Molson Coors goes for margin

Carling brewer Molson Coors has taken a rather significant — some would say unprecedented — step says The PMA Team.

The company has decided to hike its prices in the on-trade generally by toppy levels, with some of its freetrade customers seeing much larger increases. One pub company boss is privately calling it a seismic shift — a change that could fundamentally alter the beer trade and pub sector landscape in future years.

The company, which claims around 20% of the beer market, has become increasingly unhappy with its wafer-thin margins. It sells a massive 6.8 million barrels a year, but profit amounts to a single penny per pint. In the past the large brewers have been reluctant to break ranks to build margin for fear of losing volume to rivals. The result has been that the large supermarkets and pub companies have been able to play brewers off against each other. One company claims privately that there has been little or no inflation in prices it has paid for lager for many years.

Last year, the tectonic plates began to shift. It looks like head office at Molson Coors moved to rewrite the strategy, deciding to forego low-margin volume while it takes a tough stance on rebuilding margin elsewhere. The move is allowed, in part, by the closure of spare production capacity across the brewing sector — Coors itself was brewing at more than 90% of capacity thanks to contract brewing.

There was an early victory that may have emboldened Molson Coors executives. Last March, Tesco delisted Molson Coors products after it introduced price rises across its entire portfolio. The move lasted just six weeks and Tesco effectively caved in and began to relist Carling.

Meanwhile, Molson Coors also bought the rights to Cobra, which sells 200,000 barrels a year with plump margins, in a move also aimed at becoming less reliant on Carling. Last summer, Molson Coors was hanging tough in its beer-contract negotiations with JD Wetherspoon. On this occasion, the brewer was sent packing with Wetherspoon management moving to replace Coors products with Carlsberg. (Last week, six months on from the move, chief executive John Hutson was pleased to confirm that Carlsberg is selling in the same volumes as Carling, making the point that it is entirely happy with its decision.)

The Molson Coors price rises in the freetrade could well be a game-changer, though. The danger is that the other major lager brewers will be tempted to follow suit, although Carlsberg and AB InBev seem more keen to build market share for the time being. If the Molson Coors move is followed by other brewers there will be another obvious consequence — the sizeable gap between discounts received in the freetrade by single-site operators (up to £160 a brewer's barrel) and the tenants of the large pub companies will close.