Cut until you bleed

Carlos Laboy, in a November 2010 note on Molson Coors, wrote that Molson and Coors Brewing’s first major response to industry consolidation pressure was to merge in 2005. The cost reduction programme of 2005 served both companies well. In 2007, with the looming threat of AB-InBev’s formation, the companies merged their U.S. Coors business with SABMiller’s U.S. unit.

So far, so farsighted. MillerCoors is 58 percent majority owned by SABMiller, although when the joint venture was struck, the 42 percent minority partner, Molson Coors, got to define the first CEO and the leadership until 2010.

In retrospect, we would argue that it was just as well that the Molson Coors people ran the show at MillerCoors. After all, SABMiller’s efforts at turning round Miller Brewing, which they have owned since 2002, had not been crowned in success. Miller’s then CEO, Norman Adami was fortunate to have been called back to South Africa in 2007 or he would have had to face some serious questioning over his real achievements.

Since 2007, the integration of plants and supply chains at MillerCoors have yielded strong synergies but by 2010 these were already in Mr Laboy’s rearview mirror – at a time when AB-InBev was beginning to reap new cost savings at a pace that puts pressure on the smaller competitor.

Mr Laboy writes: “We concur with many distributors and industry consultants that while AB-InBev can afford to take down costs hard, pay down debt and still redeploy some of these savings to sustain or take share through joint plans with distributors, MillerCoors is somewhat disadvantaged in its ability to source similar resources. Bottom line is that both suppliers are cutting costs at a time that tired brand equities and the economy are not helping. This does not inspire

confidence among distributors, particularly in the MillerCoors network.”

Although one should usually take distributors’ complaints with a pinch of smelling salts, Mr Laboy cleary has evidence that many of them are very unhappy with MillerCoors’ management.

An increasing number of distributors would like to sell their business, probably under pressure from MillerCoors wanting to consolidate their distributor base, but cannot realise the price they want in this economy. So they have been forced to “run the business for dividends”, says Mr Laboy. Which means: they are milking it.

Mr Laboy maintains that “some key MillerCoors distributors meanwhile seem to be in outright disbelief at the sour and sad state of their supplier relationships and disturbed by a perceived lack of leadership strategies at MillerCoors.”

That’s heavy stuff coming from an analyst.

And how did MillerCoors respond? Well, in November 2010 they posted a chart depicting MillerCoors’ outstanding operating income increase on their website (see below).

In the coming months, SABMiller gets to appoint the new CEO of the MillerCoors joint venture. It would surprise us if Tom Long, 51, CEO and President of Miller Brewing Company, did not rise to the challenge.