When iconic American beer maker Anheuser-Busch, parent of Budweiser and Bud Lite, was bought by Belgian-Brazilian conglomerate InBev in 2008, many beer drinkers fretted that the new company, Anheuser-Busch InBev (NYSE:BUD) would lose focus on quality. In 2012, Businessweek went so far as to blame ABI for a "plot to destroy American beer." These claims are about to be tested in court, with news Wednesday that a class action lawsuit was being filed alleging that ABI routinely waters down beer as a matter of corporate policy, lowering the alcohol by volume below the percentage advertised. If true, this would be a violation of consumer protection laws in several states.
The lawsuit has been brought before a federal court in California, with companion cases being brought in Pennsylvania, New Jersey, and other states. Citing internal sources at ABI, including employees at bottling plants involved with the alleged dilution, lead lawyer in the California case Josh Boxer claims that sophisticated equipment measures the precise alcohol content of each batch of beer, and adds a small amount of water just before bottling.
This would not only reduce the alcohol content below what's claimed on the can, it would also allow ABI to overcharge customers by passing off some additional water as beer. The suit filed in California states that "[f]ollowing the merger, AB vigorously accelerated the deceptive practices described below, sacrificing the quality products once produced by Anheuser-Busch in order to reduce costs."
It's no surprise if adult beverage connoisseurs are having deja vu: Earlier this month, liquor conglomerate Beam ran into trouble when its popular bourbon Maker's Mark announced that it would be watering down its own product in order to stretch volume, while keeping prices the same. A vigorous public backlash forced the company to reverse this decision in less than a week. If ABI has also not only been watering down its products but also lying about it, the negative public response could far outweigh any legal penalties.
ABI vigorously denies the allegations: Peter Kraemer, vice president of brewing and supply, stated that "the claims against Anheuser-Busch are completely false, and these lawsuits are groundless." It does seem to me that this would be a relatively simple matter to test, so hopefully the beer-drinking public won't be left in suspense for too long.
Whether the allegations are true or not, the negative publicity is bad for ABI, at a time when it has already come under fire for lax attention to quality. I would suspect the primary beneficiary from this development won't be ABI rival Molson Coors, which for better or for worse tends to be painted with the same brush, but rather the fast-growing craft brewers like Boston Beer (NYSE:SAM), which have differentiated themselves with a relentless focus on quality and innovation.
Craft brews like the Sam Adams brand have historically appealed to a more upscale market, but part of their pitch has always been that their beer is more authentic and more focused on delivering a more satisfying drinking experience to the consumer. That's a pitch that could appeal to more of a mass market in the right circumstances.
Bud Lite and other mass-produced adjunct lagers already end up as the butt of jokes regarding their strength and quality. The perception that Budweiser is actively deceiving its customers into paying for watered-down beer might just be enough to shift some disgruntled regular Bud customers over to a craft beer. With its Boston Lager an established presence in most markets and an easy entry point to craft beer from mass-brewed domestics, Boston Beer could have a lot of upside if ABI is found guilty, or even popularly believed to be guilty.
Fool contributor Daniel Ferry has no position in any stocks mentioned. The Motley Fool recommends Beam, Boston Beer, and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.