Over the last few decades, the United States beer industry has been characterized by a very clear

trend
toward an increase in the concentration of the market. Today, some 80% of all beer consumed in the
United States is produced by just three companies – Anheuser-Busch (which is now owned by InBev
of Belgium), SAB-Miller, and Molson Coors-up from 57% of the market in 1980. Anheuser-Busch has
almost 50% of the market in 2008, up from just 28.2% in 1980. SAB-Miller (formed in 2002 when South
African Breweries merged with Miller Beer) has around 19% of the market, and Molson Coors (formed
in 2005 when Canada’s Molson merged with Coors) had 11% of the market.

Anheuser Busch, SAB-Miller, and Molson Coors dominate the mass market segment of the industry,
where competition revolves around aggressive pricing, brand loyalty, distribution channels, and
national advertising spending. In contrast, there in another segment in the industry, the premium beer
segment, which is served by many microbrewers and importers, the majority of which have a market
share of less than 1%. The premium segment focuses on discerning buyers. Producers are engaged in
the art of craft brewing. They build their brands around taste and cover higher product costs by
charging much higher prices-roughly twice as much for a six pack as the mass market brewers. The
micro-brewers and importers have been gaining share and currently account for about 11% of the
total market.

Over the last two decades, the industry has changed in several ways. First, consumption of beer in the
United States has been gradually declining (even though consumption of premium beer has been
increasing). Per capita consumption of beer peaked at 30 gallons in 1980 and fell to a low of 21.8
gallons in 2007. The decline in consumption as partly due to the growing popularity of substitutes,
particularly wine and spirits. In 1994, Americans consumed 1.75 gallons of wine per capita. By 2006,
that at figure has risen 2.16 gallons. Consumption of spirits increased from 1.27 gallons per capita in
1994 to 1.34 gallons per capita over the same period.

Second, advertising spending has steadily increased, putting smaller brewers at a disadvantage. In
1975, the industry was spending $0.18 per case on advertising by 2002 it was spending $0.40 per case.
(these figures are in inflation adjusted or constant dollars). Smaller mass-market brewers could not
afford the expensive national TV advertising campaigns required to match the spending of the largest
firms in the industry, and they saw their market share shrink as a result.

Third, due to a combination of technological change in canning and distribution and increased
advertising expenditures, the size that a mass-market brewer has to attain to reap all economics of
scale called the minimum efficient scale of production-has steadily increased. In 1970, the minimum
efficient scale of production was estimated to be 8 million barrels of beer a year, suggesting that a
market shared of 6.4% was required to reap significant economics of scale. By the early 2000s, the
minimum efficient scale has increased to 23 million barrels, implying that a market share of 13.06%
was required to reap significant economies of scale.

By the early 2000s, only 24 mass-market brewers were left in the United-States, down from 82 in 1970.
Among the remaining mass-market brewers, Anheuser Busch is the most consistent performer due to
its superior economics of scale. The company’s ROIC has been high, fluctuating in the 17% to 23%
range between 1996 and 2008, while net profits grew from $1.1 billion in 1996 to $2 billion in 2008.
In contrast, both Coors and Miller, along with most other mass market brewers, have had mediocre
financial performance at best. Coors and Miller merged with Molson and SAB, respectively, in an
attempt to gain economics of scale.