Beer: State-of the-Industry Report

In May, the magazine cover the beer industry wants to forget asked, “Is Beer Dead?” Inside, in an article entitled “U.S. Beer Business Continues Decline,” Ad Age probed the social and demographic factors prompting a shift from beer to wine and spirits, and beer’s falling numbers.

After three years of lackluster beer sales, analysts had exhausted milder analogies that compared beer’s fortunes to perfect storms, battlefield encounters or bouts of illness. It was only natural, if premature, to start talking about the death of beer.

The overall figures are certainly depressed, but this is more frustrating than it is fatal. And, while aggregate figures may indicate that the category has problems, they also mask a lot of variation within the category, including strong performances by some brands or segments that might be instructive for the rest.

The big picture is this: in 2004, the beer category grew overall by 0.7%, according to Adams Beverage Group research, solidifying in hard statistics the developing perception that the beer industry is a stagnant giant. While premium and sub-premium beers are hurting, imports put on a brave show (up 1.8%), and there was growth in what might be thought of as the two extremes of the beer spectrum: light beer at one pole, and specialty or craft beers at the other.

In 2004, mergers further internationalized the beer landscape, government regulations brought clarity to the long dispute over the formulation of malternatives (flavored malt beverages), and spirits and wine caused more handwringing at the brewery.

But beer still claims over half the dollars Americans spend on beverage alcohol. And, considering that it is less expensive per drink than spirits or wine, beer is clearly the leading adult beverage choice by a good margin.

LIGHT BEERS LEAD THE MAJORS AGAIN

In 2004, Americans pursued their attraction for products that promise health through reduced calories or carbohydrates. Despite the fact that the low-carb phenomenon seems to be waning, light beers overall grew by 4.4%.

Just as Diet Coke has become the habitual selection for a substantial number of soda drinkers, dieters or not, light beers seem to be the reflexive beverage of choice for a large number of beer drinkers, oblivious to the irony of pairing these beers with an order of super nachos.

MALTERNATIVES Clarified

Through 2004, the debates raged over the composition of flavored malt beverages (FBM) or malternatives. The fight concluded on January 3, 2005, when the Tax and Trade Bureau (TTB) adopted a final ruling on the formulation of these beer-ish beverages.

FMBs are sweet, low-strength alcoholic beverages that are technically classified as beer for tax and distribution purposes because they are malt-based. However, the category ran into trouble as an increasing number of brands in the nineties associated themselves with spirit companies — in effect, giving spirit brands commercial access in sales and advertising arenas where only beer was allowed.

Further examination revealed that the beer base of these beverages, on which their lower tax status and market access was based, could be less than 1%. The alcohol content of the beverage was derived almost entirely from approved flavorings that were spirit-based.

Realizing that the historic distinction in U.S. law between beer and spirits was blurred by this ambiguity, TTB published proposed new regulations on the formulation of FMBs. The comment period on the proposed ruling closed in October of 2003, by which time the TTB had received over 16,500 responses, a record for any TTB rule-making.

Two dominant positions emerged on the proposed regulations: One side, represented by the powerful Beer Institute, the NBWA; and the far smaller Brewers’ Association of America (BAA), supported the so-called 90/10 composition standard, under which 90% of the alcohol content in a malt-based beverage must be derived from malt, with only 10% coming from a distilled source.

The opposing side, represented by the Flavored Malt Beverages Coalition, an organization of FMB manufacturers, advocated a so-called 50/50 standard, which in practice meant that a majority (51%) of the alcohol in a malt-based beverage would have to be the product of the brewing process.

In the end, the TTB ruling supported the 50/50 standard. Affected industry members have until January of 2006 to reformulate their products, something they would have faced under either regime.

FMB sales are volatile, even before the new regulations roll out. Despite that, Diageo, the category leader, is in its fourth year of volume growth in malternatives.

“FMBs are about new brands and flavors, more than is the case with beer, wine or spirits,” says Diageo-Guinness’ Dave Eickholt. “These consumers live for the newness of the moment, but I think that’s typical of any category in its infancy. The challenge is to build in some stability and sustainability.”

With some brand extensions growing by three and four figures, and others falling by double digits, stability sounds like a bit of a reach. However, the kind of stability Diageo has attained comes through creating a regular stream of new flavors to appeal to young adult drinkers who find novelty to be the most attractive characteristic of a beverage. Certainly, the success of Smirnoff Twisted V — green apple, mandarin orange and cranberry — and the new Bacardi Silver Raz suggests that the category has long-term prospects.

How to keep the category fresh? “You can innovate or imitate,” said Eickholt. “If you innovate, there’s a chance for that kind of [double digit or greater] growth. If you imitate, you can get very diluted results.”

Six of the ten top-selling domestic brands — and nearly half the beers consumed in the country — are light beers, and five of those posted increases in 2004. Bud Light retained its number one position, growing by 3.7%.

The next light beer in the top-ten ranking, number three brand Miller Lite, grew by an impressive 11.1%, a gain that would have been unheard of a few years ago for the perpetual second-place brewer.

When A-B’s Michelob Ultra burst on the scene two years ago as the leading low-carbohydrate beer, Miller was slow to capitalize on the fact that their flagship Lite happened to be low in carbs as well as calories — and always had been. The aggressive repositioning of Miller Lite as a low-carb brew, and the leadership of new Miller president Norman Adami, seems to have breathed new life into the company. Dave Eickholt

“The spirits and wine guys have been successful in a very important area — the spirits guys for about five years, and the wine guys for about ten — and that’s the effort to raise and premiumize the image of their category.” — DAVE EICKHOLT, President, Diageo-Guinness USA

Coors Light fell by 2.0%, but the remaining light beers in the top ten — all A-B products — posted growth that ranged from barely significant (Natural Light: 0.7%) to breathtaking (Michelob Ultra, growing 39.8%, from an admittedly smaller base).

The sustained health of these “healthy lifestyle” beers has inspired new light brands. Despite fears of cannibalization, A-B launched Budweiser Select; Heineken risked Amstel Light by launching Heineken Light and Beck’s released its first light beer.

THE SAGGING MIDDLE AND THE IMPORT PARADOX

Just as top-selling light brands nearly all fared well, their full-carb and -cal siblings slumped: Budweiser (the number two brand overall) was down 4.5%; Busch (number six), down 3.1%; Miller High Life (number eight) down 2.1%; and Miller Genuine Draft (number 10) down by a painful 9.1%.

Contrast this with the sales of the big imports, where eight out of the top ten gained sales, some significantly. Corona Extra (up 1.9%) led a contingent of Mexican beers that for several years now has seen business expand — in 2004, for example, Tecate grew 0.4%, Modelo Especial increased a hefty 18.2%, and Corona Light upped sales 6.4%. Part of the explanation is that they are in the sweet spot of demographic trends, with a continuing surge in the Hispanic-American population. But other imports — such as Guinness, Heineken and Amstel Light — also continue to grow, so there has to be more to it. Clearly, the sophistication of an import and the appeal of a lifestyle beer make a powerful combination.

Leading IMPORTED Beer Brands

(000 2.25-Gallon Cases)

Brand Supplier 2003 2004 % Change
Corona Extra Barton Beers/Gambrinus 96,105 97,930 1.9%
Heineken Heineken USA 62,500 63,125 1.0%
Labatt Blue InBev USA 15,075 14,192 -5.9%
Tecate InBev USA* 13,464 14,600 8.4%
Guinness Stout Diageo-Guinness 10,987 11,390 3.7%
Modelo Especial Barton/Gambrinus 9,268 10,951 18.2%
Amstel Light Heineken USA 9,980 10,400 4.2%
Corona Light Barton Beers/Gambrinus 8,142 8,705 6.9%
Beck’s InBev USA 7,500 7,900 5.3%
Foster’s Miller Brewing 8,500 7,300 -14.1%
Total Leading Imported Brands 241,521 246,493 2.1%
Others 85,479 86,407 1.1%
Total Imported Beer 327,000 332,900 1.8%

Source: Adams Beverage Group – *Marketed by Heineken USA as of January 2005

Interestingly, it can be argued, almost counter-intuitively, that some of the top-selling imported beers — Corona, Heineken, Labatt Blue and Beck’s, for instance — do not differ very much from mainstream American beers. They are all of the same, dominant international style as Bud or Coors, and are sold alongside their domestic counterparts. In a sense, these are no longer “foreign” beers: they are marketed and consumed as global products — perhaps even as stealth domestics.

MERGER MANIA

Soon, it may be even harder to tell domestics from imports. Interbrew had already blurred the distinction: for example, the Belgian conglomerate sold a number of its brands in the United States through Canadian brewer Labatt. Now with the merger of Interbrew and South American AmBev, the newly-titled InBev, headquartered in Belgium, is the largest brewing company by volume in the world. (Anheuser-Busch is the largest brewer by sales, reflecting the lower price of many of AmBev’s South American brands.)

InBev boasts 200 local brands, which it divides into global flagship brands (Stella Artois, Brahma and Beck’s) global specialty brands (Leffe, Hoegaarden) and multi-country brands (Bass, Staropramen). It’s a useful distinction that U.S. beverage analysts may want to emulate. Mainstream and specialty beers, as well as light brands, behave differently abroad just as they do at home: lumping them into a category called “imports” is as useful as a single figure for domestic beer sales would be. kim 04

“Small brewers used to think, ‘our beer is so good, all we have to do is make it.’ Now we know we have to do more for our brand.” KIM JORDON, Co-founder and CEO, New Belgium Brewing

Following Coors’ first ambitious international moves in 2002, 2004 saw a protracted wrangle over the merger of Coors and Molson, which concluded early this year with the creation of Molson Coors to form the world’s fifth largest brewing company. Interestingly, it is the union of two companies both still in the hands of their founding families.

SAB/Miller, formed by the purchase of Miller Brewing Co. by South African Breweries in 2002, is now a mature venture. Miller brought its American brewing legacy to the deal; SAB brought an understanding of selling beer in developing country markets, plus plums like the Czech classic, Pilsner Urquel. The new company has extended its reach with purchases in Western Europe, Eastern Europe, Central America and China.

SPECIALTY BEER

In 2003, for the first time in eight years, the specialty beer segment grew at a faster rate than the other relatively small, exclusive segment, imports. In 2004, specialty beer growth at 7.2% was greater than any other segment of the alcohol business. About one-tenth of America’s specialty brewers enjoyed double-digit growth in 2004.

The specialty segment, comprising so-called “craft beers,” made by local brewpubs, microbreweries, and traditional regional companies, represents only 3.2% of the total beer industry. But it occupies a disproportionate share of media and public attention, as witnessed by recent coverage of high-end, high-priced beers in The New York Times and The Wall Street Journal. Paradoxically, at a time when big brewers are discounting, the media has become enamored over the prices charged by high-end beer.

Leading DOMESTIC Beer Brands

(000 2.25-Gallon Cases)

Brand Brewer 2003 2004 % Change
Bud Light Anheuser-Busch 517,000 536,000 3.7%
Budweiser Anheuser-Busch 404,000 386,000 -4.5%
Miller Lite Miller Brewing 217,000 241,000 11.1%
Coors Light Molson Coors Brewing 228,950 224,370 -2.0%
Natural Light Anheuser-Busch 115,000 115,800 0.7%
Busch Anheuser-Busch 96,000 93,000 -3.1%
Busch Light Anheuser-Busch 80,500 81,500 1.2%
Miller High Life Miller Brewing 72,500 71,000 -2.1%
Michelob Ultra Anheuser-Busch 41,500 58,000 39.8%
Miller Genuine Draft Miller Brewing 59,400 54,000 -9.1%
Total Leading Domestic Brands 1,831,850 1,860,670 1.6%
Others 658,550 644,830 -2.1%
Total Domestic Beer 2,490,400 2,505,500 0.6%
Total Beer 2,817,400 2,838,400 0.7%

Source: Adams Beverage Group

By two different measures, Colorado’s New Belgium Brewing Co. stands as a good example of this segment. Information Resources Inc. (IRI) recognized its flagship beer, Fat Tire Amber Ale, in IRI’s 2004 Beer Power Ranking of 25 top beers, all distinguished by a combination of volume, growth and profitability measures. And the Brewers’ Association included the company on its list of “Tiger Breweries,” based on size and growth performance.

With distribution in 15 states, New Belgium, which grew 16% in 2004, is at capacity for their current facility. Asked why specialty beer is blossoming, Kim Jordan, co-founder and CEO, said “I have my hunches, though they sound pretty pat. For years we’ve been saying that people have been trading up. They are more comfortable investing in small pleasures: lattes, fresh bread, specialty beer. I think this is borne out in all the enthusiasm for cocktails: people want more interesting products; they’re willing to pay more for them. We fit in with that desire. The economic situation in this country is not all that fabulous, so people aren’t doing terribly extravagant things, but they are interested in these small luxuries.”

The brewery recently launched its first TV commercials to limited markets. The series show a young man finding a vintage bicycle at a garage sale, renovating it, then riding it at sunset, with the tagline: “Follow your folly. Ours is beer.”

The TV commercials mark a certain coming of age by the specialty brewer. “They are meant to grow our relationship with customers over our brands,” said Jordan. “We’re committed to the idea that branding is more than just showing up in the marketplace. Maybe this applies to the whole segment. Small brewers used to think, ‘our beer is so good, all we have to do is make it.’ Now we know we have to do more for our brand. What you focus on is where you go.”

(

Leave a Reply

Your email address will not be published. Required fields are marked *