Big Beer's response to craft: If you can't beat 'em, join 'emDecember 12, 2012: 11:36 AM ET
SABMiller executive chairman Graham Mackay explains why craft brewers are growing too fast for the Big Beer industry to ignore them, and how his company is responding.
Interview by Beth Kowitt, writer
FORTUNE -- There are countless advantages that come with being a massive, multinational enterprise. But sometimes, a big company needs to learn how to act small. Amid the rise of craft beer, this has never been more the case for big brewers.
As Denis Wilson noted on Fortune.com last month in "Big Beer dresses up in craft brewers' clothing," craft beer saw a 13% increase in volume in 2011, while overall U.S. beer sales were down by about 1.3% by volume during that same period. Despite the fact that craft is a very small segment of the market, large beer companies cannot ignore these growth figures.
Fortune recently spoke with Graham Mackay, the executive chairman of SABMiller, about how the world's second-largest brewer is trying to capitalize on the interest in craft beer. It's a movement marked by small, independent brewers -- two things that SABMiller is not. To grab a portion of the craft-drinking segment, MillerCoors (a joint venture of SABMiller and Molson Coors (TAP)) launched a separate division in 2010 called Tenth and Blake. This operation oversees brands like Blue Moon, Leinenkugels, and it acquired Crispin cider in February 2012. The following are edited excerpts of our conversation.
Fortune: What's your global outlook on craft? Is what's happening in the U.S. specific to this country or broader?
Graham Mackay: It's U.S.-specific in the sense that the U.S. had gone in a particular direction of large-scale consolidation, dominance by a relatively small number of big brands, and trends toward less and less flavor, more repeatability, less satiating, and the rise of light beers. The U.S. was not the only one moving in that direction, but it moved furthest in that direction.
What drove that?
The endless quest in the U.S. for repeatability. Obviously, every modern society has a bit of that. Also, the elimination of harsh and intense flavors has been the central sweet spot of the beer industry for decades, if not generations. If you go back 30 or 40 years and look at the formulations for the big brands that still exist, their bitterness levels in the U.S. are 7 to 9 [measured in International Bitterness Units]. Those brands, 30 or 40 year ago, were up at the 17, 18, 19 kind of level. European lagers are somewhere between 20 and 25.
The consumer has gone back to saying, "Let's get a bit of interest, let's have a bit of difference." So, there's been the growth of craft beer. But it's also local, anti-marketing, anti-global, anti-big, and more focused on experience and knowing the brewer who produces it.
Anti-big, anti-international -- you are big and you are international. So how do you play off this trend?
We have our own craft brands. We also look selectively to acquire, or form partnerships with, or cozy up to people who have incubated good businesses. It's difficult for big companies to incubate small brands. That, at its heart, is the dilemma. To start a small brand in a credible, consistent, sticking-to-it kind of way is hard for big companies. That's what small entrepreneurs do best.
Do you think that the core craft consumer embraces this model?
There's a huge debate in the craft world about us, all big brewers, because we're like the enemy. We're the other guys. They think we're stealing their authenticity. What we say is, "Let the consumer decide." If we're authentic enough for the consumer, that's authentic enough for anyone.
Could you talk about the strategy around why you have this separate Tenth and Blake division? Why did you structure the company this way?
For most beer, the proposition is emotional. It's not functional. The beer is not that different. And even if the beer is different, there are others that taste much like it. So you're trying to create new emotional associations in people's minds. To do that, you've got to act like a small company. You've got to incubate it for a long time. Tenth and Blake is set up to introduce things slowly and carefully and consistently like a small company.
Do you think at some point we'll revert back to where we were before? More consolidation, a less sophisticated palate?
I don't think the craft movement in its current guise will continue to grow indefinitely. I don't think it can. It's not economic. Too many people won't make any money. Too many of them will go out of business. And I think it will become less fashionable. These things are fashion to some extent.
Brand portfolios of big brewing companies will get bigger, more complex, more stratified, and more differentiated because those are the trends you see everywhere else in the world. But you're not going to go back to where Budweiser (BUD) or the next Budweiser has a 30 share or 40 share.
What do you see as the future of craft and, more specifically, Tenth and Blake?
Tenth and Blake is a creation of MillerCoors to solve a specific problem, which is that we under-index in the growth segments. We need to grow our portfolio more in that direction.
In a sense, what Tenth and Blake represents is a selling or a marketing organization oriented toward beers still in incubation mode. Once the brands become big, they can be handed over to the mainstream. Blue Moon is still handled by Tenth and Blake, but it's almost inevitable that at some stage in the not too distant future, you might contemplate moving Blue Moon out into the mainstream and just treat it as another brand.