Canada: Molson Coos Brewing won’t counter bid for Sleeman Breweries Ltd. before Sapporo offer closes

When Sleeman Breweries Ltd. put itself up for sale in May, many pegged Molson Coors Brewing Co. as the logical buyer for Canada's third-largest beer maker.

While Molson's shared market dominance with rival Labatt Brewing Co. Ltd. was firmly established, with each garnering about 42 per cent of Canadian beer sales, Molson was viewed as weak in the fast-growing premium beer segment.

Sleeman's high-end labels sold in distinctive clear bottles could have helped solve Molson's premium problem, analysts and industry players said.

But Molson says it wasn't willing to overpay for Sleeman, and the Guelph, Ontario-based company is being snapped up by Sapporo Breweries Ltd. of Japan. The surprise bidder swooped in with a cash offer in August, valuing Sleeman at about $306-million, not including the assumption of $108-million in debt.

"It isn't that we didn't admire Sleeman, and think they were good brands - they are good brands," Leo Kiely, Molson's president and chief executive officer, said recently in an interview at the company's offices in Toronto. "Somebody else valued it more than we did." He dismissed suggestions Molson might counter bid before the Sapporo offer closes. "We're focused on our own business. As far as I know that's a done deal."

While Molson's pragmatic approach to the Sleeman auction has done little to remedy its difficulties in the premium segment in Canada, it has clarified its approach. The brewer is sticking with the labels it already owns, and has ambitious plans for one brand in particular.

Molson bought Creemore Springs Brewery Ltd. in April, 2005, for about $25-million. At the time, the Creemore, Ontario-based microbrewery founded in 1987 produced 40,000 hectolitres of beer annually.

Under Molson, the small plant has nearly doubled its capacity, and is getting set for a Quebec launch.

Creemore, a brand that remains revered by lager connoisseurs in its home province, will play a key role in Molson's attempts to gain premium beer market share, said Molson Canada president and CEO Kevin Boyce. Eventually, the one-time microbrew could be a national brand in Molson's portfolio.

"We have big plans for Creemore," Mr. Boyce said, but expansion will be slow. "We're going to grow it in a way true to that brand's heritage and strength. We believe it has great potential, and when we looked at [Sleeman], we felt comfortable sticking with our own."

Molson desperately needs more of its own brands in the premium segment to compete with the runaway success of Labatt's Alexander Keith's label from Halifax, as well as slew of imports, including Stella Artois, Becks and Leffe, from Belgian parent company InBev SA.

Toronto-based Labatt controls almost 42 per cent of the premium and import category, compared with 29 per cent for Molson, according to industry sources. Premium and import brands accounted for about 21 per cent of the $8-billion worth of beer sold in Canada last year. Sales of high-priced beers are also growing much faster, compared with the flat sales of mainstream labels such as Molson Canadian and Labatt Blue.

Eighteen months into the merger between Molson Inc. and Adolph Coors Co., the beer maker has met synergy targets, and its brands have performed moderately better than expected. But costs and expenses have soared, and profits have been anything but stable.

Molson's volumes in Canada and market share concern BMO Nesbitt Burns Inc. analyst Karim Salamatian. Price discounting of mainstream brands, coupled with weakness in the premium category, "give us little confidence in its ability to accelerate volume growth and turn market share trends around," he wrote in a recent note to clients.

Compounding Molson's weak position is the fact that its strong portfolio of imports, which include Heineken and Corona (in Eastern Canada), are not owned by the company. Molson must share the profits it garners from these brands with brewing partners in the Netherlands and Mexico.

The Miller Genuine Draft label is a solid premium seller for Molson in Western Canada. Last year, Miller Brewing Co. of Milwaukee, Wisconsin, launched a lawsuit against Molson seeking to win back control over its brands in the Canadian market. Molson has filed a countersuit.

According to industry sources, Molson's share of the Canadian premium and import category drops to about 5 per cent excluding partner import brands. Creemore accounts for about 1 per cent of that, the sources said.

Molson has found some success with its Rickard's label, an in-house creation whose sales have climbed over the past year with help from a new marketing campaign.

Mr. Boyce sees Rickard's as a platform to launch new flavourful premium beers to complement the established Rickard's Red label. Rickard's Honey Brown and Pale Ale are already available in some markets. Molson is testing a Rickard's White wheat beer in the Montreal area.

But Creemore remains the company's best shot at a true premium craft beer to capture the taste buds and wallets of beer drinkers willing to pay more for a good brew.

One of the challenges of expansion will be making enough product at Creemore's tiny operations. Because the beer isn't pasteurized, it has a relatively short shelf-life.

"Right now we're saying it will be brewed in Creemore. There are examples of brands shipped long distances that continue to be brewed in one brewery location. It can be done; at super premium prices, the margins will be good enough to justify that," Mr. Boyce said.

He might also look to his Colorado colleagues for a solution. Every drop of Coors Light destined for the U.S. market is brewed at the Coors brewery in Golden. The beer is shipped in concentrate form to facilities around the country, where it is bottled and sent to distributors.

"From a consumer standpoint with Creemore, that may be an option for us," Mr. Boyce said. "If it's brewed in Creemore, that may be all you have to do."

Analysts said it will be very difficult for Molson to expand Creemore enough to have much impact in the premium category. It brews between 65,000 to 70,000 hectolitres of Creemore a year, compared with more than half a million hectolitres for Labatt's Keith's.

Mr. Salamatian said a Molson acquisition of Sleeman (whose brands account for 12 per cent of the premium segment) might have provided "a more enhanced portfolio" that "could actually grow market share in the future."

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