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WIKI ANALYSIS
Formed by the merger of the Coors Brewing Company and the Molson Company in 2005, the Molson Coors Brewing Company is the fifth largest brewer in the world by production volume.[1] The company brews and sells 40 different beer products, in addition to selling beer via partnerships with companies like Heineken and Corona.
Molson Coors thrives particularly in Canada, where it commands over 41% of the market, largely through its sales of flagship brands Coors, Coors Light, and Molson. As premium beers, these brands are sold in a worldwide market characterized largely by the category's maturity and slow growth. In July 2008, Molson and SABMiller combined their US operations in a joint venture. The new venture, MillerCoors, produces approximately 70 million US barrels, making it a formidable competitor to U.S. market leader Anheuser-Busch (which sold 104 million barrels in 2007).[2][3] The company also competes in the alcoholic beverage market at large, which includes beer, wine, and other spirits. As the company does not have any significant presence in the wine and spirits segment, a faster growing portion of the industry, Molson Coors must seek growth in Emerging Markets and through partnerships and acquisitions.
Molson Coors is highly exposed to raw materials costs. Prices for the most important input materials, aluminum, barley, and grain fluctuate widely. For example, aluminum prices have fallen more than 60% from their 2008 highs of $1.50/pound to less than $0.65/pound.[4]
Company Overview
Molson Coors was created when the Coors Brewing Company of America merged with Molson Canada on February 9, 2005. In 2007, the company announced a joint venture with SABMiller (SAB-LN). The deal, forming the second largest brewer in the US, after Anheuser-Busch Companies (BUD), was completed on July 1, 2008. Under the agreement, Molson Coors claims a 42% share in the joint venture's profits, but retains 50% voting rights. The joint venture only encompasses the company's operations in the US; its Canadian and UK businesses remain completely under the control of Molson Coors. The combined company benefits greatly from logistical and transportation synergies. Instead of having to brew Coors Light in Colorado and shipping it to the east coast, Molson Coors can now brew the beer in SABMiller (SAB-LN)'s east coast breweries, creating a simpler distribution chain. The company expects to realize ultimate cost savings of $500 million.[6]
In 2008, Molson Coors posted revenues of $4.8 billion, a decrease of 23% from 2007, while net income fell 22% to $388 million.[7] The decrease in sales and net income are attributable to a change in accounting relating to the MillerCoors joint venture and a strengthening US dollar. Ignoring the change in accounting, Molson Coors' US revenues would have increased by 2.1% in 2008, leading to an overall increase in total revenues as revenues for the three remaining segments grew during the year.[8] The company also recorded a charge of $103 million relating to the formation of the joint venture; ignoring it, net income would have increased by 10% in 2008. Additionally, as Molson Coors' records its financial information in dollars, the company was affected by the dollar's .5% appreciation to the Canadian Dollar (CAD) and an 8% appreciate to the British Pound (GBP).[9][10] Molson Coors has grown through both increased barrel sales and higher barrel prices. In 2008, the company's sales volume fell as a result of a change in the allocation of barrel sales to between itself and SABMiller (SAB-LN) as part of the joint venture. Since 2004, barrel prices have increased as Molson Coors has responded to rising input costs.
Quarterly Earnings
Q1 2009
In the first quarter of 2009, Molson Coors posted revenues of $824 million (comparison to year prior numbers is immaterial as sales accounting is incomparable as a result of the Miller joint venture); net earnings rose 120% to $75.7 million.[11] The majority of this increase is due to higher net pricing as well as cost savings realized from the merger with Miller.[12] These two factors counterbalanced foreign currency exchange losses as well as lower sales volumes. The company's UK segment was particularly affected as sales volumes decreased by 13.8% as the global recession continues to affect consumer purchasing. However, Molson Coors plans to maintain its UK pricing schedule and expects the segment to improve in the coming year.[12]
Q2 2009
In the second quarter of 2009, Molson Coors posted revenues of $1.16 billion (comparison to year prior numbers is immaterial as sales accounting is incomparable as a result of the Miller joint venture); net earnings rose 136% to $187.3 million.[13] Most of the increase in net income was due to higher net pricing and $32 million in cost savings realized by the MillerCoors joint venture. Company-wide, volume decreased 3.2% on a pro-forma basis, including a 12.4% decrease in the UK. The decrease in volume is partly the result of Molson Coor's decision to concentrate on higher margin brands. The company's initiative to grow Coors Light proved successful, as the brand's worldwide volume increased 3% during the quarter.
Q3 2009
In the third quarter of 2009, Molson Coors posted revenues of $1.25 billion, a decrease of 9% from Q3 2008; net earnings increased 37.4% to $236.4 million[14] The company's worldwide beer volume decreased by 2.9% from the previous year, reflecting a 1.8%, 1.1%, and 6.3% volume declines in Canada, the USA, and the UK respectively[15] Operations in Canada and the UK were both negatively affected by the strength of the US Dollar, leading to a 7.7% decline in revenue for Canadian operations. In the US, revenues grew 16.6% based on the continuing strength of MGD 64, Coors Light, Miller High Life, and Keystone Light.c In the UK, volume decreased 6.3% but profits grew 6.5% (in spite of the British Pound's weakness versus the Dollar) as a result of the company's decision to forgo selling lower-margin beverages.[16] In the third quarter, Molson Coors announced the sale of their ownership share in the Montreal Canadiens NHL team and their pending purchase of Granville Island Brewing Company of British Columbia, a microbrewer that will add to the company's super-premium product line.[17]
Operating Segments
Molson Coors operates in four geographic regions (corporate expenses are not allocated to either segment so individual segment net income is not reported):
Canada (39% of Revenue)[18]
The Canada segment brews, markets, sells and nationally distributes a wide variety of beer brands in Canada. Besides its own brands, the company also has distribution agreements with several foreign brewers to distribute their beers throughout Canada.[19] Molson Coors' most popular Canadian brands by sales volume include:
- Coors Light
- Canadian
- Molson Dry
- Export
- Creemore
- Rickard's Red
The company has licensing agreement to distribute:
- Modelo
- Heineken
- Asahi
United States (31.5% of Revenue)[20]
In 2008, Molson Coors entered into a joint venture with SABMiller (SAB-LN) to create MillerCoors in the United States. Molson Coors has a 42% interest in the joint venture and accounts its stake under the equity method, meaning that it claims 42% of the net income for the new company.[21] MillerCoors brews, markets, sells and nationally distributes a wide variety of beer brands in the US. The most popular brands by sales volume include:
- Coors Light
- Coors Banquet
- Keystone Light
- Miller Genuine Draft
- Miller Light
- Blue Moon
The United Kingdom (28% of Revenue)[10]
The United Kingdom segment brews, markets, sells and nationally distributes a wide variety of beer brands in the UK. In 2008, approximately 58% of the UK segment's sales were to "on-premise" customers, predominantly pubs and restaurants, while the remaining 42% was to "off-premise" customers, mainly supermarket chains and convenience store chains.[22] The most popular brands by sales volume include:
- Carling
- C2
- Coors Light
- Worthington's
- Caffrey's
The company has licensing agreement to distribute:
- Grolsch
- Magner's Draught Cider
- Dos Equis
Global Markets (1.5% of Revenue)[23]
The Global Markets segment grows and expands Molson Coors' product lines in Emerging Markets, mainly in Japan, China, southern Europe, and central America.[24] The segment's production is licensed to third party brewers, mainly the company's flagship Coors Light brand.
Trends and Forces
Molson Coors Must Maintain Brand Loyalty in a Highly Competitive Environment
Molson Coors sells 40 different brands of beer worldwide (14 in the U.S.). But the majority of their sales volume is concentrated in 3 different products across 3 countries: Coors Light in the U.S.; Carling in the U.K.; and Molson in Canada. In 2008, sales of Coors Light accounted for 53% of revenue in the Canadian segment while Carling made up 80% of revenues in the UK.[25] Therefore, consumer preferences for these three products alone have a significant impact on the success of the company. Especially in the US, Molson Coors must compete with small, local breweries for consumers' tastes and preferences. There are approximately 1500 small breweries in the US, and on average, each produces 5600 barrels of beer a year.[26] Although this pales in comparison to the 70 million barrels that MillerCoors produces in the US alone. However, the company must overcome staunch loyalties when marketing products in regions with strong local breweries.
Molson Coors Must Successfully Adapt to An Increasingly Consolidated Industry
The brewing industry tends to be categorized by a few large, dominant-players, along with many smaller, specialty and niche companies (e.g., micro-breweries). Consolidation of smaller outfits with larger ones has been common among players like Molson Coors, Anheuser-Busch, InBev, and SABMiller, all of whom have sought growth through acquisition. A major, recent development on this front occurred in October, 2007, when Molson Coors Brewing Company (TAP) and SABMiller plc (SBMRY) announced that they would combine their US operations. The new venture, MillerCoors, will produce approximately 70 million US barrels and will have revenues of over $6.5B. The companies expect to produce $500 million is savings which will allow them to boost advertising spending and trim prices to capture market share from US leader Anheuser-Busch Companies (BUD).[27]
Commodity Cost Fluctuations Affect Margins
The company utilizes a variety of agricultural and commodity products in brewing and bottling its beverages. For beer, the most important inputs are hops and barley. Barley typically constitutes 8% of the brewing costs of beer, and a significant price increase in barley, for instance, would increase the cost of the company's goods sold and put pressure on margins. Barley prices have increased 85% because of a dwindling supply.[28] Farmers are increasingly attracted to farming crops such as corn and soybeans instead of barley because of the burgeoning biofuel industry. During the commodities superspike of 2007 and 2008, the prices of these commodities rose drastically with general commodities bubble and dramatically pressured margins. They receded in late 2008, but remain elevated, and the possibility of another significant rise in Commodities represents a constant threat to profits. The company plans a pricing increase across it's entire product line in 4Q2009 to help cover these input increases.[29]
Competition
Molson Coors is the 5th largest brewer in the world. However, it has a much larger market share in its three primary countries.
US Market Share
Beer is the most preferred alcohol in the United States, with 42% of alcohol drinkers choosing it. Wine is the second most preferred, with 31%, followed by hard liquor at 21%.[26] Although beer has been the historical preference of Americans, Molson Coors still competes with these other categories of alcohol.The MillerCoors joint venture is the second largest brewer in the US, with 29% of the market. The company trails its larger competitor,Anheuser Busch, owned by InBev (INB-BT), which has 49% of the US market.[31]
Canada
Molson is the largest brewer by volume in Canada with 41% of the market share by volume, although the Labatt brand (owned by the world’s largest brewer, InBev (INB-BT)), is only a few percentage points behind. Coors Light has 11% of the market share and Molson Canadian has 8%. Canada is a mature market that is characterized by heavy competition among large-scale producers, regional breweries and microbreweries.[32]
United Kingdom
Coors Breweries Limited is Molson Coors’s arm in Western Europe and owns 21% of the British market, Europe’s second largest market.[33]
References
- ↑
- ↑ TAP 2008 10-K pg. 3
- ↑ BUD 2007 10-K pg. 2
- ↑ Aluminum Price Charts.
- ↑ hans 2008 10-K pg. 32
- ↑ 1 year later: MillerCoors saving millions.
- ↑
- ↑ TAP 2008 10-K pg. 43
- ↑ TAP 2008 10-K pg. 38
- ↑ 10.0 10.1 TAP 2008 10-K pg. 47
- ↑ TAP 2009 10-Q pg. 3
- ↑ 12.0 12.1 Molson Coors Q1 2009 Earnings Call Transcript.
- ↑ Molson Coors Reports Higher Second Quarter 2009 Income.
- ↑ TAP 10-Q Q3 2009, p. 3
- ↑ TAP 10-Q Q3 2009, p. 66,69,70
- ↑ TAP 10-Q Q3 2009, p. 66,69,70
- ↑ TAP 10-Q Q3 2009, p. 66,69,70
- ↑ TAP 2008 10-K pg. 37
- ↑ TAP 2008 10-K pg. 6
- ↑ TAP 2008 10-K pg. 41
- ↑ TAP 2008 10-K pg. 40
- ↑ TAP 2008 10-K pg. 12
- ↑ TAP 2008 10-K pg. 49
- ↑ TAP 2008 10-K pg. 15
- ↑ TAP 2008 10-K pg. 21
- ↑ 26.0 26.1 conomy unleashes 'perfect storm' for boutique beer.
- ↑ TAP 2008 10-K pg. 25
- ↑ Craft Brewers Reformulate Beer to Cope With Hop Shortage.
- ↑ Higher Price Brewing for Beer.
- ↑ Leading brewers in the world by volume.
- ↑ TAP 2008 10-K pg. 11
- ↑ Canada Business Profile.
- ↑ Europe Business Profile.
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