Market evolution - interview with John Barnett, president of Molson Breweries U.S.A - Interview

John Barnett, president of Molson Breweries U.S.A., offers a perspective on the changing North American beer market.

John Barnett has had a front-row seat in the ongoing consolidation of the North American beer industry. First through the merger of Molson with Carling/O'Keefe, and second in the merger of the two importing operations, Martlet and Century.

Today, Barnett is president and CEO of the new, larger entity that resulted from the importer merger - Molson Breweries U.S.A. It is a position that affords him with an enviable perspective-on the changing U.S. and Canadian beer markets.

Geographic proximity

The Canadian brands in the U.S. market have suffered fewer vicissitudes than their European counterparts, largely thanks to the geographic proximity of their breweries. Because of this, the Canadians come into the market at a price level between the domestics and overseas imports. This beneficial price position has helped Canadian brands hold firm to their share of the import market.

"The price-value relationship of Canadian imports continues to be excellent," Barnett says, "and as long as Canadian brewery costs remain competitive, and the exchange rate doesn't get out of kilter, I think Canadian imports will retain their position. "

To that end, the company has priced its brands competitively and has supported the brands with heavy consumer spending, including more than one high-profile sponsorship.

A wrench in the works

Clouds have gathered at the border, however, as the U.S. and Canada have traded broadsides over tax structure and distribution practices.

To put the troubles in context, it would be necessary to go back to the U.S.-Canadian free trade agreement, which largely exempted beer, on the understanding that time was needed to level out the playing field between brewers north and south. "The North American trade agreement contained very specific provisions to permit time to make changes," Barnett says, "and I think everybody at that time realized that it would take time to have an open border north and south. In Canada, at that time, borders weren't even open east to west."

Provincial regulation at that time forced Canadian brewers to operate a plant in each province, and discouraged transport of beer across inter-provincial borders. The result was a thriving Canadian beer industry - but one that existed in a vacuum. As one example, the province of Saskatchewan, with a population of one million people, had five breweries.

Today, all that is changing. The Foster's Brewing Group/ Carling O'Keefe - Molson merger has effectively divided the Canadian brewing industry between two large players - Molson and Labatt.

According to Barnett, this consolidation was inevitable in a changing North American, and world, economy. "The reasons for the merger were pretty simple," he says. "Both Foster's Brewing Group and Molson realized that the way that beer is brewed and distributed in Canada would not continue," he says. "All the rules that we played by are changing.

The transition to a more efficient brewing industry has not been without cost, Barnett says. Molson has shut down nine breweries since the merger with Foster's Brewin Group. "Given that many people have been displaced," he points out, "it has been very expensive. Not every employee can uproot and move 400 miles to work at a different brewery, and our suppliers must also adjust. These things take some time."

Time, however, is one thing that seems to be in sort supply. The problems started with "Beer I," a General Agreement on Tariffs and Trade (GATT) complaint brought by U.S. brewers Heileman and Stroh against Canada.

"The Heileman and Stroh complaints caused some discomfort in Canada," Barnett says, "and people began to ask themselves, |Is Canada changing fast enough?'''

Barnett says that Canada had agreed to make changes to settle the Beer I complaint, and an 18-month grace period was agreed upon. "For that reason," he says, "I think that it's less a substantive difference of opinion, and more a matter of timing.

"I'm certain we'll see more saber-rattling and rhetoric," he says, "but at the end of the day it all makes very little sense. With all the economic problems that both our countries face, it seems a bit ridiculous that things have gone this far."

Barnett observes that many American brands are already brewed under license in Canada. "The Heileman and Stroh brands that will become more widely available under the terms of Beer I are not as successful in the United States," he says, "and there are very few examples of successful importers that aren't successful in their own countries - The brands that lead in imports are brands that lead in their home markets."

Leading brands

This maxim is certainly true for Molson. In addition to a 52-percent share of the Canadian market, Molson Breweries U.S.A. holds an estimated 20 percent of the U.S. imported beer market.

In Canada, however, Molson is facing off against one other large player - John Labatt. And, in a situation reminiscent of the consolidated U.S. market, any growth by one player must come at the expense of the other. "The Canadian beer market is the same size as California," Barnett says, "and it's not likely to grow. Although we have a large percentage of the market, there is little opportunity for significant growth. We will have to work very hard to even push our 52 percent up to 54 or 55 percent."

With that in mind, Molson has been casting its eyes at foreign markets. The most attractive, of course, is the world's largest beer market - the United States. "As the Canadian breweries become more cost competitive," Barnett says, "we'll be more able to defend our own markets against the U.S. brewers. Once we can do that, we're sitting on the edge of the biggest beer market in the world. The way we look at it, the more successful we are at lowering costs in Canada, the more successful we'll be selling in the U.S."

Molson has also ventured into other markets, Barnett notes. "We are developing programs in the United Kingdom," he says, "and we're being successful. But, when it comes down to it, the U.K. is a beer market about a third the size of that in the U.S. And there is not a great deal of profit in shipping bottled beer across the Atlantic. It's easier for us to send a truck across the border than it is to send a freighter across the Atlantic."

Import Segment

Imports face a tough U.S. market today, however, and Barnett cites more than one reason for this. "The American brewers have shown themselves to be creative and adventurous with new products and packages," Barnett says, "and the pace in the U.S. beer market is set by the domestic brewers. Not surprising considering they sell 95 percent of the beer."

This competitiveness is going to make it tough for the smaller players, Barnett points out. "For many," Barnett says, "the U.S. market will get tougher. It is a very competitive market, particularly when you consider the number of import brands scrabbling for four or five percent of the market."

According to Barnett, this competitive atmosphere may contribute to continued attrition among import companies. "I'm not sure all of the importers in business today will be able to sustain the pace," Barnett says. "Even though each player wants to grow his own brand, the beer industry as a whole isn't growing. The number of wholesalers is decreasing, and there are only so many hours in the day. Wholesalers will be forced to look for bigger volume or higher margins to survive."

Volume is a key, Barnett says. "If an importer is moving less than a million cases," he says, "on a stand-alone basis, I don't see how that importer could fund the administrative side of the business, and still have a sales force to put money behind the brand."

"If an importer has an operating budget of only three or four million dollars," Barnett says, "even if that company focuses on one market, there are so many messages and appeals out there, I don't know how people will hear them."

And so, Barnett says, the gap between the smaller and larger importers gets wider. "Unless you come up with a big, smart idea," he says, "or get lucky, it will be tough."

Pressures on Retailers

The outlook in the third tier is equally stark, Barnett notes. "Retailers are beginning to take a hard look at the number of brands they carry," he says, "and the fight for shelf space, will, if anything, become more intense.

"This makes it very hard for fringe players to maintain distribution," Barnett continues, "unless they can maintain a certain level of sales and marketing support. If an importer isn't willing to spend money, and invest in brands, they won't get off the ground.

"A wholesaler wants to know that a brand will be around for some time," Barnett explains, "and he needs to know that the brand owner is investing in the brand in a true partnership sense."

One way to do that, Barnett notes, is through sponsorships, traditionally a sticky wicket for importers. Domestic brewers have eagerly snatched up every available sponsorship opportunity, which makes life difficult for importers with slimmer resources. "Sponsorships are a major problem for importers," Barnett says. "Because if you look around at what's available, there's not too much.

"At Molson we try to look at it on a North American basis," Barnett points out. "We try to leverage our equity and knowledge and concentrate on unique opportunities. One area where we are strong, for obvious reasons, is in ice hockey. We also sponsor 10 different tennis tournaments, and we sponsor the Molson Ski Challenge, which ran at a dozen hills last winter. In addition, we sponsor musical concerts in Canada through a partnership with MCA."

Arguably the most visible of Molson's promotions have been the recent forays into motor sports. Currently, Molson U.S.A. is sponsoring two cars in the Indy racing circuit. "The motor sports circuit is a good fit for us," Barnett says. "The timing is right because the race circuit goes through our busy selling season. The circuit also covers a big part of the country, and there are very few sponsorship opportunities in the U.S. that give us that kind of wide impact.

"The biggest thing is the opportunity to get involved," Barnett says. "By putting cars in the circuit we put our name out there right beside Bud and Miller," he says, "and if we beat them... you can't buy that kind of imagery.

"If you want to have a big-league brand that grows against a declining market," Barnett asserts, "you've got to show the wholesaler that you are serious about the brand.

"It's not cheap," he says, "and that kind of sponsorship might be impossible for a smaller importer. You've got to pay up front and just hope it comes back to you."

Barnett says the benefits of high profile sponsorships go beyond increasing visibility. "It gives our reps a tool," he says, "and it gives us the chance to give our wholesalers ticket incentives, and can serve as the basis for consumer promotions at the retail level. Through our motor sports sponsorship, for example, we have the opportunity to use Indy show cars as displays in high-traffic areas."

The benefits, Barnett says, are myriad. "These things add value to a brand, " he notes, "not just awareness. People recognize that we are putting something back into the brand. When it comes right down to it, I think that our willingness to do that is one key reason why we are growing when other importers aren't."

Multi-national portfolio

One of Molson U.S.A.'s key attributes is a multi-national portfolio that includes brands from both Canada and Oceania. In addition to the Molson family of brands, the company handles Foster's and Sheaf Stout from Australia and Steinlager from New Zealand.

Lately, however, the line between these countries of origin has been blurred. This process started when Molson U.S.A. introduced its Foster's Draught. "We couldn't find a sensible way of getting kegs across the Pacific as fresh as we wanted them," Barnett says. "so we shifted production to Canada."

Recently, Molson announced that all Foster's for the North American market, including packaged product, would be produced in Canadian breweries. "The Foster's Draught has been an outstanding success," Barnett says, "and we have found that as long as Americans believe that we are offering a quality product, the country of origin doesn't matter.

"We researched the idea extensively," Barnett continues, "and in all the studies, beer drinkers in the U.S. made no distinction between beer brewed in Canada and in the country of origin. The consumers primarily looked for taste and other characteristics.

Another new development on the Molson product front has been the introduction of the company's non-alcoholic entrant in the U.S. market. Molson Exel is one of the newest contestants in the tumultuous U.S. NAB market. "Exel has been an outstanding success for us in Canada," Barnett reports, "and the extent of its success forced us to delay the intro in the U.S. Given the fact that it's a late entry, we're very pleased with it's performance.

Big changes

The strong performance of non-alcoholic brews has made many beer executives take notice. Barnett believes that the success of the category is a portent of the future. "I think that the socially-responsible use of alcohol will become a major issue," he says, "and I think that this will lead to a lowering of acceptable limits. We're seeing that in Australia already, where there has been a huge shift in drinking habits.

"In Australia today," Barnett continues, "a light beer means one with low alcohol, not low calories. We're finding that we can brew a beer with all the flavor and body of a traditional lager with lower alcohol. That means a consumer can drink a reasonable quantity of beer and drive without fear."

According to Barnett, the new concern will lead to another change in the U.S., one that some U.S. brewers are already agitating for - alcohol content labeling. "There needs to be a requirement that alcohol content be disclosed in beer," he says. "If you are asking people to be responsible, then they have to know what they are drinking. That measure would also bring the U.S. into line with other countries."

Barnett sees these steps as logical steps in facing down the neoprohibitionists. "Offering these kind of products will emerge as part of the process of rebutting violent attacks on the industry," he says.

Good opportunities

Despite the extraordinary changes afoot in the North American beer industry, Barnett is sanguine about the position of importers in the U.S. market. "Even though competition from the domestic brewers will keep volume growth to a minimum," he says, "I still believe the U.S. beer market is large enough to represent good opportunities for importers with the necessary resources. The key will be to listen to the consumer and offer them what they want."

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