BEER TODAY

You can bet that when the clock struck midnight on January 1 this year some of the celebratory bottles uncorked contained beer as well as more traditional champagne. There are good reasons to celebrate. Sure, we made it into a new millennium without the world coming to an end or even any major Y2K glitches. More importantly though, if you make, buy, sell or even drink beer, the beer industry is back.beer glass

Last year the beer industry posted its strongest volume gains in nine years. After stagnating through most of the 1990s, beer volume grew by 1.6% in 1999, according to Adams Beer Handbook 2000, a healthy rate that represents an industry-wide gain of more than 42 million 2.25-gallon cases.

Brewers, wholesalers and retailers have had even greater cause for celebration, though, for several reasons. First, much of the industry’s growth has come from light beer and imported beer, which has helped dollar volume and margins grow even faster than total barrelage. Sales of imported beer rose 10.5% in 1999, while light beer gained 5.9%. Pricing also has firmed after several years of deep discounting during the summer selling season to chase volume. Both domestic brewers and importers have seen small price hikes stick with little resistance from consumers. Prices, for the first time since 1991, are keeping pace with the Consumer Price Index. And, the industry is seeing a mini-boom in the number of legal-age drinkers entering the market.

After years of forced optimism, however, what really has dispelled brewers’ past gloom is realization of what promises to be a rosy future. “Obviously, that’s great news,” said August Busch IV, vice president marketing for Anheuser-Busch, about the industry’s performance, “but it’s only the beginning. Projections indicate that we are now at the leading edge of what should be an extended period of industry growth. Total industry volume is expected to grow at approximately 1.5% per year for the next 10 years.”

0900br12AUGUST BUSCH IV
Vice President, Marketing
Anheuser-Busch

“Obviously, we want to grow our market share as much as possible, but we think that can be accomplished while smaller brands succeed in the marketplace.”

6809BEER3BILL HACKETT

President
Barton Beers

“Light beers account for more than 40% of domestic volume but only 10% of imports. That’s a huge volume opportunity.”

6809BEER4JOHN BOWLIN
President and CEO
Miller Brewing

“One recent survey found that 86% of those surveyed say drunk driving is one of the most important public health problems facing the country. When our industry acts and when we let people know about the pro grams we support, public reaction is very positive.”

6809BEE10BILL BITTING
President
Pabst Brewing

“Our purchase of Stroh has had an impact. It helped fill up capacity in brewing facilities, which drives gross revenues…That’s better for everyone.”

As anyone in the business will tell you, being part of a growing industry is a lot more fun than competing in a flat or declining market. But growth is not without its own unique challenges.

A SMALL WORLD AFTER ALL

At the same time the industry is starting to grow again, it’s also starting to contract. Consolidation is playing a major role at all levels in reshaping the business. Beer brands are finding themselves aligned with new parent breweries, new wholesaler alliances or, at worst, being squeezed out of markets — and existence — altogether.

0900ber5JIM KOCH
President
Boston Beer Co.

“There continues to be a shakeout of marginal players. Last year was the first year there were more brewery closings than openings.”

0900br11ROB KLUGMAN
Senior Vice President of Development
Coors Brewing

“We’re seeing a lot more of both horizontal and vertical consolidation in the wholesale tier.”

0900ber7MIKE FOLEY
President (former)
Heineken USA

“There will continue to be fewer, bigger, better wholesalers in the U.S. as we go forward. They will handle retail customers more efficiently, with better service.”

6809BEER8TIM KELLY
President
Guinness Bass Import Co.

“It wouldn’t surprise me, for example, to see imports’ share of market here [in the U.S.] grow to 20%.”

0900ber8KURT WIDMER
President
Widmer Bros. Brewing.

“People are gaining confidence in craft brands that have been out there a long time.”

6809BEER6BILL YETMAN
President
Beck’s NA

“The fun went out of the business for a while. Now the fun is back. The beer business is still a people business, one-on-one, people talking to people.”

President 2 low resMARC PORTELANCE
President
Labatt USA

“Regionalism is a challenge in figuring out how to get the most out of brand resources.”

Brewer consolidation, though painful, is one of the best things to happen to the business in recent years. Among the major domestic brewers, the three-way deal that liquidated Stroh Brewery, giving Pabst most of its brands and Miller most of its brewing facilities, helped put the domestic beer business back on track. Surprisingly, though most of Stroh’s brands were in the sub-premium category, the deal stabilized premium prices.

“Our purchase of Stroh has had an impact,” said Bill Bitting, president of Pabst Brewing. “It helped fill up capacity in brewing facilities, which drives gross revenues. Brewers were chasing volume to keep capacity up. With excess capacity taken out and existing capacity filling up, the industry is more stable, so there’s less price cutting. That’s better for everyone.”

A similar phenomenon is happening in the craft and micro segment. After a couple of years of flat sales, volume is on the rise even as the number of brands declines. “There continues to be a shakeout of marginal players,” said Jim Koch, president of Boston Beer Co. “Last year was the first year there were more brewery closings than openings. That benefits strong brands like Samuel Adams.”

With fewer brands making more efficient use of smaller brewing capacity and sales volume growing, brands that are left standing are healthier and happier. Consolidation among brewers, however, is happening on a global scale, and as the world gets smaller, beer business in the U.S. will continue to change and evolve. Brewers who are finding it difficult to grow share in their own markets are pursuing growth in other markets through acquisition.

LEADING DOMESTIC BEER BRANDS
(Thousands of 2.25-Gallon Cases)

BRAND SUPPLIER

CATEGORY

1998 1999

99 VS. ’98
% CHANGE

Budweiser Anheuser-Busch Premium 490,500 475,000 -3.2%
Bud Light Anheuser-Busch Light-Prem 353,000 395,000 11.9%
Miller Lite Miller Brewing Light-Prem 215,278 220,000 2.2%
Coors Light Coors Brewing Light-Prem 193,200 203,000 5.1%
Busch Anheuser-Busch Popular 111,500 109,500 -1.8%
Natural Light Anheuser-Busch Light-Pop 100,500 106,000 5.5%
Miller Genuine Draft Miller Brewing Premium 76,122 75,090 -1.4%
Miller High Life Miller Brewing Popular 68,889 72,335 5.0%
Busch Light Anheuser-Busch Light-Pop 67,500 70,500 4.4%
Milwaukee’s Best Miller Brewing Popular 49,256 44,775 -9.1%
TOTAL LEADING BRANDS 1,725,745 1,771,200 2.6%
OTHERS 715,948 688,279 -3.9%
TOTAL DOMESTIC BEER 2,441,693 2,459,479 0.7%

Source: Adams Beer Handbook 2000

Last year, SAB got a foothold in the European beer market with its purchase of Pilsner Urquell. The merger and acquisition activity this year has heated up considerably, first with Interbrew’s purchase of Whitbread, then Scottish & Newcastle’s acquisition of Danone’s French brewing operations, including the Kronenbourg brand, and most recently Interbrew’s bid for Bass Brewers.

The acquisitions not only mean new alliances and new economies of scale for brands, but possibly a great deal of new clout for imported brands here in the U.S. “The industry is becoming more global, the world is becoming a smaller place,” said Tim Kelly president of Guinness Bass Import Co. “The U.S. beer business is not as segmented as it is elsewhere in the world. Around the world there’s a lot more share for more brands. It wouldn’t surprise me, for example, to see imports’ share of market here grow to 20%.”

THE BIG GET BIGGER

Despite recent relief, pressure on margins has been so great for so long that consolidation is leaving its biggest mark on wholesalers. Consolidation for some has been the key to growth in a competitive market; for others it’s been the key to survival.

“People said there would be a Bud wholesaler and one other guy in each market in five years,” said Bill Yetman, president of Beck’s NA. “That was five years ago. The challenge now is how to get not only distribution in a given market, but as Mr. Busch says, share of mind.”

Share of mind is probably the concern of many brewers, as wholesalers continue to consolidate. Anheuser-Busch’s then-controversial “100% share of mind program,” begun five years ago, has convinced many A-B wholesalers to forego carrying other brands, including high-margin imports. Consolidation has often left distribution of both Miller and Coors, as well as “all others” to the only other wholesaler in town. That makes it more difficult for smaller brands to get distribution, and get the attention they need when they do have a slot in the warehouse.

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