Consolidation of the Canadian beer industry is on the mind of John Sleeman, chairman and CEO of Sleeman Breweries Ltd., Canada's third-largest national brewer.

The Guelph-based company recently completed the integration of Quebec-based Unibroue Inc. brewery into its operations. Sleeman bought Unibroue in April 2004 for $36.5 million.

The company, which went public in 1996, has been buying other breweries since the mid-1990s and now operates breweries in five provinces and in the United States.

Total sales in 2004 will be about $210 million, Sleeman said in a recent interview.

John Sleeman

Nor surprisingly, Sleeman's chairman has been watching the proposed $8-billion merger between Canada's largest brewer, Molson Inc., and U.S.-based Adolph Coors Co.

"The Molson-Coors merger does not directly affect Sleeman; we're in different markets," Sleeman said. "But, I wouldn't be surprised if someone made a run at us.

"It is not my goal, but I can't prevent it. If it's a good offer, maybe I'll be clipping coupons."

Molson shareholders approved the merger on Jan. 28. Coors shareholders vote on Feb. 1.

The proposed merger between Coors and Molson would make it the fifth-largest in the world.

If Coors shareholders vote against the proposed Coors-Molson merger, Sleeman expects a global beermaker, likely London-based SAB Miller PLC, will buy these national brewers.

Belgian-based Interbrew SA bought Canada's other major beer producer, Labatt Canada, in 1995.

Last year, Interbrew merged with Brazil's AmBev to form the world's largest brewer, InBev.

Bill Chisholm of Dundee Securities Corp. said consolidation in the global beer industry comes in cycles.

"Nothing much happens and then you get lots of activity," Chisholm said.

"Sleeman could also be a target in the future," he said. "There will be lots of small brewers and a few big ones."

Consolidation in the Canadian beer market has been caused in part by the rise of microbrewers and a steady decline in beer consumption.

From 1993 to 2003, beer drinking by Canadians dropped to 83.22 litres per capita from 87.8, a 5.2-per-cent drop, according to the Brewers Association of Canada.

Total Canadian beer consumption has only grown by an average one per cent a year over the same period.

"It's a flat market," Sleeman said.

Labatt and Molson, which together account for 85 to 90 per cent of Canada's annual beer production, dwarf Sleeman's six per cent.

In 1991, three years after Sleeman resurrected his family's 170-year-old beer business, the Ontario brewer had one per cent of the province's beer market.

The company focused on producing and selling higher-priced premium beers that appealed to the changing tastes of older drinkers with more money, and low-price discount beers.

"We went on both sides of the mainstream brewers in markets that the traditional producers stayed away from because the volumes weren't there," Sleeman said.

He is critical about the unequal provincial tax treatment of Canadian brewers. "We face a huge tax bill that the other brewers don't pay," he said.

Provincial taxes are based on each brewer's total worldwide production, not the volumes produced in the taxing province.

Brewers face significant tax increases after their production exceeds 100,000 hectolitres.

The result is that Sleeman pays taxes at the same rate as Canada's largest brewers, Labatt and Molson, even though production is significantly less.

In British Columbia, Sleeman pays an additional $2.5 million, in Ontario $2.7 million more, and in Alberta, Sleeman said, "an absolutely stunning $11 million more."

"That's why Big Rock doesn't want to get any bigger. Would you make that extra pint for $11 million?" "We can't compete with people who can make and sell beer at less than we do because of the tax breaks," said Sleeman.

In 2002, when Alberta reduced its tax rate to favour Alberta brewers, sales of Sleeman's Stroh brand dropped. In response, Sleeman cut spending on Stroh marketing and advertising - one of the major costs for brewers - instead spending more on promoting its premium brands.

The increased sales of the premium brands in Alberta more than compensated for the loss of sales in the discount brands, he said.

Sleeman Breweries faces similar tax disadvantages in Ontario, where the sales of "buck-a-bottle" beer will cut into its discount beer sales.

"Customers have discovered that it doesn't taste all that bad. In markets where brand loyalty isn't a factor, mainstream beers and cheap beers have become commodities," he said.

The company's profit in the discount beer category is about one-quarter of the profit on premium beers, Sleeman added.

Low-priced beer will become a larger segment of the beer market; but it will not be dominated by a handful of brewers.

When the successful discount beermakers increase their production to meet increased customer demand, their tax rate jumps.

"It's a long time back to profitability," Sleeman said. "Once you get over a certain level it costs you a whole lot more for that next pint of beer.

"There are not many people today who are willing to wait two to three years when there are no profits.

"I don't see very many people challenging Sleeman in its size because the tax laws make it so advantageous to stay small."

(Charles Wyatt can be reached at wyatt@businessedge.ca)