewers
Association, that this market share will get to 20 percent, 1
in 5, by 2020. So, this tells you that this is a very----
Senator Blumenthal. That may be little benefit to consumers
if the 80 percent of the industry, or the, 85 percent or
perhaps larger, if you go into purchasing those craft brewers,
as your company has done, is in the hands of a small number of
behemoth beer makers and the consumer has, in effect, less
choice.
Mr. Brito. Well, my view here is today we have five micro,
you know, beers that we bought out of 4,000, and we have a
minority stake in one more, so six. That's it. I think in
4,000, having five, that is, again, more to learn, to have
those entrepreneurs join us as partners, and to get us the DNA
of what they know that we do not know. That's the beauty of
this transaction. The same thing as owning company-owned
wholesalers. That is the only reason why we do it.
Senator Blumenthal. In the limited time I have left, I
would like to ask Ms. Moss, you raised the concern in one of
the papers that I read about the need for a remedy to establish
the Molson Coors enterprise as a completely independent company
given the evidence of anticompetitive coordination after the
MillerCoors JV in 2008. Could you perhaps tell us whether you
think that the existing divestiture plan provides sufficient
guarantees of the independence of that new competitor?
Dr. Moss. Thank you, Senator. I think that's the million
dollar question. This merger is not over until a remedy is in
place. The fact that the companies have stepped forward to
offer an up-front fix I think is evidence that this deal does--
does have potential anticompetitive implications.
So, the importance of a remedy, a fully effective remedy, I
think is critical. And I think there are really open questions
about that. The disposition of MillerCoors independent
distributor contracts, how those contracts will be
renegotiated, any change in the dynamic in the market post-
merger would be important.
Miller has taken a reportedly much less adversarial
approach to independent distributors than has ABI. We want to
make sure that an effective remedy would, in the hands of
Molson Coors, would not change--or create a dynamic where
independent distributors are pressured to create exclusivity or
to discriminate against smaller rivals.
Anything that changes the incentive or the ability of the
company post-merger to compete effectively I think would be--
would be suspect. These are things that the DOJ I think will
have to look very carefully at. And there's quite a bit of
murk, or the devil will be in the details, shall we say, about
how that remedy is ultimately negotiated. And I think the DOJ
had a very good approach in Grupo Modelo. I think that is a
template, but it is--it is something that will require very
close scrutiny.
Senator Blumenthal. I thank you very much. I thank all the
witnesses. I think you have really hit the nail on the head. On
its face, this merger would clearly break the law. The
divestiture is an effort to avoid that issue. Whether the
remedy can be fashioned effectively I think is, in fact, the
million dollar or maybe billion dollar question. Again, my
thanks, Mr. Chairman.
Chairman Lee [presiding]. Thank you, Senator Blumenthal.
Mr. Pease, why should AB InBev be required to divest
wholesalers when it is not acquiring any wholesalers, let alone
any assets at all in the United States?
Mr. Pease. You are referring to that ABI is not acquiring
any distributors through the purchase of South African
Breweries.
Chairman Lee. Right.
Mr. Pease. Because they are acquiring independent AB
distributors currently. They have acquired five in the last few
months and consolidated those into company-owned
distributorships that then reduced the access for my members to
get to market. I think we have to keep in mind that, again, my
members are required by State-based regulation to use a
distributor to get their products to market, and in the States
where--in the metropolitan areas where ABI controls that
distributor, they have a wholly owned distributor, that
effectively shuts off one of the two plausible paths to market
for my members.
Chairman Lee. Mr. Brito, what is your response to that?
Mr. Brito. Well, we have owned wholesalers for more than
100 years. This transaction will have no impact in the U.S. in
the way we go to market, in our brand portfolio or anything. We
own 21 wholesalers out of a universe of 500-plus AB
wholesalers. And it's interesting to see that despite us having
owned wholesalers for 100 years, crafts have grown from 4
percent in the 1990s to 11 percent last year, to and the
Brewers Association is saying it will get to 20 percent by
2020. And, more interesting, the major wholesalers that we own
are in New York, Boston, San Diego, and Denver, one of the, you
know, hottest beds for the growth of craft beers in this
country.
So, I do not see any link between us owning wholesalers and
craft brewers being disadvantaged in the marketplace. The facts
prove quite the opposite, and I think the facts can help us
here.
Chairman Lee. Dr. Moss, your testimony indicates that the
discussion really comes down to the sufficiency of the
divestiture and the scope of the divestiture. Given that AB
InBev has stated that Molson Coors will acquire 100 percent of
SABMiller's, quote, ``brands, breweries, intellectual property,
and other assets,'' close quote, doesn't that mean that--that
this merger will have little or no effect on the state of
competition in the United States?
Dr. Moss. Senator, thank you for the question. I think you
raise sort of the critical point in this case. Were there no
remedy in this merger, it would be a presumptively illegal
merger--a big increase in concentration, lots of control of
really critical distribution.
I would note that this merger is occurring against a
relatively troubled backdrop in the U.S. beer market, evidence
of coordination in the wake of the MillerCoors JV, lots of
control of distribution, but also a growth of a really
important segment that provides choice and diversity to
consumers.
So, I think getting it right, getting this merger right--
and that means getting the remedy right--is really critically
important in this case. So, backdrop is important, context is
really important, which means, moving forward, whether that
transfer of the MillerCoors assets fully to Molson Coors really
is fully effective, that has to be scrutinized very carefully.
And so, that means really digging into the details of how that
divestiture is going to occur and whether it will, in fact,
create a fully independent Molson Coors.
You know, I think this provides a really good opportunity
to not only address some of the competitive concerns that are
in the industry, at the same time we look at a remedy that
fully restores competition. So, I think moving forward there's
an opportunity here to make some significant improvements in
terms of protecting the independent distribution channel
because craft brewers are so dependent on it, and to--to
perhaps prohibit certain types of behaviors that have
historically been entrenched in the industry that make it more
difficult for rivals to compete.
Chairman Lee. So, ultimately the effect of the divestiture
will depend on how it is executed, the implementation and the
details of how it is actually carried out.
Dr. Moss. Yes.
Chairman Lee. Mr. Hunter, let's talk about this for a
minute. Tell us how the operation of MillerCoors will be
expected to change after Molson Coors acquires SABMiller's
interest in the joint venture.
Mr. Hunter. Thank you. thank you, Chairman Lee, and I think
I am probably best placed to talk about the independence of
Molson Coors. So, Molson Coors as a business is a U.S.-listed
business. We will be the single shareholder, the single owner
of the MillerCoors business going forward. Currently, we have
50/50 governance and 42 percent economic interest in the
business. And this is an asset transaction, so all of the
MillerCoors assets will transfer to Molson Coors, and the
MillerCoors business will be run as one of our business units.
We have a business unit in Canada, one in Europe, an
international business unit, a global office, and the U.S. will
be our fifth business unit.
All of the brands are currently available to consumers, to
customers, and distributors through MillerCoors will remain in
place. For those brands that we do not own--and it is a very,
very small percentage of the volume--we have agreed a
perpetual, royalty-free license arrangement. So, those brands
are basically our brands to do as we see fit and grow those
brands in the United States. So, it was very, very important
that we could talk to our distributors about the maintenance of
the business that they know and have been investing in since
the joint venture was formed back in 2008.
So, it really is business as usual, and I am very clear on
the independence of Molson Coors. We are a U.S.-listed
business, an independent business, and we still have the
benefit of the governance from our founding families on our
board, which makes us quite unique in the world of beer.
Chairman Lee. Thank you. Senator Klobuchar.
Senator Klobuchar. Thank you very much. Thank you, all of
you. Just a few more questions.
Mr. Hunter, in the consent order resolving ABI's
acquisition of Modelo, the buyer of the divested assets,
Constellation Brands, was made a party to the order. If the
Department of Justice determines that Molson Coors should be
named as a party for the purposes of a remedy, would you have
any objections to that?
Mr. Hunter. Senator Klobuchar, our view at this stage is
that there is nothing anticompetitive about this arrangement
and our taking full ownership of MillerCoors, and that is
something I think we would need to discuss with the DOJ in due
course.
Senator Klobuchar. Okay. According to your testimony, you
talked about how this will allow you to boost production at
MillerCoors' nine U.S. breweries, create the opportunity to
increase the barley purchases, which you mentioned about
Minnesota. Could you provide a little more detail on how
changing from the joint venture to the single ownership will
actually boost competitiveness for you, make you a more
effective competitor?
Mr. Hunter. Yes. The challenge for our business is to grow
our business, and that is my intent as the CEO of the
organization, and it is the intent of the 8,000 people that we
have who are beer champions right across the MillerCoors
organization. Our business has, since the joint venture was
formed, been an effective number two in the U.S. market, but
the market has changed pretty significantly, as I think we have
heard in detail through the course of this morning. Our intent
is to get the business back into a stable position by 2018 and
back into volume growth by 2019. That's the ambition we have
set for the business. And by being part of the Molson Coors
organization, we move from two shareholders to one, simpler and
faster from a decision-making perspective. We can utilize our
total North American footprint, so our Canadian business and
our U.S. business, to drive further operational efficiencies
and allow us to invest even more assertively at the front end
of our business to compete more assertively. That is what we
are about as a business. We have been here for the long term,
and we want to be here for the long term.
Senator Klobuchar. Thank you. Mr. Brito, why does ABI want
or need this acquisition?
Mr. Brito. Well, the main reason, Chairman, for this
acquisition is really to get access to new markets in Africa,
parts of Asia, parts of Latin America, and complement our
portfolio. The beauty of this transaction in terms of strategic
rationale is that the footprints of both companies are highly
complementary, the markets where they operate. So, with this
operation, with a few exceptions like the U.S., where we
divested the assets, there will be no increase in market
concentration in any of our markets around the world on either
companies. So, that is the beauty of it.
Senator Klobuchar. All right. Thank you.
Mr. Pease, just one more question on sort of the wholesaler
issue. There have been described in your testimonies some
allegations about wholesalers being coerced into dropping--
dropping craft brew products by the major brewers. Some say
there are many ways to distribute beer and that access to
wholesalers that also carry ABI or MillerCoors products, not
necessary. That is what some people say. I did notice from
Exhibit C of your testimony that each of the 30 large--largest
beer wholesalers carries either ABI or MillerCoors. So, do you
think using non--and these guys are not alleging that is what
they want, of course, but using non-ABI or MillerCoors
wholesalers, is that even a possibility for the market?
Mr. Pease. It is a possibility if you only are content to
take your brand to a certain level. The true distribution
horsepower is with the ABI option or the MillerCoors option.
The small, independent option is feasible, again, to a degree,
but you are basically going to be constrained to a fairly small
geographic footprint. If you want to grow your business, say
like a Surly, and you want to get into the chain grocery store
or you want to get into the big-box retailer, you want to get
into the sports venue, you are pretty much limited to one of
those two options. And so, that's why our focus on all of this
is just about fair access to market for the smallest players.
If nothing negative comes out of this deal that further
restricts access to market for small and independent craft
brewers, we're going to be more comfortable. But there has been
past and even current behavior of the relatively so-called
independent ABI distributors that we would call into question.
Senator Klobuchar. Okay. And I will say that--you know, we
have mentioned some of our brewers. Everyone has mentioned
their own. But I think it is important to note there are big
ones like what we have, Schell's and some of the large--
Surly's, and then there are ones like Fitger's, which is a
restaurant in Duluth, and Canal Brewing, Lake Superior Brewing,
and one that I visited called Castle Danger, which is literally
in kind of--it is not a garage. That would be more dramatic.
Mr. Pease. But it is close.
Senator Klobuchar. It is close, in Two Harbors, Minnesota.
So, as you know, the distribution is everything for these
brewers. So, thank you for acknowledging that.
Dr. Moss, one more question. I will ask you this question--
or maybe someone else did when I was gone--but as we look at if
there is some kind of--if the Justice Department believes there
should be conditions on this but approves it, what conditions
do you think would be helpful?
Dr. Moss. Thank you. So, again, I think that is--that is
the key question here. I think, as I said earlier, any remedy
will have to create a fully independent Molson Coors for it to
fully restore competition in the market. And, again, this is a
troubled market landscape against which this merger is
occurring. So, I think lifting up the Grupo Modelo divestiture
package of conditions and moving it over to this particular
merger may not be a sufficient approach. I think additional
details, additional conditions on post-merger conduct of the
companies will be important.
For example, a remedy--a remedy would include at a minimum
any prohibitions on contract brewing. Any supply agreements
would continue to link the two companies together between
Molson Coors and ABI. So, full independence means no supply
agreements, no contract brewing.
I think a good remedy would include prohibitions on any--
any contracts with independent distributors that created
incentives for exclusivity. I think that has been conduct that
has greatly troubled this industry. Now, is the time where that
conduct can be dealt with effectively through a merger remedy.
So, prohibitions on exclusivity provisions.
I also think a remedy would address even preemptively any
closures of capacity that are in very close proximity to this
merger. I have to say those types of closures are highly
suspect given the proximity to this merger deal.
Senator Klobuchar. What was the last one?
Dr. Moss. Any preemptive closures of capacity at any
existing MillerCoors facilities. And I would emphasize that a
fully independent Molson Coors would--would not have incentives
to tacitly coordinate with ABI. We have economic evidence that
shows that there was tacit coordination and price increases
came out of that. So this, again, is an opportunity in creating
a fully independent Molson Coors to prevent any further tacit
coordination in the industry. So, I think a remedy is going to
have to be really carefully thought out.
Senator Klobuchar. Very good. Thank you. Responses, anyone?
I think we got through the barley/hops discussion. Mr. Brito,
you responded to another Senator. Very good. So, we do not have
to go there. All right. Well, I do not have any further
questions. Thank you very much, Mr. Chairman.
Chairman Lee. Thank you, Senator Klobuchar. Thanks again to
all of our witnesses. This has been an informative hearing. We
appreciate your testimony today.
The record will remain open for 1 week. We will be
adjourned. Thank you.
[Whereupon, at 12:03 p.m., the hearing was adjourned.]
[Additional material submitted for the record follows.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
A P P E N D I X
to
ENSURING COMPETITION REMAINS ON TAP:
THE AB INBEV/SABMILLER MERGER AND
THE STATE OF COMPETITION IN
THE BEER INDUSTRY
The following submissions are available at:
https://www.govinfo.gov/content/pkg/CHRG-114shrg52545/pdf/CHRG-
114shrg
52545-add1.pdf
Miscellaneous submission for the record:
Brewers and Beer Chart........................................... 2
Brewers Association, letter...................................... 3
Connecticut Breweries List....................................... 6
[all]