Anheuser-Busch doles out beer money as regulators’ scrutiny increases (Additional Coverage)

Source: MarketWatch

Jason Notte

May 18, 2017

Anheuser-Busch InBev is throwing $4.5 billion at the U.S. beer industry in the span of a decade, and that should worry competitors. But it should make the sprawling global brewer nervous as well.

On May 15, Anheuser-Busch InBev SA BUD, -2.10%  announced that it planned to spend $500 million on U.S. brewing, production and distribution this year and another $2 billion through 2020. As the company points out, it has invested $2.5 billion here since 2011, but we’ll note that it’s also faced a growing amount of regulatory scrutiny with each step.

Craft brewers are concerned

Competing large-scale brewers and smaller regional and craft brewers have expressed concern in recent weeks after ABI purchased Wicked Weed of Asheville, N.C. Those fears were compounded when ABI announced that its South African hop farms wouldn’t be able to export any hops to non-ABI brewers in the U.S. because of low crop yields this season.

However, dating back to its purchase of Mexico’s Grupo Modelo and its Corona and Modelo beer brands in 2013, Anheuser-Busch InBev has been on some shaky ground stateside. The Department of Justice ruled that Anheuser-Busch InBev’s 2013 purchase of Grupo Modelo for $20.1 billion violated U.S. antitrust laws and forced ABI to sell the rights to Grupo Modelo’s most popular brands to Constellation Brands Inc. STZ, +0.09%   for $4.75 billion. When it purchased global brewing giant SABMiller for $108 billion last year, industry groups, including the Brewers Association craft beer industry group and the National Beer Wholesalers Association, testified before Congress about the potential U.S. implication of that sale.

The result was an antitrust decision that forced ABI to sell all of SABMiller’s Miller-branded assets to rival Molson Coors Brewing Co. TAP, -0.55%  for $12 billion. That decision also forbade Anheuser-Busch InBev from acquiring more breweries without federal approval (which it’s still waiting on in the Wicked Weed deal) and from coaxing its distributors to give its beers preferred treatment over those produced by other breweries. The latter caveat has come into increased focus during the past year or so.

In Southern California, ABI wholesalers were fined $400,000 for illegally handing out or subsidizing refrigerators, televisions and draft systems for retailers. In Massachusetts, one of ABI’s wholly owned distributors (WODs) was accused of giving away roughly $1 million worth of similar items to retailers who gave Budweiser preferential treatment.

Whistleblower case

Meanwhile, it turns out that ABI doesn’t particularly like it when employees alert the authorities to such impropriety. It incurred a $6 million fine from the Securities and Exchange Commission (SEC) for not only dishing out bribes to government officials in India to get better placement of its products there, but for attempting to silence a whistleblower through intimidation. However, considering that the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau (TTB) took $750,000 from an independent distributor after a similar pay-to-play scheme in Massachusetts involving craft brewers, ABI likely isn’t done being slapped around for its distribution missteps.

And now it wants to spend $82 million to beef up its distribution chain nationwide and build new distribution centers in Los Angeles – where it just felt the wrath of California’s alcohol and beverage commission – and Columbus, Ohio.

“The market continues to be very competitive and much more fragmented, and when your market becomes more fragmented, there’s more complexity that comes with the breweries and distribution centers,” says João Castro Neves, Anheuser-Busch InBev’s CEO. “You ship some of the products that are ready into the distribution centers so you don’t lose efficiency within the breweries. We have a larger number of breweries today than we did three years ago with all our craft partners, so the combination of fragmentation, segmentation and those partnerships, we’re making those investments to cope with additional complexity.”

That itself would be significant if it wasn’t couched in a $10 million upgrade to its Baldwinsville, N.Y., brewery to start producing Teavana ready-to-drink teas in conjunction with Starbucks. Then there’s $15 million to help its Fairfield, Calif., brewery make Space Dust IPA for the Elysian brand ABI purchased in 2015, another $28 million to help its Fort Collins, Colo., brewery dry-hop ales for other craft beer acquisitions and $11 million to help its Merrimack, N.H., bulk up craft offerings on the East Coast.

“We continue to look for opportunities where it make sense,” Castro Neves said in response to an e-mailed question. “Right now the focus at Merrimack is on cross-brewing Blue Point and Goose Island beers, and we’re very excited to bring them to more beer lovers.”

Brewery upgrades

Altogether, there is roughly $200 million going into distribution and brewery improvements this year alone. Just about every one of ABI’s 12 major brewing facilities in the U.S. is undergoing changes that will make it easier for AB to brew new products there and boost the production of the 10 craft beer brands it has acquired throughout the U.S. since 2011. Dave Taylor, vice president of supply for Anheuser-Busch, includes all breweries when he looks at the future of ABI’s 21 (soon to be 22) facilities, with Castro Neves noting that employee counts at both the Blue Point brewery in Patchogue, N.Y., and the 10 Barrel brewery in Bend, Ore., have doubled since ABI purchased them in 2014.

By becoming more “local,” however, Anheuser-Busch InBev has opened itself and its distribution chain to increased local regulation and scrutiny. In Georgia, the stranglehold on beer sales by ABI (which has a plant in Cartersville) and other distributors resulted in the state becoming one of the last in the country to allow brewers to sell beer directly to consumers. In Texas, the presence of Anheuser-Busch InBev distributors and ABI’s recent federally approved purchase of Houston-based Karabach Brewing have placed ABI right in the center of a fight over direct sales and distribution limits. All of that noise eventually drifts upward, and both the SEC and TTB are certainly listening.

Ideally, this latest round of ABI spending would be about strengthening local bonds and improving the freshness of its newly acquired craft products in the marketplace. However, with Kentucky, Illinois and Missouri already banning ABI from owning distributors and other states giving smaller brewers a freer hand in getting their products to market, these latest improvements seem less like a nod to local markets and more like a way to either overpower them or hedge against future headaches.

With 5,300 breweries in the U.S. and competitors including MillerCoors, Duvel, Heineken and Constellation Brands buying up craft brands and securing shelf and tap space, deep pockets remain Anheuser-Busch InBev’s biggest advantage. However, with the eyes of regulators at every level on ABI, the company needs to buy its distributors something more than time and trouble.