BUSINESS

A GLOBAL BREW

CANADA’S TWO BEER GIANTS CONFRONT FLAT SALES AT HOME AND NEW THREATS FROM ABROAD

JOHN DeMONT July 24 1989
BUSINESS

A GLOBAL BREW

CANADA’S TWO BEER GIANTS CONFRONT FLAT SALES AT HOME AND NEW THREATS FROM ABROAD

JOHN DeMONT July 24 1989

A GLOBAL BREW

BUSINESS

CANADA’S TWO BEER GIANTS CONFRONT FLAT SALES AT HOME AND NEW THREATS FROM ABROAD

The Canadian beer industry will never be the same. Earlier this month, the federal Bureau of Competition Policy gave The Molson Cos. Ltd. and Carling O’Keefe Breweries of Canada Ltd. the green light for the $1.6-billion merger that the firms had agreed to last January. Soon after Molson president Marshall (Mickey) Cohen learned about the decision, he was on the telephone exchanging long-distance congratulations with Peter Bartels, chief of worldwide brewing at Elders IXL Ltd., the Australian brewery that controls Carling. The new venture—which will be jointly owned by Molson and Elders—will be the largest brewery in Canada, and the sixth-biggest in North America. But, more than anything, the merger is the first step in what stands to be a dramatic restructuring for the Canadian beer industry.

With 53 per cent of the annual 500-milliongallon domestic Canadian market, the new company—to be known as Molson Breweries—will vault ahead of perennial market lead-

er Labatt Brewing Co. as the country’s largest beer company. But with domestic beer consumption stagnant, Molson is looking to the huge U.S. market for growth. And Labatt, which last month gained a new president and chief executive officer, Halifax-born Sidney Oland, is also on the move, expanding its foreign beer operations and aggressively

branching out into dairy products, processed foods and even entertainment. Both strategies are designed to defend Molson and Labatt from tough foreign competition. The stage is set for cheap, tariff-free brew from the United States to flood Canada in the 1990s as the federal tariffs on brewery products are phased out under the Free Trade Agreement. And the two surviving giants of Canadian brewing—which control 96 per cent of the domestic market— will likely need all the financial strength they can muster.

Beer has never flowed freely in Canada. For the past 60 years, the domestic brewing industry has been governed by a host of interprovincial barriers that have angered foreign competitors. A particular sore spot is the timehonored rule forcing companies to brew beer in every province where they want to sell their brands. The result is a fragmented Canadian industry that has spawned many small, inefficient plants at a time when breweries in other countries have been producing cheaper beer by

building huge, megabreweries and consolidating smaller plants.

Earlier this month, Ontario added fuel to the ire of the consumers by imposing a new tax that increased the price of some American beer sold in the province. Even normally quiet Canadian customers have expressed dissatisfaction about the heavily regulated beer distribution system: a poll published last week by The Financial Post showed that 62 per cent of Canadians surveyed want to be able to buy beer from corner stores.

The protective provincial government practices for beer emerged unscathed from the Canada-U.S. Free Trade Agreement, largely due to heavy lobbying efforts by Canadian brewers. The brewers argued that the Canadian industry needed protection from large foreign competitors, which could produce beer more cheaply. But the nagging interprovincial barriers are under heavy fire. Ottawa has long balked at altering the system because of the jobs that would be lost when inefficient plants are closed in smaller provinces in Atlantic Canada and on the Prairies. Last year, however, the Canadian government bowed to heavy pressure—including criticism from the Geneva-based General Agreement on Tariffs and Trade—and assured the European Community that Canada would seek an end to the interprovincial barriers. Indeed, representatives from the 10 provinces have met twice this year to discuss those barriers and Ottawa has commissioned the Conference Board of Canada to examine the system. Said Mitchell Taylor, president of independent British Columbiabased Granville Island Brewing: “The barriers are coming down. It is just a matter of when.”

Convincing such provinces as Saskatchewan and Newfoundland of that may be difficult. They stand to suffer brewing plant closures and layoffs if the barriers are removed. An even stauncher opponent is Labatt, which has spent millions over the years setting up its own string of 12 breweries—more than either Molson or Carling. Said Edward Stewart, Labatt Brewing Co.’s senior vice-president, corporate affairs: “Dismantling the system now would rival

Even so, the London, Ont.-based company has been preparing for the inevitable. While still best-known as a brewer, Labatt has launched a quiet assault on the U.S. food industry during the past five years, buying into dairies and pasta, flour, juice and frozen-foods operations. Entertainment is one of the company’s biggest thrusts—as Labatt has entered joint ventures to buy control of The Partners’ Film Co. Ltd. of Toronto, reputedly the world’s largest television production house, and formed a concert production company.

Labatt has not forgotten its roots. Just last month, it purchased 70 per cent of Birra Moretti SpA of Udine, Italy, the country’s third-largest brewer and the largest exporter of Italian beer to Canada and the United States. Even so, brewing now accounts for only onethird of Labatt’s $5.1 billion in annual sales, causing some investment analysts to express concern about whether the company is spreading itself too thin. Said Jacques Kavafian, a beer industry analyst with brokerage house Midland Doherty Ltd.: “It is time for them to refocus.” Molson, which owns the Montreal Canadiens hockey team, is also diversifying: last year, it launched Molstar Communications, a television production company. But Molson’s main thrust is firmly directed at the United States’ beer industry. Under recently installed president Cohen, the company aims to increase shipments south of the border to 40 million cases of beer by 1991 from the current 15 million. The Molson-Carling merger gives Molson the opportunity to use Elders’ experience and size to further penetrate the huge U.S. market. And Elders, which bought control of Carling in 1987, suddenly becomes a dominant force in Canada, where it has already made great strides with its popular Foster’s brand. But, more than anything, the megamerger means there are now two home-grown Canadian brewing giants with the power to take on the major brewing conglomerates in Europe and the United States.

JOHN DeMONT

TIM FALCONER