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Brewers

VIEWS: 112 PAGES: 143

									Breweries

  Leon Chung
   Jorge Cruz
 Darren Devine
Cameron McLeod




                 reweries
                            Breweries




“All right, brain. You don't like me and I don't like you, but let's just do this and I
    can get back to killing you with beer” (Simpson, 1999).


                                                                       reweries
                         Outline
• Introduction
  – Industry Analysis:
        History of the international and North American beer
         industry.
        The Global Industry.
        The North American Market.
• Valuation:
  – Bud
  – Coors
  – Molson

                                                         reweries
  Industry Overview: History
• Ancient History:
   – Historians speculate that prehistoric nomads may have made
     beer from grain & water before learning to make bread.
   – 4300 BC, Babylonian clay tablets detail recipes for beer.
   – Beer around the world: There is evidence that beer was
     elaborated by the Babylonian, Assyrian, Egyptian (for medical
     purposes), Hebrew, Chinese, and Inca cultures.
   – Romans brewed "cerevisia" (Ceres the goddess of agriculture &
     vis meaning strength in Latin).
   – 55 BC Roman legions introduce beer to Northern Europe.
   – 23 BC Chinese brewed beer called "kiu“



                                                      reweries
  Industry Overview: History
• Ancient History:
  – 500-1000 AD the first half of the Middle Ages,
    brewing begins to be practiced in Europe, shifting
    from family tradition to centralized production in
    monasteries and convents (hospitality for traveling
    pilgrims).
  – 1200 AD beer making is firmly established as a
    commercial enterprise in Germany, Austria, and
    England.
  – 1420 German brewers develop the lager method of
    brewing.
  – 1489 Germany's first brewing guild, Brauerei Beck,
    was established.

                                             reweries
  Industry Overview: History
• Renascence History:
   – 1553 Beck's Brewery founded & still brewing today.
   – 1587 the first beer brewed in New World at Sir Walter Raleigh's
     colony in Virginia.
   – 1602 Dr. Alexander Nowell discovers that ale can be stored
     longer in cork sealed, glass bottles.
   – 1612 the first commercial brewery opened in New Amsterdam
     (NYC, Manhattan).
   – 1674 Harvard College has its own brew-house.
   – 1680 William Penn (founder of Pennsylvania) operated a
     commercial brewery.
   – 1786 Molson brewery is founded in what is today Canada.



                                                       reweries
  Industry Overview: History
• Modern History:
  – In the mid-19th Century (1850's) German
    immigrant brewers introduced cold maturation
    lagers to the US (Anheuser-Busch, Miller, Coors,
    Stroh, Schlitz, and Pabst roots begin here).
  – The modern era of brewing in the US began in the
    late 1800's with commercial refrigeration (1860),
    automatic bottling, pasteurization (1876), and
    railroad distribution.
  – 1870's Adolphus Busch pioneers the use of double-
    walled railcars, a network of icehouses to make
    Budweiser the first national brand.

                                            reweries
  Industry Overview: History
• Modern History:
  – 1876 Pasteur unraveled the secrets of yeast in the
    fermentation process, and he also developed
    pasteurization to stabilize beers 22 years before the
    process was applied to milk.
  – 1880 there were approximately 2,300 breweries in
    the US.
  – 1890s Pabst was the first US brewer to sell over 1
    million barrels in a year.
  – 1914 commercial competition drove the number of
    operating breweries down to 1,400.


                                               reweries
   Industry Overview: History
• Modern History:
   – 1919 House of Representatives Bill No. 6810, establishing the
     apparatus for the enforcement of prohibition. The bill was passed
     October 10, vetoed by President Wilson on October 27. The veto
     was subsequently overridden by Congressional vote.
   – 1920 Prohibition Starts for beer, even though some regions
     started as early as 1846, e.g. Maine. Prohibition focused more
     on whiskey and other distilled products.
   – 1920s Near beers brewed during prohibition: Pablo by Pabst,
     Famo by Schlitz, Vivo by Miller, Lux-O by Stroh and Bevo by
     Anheuser-Busch.
   – 1933 Prohibition ends for beer (April 7).
   – 1935 only 160 breweries survive Prohibition.
                   Source: http://www.beerhistory.com/library/holdings/raley_timetable.shtml




                                                                          reweries
   Industry Overview: History
• Modern History:
   – 1935 the beer can is introduced (American Can Co. & Kreuger
     Brewing).
   – 1966 Budweiser is the first brand to sell 10 million barrels in
     a year.
   – 1976 New Albion is the first in the rebirth of brewpubs and
     microbreweries in the US first opening in California.
   – First half of the 1900's beer was associated with men, blue-
     collar workers, college students, and mainstream sports
     enthusiasts.
   – Late 1900's beer had a different image and cultural function, with
     growth in popularity among a more diverse share of the
     population.
                          Source: http://www.beerhistory.com/library/holdings/raley_timetable.shtml



                                                                              reweries
                            The Brew Process
1.       Malted barley is cracked in the Roll Mill turning into
         grist and then stored in the grist case.
2.       The grist drops into the mash lauter tun and mixes
         with hot water provided by the hot liquor tank
         producing a sugary liquid called wort.
3.       The wort travels to the brew kettle where it's heated
         to a rolling boil. Hops are added to provide
         bitterness, flavor, and aroma.
4.       The hopped wort passes through the heat exchanger
         cooling to the right temperature for fermentation.
5.       The now chilled, hopped wort meets up with the
         yeast in the fermenter to begin the fermentation
         process. Once completed, the liquid referred to as
         wort is now called beer.
6.       The beer enters a filter designed to help remove
         yeast and haze producing compounds.
     •       PASTEURISATION: This is a process of heating and
             rapid cooling which prolongs shelf-life and destroys any
             bacteria or other organisms in the beer.
7.       The finished beer exits the filter and enters the
         serving tank ready to be dispensed.


                                                                        reweries
        Industry Overview:
       General Characteristics
– Beer is a Mature Product.
– It is the largest seller in the alcohol drinks sector.
– Sales are related to:
      Weather (summer months)
      Holidays: Christmas and the 4th of July in the US
      The first and fourth quarters historically are the slowest with
       the rest of the year typically demonstrating stronger sales
– Consumer base: heavily male dominated.
                              Source: The Brewers’ Handbook (http://www.beer-brewing.com/)




                                                                      reweries
Industry Overview




                    reweries
       Global Beer Market:
      General Characteristics
• Beer is one of the smallest global
  consumer goods.
• Although globalization is a general trend
  in many industries, the brewing industry
  has long been lagging behind and has
  remained very fragmented.
• Globalization in the beer industry has
  proceeded at a much slower pace than in
  many similar industries (e.g. tobacco).

                                    reweries
            Global Beer Market:
              Recent Trends
• Consolidation led by major international brewers.
   – During recent years brewers like Heineken and Interbrew have
     started internationalizing their activities.
• Volume growth in developing markets
   – China: Second largest market (by sales) and growing. Largest
     market in total volume.
   – Eastern Europe and Russia
• Big gets bigger:
   – According to various studies aggregate volume of the world‟s
     top 10 brewers has grown at more than four times the pace of
     total industry volume since the mid-1990s.
                                              Source: Ludwig Theuvsen and Oliver Ebneth (2004).
                           International Food and Agribusiness Management Association (IFAMA).
                       http://www.ifama.org/conferences/2004Conference/Posters/Ebneth1022.pdf




                                                                           reweries
    Development of the Top 10 Brewers and the World
                        Market
                   (in millions of hl*)




•    hl = hectoliter, measure used in the brewing industry equivalent to 100 liters.
                                           Source: International Food and Agribusiness Management Association (IFAMA).




                                                                                                reweries
   Top 10 Global Brewers (2003)
                        (57% Market Share)*




* Volume of the world beer market in 2003: 1.455 billion hl.
                                     Source: International Food and Agribusiness Management Association (IFAMA).




                                                                                          reweries
Above Average Growth of the 5 largest
brewing companies over the last 5 years




            Source: International Food and Agribusiness Management Association (IFAMA).



                                                                   reweries
Global Beer Consumption
                               Per Capita
                      Share   Consumption
        Country      (2001)     (in liters)
          US           16.4        83.1
         China         14.3        15.8
       Germany         7.3        123.1
         Brazil        5.8         46.7
          UK           4.1         97.1
         Japan         3.6          40
        Mexico         3.5         48.6
   Russian Federation 3.1           30
         Poland        1.7         60.5
        France         1.5         35.9
    Czech Republic     1.2        158.1


                                              reweries
           Global Beer Market
• Reasons for global expansion:
   – Growth potential
   – Expansion in view of saturated home markets.

                                                          Source: Ludwig Theuvsen and Oliver Ebneth (2004).
                                       International Food and Agribusiness Management Association (IFAMA).
                                   http://www.ifama.org/conferences/2004Conference/Posters/Ebneth1022.pdf


• Global market share of top 20 brewers is increasing
   – 1990 - 51%
   – 2000 - 65%
• Industry remains fragmented
   – 5 largest account for approximately 30% of total volume
   – Compare this to the cigarette industry – 5 largest, 60% share
• Home Market Dependence.

                                                                                reweries
       Global Beer Market
• According to Theuvsen and Ebneth
  (2004)
    “consolidation in the brewing sector is far from
      ending and the internationalization process has
      just begun to pick up speed”

                                         Source: Ludwig Theuvsen and Oliver Ebneth (2004).
                      International Food and Agribusiness Management Association (IFAMA).
                  http://www.ifama.org/conferences/2004Conference/Posters/Ebneth1022.pdf




                                                                      reweries
             Global Beer Market
• Internationalization Process:
   – According to Kutschker et al. (1997) the process can be
     classified into three categories:
          international evolution
          international episodes
          international epochs
   – According to Theuvsen and Ebneth (2004) in the brewing
     industry we could identify an international epoch over the last
     five years, which is characterized by
          a broad scope
          high speed
          long duration of change
   – They also predict that “during the following years,
     consolidation and integration will be the overall pattern”.

                                                        reweries
                   Global Beer Market




•   Source: International evolution, international episodes, and international epochs--implications for
    managing internationalization. Michael Kutschker, Iris Baurle, Stefan Schmid. Management International
    Review. Wiesbaden: 1997.Vol.37, Iss. 2; pg. 101, 24 pgs




                                                                                            reweries
The Internationalization
         Matrix




                                  Source: Ludwig Theuvsen and Oliver Ebneth (2004).
               International Food and Agribusiness Management Association (IFAMA).
           http://www.ifama.org/conferences/2004Conference/Posters/Ebneth1022.pdf



                                                           reweries
      The North American Market:
        General Characteristics
•   3 basic levels of brewing according to annual production:
     – High-volume (shipments of over 15 million barrels):
            They account for around 80% of total production.
            All of them are owned by the 3 largest brewing companies in the US (Anheuser-
             Busch Inc., Miller Brewing Co., and Adolph Coors Co.)
     – Regional (15,000 – 15M barrels):
            They account for 15% of total production
            Usually focused on local distribution
            Many micro-breweries have grown into this category in the last 5 years.
            Examples: Stroh Brewery Co., Pabst Brewing Co., Genessee Brewing Co.
     – Small Breweries (less than 15,000 barrels):
            They account for 5% or less of total production.
            Microbreweries and brewpubs (also restaurant-breweries or ―craft brewers‖).
            They started in the late 1970s
                                                       Source: Goldammer (2000) - The Brewers Handbook
                                           http://www.beer-brewing.com/US_beer_market/beer_retailers.htm




                                                                                    reweries
   The North American Market:
        Market Segments
• Domestic, imported and specialty beers:
  – Domestic Beers
         Sub-premium
         Premium
         Malt liquor segments
         Super premium*
         Light*
         Ice*
         Dry*
  * They are the result of high price competition during the 1970s and
    1980s. They are priced high and their purpose is to reclaim some of the
    revenue lost during the ―price wars‖.


                                                               reweries
 The North American Market:
      Market Segments
– Imports: They‘re growing steadily (around 5-8%
  since 1990s). Reasons for growth:
      Expanding economy
      Consumer interest in ‗higher-quality‘ (higher-priced) beer.
      Growth of the Hispanic community in the US.
      Most importantly, corporate partnerships/ownerships of
       foreign breweries that allow foreign brands to access the
       local distribution networks.
      Since 1995 the No. 1 import is Corona Extra from Cerveceria
       Modelo.
                                        Source: Goldammer (2000) - The Brewers Handbook
                            http://www.beer-brewing.com/US_beer_market/beer_retailers.htm




                                                                     reweries
The North American Market:
     Market Segments
– Specialty Beers:
     Fastest growing segment (10-15% since 1990).
     They are perceived as higher quality by
      consumers.
     Subcategories include:
       o   large breweries
       o   regional breweries
       o   contract brewing companies
       o   microbreweries
       o   brewpubs
                                         Source: Goldammer (2000) - The Brewers Handbook
                             http://www.beer-brewing.com/US_beer_market/beer_retailers.htm




                                                                      reweries
     The North American Market:
          Industry Structure
• Flat consumption trends: only some international markets and the
  micro-brewing segment show growing opportunities.
   – The Western and the Southern regions have accounted for most of the
     growth (around 1.4% in 2002).
• Highly Concentrated: The industry includes more than 300
  breweries but is dominated by three producers who command a
  nearly 80 percent market share:
   – Anheuser-Busch (45%)
   – Miller Brewing (23%)
   – Adolph Coors (10%)
• The market leaders have expanded their respective market shares
  at the expense of other national brewers like Strohs Brewery.
• The industry as a whole has stable and relatively predictable CFs.
                             Source: Department of Employment and Economic Development of Minnesota (2004)
                                                            http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf
                                                                   Goldammer (2000) - The Brewers Handbook
                                              http://www.beer-brewing.com/US_beer_market/beer_retailers.htm




                                                                                    reweries
The North American Market:
     Industry Structure




             Source: Poitras (2003) – US Breweries: Anheuser-Busch



                                              reweries
       The North American Market:
            Industry Structure
• Market Leadership:
   – For any consumer product company and for brewers in specific, ML is
     very important as it gives benefits over their rivals (i.e. production,
     distribution and advertising economies of scale).
• Distribution:
   –   Expensive to ship: beer has low value relative to weight.
   –   Therefore, several breweries are needed for successful distribution.
   –   This sometimes explains why large breweries take over small ones.
   –   The importance of good distribution networks.
• The importance of branding and pricing:
   – Price elasticity of demand.
   – Premium Pricing
                                                                                                   Sources:
                                    Department of Employment and Economic Development of Minnesota (2004)
                                                           http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf
                                                              Poitras (2003) – US Breweries: Anheuser-Busch




                                                                                   reweries
   The North American Market:
        Industry Structure
• The industry‘s niche markets are very
  fragmented, but some are growing:
  – From 1990 – 1995 smaller brewers increased their
    MS from 7.1 to 8%.
  – The number of U.S. brewing establishments has
    nearly doubled since 1990 (from 73-172) but nearly
    all of the establishment growth occurred in firms
    employing fewer than 20 employees.
  – Virtually all new entrants to the beer industry are
    niche players that pursue specialized, often regional
    but sometime national tastes.
              Source: Department of Employment and Economic Development of Minnesota (2004)
                                            http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf




                                                                        reweries
   The North American Market:
        Industry Structure
• The fastest growing market segment in the US is
  the smaller microbrews which are often brewed
  by regional brewers.
  – Characteristics of the microbrews market segment:
        High barriers to entry (i.e. legal, manufacturing and
         distribution costs)
        Small consumer market with less consumer price
         differentiation (i.e. low price elasticity) than for major
         brands.
        Due to the high costs of entry microbrews rely on regional
         brewers to produce their products under contract (e.g.
         Minnesota Brewing, Samuel Adams)
                   Source: Department of Employment and Economic Development of Minnesota (2004)
                                                 http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf




                                                                             reweries
 The North American Market:
       Demographics
– Beer consumption is overwhelmingly male-dominated; men
  account for more than 80% of the volume consumed.
– The largest group of male consumers are white and they favor
  domestic light beer.
– African American drinkers make up about 10% of the beer
  market overall, and they are the biggest consumers of malt
  liquors, followed by ice beer.
– Women beer drinkers are more attracted to specialty micro-
  brewed beers than they are to the big brands, due to their
  greater variety.
– Craft-beer is more appealing to white beer drinkers than to
  African Americans.
                                         Source: Goldammer (2000) - The Brewers Handbook
                       http://www.beer-brewing.com/US_beer_market/beer_demographics.htm




                                                                    reweries
   The North American Market:
         Market Trends
• Consolidation (e.g. mergers and acquisitions) due to:
   – Flat consumption trends
   – Regulatory burdens
   – High Taxation
• The market is mature with flat consumption trends due
  to:
   – Increased alcohol awareness.
   – Slow population growth.
   – Aging population (young [male] adults are the largest beer
     consumers).

                  Source: Department of Employment and Economic Development of Minnesota (2004)
                                                http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf




                                                                            reweries
   The North American Market:
         Market Trends
• As competitors fight to maintain market shares,
  competitive pricing could result in decreases in
  industry-wide pricing levels and ultimately decreased
  operating margins.
• Price competition combined with increasing vertical
  integration (i.e. Anheuser-Busch) and the inherent
  production economies of the market leaders makes it
  very difficult for an inefficient major brewer to
  compete on a national scale.
                                   Source: Standard & Poors Industry Surveys as quoted by the
                    Department of Employment and Economic Development of Minnesota (2004)
                                            http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf




                                                                         reweries
   The North American Market:
         Market Trends
• Changes in tastes
   – Shift to “light beer‖ (started by Miller in 1972 – Miller Light).
   – Affected companies:
          Schiltz
          Pabst
          Stroh
   – Light beer segment grew from 0% to 23% of US beer
     consumption since 1972.
   – A-B has deterred Miller‘s leadership in this segment. In 2001
     Bud Light became the top selling beer overall.

                                        Source: Standard & Poors Industry Surveys as quoted by the
                         Department of Employment and Economic Development of Minnesota (2004)
                                                 http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf




                                                                              reweries
      The North American Market:
            Market Trends
•   Distribution:
     – Increasing number of independent (multi-brand) wholesalers.
     – More wholesalers going out of their home-states.
     – However, the total number of wholesalers is decreasing.
            Due to consolidation.
            The number of wholesalers has declined from more than 5,000 nationwide in 1970 to
             fewer than 2,500 today.
•   Retailing:
     – Traditional stores (mom-and-pop operations) account for a significant amount of
       sales but national retail chains are accounting for more sales.
     – While independently owned taverns, restaurants, and night clubs account for a
       sizeable share of beer sales, national restaurant/hotel chains are growing in
       importance.
     – Consequences:
            More competitive pricing
            Distribution networks have become more important.
                                                       Source: Goldammer (2000) - The Brewers Handbook
                                           http://www.beer-brewing.com/US_beer_market/beer_retailers.htm




                                                                                    reweries
   The North American Market:
         Market Trends
• Internationalization through:
     Exports (i.e. Miller)
     Joint Ventures.
     Equity Purchases of foreign brewers and
      distributors (i.e. Anheuser-Busch and
      Grupo Modelo).
• Ethical Investment
                              Source: Standard & Poors Industry Surveys as quoted by the
               Department of Employment and Economic Development of Minnesota (2004)
                                       http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf




                                                                    reweries
   The North American Market:
          Regulations
• Regulations focus on:
  –   Distribution
  –   Labeling
  –   Advertising
  –   Credit
  –   Container characteristics
  –   Alcoholic content
  –   Tax rates
  –   Litter assessments.
                                        Source: Goldammer (2000) - The Brewers Handbook
                         http://www.beer-brewing.com/US_beer_market/beer_distribution.htm




                                                                     reweries
    The North American Market:
           Regulations
Subject to regulation at the 3 levels:
• Federal:
   – Formerly issued by the Bureau of Alcohol, Tobacco,
     and Firearms (BATF), which was established by the
     Federal Alcohol Administration (FAA) Act.
   – On November 25, 2002, the Homeland Security Act of
     2002 split the agency into two different agencies.
         The Department of Justice
         The Alcohol and Tobacco Tax and Trade Bureau (TTB)
          (kept within the United States Department of the Treasury).
                                            Source: Goldammer (2000) - The Brewers Handbook
                              http://www.beer-brewing.com/US_beer_market/beer_distribution.htm




                                                                          reweries
   The North American Market:
          Regulations
• Federal:
       TTB responsibilities:
         o   Enforce the compliance of provisions for the formulation
             and labeling of alcoholic beverages, as required by the
             Internal Revenue Code and the FAA Act
         o   Taxes, distribution and advertising.
         o   International trade regulations
         o   Lab testing (approval of brewing formulas and
             equipment)

                                          Source: Goldammer (2000) - The Brewers Handbook

                            http://www.beer-brewing.com/US_beer_market/beer_distribution.htm




                                                                        reweries
    The North American Market:
           Regulations
• State:
   – After Prohibition, state governments were given considerable
     authority over the production, importation, distribution, sale, and
     consumption of beer within their borders.
   – Regulations vary across states (i.e. Minnesota requires that
     the beer label show the alcohol content, while Michigan does not
     permit the label to show alcohol content).
   – Other regulations include:
          Max – Min alcohol content
          Max – Min size of containers
          Credit sales
          Advertising
          Production, distribution and retailing
          Taxes
                                                          Source: Goldammer (2000) - The Brewers Handbook
                                           http://www.beer-brewing.com/US_beer_market/beer_distribution.htm




                                                                                   reweries
  The North American Market:
         Regulations
• Local:
  – Many states permit local jurisdictions to regulate and
    separately tax beer sales, and even to prohibit the
    sale of beer within their jurisdiction.
        Georgia, Illinois, Louisiana, Maryland, New York, and Ohio
         have cities or counties that impose local beer taxes.
  – Jurisdictions in which the sale of alcoholic beverages
    is prohibited are called “dry”.
        about 4.3% of the U.S. population live in dry counties
                                           Source: Goldammer (2000) - The Brewers Handbook
                            http://www.beer-brewing.com/US_beer_market/beer_distribution.htm




                                                                        reweries
  The North American Market:
         Regulations
• Other consequences of Prohibition:
  – „Three-tier‟ system: the industry is required
    to be divided into
       Brewers and Importers
       Wholesalers
         o   Exclusive (often partially owned by the brewery).
         o   Independent or multi-brand: Unlike wine and spirits
             wholesalers, which are generally multi-state operators,
             beer wholesalers tend to operate within the boundaries
             of a single state
       Retailers
                                           Source: Goldammer (2000) - The Brewers Handbook
                            http://www.beer-brewing.com/US_beer_market/beer_distribution.htm




                                                                        reweries
     The North American Market :
             Regulations
•   Taxes:
     –   44% tax of beer retail price in US (2001).
     –   taxes equal 31.7% of final sales of all products (GNP) in the U.S. (approx. 20% at the
         federal level and 12% at the state-local level)
•   Brewers
     –   Beer Excise Tax
         Source: Dawson, Havis (2002). Stir. Beverage World; Dec 15, 2002; 121, 1721; ABI/INFORM Global pg. 38




                                                                                          reweries
 The North American Market

• Threats of new entrants:
  – Barriers to entry:
        Capital Intensive
        Distribution networks
        Regulations
  – Economies of scale in marketing, production
    and distribution.


                                       reweries
 The North American Market

• Rivalry (price competition has been decreasing):
   – Increasing competition from imported beers (however, national
     brewers own part of these breweries).
   – 2,200 wholesalers.
   – 560,000 retail establishments.
   – Growing popularity of micro-breweries and other craft-beers.
   – Alternative: expansion to super-premium beers and other
     segments with lower demand elasticity.




                                                       reweries
 The North American Market
• Substitutes (Growing):
  – Growth in:
        Premixed drinks.
        Alternative malt beverage.
        Alternative non-alcoholic drinks (from juices to
         mineral water).
  – However, beer remains the largest drink
    sector.


                                                  reweries
 The North American Market
• Buyer‘s Bargaining Power:
  – It changes from segment to segment, but in
    general:
        Low switching costs
        Price competition
        Increasing health conscience.
  – However, for craft-beers, which are perceived
    as having higher quality, these characteristics
    may not always hold.

                                         reweries
   The North American Market

• Suppliers‘ Bargaining Power (Low):
  – Most supplies come from competitive
    industries which are more fragmented than
    the beer industry:
       Farmers
       Labor (the case of unionized labor)
  – The more consolidated supplier is that one
    supplying bottles/cans.


                                              reweries
  The North American Market
• Key elements for improving operating margins for
  national breweries:
   – Expanded market share.
   – Low cost structure.
   – Price increases and premium pricing (low demand elasticity).
   – Improved production efficiencies (packaging and automation).
   – International expansion to countries with increasing consumption
     trends.
   – Connection between branding and pricing.
   – Distribution Networks (wholesalers‘ loyalty).
                  Sources: Department of Employment and Economic Development of Minnesota (2004)
                                                 http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf
                                                    Poitras (2003) – US Breweries: Anheuser-Busch




                                                                             reweries
VALUATIONS

 Molson – Leon Chung
Coors - Cameron McLeod
  Bud - Darren Devine




                         reweries
Molson




         reweries
       Company Overview
• Founded in 1786 by John Molson
• 3,800 employees
• 5 breweries located in Vancouver,
  Edmonton, Toronto, Montreal and St.
  John‘s
• Oldest beer brand in N. America
• Operations in Canada, Brazil, and the
  United States

                                   reweries
       Company Overview
• Canada‘s largest brewer
• In 2001, Molson repurchased 100% of
  Molson brands in the US and has 50.1%
  interest in Molson USA
• Pursuing the fast growing Brazilian market
• Global gross sales of $3.5 billion



                                    reweries
          Senior Management
• Daniel J. O'Neill*
  President and Chief Executive Officer
• Brian Burden*
  Executive Vice President and Chief Financial Officer
• Kevin T. Boyce*
  President and Chief Operating Officer, North America
• Robert Coallier*
  President and Chief Executive Officer, Cervejarias Kaiser and
  Executive Vice President, Molson Inc.
• Raynald H. Doin*
  Senior Vice-President Strategy and Integration, Human Resources
• Marie Giguère*
  Senior Vice President, Chief Legal Officer and Secretary
• Peter L. Amirault*
  Senior Vice-President Business Development and Innovation


                                                      reweries
          Portfolio of Brands
Core Brands
• Canadian, Canadian
  Light, Carling Black
  Label, Exlight, Export,
  Golden, Marca Bavaria,
  Kaiser, Molson Dry, and
  Rickard‘s
Molson‘s Partners
• Coors Light, Corona,
  Heineken, and MGD


                                reweries
       Challenges in 2003
• Faced same challenges in US as Coors
  did
• In Canada, Alberta and Ontario faced
  strong discount activity and Molson had a
  hard time responding
• In Brazil, market share decreased by over
  2% due to increased competition


                                   reweries
      Plans for the Future
Five Key Objectives
• Grow operating profit
• Grow market share
• Grow volume
• Organizational renewal
• Improve quality


                             reweries
1) Grow Operating Profit




                     reweries
    1) Grow Operating Profit
• Revenue growth
• – through both pricing and product mix improvement
• Cost savings
   – Project 125
         Capacity utilization savings are expected to reach $41 million
          through improved brewery assets usage and equipment
          modernization.
         Best-in-class practices and materials sourcing aim at procurement
          savings of $35 million.
         Costs savings of $40 million for distribution are anticipated
         through capital investment, productivity and supply chain
          integration.
         Savings in organizational costs of $9 million are planned.



                                                              reweries
   2) Grow Market Share

Segmentation of Canadian Beer Market




                                 reweries
       2) Grow Market Share
Canada
• Total market share in Canada decreased by 0.6% from
  44.4% to 43.8% - however, customers‘ preference for
  core owned brands (increase in share by 0.9%) lead to
  a rebalancing in Molson‘s brand portfolio in favour of
  owned brands
• Strengthen the CANADIAN brand in the premium
  segment
• Redesigned packaging including a customized die-cut
  label for bottles
• New look for cans
• Refreshed outer case


                                               reweries
     2) Grow Market Share
Brazil
• Market share decreased from 14.6% to
  12.4% in Brazil
• The flagship brand, KAISER PILSEN, was
  reformulated the liquid and launched a
  new advertising campaign



                                 reweries
     2) Grow Market Share
United States
• Market erosion of GOLDEN and
  MOLSON ICE
• Molson used print, radio and outdoor
  advertising to win the young adult
  consumer
• Use of Molson Twin Labels


                                   reweries
3) Volume by Geographic Sector




                         reweries
3) Volume by Hectolitres




                     reweries
          3) Grow volume
Canada
• Volume grew by 0.7% but was slower than
  industry which moved up 2.0%
• Product innovations and new packaging are and
  will be biggest drivers of volume
• New products such as COLD SHOTS,
  CANADIAN LIGHT, and MOLSON ULTRA
  should increase volume in fiscal 2005


                                      reweries
           3) Grow volume
Brazil
• Brazilian operations experienced volume drop
  of 17.5% over fiscal year while industry only
  declined by 3.4%
• Have hired key sales leadership with beer sales
  experience
• Created Kaiser-managed sales teams to work
  with Coca-Cola distributors
• These and other measures lessened and even
  reversed the negative trend in some geographic
  areas

                                        reweries
           3) Grow volume
United States
• Molson USA grew by 1.4%
• Aligned itself with Coors distributors which
  accounted for 85% of Molson USA‘s distributors
• Improved results and leveraged Coors market
  infrastructure
• Continue to build on strength of CANADIAN
  trademark and use innovative packaging


                                       reweries
  4) Organizational Renewal
Organizational Design
• New structure of an integrated but decentralized sales
  force connected to local markets
• Brazil: hiring of more than 1,200 experienced sales
  people in six regional sales centres
Leadership Development and Succession Planning
• Production Leadership Program
• New program for development of talent in strategic
  marketing function
• Optimal Work Environment philosophy
Optimal Work Environment

                                                reweries
           5) Improve quality
• Renaissance in Brewing initiative
• Quality
  – Incoming raw materials
  – Conversion in the brewery
  – Consumer and customer satisfaction
• Safety
  – Frequency of down time declined by 16%
  – Severity of accidents resulting in down time declined
    by 11%


                                               reweries
       Events in the News
• Molson and Coors Announce Merger of
  Equals to Create World's Fifth Largest
  Brewer
• Molson and Coors Announce Agreement
  to Pay Special Dividend to Molson
  Shareholders Molson to Build New $35
  Million Brewery in New Brunswick


                                  reweries
  Molson and Coors Announce
           Merger
• Pentland agrees to forego participation in
  special dividend
• Molson Coors Brewing Company will be fifth
  largest in world
• Combined total of 60 million hectolitres
• Management structure and board composition
  –   Chairman: Eric H. Molson (Molson)
  –   CEO: Leo Kiely III (Coors)
  –   Vice Chairman: Daniel J. O‘Neill (Molson)
  –   CFO: Timothy V. Wolf (Coors)


                                                  reweries
   Special Dividend to Molson
          Shareholders
• Announced on Nov. 5th
• As part of Molson and Coors merger
• Pentland will forego special dividend
  – As a result, dividend will be $3.26 rather than
    $3.00
• Pentland is owned by Chairman Eric
  Molson and Director Stephen Molson


                                          reweries
              New Brewery
•   Cost of $35 million
•   Located in Moncton, New Brunswick
•   Completed by January 2007
•   Capacity of 6 million 12 packs annually
•   Implementation of distribution system
•   $3.5 million forgivable loan


                                      reweries
Income Statement




                   reweries
    Income Statement Analysis
•   P/E                     17.99
•   Price to Sales           1.22
•   Price to Book            3.50
•   Dividend Per Share       0.56
•   Book Value Per Share     9.57
•   Revenue Per Share       27.34


                           reweries
Balance Sheet




                reweries
       Balance Sheet Analysis
•   Quick Ratio                         0.25
•   Current Ratio                       0.42
•   Debt to Equity                      0.65
•   Return on Equity (ROE)            25.1%
•   Return on Assets (ROA)            6.03%
•   Return on Invested Capital (ROIC) 10.7%


                                    reweries
Cash Flows Statement




                  reweries
         Cash Flow Analysis
• Operating Activities                  216.4
• Investing Activities                  (73.1)
• Financing Activities                 (125.8)
• Net                                    21.2
• Operating Activities is greater than other
  expenditures
• Investing Activities, Molson has been investing
  in newer equipment
• Financing Activities, repayment of long term
  debt was greater than refinancing

                                         reweries
      Stock Price Summary
• Traded the TSX
  – Symbol: MOL.A P
  – Price: 33.460
  – 52 week high: $36.80
  – 52 week low: $28.50
  – Market Capitalization of approximately $4121
    million



                                       reweries
Stock Price Performance: One
       Year Chart (TSX)




                        reweries
Stock Price Performance: Five
      Year Chart (NYSE)




                         reweries
Recommendation




     Hold


                 reweries
reweries
          Company Overview
• Adolph Coors company was founded in 1873
• World‘s 9th largest brewer with $4 billion in annual sales
• Principal subsidiary is the Coors Brewing Company,
  which is the 3rd largest brewer in the U.S.
• Also owns Coors Brewers Limited in the U.K., which is
  the U.K.‘s 2nd largest brewer
• Primary product in the U.S. is Coors light and in the U.K.
  their flagship is Carling. They rank #3 and #1
  respectively in sales per market
• Traded on the NYSE, ticker symbol (RKY)

                                                 reweries
   Company Overview Con’t
• Corporate headquarters and primary brewery
  are located in Golden, Colorado
• The Coors Golden brewery is the world's largest
  on a single site. Coors owns a second brewery
  in Memphis, Tenn., and a packaging facility in
  Virginia's Shenandoah Valley, near the town of
  Elkton, Va.
• Coors products are available in over 30
  international markets

                                        reweries
           Portfolio of Brands
• Coors has a wide array
  of brands including:
   – Coors Light, Coors
     Original, Aspen Edge,
     Killian‘s, Blue Moon,
     Keystone Ice, Keystone
     Premium, Coors NA, Extra
     Gold, Zima XXX Hard
     Lemon Lime, Zima XXX
     Hard Black Cherry, Zima
     XXX Hard Orang




                                 reweries
Flagship Brands
        • Carling is the #1 selling
          beer in the U.K. and
          Coors Brewing Limited is
          ranked #2 for total
          market share with 21%
        • Coors Light is the #3
          selling beer in the U.S.
          and Coors Brewing
          Company is ranked #3 in
          total market share with
          11%

                         reweries
               Brewing Bits
• Coors uses an all-natural brewing process and
  the finest ingredients: ideal brewing water,
  hops, cereal grains (rice and refined corn
  starches), and barley. Coors has developed
  special strains of barley it malts itself to ensure
  product quality. Nothing artificial is in Coors
  beers.
• On average, Coors takes 55 days to brew, age,
  finish and package its lagers—about twice as
  long as its major competitors. The result is a
  naturally aged, stable and smooth product.
                                            reweries
          Challenges in 2003
• Continued weakness in the US economy during 2003
  and, specifically, high unemployment levels among the
  key 21- to 24-year-old male consumer population,
• Unfavorable weather, particularly in the Northeast, for a
  significant part of the peak summer selling season,
• The popularity of low-carbohydrate diets that softened
  demand for beer,
• The rise in popularity of distilled spirits and other
  alternative beverages, particularly among 21- to 29-year
  olds, and
• A grocery store strike in California that likely impacted
  sales in the largest beer state.

                                                reweries
        Plans For The Future
• They are striving to capture an increasing share of each
  new generation of legal-drinking-age beer drinkers in
  order to gain their brand loyalty for the long-term
• They intend to seek publicity through both new products
  and brands, or product developments with existing
  brands, such as Coors Light and Carling
• Strengthen their access to retail by creating a solid
  distribution network with wholesalers and retailers
• Lower the cost structure in order to grow profits and
  afford the investments needed to grow and succeed


                                                reweries
              Sales Volume
• Has risen
  dramatically with the
  acquisition of Coors
  Brewers Limited




                             reweries
New Global Strategy




                  reweries
            Financial Review
• Have become globalized and diversified. In 2003, CBL
  performance in the U.K. and Coors Light in Canada
  showed the advantages of becoming more than a one-
  brand, one-market company.
• Continued cost reduction and productivity despite
  difficulties. Improved upon costs and productivity, in
  spite of challenges, particularly in the U.S. market.
• Reducing debt ahead of schedule. In just two years,
  they reduced debt by nearly a third through an
  emphasis on cash generation and disciplined capital
  management.


                                               reweries
Sales by Volume & Dollars




                      reweries
          After Tax Income
• Figures are in
  millions of dollars
• Coors has seen
  steady growth in
  income
• Large increase in 02
  is due to the
  acquisition of Coors
  Brewing Limited
  (U.K.)

                             reweries
           Financial In Brief
• Adolph Coors Company is ranked among the
  500 largest publicly traded corporations in the
  U.S., based on annual sales. The company is
  the world's 9th largest brewer.
• In 2003, Coors sales volume was 32.7 million
  barrels (1 U.S. barrel equals 31 gallons).
• Net sales for 2003 totaled $4.0 billion. 2003 net
  income was $174.7 million, up 8.0 percent from
  2002.

                                          reweries
      Merger With Molson
• Coors is planning on merging with Molson
  in December, 2004
• It will become the 5th largest brewing
  company in the world
• Goals are to increase penetration into
  new markets
• Allows the company‘s to compete with the
  ―superpower‘s‖ of the brewing industry

                                  reweries
       Propels MolsonCoors into
                ‘Top5’                     Volume (M hl)
InterbrewAmBev                                             215
           A-B                                       152
     SABMiller                               116
      Heineken                              109

 Molson Coors                         60

   Carlsberg(1)                   54
    Scottish &
                                 50
    Newcastle
  Grupo Modelo              42

         Coors              39

         Asahi          36
       Tsingtao        33
       FEMSA       25
          Kirin    23
       Molson      21
       Foster‟s   17


                                                                 reweries
reweries
   Income Statement Analysis
• Increased sales due to U.K. and Canadian success
• High interest expense due to the $1.6 billion investment in CBL
• Steady increase in net income even with a highly competitive U.S.
  market
• P/E:                                                  14.8
• Price to Cash Flow Ratio:                             5.25
• Price To Sales:                                       0.64
• Price To Book:                                        1.93
• Dividend Per Share:                                   0.82
• Book Value Per Share:                                 34.62
• Revenue Per Share:                                    108.0



                                                        reweries
reweries
reweries
       Balance Sheet Analysis
•   Only has $0.53 cash on hand per share
•   Quick Ratio:                        0.67
•   Current Ratio:                      0.95
•   LT Debt to Equity:                  91.5
•   Total Debt to Equity:               98.7
•   Return on Equity (ROE) Per Share: 18.0
•   Return on Assets (ROA):             5.57
•   Return on Invested Capital (ROIC): 9.07

                                        reweries
reweries
          Cash Flow Analysis
•   Dividend Yield:                      1.17
•   Dividend Yield - 5 Yr. Avg:          1.25
•   Dividend Per Share:                  0.82
•   Dividend Payout Ratio:               17.0
•   5 Year Annual Growth:                20.8
•   Revenue - 5 Year Growth:             15.7
•   Dividends Per Share - 5 Year Growth: 6.44
•   EPS - 5 Year Growth:                 21.3

                                         reweries
      Stock Price Summary
• Traded on the NYSE
  – Symbol: RKY
  – Price: $71.88
  – 52 week high: $80.11
  – 52 week low: $53.73
  – Market Capitalization of approximately $2.6
    billion



                                        reweries
Stock Price Performance: One
      Year Chart (NYSE)




                       reweries
Stock Price Performance: Five
      Year Chart (NYSE)




                        reweries
Recommendation

     Hold




                 reweries
reweries
               Overview
• Established in 1864
• Largest Brewer in the world
• Budweiser is #1 brand of beer in the world
• Beer Production, Entertainment,
  Packaging, Real Estate Development &
  Transportation
• Almost 50% domestic market share

                                    reweries
              Operations
• 12 US Breweries
• 2 International Breweries (China/ UK)
• Produced 111 Million Barrels of Beer
• 6th consecutive year with double digit
  growth in earnings per share
• $16 Billion in Sales



                                     reweries
     Competitive Advantage
• Three divisions: Brewers, Wholesalers &
  Retailers
• 2/3rds of volume delivered by wholesalers who
  only carry Anheuser-Busch (A-B)
• Loyalty of wholesalers is compensated by large
  profit margins
• Leverage 49.8% market share into 75% of
  markets operating profit through Procurement,
  Manufacturing efficiency and Marketing

                                        reweries
                Products
•   Budweiser & Bud Light
•   Michelob and Michelob Ultra
•   Busch and Busch Light
•   Hurricane and Malt liquors
•   Bacardi Silver & Mike‘s Hard Lemonade
•   O‘doul‘s & non-alcoholic beverages


                                   reweries
       Subsidiaries & Satellites
• A-B Packaging: Recycling, Printing/ Packaging,
    Aluminum Production
• Busch Entertainment: Sea World, Busch
    Gardens
•   50% Share in Grupo Modelo: Corona (93-98)
•   27% Share in Tsingtao: China‘s largest brewer
•   20% Share in Cervecerias: Chile‘s largest brewer
•   Distribution partnerships: Labatt & Kirin (Japan)

                                               reweries
                         Executives
•   August A Busch III Chairman of the Board (29 Years)
•   Patrick T. Stokes President & CEO (20 Years)
•   W. Randolph Baker CFO & Vice President (8 Years)
•   John E Jacob Director of Global Communications (14 Years)
•   Carlos F Gonzales Director ―Grupo Modello‖(8 Years)
•   James J Forese Director (26 Years) Americas Most Powerful People
•   Charles F Knight Director (21 Years) Americas Most Powerful People



                                                             reweries
    Financials-2003 Annual Report
•   Symbol               BUD
•   Price (Nov 12-04)    $51.06
•   Outstanding Shares   $837 Million
•   P/E                  20.59
•   EPS                  2.48
•   Dividends Paid       $685.4 Million
•   ROE                  70%

                                    reweries
Financials Cont.




                   reweries
reweries
     Balance Sheet Analysis
• Invested $200 Million in Bonds & Loans
  with Tsingtao Brewery in China
• Net Increase to Debt $682.2 Million with
  US Dollar Notes and Commercial Paper
• Current Ratio .88
• 11% Decrease in Shareholders Equity



                                    reweries
Debt Analysis




                reweries
reweries
   Income Statement Analysis
• 9% Increase in                               Anheuser Busch Income Growth
  Revenues
                                     18000
                                     16000
• 7% Increase in                     14000                                    Revenue
  COGS
                        $ Millions
                                     12000                                    COGS
                                     10000
                                                                              Operating Income
                                      8000
• 18% Increase in                     6000                                    Net Income
  Operating Income                    4000
                                      2000
                                         0
• 22% Increase in Net                        2001     2002      2003
  Income

                                                                        reweries
      Income Statement Cont
• Advertising and promotional activities are
  a key component of A-B‘s Strategy
• Advertising Costs were $806.7 Million
• Promotional Costs were $511.8 Million
• A-B is able to gain a competitive
  advantage through their advertising



                                     reweries
reweries
    Cash Flow Statement Analysis
• 1.82 Billion in Free Cash Flow
• Acquired almost $2 Billion in Treasury Stock
• Paid $652 Million in Debt
• However, increased Debt by $1.4 Billion
• Issued $685.4 Million in Dividends
• Continue to acquire businesses and invest in
  packaging and related operations
• Future Cash may be directed towards China

                                        reweries
    Cash Flow Statement Cont
• Reached 5 year agreement with Union
• Pension Increases of 14%
• $7.5 Million signing bonus
• 100 Million executive stock options yet to
  be exercised
• Price equal to price on option issue date
• Employee Stock Ownership Plan (ESOP)
  deferred 45.4 million shares for purchase

                                     reweries
Impact of Stock Options on
            N.I.




                      reweries
                      Derivatives
• Derivatives used to mitigate the company‘s exposure to volatility in
  commodity prices, interest rates and foreign currency.
• Hedges only with derivatives that have high correlation with the
  underlying transaction pricing
• Company policy is not to speculate in the derivatives market




                                                          reweries
    Employee Pension Plans
• Defined contribution plans
• Pension plans cover substantially all
  regular employees
• Based on negotiated labour contracts




                                    reweries
Financial Statement Analysis Cont.
 VALUATION MEASURES- Nov 12                   Profitability- Nov 12-04

                                        Profit Margin (ttm):          0.1235
Market Cap                     40.34B
Enterprise Value (12-Nov-04)   48.14B   Operating Margin (ttm):          0.226
Trailing P/E                   18.86
Forward P/E                    17.19
                                            Management Effectiveness
PEG Ratio (5 yr expected)       1.85
Price/Sales                     2.71    Return on Assets (ttm):       0.1205
Price/Book                     14.49
                                        Return on Equity (ttm):       0.8121
Enterprise Value/Revenue        3.26
Enterprise Value/EBITDA         11.3    Dividend Yield                    0.02



                                                                  reweries
Technical Analysis




                     reweries
     Dividend Discount Model
• Good for stable companies w/ growing
  dividends.
• 2001= 614.1 2002= 649.5 2003= 685.4
• Stock Price = Ex (Div/Share)
                   (k – g)
g= 6% Div/ Share= .82 k= .075
Ex Stock Price= $54.67
Actual Price= $51.06

                                     reweries
reweries
reweries
reweries
Recommendation




     Hold
                 reweries
        Questions???

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    ?                   ?
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                       ? ?
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                        reweries

								
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