Analysis Of Miller Coors Merger

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Tuesday’s news of a joint venture between Molson Coors and SABMiller—the combining of their U.S. units to form a single entity that will be called MillerCoors—didn’t come as a shock. Something that big doesn’t happen without a lot of noise preceding it, and market-analyst chatter certainly did. But it’s surprising that it took this long. It’s also questionable whether the deal will work.

The melding of the two companies is a move that’s necessary for their survival. The U.S. beer market is a rich one, but Anheuser-Busch’s dominant 48 percent share of that market has shaped the paths of the significantly smaller Miller and Coors businesses: Instead of acting, they’ve been reacting. The joint venture puts MillerCoors at about a 28 percent market share and will save the two firms the effort and cost of competing with each other.

The new company’s portfolio is bigger and broader, making it better suited to a wider variety of markets. Besides its light and premium brands, Miller brings the craftlike Leinenkugel beers as well as solid imports such as Pilsner Urquell and Peroni, while Coors contributes its surging Blue Moon specialty brand. The firms’ geographical strengths mesh nicely, without much overlap; Coors is popular in the West and Northeast, while Miller does well in the middle of the U.S.

Investors have already reacted favorably to the news, probably because annual savings are expected to total $500 million by the end of the third year. That projection is based on reduced supply costs from economies of scale, reduced shipping expenses, and reductions in advertising and marketing costs.

Again, not startling: Two large companies form a joint venture to better compete with a larger company, rosy predictions are made, and cost savings are projected. Investors are happy.

There will certainly be less money spent on shipping and probably some savings as redundant jobs are cut. But steep price increases are projected in materials, which could eat up savings from reduced supply costs. And the consolidation of wholesalers won’t mean huge savings, as many areas have already consolidated the Coors and Miller houses.

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