Pabst and MillerCoors (Accidentally) Reveal an Open Secret in the Consumer Products Industry

Readers, a rather embarrassing recent lawsuit between Pabst and MillerCoors just gave us yet another reason to deeply distrust brands and branding. I've copied the article's full text at the bottom of this post, but these are the relevant facts:

1) Pabst Brewing Company filed a breach of contract lawsuit against MillerCoors, accusing it of deliberately violating a long-term production agreement in an attempt to sabotage Pabst as a competitor.

2) Pabst claims it was told that MillerCoors no longer had the available capacity to extend the arrangement past 2020, and would only do so if Pabst paid three times the current rate.

3) MillerCoors first began brewing for Pabst in 1999, but MillerCoors has announced the planned closure of its Eden, NC facility where most of its Pabst production took place.

Now, at first this lawsuit might just look like a couple of gigantic beer companies whining at each other (uh, which it is). However, if you look at these facts through a lens of consumer empowerment, this lawsuit tells us something much bigger. It tells us about an increasingly open secret in the consumer products industry: that many if not most companies simply do not make--and no longer intend to make--the foods, beverages or products they sell.

In fact, this practice is so widespread that, incredibly, companies will even hire direct competitors to make product for them. Just like Pabst hired MillerCoors.

These companies don't want you know this. And to be honest, they can't afford to have you know it. Why? Because if anybody can make their product, their brands cannot possibly have any value.

Let's go further. Recently, you (accidentally) found out Bumblebee Tuna is produced by a third-party food manufacturer. This manufacturer also produces Chicken of the Sea brand tuna, and it also produces nearly identical store-brand canned tuna costing some 30-40% less. When you found all this out, did you value Bumblebee and Chicken of the Sea brands more? Or less?

When you found out about Sara Lee's decision to sell off all of its bakeries to become a "virtual foodmaker," contracting out the manufacture of all of its cakes and pastries, did it make you excited to pay up for Sara Lee labeled foods? Or, instead, once you learned that Sara Lee does little more than slap stickers on somebody else’s cakes, did it make you question the entire value of the brand?

The inadvertent disclosure that Pabst brews little if any of its own beer is yet another textbook example of how consumers can save a ton of money by being just a little more knowledgeable--and cynical--about how most branded products are made. Remember also the unfortunate revelation that Pabst is the same beer company that sells the same beer to three totally different market segments at drastically different prices.

Readers, if you knew that a brand you habitually buy is actually made by some unnamed third-party food manufacturer (or beer brewer), why would you pay extra for that brand? And if you knew that the same third-party food manufacturer was also making the less expensive but equivalent unbranded products sitting right next to your favorite brand, why in the world would you pay extra for that brand?

One final point. If you're running a consumer products company and you decide to enhance your profits by going "asset-lite" and hiring other companies to make your products for you, you're taking on two immense strategic risks. First, the company you contract out to can always change its mind--or drastically raise prices, just as MillerCoors did to Pabst. And if you don't have your own beer brewing assets and capacity, you're outta luck. Suddenly, you can't even make your own product.

But it gets worse. Brands that contract out most or all of their production are engaging in a second, and far more dangerous, strategic risk: the risk that they'll utterly destroy the perceived value of their brands in the eyes of consumers.

The strategy of taking a well-known product brand and outsourcing it to third-party manufacturers is, essentially, an arbitrage play. These companies capture the excess price you habitually pay for their brand, while they save on operating expenses and capital expenditures by using somebody else's factory assets rather than their own. While a shareholder in a consumer products company might love this idea, a savvy, empowered consumer will flatly refuse to pay up for a brand arbitraged at her expense. She'll obtain far more value choosing an equivalent and more appropriately-priced generic or store brand. Heck, they all likely come from the same factory anyway.

Brands were supposed to be an intangible representation of quality. Now, increasingly, they just represent a sticker and a pointlessly high price.

Once you learn what consumer products companies don't want you to know--once you see that the emperor has no clothes, and that anybody, anywhere (even a direct competitor!) might be manufacturing a given branded product, that brand loses all value. There's nothing special about it at all.


Read Next: Consumers! Pay For Your Own Brainwashing (Or Don't)


Notes:
1) A big hat-tip to Stuart at Addicted to Canning for pointing me to the news story about Pabst and MillerCoors.

2) The Pabst MillerCoors article, full text:

Pabst Sues MillerCoors Over Eden Plant Closure
Pabst Brewing Company last week filed a breach of contract lawsuit against MillerCoors, accusing the company of deliberately violating a long-term production agreement in an attempt to sabotage Pabst as a competitor.

According the official lawsuit, obtained by the Milwaukee Journal Sentinel, the two companies began negotiating a five year extension of MillerCoors’ production contract to brew Pabst beers past 2020 early last year. Although MillerCoors had initially assured Pabst that it had the production capacity to continue the arrangement, the company abruptly reversed its position and announced the planned closure of its Eden, N.C. facility — where most of its Pabst production took place.

Pabst claims it was told that MillerCoors no longer had the available capacity to extend the arrangement past 2020, and would only do so if Pabst paid three times the current rate — effectively killing any opportunity for negotiations to continue.

Pabst lawsuit accuses MillerCoors of “attempting to frustrate [its] contract rights,” and claims that losing the ability to extend the contract will cost the company upwards of $400 million in damages.

A spokesman for MillerCoors told the Milwaukee Journal Sentinel the company had done nothing wrong and was “highly confident” that the court would rule in its favor.

In total, Pabst filed seven claims against MillerCoors, including breach of good faith and fair dealing, strict liability for misrepresentation, fraud and negligence.

MillerCoors first began brewing for Pabst in 1999. The two companies set terms for their current production agreement in 2007.


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