Canada: Molson Coors fights rough competition in discount beer segment by building market share for premium brands

Under assault in Canada from discount brewers, Denver-based Molson Coors is reinforcing its strategy of relying on higher-priced beers such as Molson Canadian and Coors Light.

"It has been a very competitive environment up there in Canada. Consumers have shown a penchant for buying brands based on price," said Patrick Schumann, an analyst with Edward Jones.

Discounts by InBev NV, owner of premium beer Labatt, and other rivals reduced Molson Coors' Canadian sales volume by 2.5 percent in the third quarter. But Molson Coors has no intention of following Labatt deeper into discount brands, said Molson Coors spokesman Paul de la Plante.

"If our competitors choose to go out and cut prices, it is not going to be automatic for us to do the same," he said. "If we lose unprofitable share because our competitors choose to buy it away from us, so be it."

Instead, Molson Coors is concentrating on building market share for premium brands like Molson Canadian, Coors Light and super-premium brands Rickard's Red and Creemore Springs.

Methods for building market share could include advertising and improvements in the way the company deals with clients and customers, de la Plante said. "We support brands that win for us."

Coors Light sales in Canada have soared to No. 1 in the light-beer market because of aggressive marketing since Adolph Coors and Molson merged last year.

Sleeman Brewing, the country's third-largest beermaker behind Molson Coors and Labatt, also has taken a hit from discount brands such as Ontario's Lakeport Brewing, which has become synonymous with cut-rate beer in the province.

Japanese brewer Sapporo recently purchased Sleeman for $355 million after the company went on the block in part because of competition from discounters.

"Your profit margins get squeezed, and you cut costs so you can continue to be profitable as a public company, but you tend to make decisions on a 90-day horizon instead of a five- to 10-year horizon," said John Sleeman, the brewer's CEO.

With 65 percent of Molson Coors' profits generated in Canada, the company's growth strategy there is no small matter, analysts say.

Even the company's third-quarter results, which showed a 25.5 percent bump in profits thanks to increased sales in the United States, haven't kept some analysts from fretting over tough sledding north of the border.

Molson Coors has its own discount brands to compete with discount brewers like Lakeport, the largest of the discounters, and others.

Molson Coors' Carling, Carling Light and Bohemian target the same price-conscious customers.

And the growth of discount brands has slowed, making them less of a threat than they have been in recent years, de la Plante said.

Concentrating on higher-priced beers in order to build market share is a prudent strategy, Schumann said.

"There are higher margins, and you get more of a loyalty factor," he said. "If they lock in share and growth in premium, it is better for their performance."

Molson Coors has done a good job of wringing costs from its operations since the merger, Schumann said. But even with lower costs, the company's market strategy will take time to succeed.

"With the position (discounters) have already, this is not going to go away quickly," he said.

Regulations governing beer sales in Canada make it difficult for big brewers to undersell the discounters, said Gareth Tingling, Toronto beer industry analyst.

A number of provinces in Canada set a price floor on beer below which it cannot be sold. Lakeport and other discounters sell at that rock-bottom price.

Without that government-imposed floor, Molson Coors could drive the smaller rivals out of business, Tingling said.

And if Molson Coors pushes hard in the discount market, it could hurt sales of its more expensive brands and cannibalize sales of its own products, Schumann said.

Growth of the discounters was aided by a tax break that the Canadian government grants in order to help small microbrewers build market share, said Jeff Newton, Brewers Association of Canada's president for eastern Canada.

"This discounting has been the unintended consequences of government tax policies to support small brewers," Newton said. "The (volume) thresholds that the government used migrated upward over time until they were set at such high levels, brewers who didn't have an economies-of- scale disadvantage used the tax breaks to subsidize their price."

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