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USA: Brewer Coors may have slashed its exposure to the tough U.S. market by virtue of its merger with Molson but North America remains a key challenge for the new company, analysts said after its first presentation. Going into this week's meetings in New York and Toronto, some had considered Molson Coors' profit-draining Brazilian operations to be the top priority for CEO Leo Kiely, along with falling market share in Canada, Reuters commented on March 4.

Several suggested afterwards that the brewer might not be adequately prepared for a tough price environment in the U.S. market and that combined with its decision -- albeit necessary -- to curb prices in Canada while marketing aggressively could put the squeeze on its 2005 top line growth forecast. "We are going to be defining Molson Coors' success or failure by the fate of the North American businesses. The UK business is performing very well and the Brazilian franchise is either going to improve dramatically in a short period of time or it's going to be sold," said Deutsche Bank analyst Marc Greenberg.

"The structural challenges in the U.S. are probably going to get worse before they get better ... and there's no named U.S. president, there's no real clarity on marketing," he added. "At a point in time when (the market) has become a pitched battle with Miller and Bud that's the big danger."

Molson Coors was formed last month by the merger of Montreal's Molson Inc -- North America's oldest beer company and Canada's leading brewer -- with Coors, more than a hundred years old itself and the third-largest brewer in the U.S. The new combination is the world's fifth-largest brewer by volume but trails much bigger rivals with far deeper pockets.

InBev, the world's biggest brewer, produces some 215 million hectoliters (56.8 million gallons) according to data from Molson Coors' presentation, sourced to company reports from the latest fiscal year. That compares to 60 million hectoliters (15.85 million gallons) for Molson Coors.

Number two brewer Anheuser-Busch has more than twice the volumes of Molson Coors and is slugging out a harsh promotions war with SAB-Miller for U.S. market share, putting further pressure on prices already affected by rising wine sales and a trend for low-carbohydrate drinks. "TAP's 2005 top line growth forecast (in the "mid to high single" digits) appears aggressive in our view," Merrill Lynch analysts said in a research note. "We expect top line growth to come in at less than 2 percent in 2005."

Merrill said it estimated Molson's total volumes slipped by over 6 percent in 2004 and its consolidated net sales were flat. In 2004 Coors' consolidated shipments were flat and its net sales rose by 7.6 percent, boosted in part by UK currency.

Several investment houses raised 2005 and 2006 earnings per share estimates for the brewer -- to an average of $4.97 and $5.62 respectively, according to Reuters Estimates -- after the company steered down expectations on its likely rate of tax.

But this was offset by concern that marketing and pricing challenges may eat into merger savings -- Molson Coors is targeting $175 million worth of synergies in 3 years, which some analysts consider already factored into its share price.

The cornerstone of the brewer's U.S. strategy is to focus on Coors Light rather than distracting consumers with new brands. It has unveiled new 8-ounce cans and a new 18-pack cooler box with plastic bottles.

But: "We expect both Anheuser-Busch and Miller to step up marketing spending and discounting to drive demand, particularly in light beers, which is about 85 percent of Coors U.S. mix," said analysts at JP Morgan in a note.

Legg Mason analyst Mark Swartzberg cut net revenue per barrel growth expectations for the company's Americas business from up 2.3 percent to up 1.8 percent in 2005, saying he expected the impact of an uptick in price competition to be more adverse than the company presently appears to expect.

Outside of a decision on Brazil, which will be put to the board in May or June, the brewer ultimately has to strike a delicate balance between maintaining its solid UK market, fixing Canada and figuring out the U.S. "The diversification benefits of UK and Canada, if they get it right, coupled with the (merger) synergies which are attainable, are going to put them in a very good situation," concluded Deutsche's Greenberg. "It's just a question of how much they're going to need to spend back in the U.S.


05 March, 2005