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The Canadian brewery industry, North America Industrial Classification System (NAICS) 31212, includes companies that are mostly occupied in brewing beer, ale, malt liquors, and non-alcoholic beer. Companies that produce malt and which bottle non-alcoholic malt beverages are not included in this category. The brewery industry produces a range of beer, lager, ale, porter and stout, as well as draught and seasonal beer.
Nearly ten million Canadians drink beer, produce it the number one alcoholic beverage in Canada. In 2000, Quebec had the highest per capita consumption of beer in Canada (at 76.
52 liters per person). Many popular specialty, premium and microbrews are targeted to men and women over 29 years of age. In terms of Canadian alcoholic beverage production, beer is the leader, followed by distilled spirits and then wine.[1]
Domestic beer sales are divided into three categories: draught, bottled and canned. From 1988 to 2000, sales of canned beer increased from 14.7% to 19.2%, sales of draught beer increased from 9.3% to 11.5%, and sales of bottled beer decreased from 76% to 69.
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The increase in sales of draught beer may have been due to more product offerings of this type. With the removal of barriers to imports and related internal trade modifications, the industry has been subjected to more fundamental change than ever before. In order for the industry to remain competitive, major consolidation and restructuring had to occur. It was also necessary for the industry to innovate and develop new technologies.
Ontario brewers are certainly being seriously impacted by the escalation of cross-border shopping. Over the last 12 months, for example, sales of Ontario beer in provincial border communities have declined with individual stores registering drops as high as 11.
5%. Moreover, the cumulative effect is significant. Since 1988, when we believe this really began to happen, sales of Ontario beer in our 18 St Catharines and Niagara Falls area beer stores have fallen by over 25%, and over 13% in our 12 Windsor stores.
This really brings into question the ongoing viability of the current network of Brewers' Retail stores across the province and our cost of distribution, certainly in border towns and communities.
Questions 1.
The main aim of The Canadian Food Inspection Agency (CFIA) and the provincial liquor boards such as Liquor Control Boards of Ontario is working to guarantee that such beverages, including beer, conform to Canadian compositional safety standards under the Food and Drugs Act (for alcohol content, toxins, etc.) before being approved for sale in Canada. Besides that, both domestic and imported alcoholic beverages must comply with labeling, net quantity and standardized container size requirements under the Consumer Packaging and Labeling Act.[2]
The federal Importation of Intoxicating Liquors Act assigns to local governments, or their agents, the exclusive right to import liquor into the province, whether from outside the province or from another country. Provincial control is further assured through powers contained in various liquor control and licensing acts.
These controls have been used widely, both in brewing, and also in the wine and spirits segments of the alcoholic beverages industry. Indeed, while it is the effect of provincial authority on beer that has received most attention in the recent period, provincial governments have also implemented draconian measures in the wine sector in order to protect specific provincial interests, most notably in British Columbia, Ontario and Quebec.
In the wine industry, in addition to differential markups, specific rules favoring local segments of the industry have been in place for some time. In Ontario and British Columbia these rules have been in the form of a required minimum content of locally grown grapes in wine, and in Quebec that the wine sold in convenience stores be locally bottled. But, as with the beer industry, such practices are at present under scrutiny.
The Ontario as most provinces in Canada have established minimum prices for all alcoholic beverages, including imports, to prevent the sale of alcohol at prices that would encourage over-consumption. While provinces have had to eliminate most preferences they traditionally gave to locally-produced beer or beer from other provinces or imports, in order to comply with trade agreements, they still have considerable regulatory influence.
This provincial authority stems from a federal statute, the Importation of Intoxicating Liquors Act. This federal legislation requires that all liquor imported into Canada be brought in through a provincial liquor board. Such Control Board of Ontario is also responsible for regulating and controlling traffic in intoxicating liquor for sale and consumption within their respective jurisdictions. The provincial boards collect federal and provincial duties and taxes on alcohol products, and then add their own mark-up prior to sale of the product.
By using its power deriving from the Importation of Intoxicating Liquors Act - specifically, the "right of first receivership" provision, Ontario requires out-of-province firms to deliver their beer to a specific warehouse of the Liquor Control Board of Ontario (LCBO). From there it is shipped to the stores owned by the LCBO or to the Brewers Retail outlets. This is a cost which need not be incurred by firms located within the province. It appears that the principal motivation for maintaining this regulation is to protect the brewers located in Ontario.
According to the rules Competition Bureau the decision as well as the decision backgrounder published by the Competition Bureau (see attached) clearly shows that the microbreweries allegations are founded and that the practices of the large breweries have negative impacts on competition. Despite this fact and the analysis of various documents relating to conditions in this very specific market, the federal Bureau acknowledges that the practices indeed exist but that they do not constitute a violation of the law.
Question 2.
The restructuring which has been underway in the Canadian brewing industry for the last few years is arguably the most momentous in its history. It is attributable, on the one hand, to the power that governments in Canada have used to regulate the industry, and changes in the way such powers are being used.
On the other, it is due to international trade pressures coming through the General Agreement on Tariffs and Trade (GATT) and to competitive pressures which spring from a market which has been stagnant for a decade. Moreover, while beer was exempted from the Canada-U.S. Free Trade Agreement (FTA), the belief that this will not remain so indefinitely has prompted the brewers to become more cost effective.
The Agreement on Internal Trade (AIT) has laid out a framework for non-discriminatory treatment of alcoholic beverages which has resulted in a number of barriers being addressed and efforts to avoid the creation of new barriers. However, internal barriers for which removal would have had international implications, due to national treatment requirements, were not addressed in the AIT process on the instruction of Ministers.
Provinces have been encouraged to address outstanding non-conforming measures, with the ultimate goal being for all parties to be able to rely on the general provisions of the Chapter to guide interprovincial trade, thereby providing non-discriminatory access, equivalent to that already provided to in-province and imported products.
On July 22, 2004, Molson and Coors announced a definitive agreement to combine in a merger of equals. The company will be called Molson Coors Brewing Company and will be the world's fifth-largest brewing company by volume, with combined beer sales of 60 million hectoliters, or 51 million barrels, and a strong foundation of established brands in four of the world's top eight beer markets.[3]
The combination is expected to unlock significant value for shareholders. From the outset, value creation will come from both the ability to focus marketing investments on core brands to grow revenues and the ability to capture an expected US$175 million in annualized synergies, half of which are expected to be realized within the first 18 months following completion of the merger.
Secondly, a stronger overall financial platform will lead to deeper support of core brands and key markets to drive revenue, share and volume growth. Finally, the merger will create the scale and balance sheet strength to allow Molson Coors Brewing Company to compete more effectively in the increasingly global and highly dynamic brewing industry long-term.
Molson is Canada's largest brewer and one of the world's leading brewers of quality beer with operations in Canada, Brazil and the United States. A global brewer with CAN$3.5 billion in gross annual sales, Molson traces its roots back to 1786, making it North America's oldest beer company. Committed to brewing excellence, Molson produces an award-winning portfolio of beers including Molson Canadian, Molson Export, Molson Dry, Rickard's, A Marca Bavaria, Kaiser and Bavaria.
Adolph Coors Company was founded in 1873, Adolph Coors Company is the world's eighth-largest brewer, with $5.4 billion in annual gross sales. Its principal subsidiary is Coors Brewing Company, the third-largest brewer in the U.S., with a beverage portfolio that includes Coors Light, Coors Original, Aspen Edge, Killian's, Zima XXX and the Keystone family of brands. The company's operating unit in the United Kingdom, Coors Brewers Limited, is the U.K.'s second-largest brewer, with brands that include Carling – the best-selling beer in the U.K – Grolsch, Worthington's, Reef and the recently launched Coors Fine Light Beer.
It is the imposition of differential markups on domestic and imported products by the provinces that has been a major factor in the rulings by the GATT against Canada. As an example of the importance of such differentials: until recently, Ontario had imposed a markup on beer produced in Ontario of 26 cents per liter, but on beer produced abroad and on beer produced out of province of 92 cents per liter.
A subsequent agreement was reached between the EC and Canada on liquor board practices which provided for national treatment in respect of listings, distribution and mark-up policies. Minimum pricing legislation involves the setting of a minimum retail price at which beer can be sold in various provinces. While such a law definitely restricts competition, as well as trade, it appears that at least 4 Canadian provinces (Ontario, Newfoundland, Nova Scotia and B.C.) will retain them. As well, minimum pricing was adopted in Quebec in November, 1993.
The irony is that these practices by provincial governments have discriminated not only against foreign producers but equally against out of province domestic producers. Furthermore, these discriminatory practices have been compounded by production regulations, which have required that beer sold in any province be brewed in that province. Such requirements have not always been laid down in the form of legislation. Rather, the power derived from the Intoxicating Liquors Act enabled the provincial governments to demand local production - under the threat of legislation. As a consequence of such requirements, the industry has been forced into a production straightjacket, with attendant high costs and high prices to the consumer.[4]
Since Ontario (a) accounts for almost 40 percent of total Canadian consumption, (b) is believed to account for two thirds of Labatt and Molson profits (De Verteuil, 1992) and (c) has restrictive distribution practices, it merits special attention. The profitability stems in part from low costs associated with the centralized Brewer's Retail distribution system. It is not surprising therefore that the environmental levy and the new Ontario service charge on imported beer favor domestic bottled beer over the imported U.S. canned product.
These new levies, which have increased the relative price of an imported 6-pack of cans by $.75 (De Verteuil, 1992), have solidified the Big Two's position in this market. The new charges involve a service charge on imports, which is designed to bring the cost of imported beer more in line with the distribution costs incurred by the Liquor Control Board of Ontario (L.C.B.O.) in shipping the good to various locations. The second charge involves a $.10 environmental charge on non-refillable containers. Similar environmental charges are being considered in B.C. and Quebec. It is not surprising, given the importance of this market to Canadian brewing, that such charges were first implemented in Ontario.
In response to these charges the U.S. has recently imposed a retaliatory duty on all beer imports from Ontario. The Canadian government has reacted to this with its own set of increased duties on products produced by the Heileman and Stroh breweries and imported into Ontario. These are 2 of the 3 breweries which were found to have been "dumping" beer in B.C. in 1991 and it was these 2 breweries whose complaints in 1990 led to a GATT ruling against Canada for unfair treatment of imported beer.
To see the importance of the Brewer's Warehousing System, imagine for a moment that the market for snowsuits in Ontario were dominated by two firms, and that over 90 percent of the market was supplied by them. Further, assume that the provincial government decreed that these two firms could form a marketing chain which would have almost sole rights to distribute, not just their own snowsuits, but the snowsuits of other domestic and foreign producers.
Suppose now that the various levels of government in Canada implemented "free trade" by reducing levies and punitive tariffs on imported and out-of-province products, but left the retailing system untouched, and contentedly told themselves that the interests of the snowsuit buying public were well served by such policies.[5]
To stretch the imagination a little further, say there were two additional elements to the story: first, that the monopoly distributor (owned by the two big companies) then proposed to the government and its competition that it would act as a public benefactor by agreeing to market the competing snowsuits with all due care and attention and second, that the government decreed there would be a minimum price at which any manufacturer could sell their snowsuits.
An obvious question to ask at this point is why foreign firms could not just set up production in Ontario. There are several reasons why this is unlikely. First, they would have to operate at a small scale of production and thus lose the cost advantage which they may have if they produced beer from their current U.S. plants. Second, and very important, is the minimum pricing law in Ontario. This law essentially insures that the price difference between domestic and foreign beer can be kept at a minimum.
If the Canadian consumer views the domestic beer as being superior to U.S. beer, he or she is unlikely to demand the latter unless it is offered at a substantial price discount. The minimum pricing law would therefore prevent a U.S. entrant from gaining a significant market share. Third, there exist franchise agreements between the Big Two and certain U.S. producers which would limit both the profitability and the feasibility of this. The franchise agreements are between Canada's Big Two and specific American brewers (e.g. Miller and A.B.). If a U.S. brewer were to set up in Ontario it would therefore more likely be one of the mid-sized brewers.[6]
The most recent development in Ontario has been the conclusion of an agreement between Canada and the U.S. in August 1993, which effectively ended the 1992/93 Ontario-U.S. "beer war." The main components of this agreement were: i) a lifting of the punitive levies which had been imposed by each side on the other's beer exports; ii) a lowering of the minimum price for beer in Ontario, by between one and two dollars per case of 24 depending upon alcohol content; iii) greater accessibility to Ontario customers for U.S. brewers via the Brewer's Retail outlets; iv) the maintenance of the environmental levy on cans.
This agreement is significant in that it permits the consumer to share in the benefits of rationalization and the lowering of interprovincial barriers. However, given the ability of governments to set tax rates on alcohol, a minimum price serves no obvious purpose other than to protect domestic producers. In addition, under present rules, 3 percent alcohol beer sells for almost the same price as 7 percent alcohol beer. It makes no sense that consumers should not be free to purchase the former at a significantly lower price than the latter.
But minimum pricing has effectively ruled this out. Furthermore, this agreement has put the potential competition (mainly the U.S. brewers) into a straight-jacket, making price competition unlikely for the foreseeable future. Lastly, it leaves the control of sales and distribution in the hands of the two major domestic producers.[7]
I think the merger of two these great companies is a very reasonable steps for their both. First of all because of the transaction which will be structured pursuant to a Plan of Arrangement under which each share of Molson held by a Canadian resident will be exchanged, at the election of the holder, for exchangeable shares in a Canadian subsidiary of Molson Coors and/or shares of Molson Coors. Molson shares held by nonresidents of Canada will be exchanged for Molson Coors stock.
The transaction is structured to be tax deferred to all U.S. holders of Coors, tax deferred to Canadian resident Molson shareholders who properly elect to receive exchangeable shares, and taxable to U.S. holders of Molson shares and those Canadian resident Molson shareholders who choose to convert to Molson Coors stock. Under the proposed Plan of Arrangement, each Molson Class B voting share will convert into shares having the right to exchange for 0.126 voting share and 0.234 non-voting share of Molson Coors and each Molson Class A non-voting share will convert into shares that have the right to exchange for 0.360 non-voting share of Molson Coors.
Both boards of directors have received fairness opinions from their financial advisors. The proposed merger, which is subject to approvals by the shareholders of both companies, the Superior Court of Quebec, appropriate regulatory and other authorities, as well as customary closing conditions, is expected to close following shareholders' meetings and votes in the fall of 2004.
Application will be made to list the shares of Molson Coors Brewing Company on the New York Stock Exchange and the exchangeable shares on the Toronto Stock Exchange. The company intends to maintain Molson's quarterly dividend amount per share as adjusted for currency exchange and the share exchange ratio detailed above.
Significant value creation for shareholders, driven by substantial cost synergies, strong cash flow & enhanced revenue opportunities
Experienced management team to ensure smooth integration and capitalize on growth opportunities
Creates top-5 brewer with the operational scale and financial strength to become a consolidator in the global brewing industry
Superb strategic and cultural fit
The companies have also agreed not to solicit other offers. The merger agreement provides for the payment of a US$75 million break-up fee to either party in the event the transaction is not completed under certain circumstances. Molson and Coors have been advised by Pentland, the company through which Eric Molson holds his voting interest in Molson, that Pentland has taken steps to terminate an agreement between Pentland and the Swiftsure Trust which restricts the transfer of Molson shares held by the parties to that agreement.
But despite of all arguments for mergers another one mind Ian Molson, former deputy chairman of Molson Inc., filed official notice with Canadian securities regulators that he plans to make a hostile bid for the Montreal-based brewer. A former investment banker with Credit Suisse First Boston in London, Ian Molson, a cousin of Molson chairman Eric Molson, has reportedly been trying to put together a $4 billion all-cash offer for Molson since the company announced plans in July to merge with Adolph Coors Co. "Given recent developments regarding Molson Inc., [Ian Molson] is currently considering his options regarding his holdings in the company, including potential acquisitions of additional shares, either alone or with others," the filing stated.[8]
The July 28 filing is related to a 2002 purchase of 26,580 Class B voting shares of Molson, which brought Ian Molson's control of the company up to 2.3 million Class B shares, or 10 percent. Eric Molson controls about 55 percent.
To conclude, cross-border shopping is a visible consequence of uncompetitive pricing of Canadian versus US beer and the cause is principally government tax and regulatory policy. In the meantime, we are out of balance on taxes relative to the US and the single most effective way to reduce the immediate and escalating problem of cross-border traffic in beer is to reduce disproportionate tax differentials between Canada and the United States.
Question 3
Molson Inc. executives will not get to vote their options as shares in the coming vote on the proposed merger with Adolph Coors Co., the Canadian brewer announced Thursday in a change after pressure from some of the company's big investors.
The brewer backed down on the options plan following a public outcry by institutional shareholders such as the Quebec pension fund Caisse de depot, which said it was unfair to allow options to count as votes in the coming shareholder vote for the proposed merger. The transaction is unpopular with some investors, who have been awaiting a sweeter rival bid to emerge.
Molson said option holders will not vote on the merits of the merger, but they will vote only on the issue of converting their Molson options into options of the combined company, to be called Molson Coors. "The company believes these changes address the concerns raised by institutional shareholders and will now allow shareholders to focus on the financial, operating and strategic benefits of the proposed merger," Molson said in a statement.
The Caisse, Canada's largest pension fund with more than $71 billion in assets, welcomed the change. "In our opinion, such an approach is better aligned with the interests of the various holders of securities," chief executive Henri-Paul Rousseau said in a letter to Molson. In a related development, the company also modified another contentious clause, and will not pay chief executive Dan O'Neill a $2.4 million payment after a change of control at the brewer. Instead, if O'Neill leaves the new combined company within two years of the merger, he will be entitled to his change of control payment in lieu of severance. [9]
Besides the Caisse, Molson said the Ontario Teachers Pension Plan as well as Coors have also agreed to the changes to the option holder voting and executive compensation plan. O'Neill is slated to become vice chairman of the new combined firm, which would be the third-largest brewer in North America with annual sales of about $6 billion.
The proposed deal requires a two-thirds majority for each class of shares: Common Class B shares and multiple-voting Class A shares, which are controlled by heirs of the founding Molson family.
Besides that some group of people opposite merger of these companies because of bad reputation and advertising of these companies. Their arguments are follows:
The dirty laundry behind the Molson Coors merger is a record of irresponsible advertising designed to appeal to underage youth and trick women into bed, according to the Marin Institute and Dads and Daughters. The two national advocacy organizations today called for an end to the Molson "Friends" ad campaign that defines "friends" as casual sex partners and gives guys "tools" to help seduce women. The "Friends" campaign includes fake business cards, wallet photos and stickers to help men seem more successful and sensitive. One ad tells guys: "buy some hottie a Molson" and use a fake photo of your puppy to "start a conversation that really goes somewhere."
"We want to know if the leaders of Molson Coors have put their daughters' faces in the picture here," said Joe Kelly, president of Dads and Daughters. "Do they want their daughters lied to, alcoholically lubricated, and otherwise manipulated into having sex with strangers? If the answer is no, as it should be, then Molson Coors has no business selling this message to anyone else's daughters and sons."[10]
Related billboard ads have already established that the difference between friends and "friends" is sex. "Molson and Coors are already more than friends -- they've been marketing and distribution partners for six years," said Amon Rappaport, Marin Institute's communications director. "As they merge, Molson Coors should leave behind irresponsible advertising like the 'Friends' campaign that clearly violates several provisions of the Beer Institute Advertising and Marketing Code."
According to the Code, advertising and marketing should "portray beer in a responsible manner" and use "good taste," but "Friends" fails on both accounts by suggesting that men should use Molson beer and "tools" to deceive women. The Code also prohibits suggestions of "...promiscuity, or any other amorous activity as a result of consuming beer."[11]
"There is no doubt that the ultimate goal of the deceptive strategies in Molson's ads is getting one of the so-called 'sexy gals' into bed," said Kelly. "When conservative estimates suggest that 25 percent of our daughters have experienced sexual assault, and approximately one-half of those cases involve alcohol, it is irresponsible for any beer company to promote this dangerous connection."
"Coors Brewing Company likewise has a history of irresponsible advertising, particularly in targeting underage youth," said Rappaport. Coors Light and the Coors Twins spokesmodels appeared in the PG-13 Scary Movie 3 last Halloween, and the company co- promoted its connection to the teen-targeted film in a national advertising campaign.
"Molson and Coors are right when they publicize their union as a 'merger of equals' – both are equally guilty of irresponsible advertising," said Rappaport. The Marin Institute and Dads and Daughters are calling for Molson Coors to withdraw the "Friends" campaign, issue an apology, and promise to comply with the Coors Advertising Complaint Evaluation process and the Beer Institute Advertising and Marketing Code in the future.
Worked Cite:
[1] The Canadian Brewery Industry
[2] Donald H,S, Brean, “Canada’s Economy: Structure and Performance”, pp. 34 – 57.
[3] Molson and Coors Outline Merger of Equals in Preliminary Proxy Filing September 17 2004
[4] James M. Gillies, “Globalization and Canadian Economic and Industrial Strategy in the Twenty-First Century”, pp. 178 – 204.
[5] James M. Gillies, “Globalization and Canadian Economic and Industrial Strategy in the Twenty-First Century”, pp. 178 – 204.
[6] David Barrows and John A. Cotsomitis, “International Trade and Investments”, pp. 144 – 177.
[7] H.T. Wilson, “The Quagmire of Industrial Policy” pp. 413 - 420.
[8] Molson Cousin to Bid Against Coors AUGUST 10, 2004 – DENVER
[9] CPP Investment Board Opposes Molson Plan for Options Holders October 4, 2004 http://quote.bloomberg.com/apps/news?pid=10000082&refer=canada&sid=a1PavFGz2l7o
[10] Advocacy Groups: Molson Coors Merger Unites Two Irresponsible Brewers; National Organizations Call for End to Ads Designed to Trick Women into Bed 7/28/2004 6:00:00 AM
[11] Advocacy Groups: Molson Coors Merger Unites Two Irresponsible Brewers; National Organizations Call for End to Ads Designed to Trick Women into Bed 7/28/2004
North America Industrial Classification System. (2020, Jun 02). Retrieved from https://studymoose.com/north-america-industrial-classification-system-new-essay
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