Selling the Rock

The good folks of Latrobe, Pennsylvania, are up in arms because the mighty Anheuser-Busch has bought local beer brand Rolling Rock and will close down the brewery, shifting production to New Jersey. Fiona Rintoul

But why would A-B want a cheap brand in a market that is so clearly trading up?

Cold? Heartless? Morally bankrupt? Strong words. But if you think such venom couldn’t possibly be elicited by the mere passing of a beer brand from one global brewing conglomerate to another, then think again.

This and worse was hurled at InBev by a Pittsburg Tribune-Review reader in response to news that the Belgian-Brazilian beer manufacturer was “Selling the Rock” – or in other words flogging the ailing Rolling Rock family of brands to Budweiser producer Anheuser-Busch (A-B).

In Rolling Rock’s home state of Pennsylvania, the furious reader was by no means alone in his growling acrimony. Feelings were running high in the Keystone State as it became clear the US$82 million purchase of Rolling Rock’s global brands and recipes by Bud meant Rolling Rock’s Latrobe, PA, brewing plant (which was not included in the sale) would come under the axe if a separate buyer could not be found.

“They thoroughly sold out the city,” the mayor of Latrobe told a journalist from New Jersey, where Rolling Rock will henceforth be brewed using spare capacity at existing A-B plants. “Everyone’s so down and depressed.”

So it hasn’t been a great PR move for either company in Pennsylvania. And there may be lessons to be learnt about how folksy marketing of the “It began in the year 1893, in the town of Latrobe, PA…” variety (see www.rollingrock.com) can turn round and bite you on the backside. But does the deal actually make business sense for InBev and A-B?

Right place, right time?
Set against both companies’ giant market capitalisation (US$33 billion for A-B, E22 billion for InBev) the deal was, well,
quite small beer actually. “It won’t move the needle on their stock valuations,” as one analyst puts it, though there are potential positives on both sides. “The timing was good for both companies,” notes Gerard Rijk, beverage analyst at ING.

For InBev the scenario is relatively straightforward. “The decision to sell the Rolling Rock brands was based on InBev’s strategic approach to the US market, which is to focus on high-growth import brands,” said InBev US president Doug Corbett. “Our sales and marketing efforts will emphasise our leading imported beers, including Stella Artois, Bass Pale Ale, Beck’s, Brahma, and Labatt Blue.”

This is a strategic approach the logic of which anyone can understand. Since 1970 regular domestic beers have lost two-thirds of their volume in the US to light beers, and import and craft beers. Beer generally has also lost out to wine and spirits. “The US consumer is drinking less, but is drinking better, or in essence trading up,” says a recent research note from HSBC.

Rolling Rock was InBev’s only US brewing plant. In 2005 it produced less than a million barrels. Why keep it? “It was a small brand that didn’t really fit in InBev’s portfolio,” Lauren Torres, beverage analyst at HSBC told the drinks business. For A-B the case for the deal is less immediately compelling. We must assume Bud really wanted the beer in the slender green-painted bottle since most analysts thought InBev got a better than expected price for it; Rijk had reckoned on a sales tag of
around US$50m, while some press reports pitched the price as low as US$25m. Why Bud wanted it so much is less clear.

Strategic moves
In theory, the purchase of Rolling Rock is part of A-B’s strategy of diversifying away from its core products in the US market which are Bud and Bud Light, both cheap beers. Bud has done this by signing import deals with the likes of Grolsch and Tiger and by trying to get into premium-priced beers. Recently, for example, it took a large stake in the Chicago-based craft beer brewing company Goose Island Beer.

“Part of the reason A-B needs to respond to changes in the market is to satisfy the needs of wholesalers,” says Torres. “It has a lot of product going out through exclusive wholesalers. Wholesalers want variety and more acclaimed brands that are distinctive.”

The only problem is it’s not clear that Rolling Rock is acclaimed or distinctive or any of the other things wholesalers and consumers seek. “It’s tough to say how it fits into Bud’s strategy,” concedes Torres. “It won’t change the volumes that much and I don’t think of it as a premium-priced beer. It’s a cheap brand. Why do they need a cheap brand?”

A-B is pinning its hopes for Rolling Rock on its ability to cut costs and revitalise the brand. And although “the Rock” is a cheap beer, it’s not as cheap as Bud, so there is an opportunity for comparative premium pricing. Cost savings will be achieved by shedding the Latrobe brewing plant, which InBev ran below capacity in any case, and shifting production of Rolling Rock to the Newark, NJ plant where A-B churns out some 100m barrels of Bud per annum.

Brand building
As for the brand, there’s plenty of room for improvement. Rolling Rock underperformed in the craft segment under InBev’s indifferent care. Volumes were down 13% in 2005 and 8% year to date.

“We have an ideal opportunity to grow this historic brand,” says A-B president August A Busch IV. “This beer is not like others and its consumer following is equally distinctive.” Certainly, A-B has huge distribution power and marketing muscle. “We believe A-B could revitalize the brand by increasing marketing spend and expanding distribution (currently 63%),” says Caroline Levy, beverage analyst at UBS.

Authenticity issues
Of course, there is the small matter of A-B having taken away the brand’s heritage by moving production from a sleepy hill town in Pennsylvania to the throbbing New Jersey industrial belt. But it’s probably excessively naïve to think that this could stand in the way of the mighty Bud.

Assurances have been issued about the quality of the water at the Wanaque Reservoir in North Jersey from which Rolling Rock will be made from August when A-B starts brewing it “using the brands’ same time-honoured recipes”, not to mention “maintaining Rolling Rock’s craftmanship and heritage that its fans expect and appreciate”.

The marketing men are already spinning their hoops quite clearly. Rolling Rock may lose some fans due to its relocation – particularly in Pennsylvania and definitely in Latrobe – but as Torres says, “Bud is a good marketing company in addition
to being a good brewer, and is some guy on the West Coast really going to know or care?”

Whether the deal will have any long-term impact on A-B’s position in the market is another matter. “We believe that it is too early to get optimistic on A-B as we see a competitive beer market with near-term pricing and cost risks,” says HSBC’s most recent research note. There is nothing in the Rolling Rock deal to alter that assessment.

© db July 2006