Beer War

A major battle is brewing over value beer in Canada.

Manjit Minhas just wants to sell cheap beer. The 25-year-old founder and president of Calgary-based Mountain Crest Liquors Inc. has been trying for months now to sell her Lakeshore Creek beer in Ontario, but she was officially denied entry at the end of June. Manjit incorporated Lakeshore Creek Brewing–the eastern counterpart of her brother Ravinder's Calgary-based Mountain Crest Brewing Co., an upstart that now commands 10% of Alberta's retail beer market–in Ontario last summer, but she hasn't seen any business yet. According to Minhas, Lakeshore was barred from the province because the powers that be–the Liquor Control Board of Ontario, the Alcohol and Gaming Commission of Ontario and retail chain the Beer Store–don't approve of the structure of her company, or of her marketing and advertising tactics. “We are going to do a full exposé as far as what crap we've been through, how unjust the system is, and how it's been skewed to favour the big boys,” Minhas says. Ontario's Beer Store happens to be owned by Molson Coors, Labatt and Sleeman–Canada's three biggest brewers.

Ontario is a setback, but Manjit Minhas's experience speaks both to the competition that operations like hers present mainstream breweries and to the growing importance of the discount segment in the Canadian beer market. Manjit began selling beer (under the brand “Minhas Creek”) in Manitoba about six months ago; she hopes to expand to Saskatchewan, British Columbia and Quebec. The goal is to duplicate her brother's success in Alberta–Ravinder, 23, has sold two million cases of 12 cans there since the company started in 2002.

It used to be that if you brought a case of cheap beer like Lakeshore Creek to a party, you were considered, well, cheap. Not so anymore. The value beer market is booming–consumers these days seem less concerned about image, and more about value. “It's not an embarrassment when you walk into a party with value-priced beer,” says Jim Brickman, executive chairman and founder of Waterloo, Ont.-based Brick Brewing Co. Ltd. “It's telling the world you're a smart shopper.” Not only is the stigma of cheap beer fading, but consumers are also tired of paying high prices for beer that tastes pretty much the same. Brick and Mountain Crest are among several brewers cashing in. The good news for customers is that a cheap beer war is brewing–just in time for the dog days of summer.

The hottest battleground is Ontario, and the ads are everywhere: Hamilton-based Lakeport Brewing Corp.'s 24 for $24, Brick's Buck a Beer, to name just two. Labatt recently got into the mix by introducing its Labatt Genuine Honey lager in Ontario for just over a buck a beer, a shot across the bow to Lakeport's hugely successful Honey Lager. Though the beer is cheap, the fight for consumers' beer buck (literally) is a lucrative one. “The growth is unmistakable,” says David Hartley, analyst for Toronto-based First Associates Investments, who expects Brick to be a leader in the value beer category next year.

According to Statistics Canada, Canadians bought about $7.9 billion worth of beer in 2003, amounting to about 265 million cases of 24. An estimated 20% of that was spent on value beer. Mainstream brands captured about 65%, and the premium segment the rest, but the value segment is on an upswing. “It's no secret now that the beer market in Canada, particularly in Ontario, has segmented out into three distinct sections: the value, the domestic, and the premium domestic and imported,” says Stephen Beaumont, Canada's resident beer authority and author of five books, including The Great Canadian Beer Guide. “The only segment that's kind of stagnant is that middle segment, which is populated by Molson Canadian, Labatt Blue and all the mainstream brands.”

In Ontario, import and premium beers retail for about $36 to $45 per two-four. Mainstream brands offered by the big brewers retail at about $32 to $36. That means the discount brewers, with two-fours priced at about $24 to $29, are saving customers up to $10 per case. The price differential, combined with the lack of differentiation between mainstream and value brands, is one of the major reasons discount beers are doing so well. “Mainstream beer is too expensive,” says Brickman. “There's quite a spread there between that and value-priced beer, and not a big sense of difference as far as taste.” Another factor is the decline in the market appeal of middle-of-road beer heavyweights. “One of the reasons why this value discount segment has emerged like it has,” says Hartley, “is that the mainstream brands, like Molson Canadian and Labatt Blue, have destroyed too much of their brand equity, so people don't really see the difference between these brands and the discount brands.”

Our national taste buds seem to be changing, too. According to the Brewers Association of Canada, per capita consumption of both wine and spirits rose between 1994 and 2004, while beer consumption declined during the same period. Even staunch beer drinkers have changed their drinking habits. “The old definition of a brand-loyal beer drinker is gone,” says Beaumont. “What we have now is people drinking for the occasion. People will have a couple of import [beers] on Thursday night after work, they'll have a case of value-brand beer at the Sunday softball game, they'll have some Canadian or Blue on Saturday afternoon while they're cutting the lawn.”

All of these factors mean mainstream brewers are feeling the heat. Molson Coors reported a net loss of US$46.5 million for the first quarter of 2005. Net sales in Canada were down to US$297 million, from US$303 million in 2004's first quarter, largely due to declines in the overall market for Molson Canadian and Molson Dry. Meanwhile, Sleeman Breweries–an independent brewer producing premium beer at higher-end prices–saw first-quarter earnings drop to $1.6 million, from $2.2 million a year ago. “The value beer category,” chairman and CEO John Sleeman said, “continues to be highly competitive and growing in Alberta and Ontario.”

It's a different story in Discount Beerville, where brewers like Brick and Lakeport are posting record numbers. During fiscal 2005, which ended Jan. 31, Brick's overall beer volumes rose 225%, and its net revenue for the year rose to $22.7 million, compared with $15.4 million in fiscal 2004. Volume of its premium brands declined 17%, but the drop was offset by an 82% increase in mainstream brands and a whopping 325% increase in its Laker brand family. “We're primarily in the premium beer business,” says Brickman. “The value segment has certainly contributed to our bottom line, but in essence it's really there to help fund our premium strategy.” Brickman adds that Brick will continue to compete in the value beer segment “and see where it goes,” but the main focus will remain on premium beer because of higher margins.

Rival brewer Lakeport, however, is dedicated to the value segment of the take-home beer market. Its market share in Ontario was up to 5.4% in its last fiscal year, from 1.2% in 2001. Lakeport (TSX: TFR.UN) recently went public as an income trust, raising $52 million. Something to keep in mind is that Lakeport is growing because of its success, and projects that it could lose its Ontario small-brewer tax exemption by next April if it becomes too large to be classified as a microbrewery, costing it an estimated $2.7 million per year. Hartley believes discount beer prices as a whole may go up if Lakeport is forced to raise prices. On the other hand, other value brewers could keep prices low and go for bigger volumes.

How the market plays out may not be in the discounters' hands, either. “It will really depend on what the big beer companies do next year,” says Hartley. Brickman agrees, adding that Labatt's recent foray into the value beer segment is an interesting move. “For them to come down and meet us when they know our limitations is really puzzling, from a strategic standpoint,” he says.

As Beaumont looks further down the road, he cautions that value brewers will have their work cut out for them. “I don't think the value segment of the beer market has enough legs to carry a company down the road to great long-term success,” says Beaumont. “You've got to respect the power of Molson and Labatt. If they decide they want the value segment, they can take the value segment.” But don't expect cheap beers to go away. “There's always going to be a low-end player, but if they don't have the capacity that a Lakeport or a Brick have,” says Hartley, “then you don't have to worry too much about them.”

As for Minhas, she has a challenge ahead. She says she's working on another plan to get into Ontario, and once she does–she hopes it will be by the end of the year–she's optimistic the glass will look more than half full. In her first year in Ontario, she plans to sell three million cases of 12. And though the recent roadblock has her down, she's not out. “We're still fighting the battle to get in there,” she says. “And we're not giving up.”