In the coverage of the BUD/InBev merger, I keep reading that one of the reasons for the merger is the need to reap economies of scale in raw materials purchasing. For example, this quote from the New York Times:
"The rising cost of beer ingredients like grain has also driven companies to seek greater scale and purchasing power."
And this one from the Wall Street Journal:
"The reshaping of the U.S. beer sector in the past year has been driven by lackluster sales growth for mass-market brews such as Miller Lite and Budweiser and the desire by global brewers to gain economies of scale amid rising costs for commodities such as barley, aluminum and glass."
Is this really true? I'm not sure. The global markets for grain and aluminum are enormous. Will the combined BUD/Inbev pay less per liter of beer than BUD does on its own? What about barley? That makes more sense, as the beer industry is probably the largest consumer of barley.
Buffett spoke once about how Sam's Cola and Coke paid about the same for their main raw materials:
“Wal-Mart’s selling Sam’s Cola. And Wal-Mart is a very, very potent force. One thing that’s helpful is that they were selling it as cheap as $4 a case here. And I don’t believe that’s sustainable. That’s 162/3 cents a can.
It’s been a while since I looked at aluminum—and it’s down. But I think the can is close to a six-cent item by itself. The can is far more expensive than the ingredients... Distribution costs, trucking, stocking and all that sort of thing have to be fairly similar. In a 12-ounce can, there’s 1.3 ounces of sugar—which at the domestic price, would be around 13/4 cents per can. And that’s got to be the same whether it’s Sam’s Cola or Coca-Cola."
So I'm skeptical that this is behind the consolidation in the beer industry. It may be that higher raw materials costs have put pressure on margins, and that companies are looking to mitigate this by cutting costs in other areas like headcount per unit volume, which mergers (and layoffs) can accomplish. But I don't think the combined BUD/InBev will become the Wal-Mart of the grain industry, bullying suppliers into lowering prices.