Changes in habits and buying patterns raise the intriguing question is Big Beer making money? After all, there are now hundreds of breweries and brands of beer out there.
A visit to the average liquor store; or supermarket beer aisle, reveals dozens or hundreds of beers you have never heard of. Today’s beer selection includes; microbews, imports, old favorites, traditional corporate lagers, and lots of weird stuff I’m not sure about.
Thus, I have to ask is Molson Coors (NYSE: TAP) making money? To clarify, Molson Coors combines two of North America’s oldest brewing empires with dozens of other brands of beer. Currently, Molson Coors is the largest brewer in the United States, and the seventh largest brewer in the world.
Is Molson Coors Making Money?
Molson Coors is making money but its income and revenues are shrinking. For instance, the brewer’s revenues fell from $2.418 billion in December 2018 to $2.303 billion in March 2019.
Additionally, Molson Coors’ revenues fell from $2.332 billion in March 2018 to $2.303 billion a year later. However, Molson Coors’ gross profit grew from $795.8 million to $890.3 million between March 2018 and March 2019.
However, Molson Coors’ operating income dropped from $429.5 million in March 2018 to $222.1 million a year later. Plus, the net income fell from $278.1 million in March 2018 to $151.4 million on 31 March 2019.
Importantly, Molson Coors’ operating cash flow fell from $315.2 million in March 2018 to -$98.5 million a year later. Moreover, Molson Coors’ free cash flow fell from $108.5 million in March 2018 to -$294.1 million a year later.
Thus, Molson Coors is posting a negative cash flow. I have to wonder if the company will soon post losses.
Is Molson Coors in Trouble?
I think problems could be on the horizon Molson Coors because the company had just $234.3 million in cash and short-term investments on March 31, 2019.
Conversely, that number was up slightly from $197.9 million in 2018. However, it is down from $1.058 billion in December 2018.
Stockrow data shows Molson Coors’ financial resources are limited. This will threaten any company that operates in a capital intensive manufacturing sector. In conclusion, brewing is manufacturing.
In fact, brewing requires massive infrastructure, vast amounts of raw materials and a growing level of technology. Yet competition is increasing while brewers have less control.
How Big Retail is Slowly Destroying Big Beer
Additionally, Molson Coors is slowly losing control of its distribution to Big Retail.
To explain, most Americans buy beer at the grocery store. However, a few giant retailers dominate the American grocery business.
For instance, America’s largest “grocer” is Walmart (NYSE: WMT) which had a 21.4% of the grocery market in 2018, MarketMadHouse reports. Meanwhile, the largest standalone grocer is Kroger (NYSE: KR), which controls 10.2% of the grocery market.
Thus two companies could control 31.6% of the American grocery market. This situation is bad for Molson Coors because Walmart and Kroger are deep discounters. To explain, Kroger and Walmart make money by selling huge volumes of merchandise at the lowest possible price.
How Walmart and Kroger Threaten Big Beer
Huge volumes and low prices give Kroger and Walmart large market share. Plus large market share gives Walmart and Kroger the leverage to force companies like Molson Coors to lower prices drive more deep discounting.
Such deep discounting hurts Molson Coors by driving smaller retailers (liquor stores) out of business. That forces people to buy beer at the big box with the lowest prices.
Plus, it is in Walmart and Kroger’s interest to have the widest selection of beers possible at the lowest practical prices. Wide selection, helps Walmart or Kroger by discouraging brand loyalty. Plus, it forces, Molson Coors to keep rices low because there is always something cheaper on the shelf.
Meanwhile, Molson Coors has to sell at Kroger or Walmart’s price if it wants Coors, Blue Moon, and Molson in Walmart and Kroger’s beer cooler. Worst of all, grocers’ demands could force Molson Coors to increase production when beer prices are falling. That helps Kroger and Walmart make more money at Molson Coors’ expense.
Will Deep Discounting Kill Molson Coors?
The situation is worsening for Market Coors because several aggressive grocery discounters are gobbling up market share.
For instance, drugstore CVS Health (NYSE: CVS) now has 3.9% of the US grocery market, The Guardian claims. Meanwhile, Albertsons has 5.2% of the US grocery market and Costco Wholesale (NASDAQ: COST) owns 4.2% of American grocery sales, UBS estimates.
German-based uber discounter Aldi now has 1.1% of the American grocery market and boasts about becoming America’s third largest grocer, Business Insider reports. Aldi currently operates around 1,600 stores in the US but plans to add 2,500 by 2022.
Can Molson Coors Survive?
Consequently, Molson Coors operates in a beer market dominated by retail giants that care only about low prices. Under these circumstances, the only Molson Coors can reach a mass market is to cater to big retail’s demands.
Unfortunately, this change comes when overall US beer sales are falling slightly. In fact, the Brewers Association estimates US beer sales fell slightly by -0.8% in 2018.
My guess is the only way traditional brewers like Molson Coors can survive is to concentrate on sales through restaurants and bars. Only time will tell if bar sales can make up for the diminishing returns from retail.
Is Molson Coors a Value Investment?
Given the changing industry conditions, observers will wonder if Molson Coors (NYSE: TAP) is a value investment.
I say no because of the brewer’s limited cash flow. However, Molson Coors is cheap, trading at $56, on 28 June 2019. In addition, TAP paid a dividend of 41₵ on 14 June 2019. However, that dividend has not grown since 2015, when it rose from 37₵ to 41₵.
As a result, Molson Coors offered a dividend yield of 2.93%; an annualized payout of $1.64, and a payout ratio of 34% but no history of dividend growth on 25 June 2019.
My recommendation is for investors to stay away from Molson Coors because it is a week company in a dramatically changing industry. In fact, I advise investors to stay away from historic consumer brands like Molson Coors until we see how the North American grocery wars conclude.