BEER TODAY, BEER TOMORROW

Perhaps no industry has changed more in the past two decades than the beer industry. From the small number of national and regional brewers that dominated the industry in the 1970s, the business has spawned more than a thousand new breweries. Where consumers once chose from only a few dozen brands, they now can pick from hundreds. Even Anheuser-Busch, which brewed basically three beers 20 years ago, now makes and markets more than two dozen, and has tested dozens more. U.S. consumers now can buy and enjoy more beer styles than in any other nation on earth. And the growth of consumer interest in beer has led to increased acceptance of higher prices for top-end beers.

But as we approach the millennium, the more things change, the more they seem to stay the same. The bulk of the industry’s volume is still dominated by even fewer brewers than before — the Big Three, followed by Stroh and Pabst in the middle, then a handful of small specialty brewers. Sales are basically flat, and have been for most of the decade. The explosive growth of domestic micros has slowed dramatically. Even beer prices remain little changed in real terms in the past 10 years.

For all that, the beer industry is still an exciting, dynamic business. Fraught with challenges and intense competition, it nonetheless fosters camaraderie and a shared passion among both brewers and consumers alike for the products it makes. No matter what their circumstances, the industry’s top executives would rather be no place else. Where they sit, however, is a lot more comfortable for some than others.

The big news in the industry is old news. More than any other factor, the lack of growth in overall volume has affected, even generated, industry trends. Almost every major issue facing the industry–from consolidation to the rise and fall of micros–can trace its roots back to competition in a no-growth environment. While brewers expressed concern about some issues, most trends will have a positive impact on retailers and consumers.

Brand Proliferation Slows

One of the biggest changes in the past year has been the slowdown in brand proliferation. Distribution for new brands has been getting tighter for several years. With growth in the domestic craft segment coming to a virtual halt this year, the number of brands at retail is beginning to contract.

For years, the major brewers looked for new products that would give them a competitive edge. Brewers tried to hang their hats on each new brewing technique that came along – packaged draft, dry, ice – hoping to give consumers more distinct benefits and differentiated products. All along, though, they were merely coming up with “new and improved” versions of American lager.

Small entrepreneurs saw a way to get into the competitive environment by offering consumers hand-crafted beers in a range of styles unlike typical mainstream brands. The combination of a rebounding economy and experimental consumers looking for higher quality products led to explosive growth of craft beers in the early ’90s. As long as consumers continued to experiment, it almost didn’t matter how many or what kind of products retailers put on the shelves. But the honeymoon has been over for awhile now.

“There’s been a reality check at both the retailer and wholesaler levels,” said Paul Cooke, president of Labatt USA. “The profusion of brands was wonderful for consumers, but retailers and wholesalers have asked themselves how many brands they really want. Consumers can only hold about two to five bits of information at one time. In terms of brand loyalty, that means they can fit two or three brands into their repertoire.”

Consumers also may have had their fill of the flavor-of-the-month. While a peach lambic or strawberry wheat beer may be interesting once in a while, most consumers drink beer for refreshment.

“Consumers who at one time experimented with the trendy, heavier beers are returning to the more drinkable, mainstream lagers,” said August Busch IV, vice president of marketing, Anheuser-Busch. “While consumers are continuing to show interest in specialties, they’re choosing more drinkable versions of their favorite varieties.”

Craft beers are starting to shake out on the basis of quality and brand support. Volume may continue to grow, albeit at much slower rates, but the number of brands is decreasing. The brands that are most likely to survive in the market are a couple with national presence, strong regionals, and local brewers that have a loyal following in their core markets.

“There’s a bit of a shakeout going on and those brewers who are affected are finding it harder to get distribution,” said Ken Grossman, president of Sierra Nevada.

Even established brands are finding it more difficult to compete. Brands like Pyramid and Sierra Nevada have been forced to pull out of some markets where support for their brands was marginal. Many are being pushed to discount in core markets to defend their turf from outsiders. And some, like Pete’s, have had difficulty getting consumers to understand just what it is they stand for.

When the category was relatively new, brewers were content to let consumers “discover” their brands. Now that consumers have become increasingly sophisticated about beer, brewers can’t afford to wait for consumers to come to them. The brands with the best chance of growth are those with strong marketing programs. Even better off are brands that have been acquired or those that have forged alliances, like distribution agreements Redhook and Widmer have with Anheuser-Busch.

“The marketplace has made its call,” said Scott Barnum, president and chief operating officer, Pete’s Brewing. “Consumers are looking for brands with equity. Conditions are very challenging. Consumers want these beers, but now they won’t accept less than the best quality. It doesn’t help when the domestic guys are spending at high levels. It places more importance on brand equity building, which has been our focus for the past year.”

Pete’s equity was diffused by introducing too many new products, and when consumers started targeting a few – rather than many flavor varieties – sales started to fall. This year, the company has put more focus back on the brand’s roots in Wicked Ale and founder Pete Slosberg’s laid-back style. Gambrinus acquired the brand this spring, which may give the Pete’s the resources and distribution network it needs to get back on a positive growth track.

Meanwhile, for years, Boston Beer’s president Jim Koch has chastised other brewers for not paying more attention to quality issues like freshness dating. The strategy is now paying off as consumers look for brands with both quality and equity.

“We compete first with product quality,” said Koch, “then brand support like ads, point-of-sale and sales support. If people’s high expectations for Sam Adams are met every time, and they see communications for the brand, that’s what it takes. Not all craft beers have met consumers’ expectations for quality. This is the time to step up our level of brand support and focus it on Sam Adams, and Boston Lager in particular.”

Micro Loss Is Import Gain

As consumers’ palates have grown more sophisticated, they have migrated in large numbers from craft beers to imports for a couple of reasons.

“The import segment is growing because people are reverting to high quality, authentic brands, brands that have been around since 1888, not 1988,” said Michael Foley, president of Heineken USA.

Some consumers were exposed to a particular beer style from experimenting with micros and now are looking for the real thing.

“Consumers are more sophisticated,” said Jeff Coleman, president of Paulaner North America. “They’re moving up in taste. The icon used to be an imported label. Now they’re drinking beers like ours [imports] because many of our brands are originators of their styles.”

But imports also are attracting consumers who formerly drank only domestic beers. Many mainstream consumers have discovered that volume leaders like Corona and Heineken are very drinkable lagers, but with more cachet than their usual brand. And craft beers exposed consumers to so many more different tastes in beer that consumers have added more products to the portfolio of beers they drink depending on the occasion.

“There’s been a shift in consumer use of beer,” Barnum said. “Now consumers drink a repertoire of beers based on the occasion, so they’re seeing domestic specialties and imports more as one category. The move last year from domestic specialties to imports was because of over-proliferation and lack of brand identity among craft brands and aggressive marketing by imports.”

Corona, for example, has been on fire for several years. A steady, consistent marketing program for more than a decade, along with growth in Hispanic drinkers, has contributed to annual growth rates over 35%. Sales volume last year put Corona into the top import spot over Heineken, and growth this year is just as fast.

Corona’s upward momentum has accounted for a large portion of segment growth in the past few years. This year, though, growth in imports is spread more evenly across countries and across brands. Other Mexican beers, like Tecate, Dos Equis and Sol, all handled by Labatt USA, are experiencing tremendous growth.

U.K. beers also are having a good year. Labatt USA’s Boddington’s and Whitbread brands about doubled their volume last year and are on a hot growth track. Consistent marketing programs and an award-winning new ad campaign have propelled Guinness to growth rates of more than 20% annually. Guinness Import Co. is looking to repeat some of that success with other brands in the portfolio, such as Harp and Bass. New point-of-sale materials and the Guinness “Fleadh” this summer are helping to sell more Harp than in recent years, according to the company. And Bass may go back to a more traditional approach of promoting its heritage after pushing the envelope with recent ads, though promos like this summer’s giveaway of items from Lord Trent’s estate show the brand can still have fun without being stodgy. Other Irish beers, such as Heineken USA’s Murphy’s and Scottish & Newcastle’s Beamish also are hot with consumers here.

European brands also have shrugged off the doldrums of recent years and are growing more quickly. Heineken is back to a double-digit growth rate. Mainstream German beers Beck’s and St. Pauli Girl are back on track, and specialty German beers like Paulaner and Ayinger are experiencing strong growth. High end Belgian ales still hold a lot of appeal for consumers looking for a unique beer experience.

Even Canadian brands are on the upswing. Labatt Blue’s growth, for example, has pushed it past Molson Ice in sales, making it the number-three Canadian brand in the U.S. And Blue Light is up 35%.

Consumers have found that imports offer a certain reliability in terms of both quality and image. And with a strong economy, they’re willing to pay high prices for that reassurance.

“Craft beers brought down the fences as far as price is concerned,” said Bill Yetman, president of Beck’s North America. “Some consumers want to wear nice clothes, drive a nice car and drink a good beer. A fancy name and fancy label won’t necessarily cut it.”

“Craft brewers went north so fast, they opened up the category to a whole new group of consumers who had been only domestic beer drinkers,” said Bill Hackett, president of Barton Beers, Ltd. “Consumers were exposed to a wide range of tastes beyond blonde lager, and craft beers got them to pay a higher price point for beer. Consumers are still willing to try new things. As crafts have lost their desirability, imports have been there to pick up the business.”

Pricing

Despite the fact that consumers are willing to pay more for beer, pricing has been the industry’s greatest concern. Brewers entered the summer selling season confident that they wouldn’t see a repeat of last year’s aggressive discounting, especially among major domestic brands. But discounting has been as deep or deeper this year as last.

“The price wars of the major domestics continues to be a disruption for imports and higher-priced specialties,” said Carlos Alvarez, president of Gambrinus. “It doesn’t seem like it will end anytime soon. Unfortunately, it provides distributors with less margin and less overall dollars.”

With the light beer and import segments the only ones showing notable growth, other mainstream brands are under pressure to keep volume up. Many brands are using discounting as a means of trying to protect their market share. The aggressive pricing isn’t limited to big brands, either.

“The mainstream premium segment is getting squeezed except for lights,” Cooke said. “There’s lots of pricing action. As micros implode, they’re pricing their products downward, too. Consumers aren’t asking for lower prices; this is all being done by the brewers.”

Consumers may not be asking for lower prices, but they will rarely turn their backs on a sale. The more competitive the market becomes, the more brands are using price to entice consumers.

“Start at the top end,” said Jack MacDonough, CEO of Miller Brewing. “Corona hasn’t taken a price increase the entire decade. That makes it harder for those below them to take a price increase. We used to compare ourselves to less expensive beers. Now we look at the high end, and if the gap isn’t right, we adjust our pricing.”

Some brewers are concerned that they’ll have to drop their prices to stay competitive, and that lower prices may send the wrong signal to consumers. But the consensus among brewers of high end beers is that consumers will still pay high prices for brands they perceive provide high value.

“I think that those with equity in the better beer category won’t have to price as aggressively,” Barnum said. “The trick is to give consumers value, but not price so aggressively that you reposition the brand at a lower price point.”

Brands like Gambrinus’ Moosehead and Labatt USA’s Rolling Rock, for example, recently took price increases to try to recapture the high end positioning they once enjoyed.

“Dropping prices on brands at the upper end is the surest way to destruction,” said Cooke. “There’s a tremendous opportunity for brands and brewers who invest in brands. Those who keep prices high and hang in there will do well.”

While importers see the widening gap between prices of their products and those of discounted domestic premiums as reinforcing their high-end image, domestic premiums don’t see lower prices eroding their image at all.

“The price of soft drinks is down substantially this year,” MacDonough said. “Does it affect their image? No. How you market your product affects your image. Consumers are always looking for products on sale.”

“Certainly no brand is completely immune from price pressures by competitors,” Busch said. “Our research suggests that Budweiser and Bud Light drinkers are less likely to switch brands based on price. Quality, consistency and freshness help negate any brand switching based on price.”

Core Brand Focus

Image, in fact, is what major domestic brewers have been focused on for some time. Despite their forays into new products, especially experiments with craft beers, the major domestic brewers actually turned their focus from crafts back to their core brands before the craft category began slowing down.

Anheuser-Busch killed both Elk Mountain and American Originals lines and rolled its specialty brewing efforts and expertise into line extensions for the Michelob brand. Miller never went much farther than investing in Leinenkugel, Shipyard and Celis before putting its energy and resources back into revitalizing Lite. Coors cut the Blue Moon line back to a few products that sell well and put more time and focus into Killian’s Red, a relaunch of Original Coors and new ads behind Coors Light.

In the battle for consumers’ palates and wallets, big brands have to go where the volume is. That means reaching young adults from 21 to 35. With each new generation, brewers almost have to reinvent their brand communications to find the most compelling messages. Since the light beer category is where the growth is, that’s where a lot of the spending is.

“The growth trend of light beer is very hot and very big,” said Leo Kiely, president of Coors Brewing. “The big brewers are battling over light. That’s where future market share is going to be, and it’s a three-horse race. The question is how strong is your franchise? How much pricing do you have to do to maintain your franchise? We did significantly less discounting last year. This year we’re doing a bit more, but innovative packaging like bat-shaped bottles and John Wayne cans, solid promotions and advertising are what’s working. Our ‘Beer Man’ campaign, for example, is what’s building the franchise. These are the things we focus on.”

Miller’s focus has been on how to make Lite relevant to contemporary young adults. It’s recent strategy of an unpredictable mix of executions aimed at 20-somethings started with a slew of ads from “Dick” and has expanded to a diverse pool of spots under the “Miller Time” theme. Once a phrase that signified the end of a hard day’s work, Miller Time now means “fun and the unexpected.” While the ads were controversial at first, (especially among over-30 wholesalers), they seem to be reaching their target without alienating older drinkers.

“On the marketing side, we’re happy with what we’re doing,” MacDonough said. “In addition to continuing work on Miller Time for Lite and Genuine Draft, we revived the “champagne” package for Miller High Life, introduced a new High Life 7-ounce package and new advertising, which has been well received. Red Dog also is getting new ads after a two-year hiatus.”

Bud Light has been on fire, taking up some of the slack for Budweiser, which has seen its fortunes decline somewhat in recent years. Bud Light’s new creative, starring a bunch of suburban guys who come up with new ways to get out of doing household chores, continues the brand’s tradition of using humor to make the brand relevant.

Budweiser also has gotten a new mix of ads to augment talking frogs and lizards and the freshness and heritage campaigns the brand launched a year ago. New ads also use humor to present classic American scenarios like one involving a traveling salesman and a farmer’s daughter. While the spots don’t overtly tweak patriotic heartstrings like past umbrella themes such as “Proud to be Your Bud,” they do continue to present the brand as a classic American icon.

Consolidation

The upshot is that both lights and imports are growing at the expense of other segments.

“Consumers are used to drinking satisfying and refreshing lighter style beer,” Alvarez said. “Consumer preference also is for strong brands. Light beer brands are the ones that are advertised most heavily. The other side of the coin is not heavy beer so much as a strong economy that allows consumers to spend more in social situations. Consumers are finding very reliable brands within the import segment that they can enjoy on different occasions.”

The combination of heavy advertising and discounting is putting pressure on more marginal brands at both the high and low ends. Lower prices mean slimmer margins for brewers, wholesalers and potentially retailers.

“If you take a macro look at the business, a big trend is less room for Stroh and Pabst because of the battle between the Big Three and the growth in imports and crafts,” Kiely said.

Stroh Brewery Co. purchased G. Heileman two years ago to try to achieve some economies of scale in both production and marketing. But both Stroh and former Heileman brands are concentrated in the subpremium segment. Pricing trends have put a lot of pressure on the company, despite the fact that some brands with solid consumer equity like Old Milwuakee continue to sell and that the malt liquor category is growing.

“The acquisition worked well,” said Bill Henry, president of Stroh. “The cost savings we expected happened, and we used the savings to invest in marketing last year to get results for our brands. But we didn’t expect the increasingly competitive environment, which has made business tough. We’ve had to pull back this year, but we’ll continue to invest in building our brands.”

Stroh also experienced a loss in contract production as growth of the craft segment slowed, and the brewer has seen export sales slow due to the strength of the dollar. Stroh’s financial picture has improved from the first quarter this year, according to Henry, but he didn’t deny that profits are being squeezed.

As profits get squeezed, consolidation at the brewer and wholesaler levels may become more prevalent, bringing mixed blessings.

“At the brewer level, the net impact of consolidation will be positive when the dust settles,” said Reggie Fils-Aime, vice president of marketing, Guinness Import Co. “On the craft beer side, especially, people rushed in not well prepared for the issues and challenges they would face and ended up making bad beer. Consolidation will be like pruning a rose bush; it will be better for the industry.

“At the wholesaler level,” he continued, “I don’t think it’s good for the business. Fewer wholesalers means less competition, and it forces wholesalers to focus on big brands.”

Big brands, of course, are just what the major domestics want wholesalers to concentrate on. “In some cases, wholesalers are realizing their best financial position can be attained through consolidation of their operations,” Busch said. “Consolidation is an appropriate option for many wholesalers in order to increase their capacity to deliver retailer satisfaction and long-term sales, share and profit growth.”

Imports again find themselves in an enviable position in this environment. By holding their prices, imports provide wholesalers with higher margins, making them more important to wholesaler portfolios.

“It’s important to Beck’s NA that we continue to provide wholesalers with profitable margins,” Yetman said. “Price discounting is a short-term fix; quality of the product has to speak for itself.”

“The only bright spot for wholesalers’ bottom line is growth of imports and light beers,” Cooke agreed. “They will increasingly have to shift their attention to imports. There’s a wonderful alignment now between what the consumer wants, what retailers and wholesalers want and what we want.”

Though retailers might worry about all the talk about tight profits, overall business should remain good at the retail level, depending on their product mix.

“There’s been very little volume growth in the 1990s,” MacDonough said, “but there’s been a switch from inexpensive beers to expensive beers, so dollar sales in the category have increased over time. It’s a reflection of the economy. An awful lot of concern among retailers [about slow growth and discounting] may be unwarranted.”

Government Intervention

Also unwarranted may be concerns about government intervention in the beer business. Though there’s been a lot of talk recently about whether the beverage alcohol industry will be Capitol Hill’s next target after tobacco, most observers think it’s unlikely. Even the tobacco bill fell apart despite the support it had from both legislators and the public.

“Legislative issues are certainly topical,” Kiely said. “DUI laws are getting tougher, and the smoking ban in California restaurants makes the question ‘Is alcohol next?’ a pertinent one. The sharks smell blood in the water, but I doubt the feeding frenzy will gain a lot of momentum. Alcohol is different than tobacco. Most people use it responsibly. Some studies show it actually may be good for people’s health. And ours is an industry that is upfront about the issues.”

The fact that the beer industry strongly supports programs designed to discourage drunk driving and underage drinking and doesn’t deny the problems some people have with alcohol puts it in a different league than the tobacco industry. And public perception of beer is much more positive than that of tobacco.

Outlook

Despite slow growth, the industry still offers plenty of opportunity to those positioned to take advantage of market conditions. The craft segment will likely continue to consolidate and the number of brands will decline. Those that are left will be brands with good equity and strong support that will provide retailers with good margins. As the field shrinks, retailers also will be able to devote more space to brands that turn more quickly. Imports will continue to grow along with the economy, giving consumers an affordable luxury and the heritage and authenticity that micros lack. And the Big Three will continue to battle for market share, particularly in the light beer segment.

Even changing demographics could help boost consumption. “The number of 21-year-olds, which declined from 1992 through 1997 will increase 14.6% by the year 2002,” Busch said. “Additionally, as baby boomers grow older, they are maintaining consumption levels to a greater degree than previous generations.”

What remains to be seen is what shape the industry will take as we enter the new millennium. As the price gap between premiums and subpremiums narrows, the pressure is on brewers like Stroh and Pabst to wring all the cost efficiencies they can from their breweries to maintain their profitability. At the same time, an unexpected downturn in the economy could quickly rewrite this scenario, making subpremium brands much more attractive than imports.

Right now, it’s a game of brand against brand more than one segment of the business versus another. And in today’s competitive environment, only the strong will survive.

The following are links to numerical charts and graphs…

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