Beer Industry Report

0309brSome have likened the events of the past year to the confluence of elements that create the perfect storm. To many in the beer industry, it certainly seemed as if nature, economics, world events and even consumers themselves were conspiring against them. After a tough start to 2002, with a stumbling economy and consumer fears in the aftermath of 9/11, beer bounced back in the fourth quarter. But 2003 opened with war, bad weather and an economy that refused to improve, putting the brakes on beer sales.

While results were mixed for individual brands in 2002, the overall picture looked bright, especially given industry performance early in the year. Domestic beer volume grew about 0.7% and import volume rose about 6.0% for a combined industry growth of 1.3%.

This year, though, started out with the sort of bang that beer marketers dread. Wild winter weather kept people indoors, and a wet, cool spring in much of the eastern half of the country didn’t do much to encourage them to come out. Then war in Iraq further dampened consumer confidence and raised fears about travel. On top of that, the economy stubbornly resisted recovery. Despite positive signs, consumers still watched their spending closely.

“The employment numbers this recession have hit 25 to 40 year-olds really hard, which has hurt on-premise numbers, import numbers and everybody all around,” said Leo Kiely, president and COO, Coors Brewing.

AABIV.An-Busch

“The growing globalization of our industry is changing the competitive make-up of the beer industry. Our industry environment — both domestically and globally — is dramatically different than it was just a few years ago.”

— AUGUST BUSCH IV
President
Anheuser-Busch, Inc.

LeoKiely(Coors)

“New drinkers are drinking beer, just not as much as we expected. We’re not the only category vying for their attention, and the spirits guys have done a good job of going after those drinkers.”

— LEO KIELY
President and COO
Coors Brewing

These are temporary conditions, executives believe. Once resolved or reversed — better weather, an end to the war, improvements in the economy — and industry performance should improve. And, in fact, volume numbers started to move up as summer finally made its appearance in late June and July and the war was officially declared over. The underlying trends of the past few years, however, are still driving the direction the industry is headed. Unusual market conditions of the past two years just seem to have accelerated the pace of changes in the industry.

“We’ve seen a continuation of the same trends we’ve been watching for a long time,” said Paul Shipman, president of Redhook Ale Brewery, “but there’s been a lot more progress made in those trends in the past 12 months.”

And those prevailing trends affecting the U.S. beer market are consolidation in the industry, the changing face of beer consumers, continued growth of high-end products and the gradual shift to lighter beers. Increasingly, though, what happens here is affected almost as much by global trends as domestic ones.

“Consolidation at both the brewer and wholesaler level is certainly one of the most significant trends today,” said August Busch IV, president of Anheuser-Busch, Inc. “The growing globalization of our industry is also changing the competitive make-up of the beer industry. Our industry environment — both domestically and globally — is dramatically different than it was just a few years ago.”

Maximize Opportunities, Minimize Costs

For the major players, globalization — and consolidation — makes sense on a number of levels. In theory, growth through consolidation gives brewers greater efficiencies and economies of scale. It also increases utilization of industry capacity. Globalization gives brewers the opportunity to expand into markets with more growth potential than their own backyards.

BillHacket

“Retailers have to resist the temptation to just jump on the next bandwagon…. Healthy, consistent brands can offer good returns on a daily basis.”

— BILL HACKETT
President
Barton Beers

C_Alvarez

“It’s incredibly difficult to get distributors to bring a brand to the attention of consumers in today’s environment.”

— CARLOS ALVAREZ
President
The Gambrinus Co.

The beer market is relatively mature in Europe. The trend here toward high-end products such as imports, however, has European brewers eyeing the U.S. market with more interest than ever. Brewers like Interbrew and SABMiller see tremendous opportunity for their brands here and continue to buy up more. Already, Interbrew’s Stella Artois has seen significant growth in core markets. SABMiller’s Pilsner Urquell is getting an influx of marketing attention and money to raise its awareness among consumers.

And while the U.S. beer market faces a decade of growth in the demographic group most likely to consume beer, it is expected to grow slowly. That has U.S. brewers looking for opportunities to expand elsewhere.

“The European market is unattractive and in a state of predictable decline,” Shipman said, “and the North American market is only slightly better. To get really excited, go to China, India or Latin America, where an increasing standard of living and increasing population will lead to greater alcoholic beverage consumption.”

Anheuser-Busch has long had a major share of Grupo Modelo in Mexico and recently increased its stake in China’s Tsingtao to nearly 10%. The brewery plans to up that share to 27% in the next few years. Miller Brewing was purchased by South African Breweries from Phillip Morris last year to form SABMiller, giving Miller brands more opportunities globally. And Coors Brewing purchased a stake in the UK’s Carling brewery last year.

“We’re in a stamina game here in the U.S.,” said Kiely, “so we felt expansion would be really good for us. All brewers are looking for growth markets. We’re in dialogue around the world, but we also need to mind our knitting here at home.”

Ed Gawronski

“I think the slow growth in volume isn’t due to disinterest in beer, but to temporary market conditions. What’s really going to affect our business is how well we develop consumer pull.”

— ED GAWRONSKI
Vice President, Marketing and Business Insights, Miller Brewing

MolsonGuy

“The onus is on the beer industry to maintain excitement. We have a good understanding of the entry level drinker, and there are some good promotions out there.”

— DAVE PERKINS
President
Molson USA

Globalization and consolidation are double-edged swords. On one hand, as the big get bigger it makes it more difficult for smaller brewers to compete, sometimes forcing them out of business. On the other, brands that get picked up by big brewers through acquisition may get the lease on life and attention they need to thrive.

“I’m not sure globalization bodes well for some brands,” said Joe Fisch, president of U.S. Beverage. “Lots of strong independent brands are looking for ways into the market, but the cost of entry is higher than ever. Being a single branded import is very difficult, but being part of a portfolio could really help.”

LEADING DOMESTIC BEER BRANDS

(000 2.25-Gallon Cases)

Brand Supplier Category 2001 2002 % Change
Bud Light Anheuser-Busch Light 469,500 505,000 7.6%
Budweiser Anheuser-Busch Premium 438,000 423,000 -3.4%
Coors Light Coors Brewing Light 231,000 232,500 0.6%
Miller Lite Miller Brewing Light 217,000 214,500 -1.2%
Natural Light Anheuser-Busch Light 113,000 113,500 0.4%
Busch Anheuser-Busch Popular 105,000 99,500 -5.2%
Busch Light Anheuser-Busch Light 75,500 78,300 3.7%
Miller High Life Miller Brewing Popular 72,000 73,000 1.4%
Miller Genuine Draft Miller Brewing Premium 70,000 66,500 -5.0%
Michelob Light Anheuser-Busch Light 40,000 40,400 1.0%
Total Leading Brands 1,831,000 1,846,200 0.8%
Others 654,940 657,510 0.4%
Total Domestic Beer 2,485,940 2,503,710 0.7%

Source: Adams Beer Handbook 2003

Twenty or thirty years ago, a small boutique brand like Sam Adams, Moosehead or St. Pauli Girl had a chance to grow and make a name for itself. Maintaining that growth in the face of growing competition and the marketing muscle of bigger brewers isn’t easy.

“It’s almost a certain impossibility that even a brand with all the right characteristics — flavor, packaging and so forth — will get distribution and recognition without a strong parent,” said Carlos Alvarez, president of the Gambrinus Co. “It’s incredibly difficult to get distributors to bring a brand to the attention of consumers in today’s environment. Brands like Stella Artois and Pilsner Urquell have very structured, dedicated support.”

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