When we aren’t talking about sports or sports betting, one of our favorite things to discuss is the impact of sports on the fans. This has been a big issue recently, with ESPN shutting down Grantland and with hundreds of layoffs potentially indicating a drop in sports viewership. The primary issue is that networks such as ESPN more or less control the sports world, gripping the reins when it comes to scheduling, advertising, news coverage and more. But now, with a new merger agreement signed between Miller and Anheuser-Busch, there may be a new threat to the world of sports as we know it: beer.
It sounds a bit funny, but Anheuser-Busch and Miller are two pretty big names in sports as far as sponsorship and advertising are concerned. Athletics in general tend to receive a great deal of their sponsorship from major brewing companies, so it would not be outlandish to suggest that a merger between two of the most prominent beer labels may have an impact on the sports industry. To assess whether or not the merger between Miller and Anheuser-Busch poses a threat to the industry, we will first discuss the importance of sponsorship in general. This will be followed by some details on the merger, concluding with an assessment of the merger’s potential impact on American sports.
The Importance of Sponsorship
To be clear, when we speak of sponsorship in sports, we’re talking about companies like Anheuser-Busch throwing their money at actual sports organizations and events for the purposes of advertising their brand. We aren’t talking about endorsements, such as Michael Jordan’s endorsement by Hanes or Peyton Manning’s endorsement by pretty much any company who will pay him. We love the commercials, but we doubt they have a serious impact on the world of sports at large.
When we talked about ESPN’s closing of Grantland earlier this month, we mentioned that journalism is funded pretty much entirely by advertising. Yes, printed publications need people to buy their rags and online publications need the odd person to sign up for a subscription, but advertising is where the real money is made. In similar fashion, while sports organizations need media coverage with decent ratings and a decent sales rate on merchandise, advertisers are pretty much in charge. And as it turns out, they influence much more than finance.
Picture sports organizations as marionettes. They differ in size, and some are crafted a bit better than others, but they don’t function without someone pulling the strings. And advertisers most certainly pull those strings, sometimes to excessive degrees. For instance, due to UFC’s deal with Reebok, UFC’s employees can only wear Reebok-brand clothing in the ring. This isn’t too much of a problem, aside from the fact that the personnel whose wear is restricted do not receive any of the compensation provided by Reebok. Nonetheless, it’s profitable for UFC. Some athletes in the NFL and NBA have also had their clothing restricted by sponsorships, and some have even had deals fall apart due to disputes over the matter.
Anheuser-Busch and Miller certainly don’t have that kind of reach. After all, it’s hard to force an athlete to drink only one brand of beer. But don’t forget that Anheuser-Busch is the brewing company behind the Budweiser brand, and that logo’s been emblazoned on so many sporting events that it’s probably been burned into your skull by now. They primarily go for football, and the NFL makes a good chunk of their money from that particular sponsorship. In fact, Anheuser-Busch just paid $1.4 billion to extend their NFL sponsorship by another six years.
Not only does Anheuser-Busch get to advertise their beer by incorporating their logo into marketing materials for NFL events, but they help advertise the NFL in return. Earlier this year, Bud Light launched a campaign involving twenty-eight team-specific cans. That’s one can for each team with which they currently have a partnership, and each can bears a message related to the team’s hometown. For instance, the can for the Seattle Seahawks promises to be “The perfect beer for cheering so loudly it registers on the Richter scale.” By all appearances, this is a clever reference to the long-held belief that Seattle (and most of the rest of the Pacific Northwest) will one day be eradicated by a gigantic earthquake.
The point is that sports and advertising have a symbiotic relationship. Advertisers do not technically depend on the sports industry, but they certainly profit from it. And while sports organizations would probably be able to accrue suitable funding without sponsorship, companies like Anheuser-Busch certainly aren’t hurting them. It is for this reason that we believe a major change in one industry may affect the other in some fashion.
Some Details on the Merger
It seems pretty well established that Anheuser-Busch has the potential to affect the sports world. Before further exploring what these effects may be, however, we should discuss some details regarding the merger between Anhesuer-Busch and Miller.
The merger between Anheuser-Busch InBev SA and SABMiller was signed this past Wednesday. A $107 billion deal, it is believed that the resulting corporation will generate as much as $64 billion in revenue. The net earnings before interest, taxes, depreciation and amortization (EBITDA) is believed to clock in at around $24 billion. The $107 billion in question ($105 billion according to some sources) is to be paid to SABMiller by Anheuser-Busch InBev SA, giving the deal the appearance of being less of a true merger and more of an acquisition.
Now that the deal has been signed, it’s pretty much an absolute reality. It isn’t impossible for Anheuser-Busch to back out, but they’d have to pay Miller a $3 billion break-up free if they elect to do so. This isn’t as much as the deal itself, nor does it really compare to the $70 billion that Anheuser-Busch will have to spend in order to finance the purchase. Major shareholders will also receive compensation in the form of cash or stocks.
There has already been some speculation as to whether or not Anheuser-Busch is encroaching on antitrust regulations. Their deal with Miller wouldn’t exactly constitute a monopoly, but it’s close. Anheuser-Busch labels include Beck’s, Budweiser, Corona, Michelob and Stella Artois. With their acquisition of SABMiller, they will have control over the Miller brand in addition to Coors, Blue Moon, and Foster’s. This is in addition to the dozens of lesser-known brands produced by each brewing company. SABMiller is also one of the largest Coca-Cola bottlers in the world. Once the merger is complete, Anheuser-Busch will have control over approximately one-third of international beer market, and a major hold on the beverage market in general.
We talked a little bit about revenues, but we’d like to throw a few more numbers at you. While some sources have put revenues at $64 billion, others are estimating annual sales to be higher than $73 billion. And while they will only control one-third of the market, the preponderance of their labels among their competitors should give them on 80% market share of total worldwide beer sales. Their company itself will be worth an estimated $275 billion, which may raise significantly if they continue expanding into areas such as Africa in which beer sales have been rising somewhat steadily as of late.
The antitrust issue does not arise from the extent of their control alone, but more specifically from the power they will have over pricing. For companies, pricing power usually offers a great benefit. For customers, not so much. This is why it’s such a big deal whenever major brands are accused of price fixing (as occurred with several major chocolate labels in 2008). True price fixing, which usually occurs between rival corporations working in tandem, would not be necessary for a corporation with pricing power over four-fifths of global beer sales.
That’s not to say that Anheuser-Busch will take advantage of its newfound pricing power once the deal with Miller has been completed. Craft beers are on the rise and, while both Anheuser-Busch InBev SA and SABMiller already own quite a few localized breweries worldwide, raising prices on their major brands would still send some of their consumers off in search of smaller competitors with more unique flavors. In short, Anheuser-Busch may have something close to a monopoly, but they can’t make much more use of it than they already are. Still, their increased power over the global beer market will allow them to rake in more cash with minimal effort. And this is at the heart of the threat they now pose to sports organizations.
The Larger Effect on Sports
It might sound as if this deal could be quite profitable for sports organizations who make money from advertising Anheuser-Busch brands such as Budweiser. After all, the brewing company’s new revenue projections indicate that they’ll be able to spend a lot more on marketing. But given the nigh monopolistic market share that Anheuser-Busch InBev stands to gain from its merger with SABMiller, the belief that sports organizations should feel threatened actually makes a lot of sense. After all, why should they keep spending so much money on sports adverts when they’re pretty much guaranteed a profit? Heck, between their current brands and the ones they’re about to acquire, they could easily make a living on name recognition alone.
That’s not to say that they’ll stop marketing altogether, but it won’t be as much of a necessity with one major competitor now off the market. And while the deal was only signed quite recently, it was originally announced in mid-October. They’re clearly taking their time to dot the i’s and cross the t’s on this, and we’d be surprised if marketing wasn’t one of the major kinks they’re currently working out.
More than that, we have good reason to suspect that they won’t necessarily stop pursuing sports-related marketing in particular. First of all, as we mentioned earlier, Bud Light’s NFL sponsorship has already been renewed for half a dozen more years. They spent $1.4 billion to renew that deal, and their contract would likely stipulate a greater payout if they attempted to pull out of their obligation now. Since the NFL would lost as much as $12 billion if this happened, they would also likely pursue a lawsuit if Anheuser-Busch did not adhere to their contract. So even if Anheuser-Busch does start to pull the plug on some of its sponsorships, we’ve got six more years before they can afford to do so.
But remember that the NFL is not their only sports partner, just one of their bigger ones. Anheuser-Busch owns a principal percentage of the St. Louis Cardinals, so they have pretty tight relations with the MLB as well. It’s hard to see them selling. Anheuser-Busch is headquartered in St. Louis, and if you’ve ever wondered why the Cardinals play at Busch Stadium…well, there you have it. They’ve owned the Cardinals since back in 1953, and they caused a major fuss when they announced plans to sell the team in 1995. If you’re wondering why we still refer to them as principal owners, the answer is simple. While they may not own the team anymore, they still have marketing rights. Furthermore, they strengthened their connection with the team just over a decade ago when they bought stadium naming rights in 2004. The deal even made Anheuser-Busch the team’s exclusive alcoholic beverage sponsor, thereby giving them the rights to use the team’s logos on televised promotions. A twenty-year deal, their contract won’t expire until shortly before the expiration date on their contract with the NFL.
As we said earlier, sports organizations and their sponsors have something of a symbiotic relationship. Anheuser-Busch will likely continue to sponsor at least some sports organizations with whom they are currently partnered, as it increases their marketing power to be affiliated with a major name in sports. But with their new hold on the beer market, they could easily start cutting some of their sponsorships to save marketing costs while still greatly improving their profits. For the NFL and for the Cardinals, there is no need for concern. For other sports organizations, the merger between Anheuser-Busch and Miller may signal the end of a good run.