Will MillerCoors Kill Off This Favorite Hipster Beer?

Hipsters everywhere, drink it while you can: Pabst Blue Ribbon may not be around much longer. In a contentious lawsuit that could determine the fate of the beer, Pabst charges that the MillerCoors division of Molson Coors (NYSE: TAP) is trying to put it out of business by not renewing its contract brewing agreement.

Pabst doesn't actually brew its own beer, but instead relies upon an arrangement with MillerCoors to produce the 4 million to 4.5 million barrels of beer it needs annually at MillerCoors' Irwindale, California brewery. As beer consumption has declined, however, Molson says the brewery is no longer needed and wants to close it down. The subsequent capacity reduction would make it impossible to continue the contract arrangement.

In a lawsuit attempting to keep the contract alive, Pabst contends it's not a capacity issue at all, but rather, MillerCoors wanting to eliminate competition. Pabst says it obtained "stunning documents" that prove the brewer was "trying to get rid of us."

Trouble brewing

The contract between Pabst and MillerCoors extends back to 1999 and is due to expire in 2020, though there are provisions for two five-year extensions in the contract. Pabst says it should have the right to extend the contract at a fair price, but MillerCoors counters that beer-industry dynamics mandate that it close the brewery.

Data from the Brewers Association shows that beer-sales volume declined 1% last year to 196 billion barrels, another drop in what has been many years of declining beer consumption. At the same time, the number of breweries operating has exploded. There were almost 6,400 breweries operating last year and while most of them were craft breweries, that's 2.5 times more than existed just five years ago and a fourfold increase from when MillerCoors and Pabst first signed their contract brewing agreement.

But Pabst says no other brewer exists that has the capacity to produce the volume of beer it needs. Anheuser-Busch InBev could do it, but the mega brewer doesn't engage in contract brewing, meaning if the MillerCoors agreement ends, Pabst is finished.

Pabst might have standing

Although Molson Coors offered to extend the contract, the $45-a-barrel price Pabst says it demanded was triple what it currently pays and it couldn't accept the offer "because it would have bankrupted us three times over." Molson also refused to lease the brewery to Pabst, though it did offer to sell it at a price Pabst claimed was "astronomical."

In an April hearing, the presiding judge seemed to cast a skeptical eye at MillerCoors' argument that it had no obligation to keep Pabst in business. His decision allowing Pabst's lawsuit to go forward noted that MillerCoors used information about how terminating the contract would impact Pabst: It "would be improper as it doesn't relate to a sufficient capacity determination."

Although a business should be able to walk away from a partnership at the end of a contract without being forced into involuntary servitude, the court could mandate the extensions be honored at a more reasonable price. Of course, that would only delay the inevitable for Pabst for 10 years.

A problem for others

It also highlights a risk other brewers may face if they similarly rely upon contract brewing arrangements. Boston Beer (NYSE: SAM), for example, contracts with City Brewing Company of Latrobe, Pennsylvania to produce its Samuel Adams beer. Its international business also relies upon third parties for brewing its beer and cider.

Particularly because cider is one of the primary beverages carrying the brewer at the moment, Boston Bear could be facing disaster should it run into issues such as Pabst is facing. Depletions rose 18% last quarter solely on the strength of its Truly Spiked & Sparkling seltzer, Twisted Tea hard tea, and Angry Orchard hard-cider brands.

Although Boston Beer says it would work with its contract breweries to smooth out any problems -- which sounds nice -- that may not be possible, as Pabst has discovered, if your contract brewer wants you out of business.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Boston Beer. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.