Beer: State-Of-The-Industry Report

And we thought a shortage of hops was a problem.

In the recent past, brewers lost sleep over how to lay their hands on adequate supplies of beer’€™s most distinctive ingredient, and its escalating cost. Before that, the concern was the erosion of beer’€™s market share, as wine and spirits enjoyed growing cachet.

But the challenges of the last year have made some yearn for the problems of the past. Consolidation of the biggest brewing companies has created an effective duopoly in the U.S., with serious repercussions that extend into the distribution and even retail tiers.

And consumers have been whiplashed by the recession, with the consequences of their spending decisions rippling back through the beer business from bottom to top. Optimists see economic circumstances improving; more cautious voices warn that conditions are simply worsening at a slower pace. Either way, an anxious public is wary of parting with its money, a reluctance that is felt by all businesses, including beer.

Craig Purser, president of the National Beer Wholesalers Association (NBWA), summed up the mood: ‘€œConsumers, regardless of what they’€™re going through, are dialing it back. Anyone who says beer is recession-proof hasn’€™t done their homework and doesn’€™t know what’€™s going on.’€

Sales Trends

After modest growth of the entire beer category in 2006 and 2007, The Beverage Information Group (BIG) reported 2008 growth of a meager 0.5% by volume. Gains and losses were spread unevenly across segments, with some conspicuous differences from the previous year.

Premium beer dropped 4.1%, a deeper loss than last year’€™s. But sub-premium beer, after four years of losses and weak growth in 2007, grew in 2008, and recorded growth as high as 7.1% by this summer (figures from Information Resources, Inc., IRI, a Chicago-based market research firm).

Consumer fondness for light beers is remarkably stable, with the segment accounting for the second year for 51% of the total beer market. Indeed, light beers occupy eight of ten spots on the Beverage Information Group’€™s list of the top ten domestic beers, with Budweiser and Busch the only full-calorie beers.

The five-year run of growth in the import sector had slowed in the past two years under pressure from the weak dollar, and finally turned to a 5.4% fall in 2008, largely due to losses by the category leaders, Corona and Heineken.

The Beverage Information Group lumps superpremium and craft beer together, and shows growth of 13.6% for that category in 2008. IRI figures for a later time period show superpremium on its own growing at a steep 15.45%. Michelob Ultra again leads the list of brands, but part of the strength of the segment is no doubt due to Bud Light Lime.

Craft beer was once again a healthy segment, with 6% growth (as reported by the Brewers Association, the trade association for small brewers). Although this was half the rate of the two previous years, this marked a sixth year of consistent expansion. Craft beer’€™s share of the total market is small, but at 4%, it has reached a new high for the segment.

Craft may be small, but other segments are smaller. Malt liquor fell in 2008 to a 2.6% market share. Flavored malt beverages (FMB), also called ‘€œprogressive adult beverages,’€ continued to slide, this year by 9.6%, taking the segment to 1.6% of the beer category. Still, constant reinvention through the introduction of new flavors keeps interest alive among FMB devotees, and the largest individual brands out-sell the largest individual craft brands.

Shifting Consumer Behavior

At first glance, the beer figures are puzzling: premium beer down, imports down; sub-premium up, craft and superpremium up.

Dan Wandel, SVP, Beverage Alcohol Client Solutions with IRI, sees two forces at work. ‘€œCertainly, it makes sense for the sub-premium segment to do well in this economy. They offer value, they predominantly sell in cans and we’€™ve seen cans outpacing glass for the last several years in the category,’€ he explains.

But he feels the attraction to craft beer is different. ‘€œI think the success of the craft segment continues to be based on demographics, with today’€™s consumer, particularly the millennials, seeming to seek out variety. That bodes very well for the craft segment and it’€™s helped to fuel their success.’€

An IRI study of segment switches within the beverage alcohol industry found most of the trading up and down in beer was within the beer category. ‘€œWe didn’€™t see a tremendous amount of beer consumers trading out to wine or spirits,’€ explains Wandel. ‘€œThere was a little trading from wine and spirits to beer. I think it would be fair to say that craft benefited from some of that movement.’€

Jim Koch, founder of Boston Beer, brewer of the Samuel Adams line, sees a unifying thread that explains consumer choices. ‘€œI think we’€™re seeing the same phenomenon: the consumer’€™s emphasis on value. They’€™re looking for value rather than image and status.

‘€œThe imports have been associated with higher status and better image, not necessarily with great ingredients and flavor. Craft beer offers, maybe not the same image and status, but a lot of quality and flavor at the same price as an import. In these tough times, people are foregoing the extra cost of status and image, but they’€™re willing to pay more for more flavor and better ingredients. That’€™s the kind of value that craft beers provide.’€

Koch continues, ‘€œThe same phenomenon is happening with premium and sub-premium beers, because the sub-premium beers offer pretty comparable flavor at a lower price. Traditionally, the difference between a premium and a sub-premium beer has been more advertising and a stronger brand image. Consumers are similarly saying, ‘€˜I’€™m not going to pay more money just for the brand image.’€™’€

Interestingly, A-B InBev has been quick to readjust its marketing efforts, with reports that one of its major value brands, Natural Light, the fifth best-selling beer in the U.S., has launched its first national ad campaign in 25 years on various cable TV outlets, following regional tests last year.

Industry watcher Harry Schuhmaker, publisher of Beer Business Daily, reinforces the value message, with particular reference to imports. ‘€œIf you had told me two years go that Corona and Heineken were going to be down double-digits, I would have thought you were nuts. I think what happened was the consumer suddenly woke up and discovered that incomes weren’€™t going to rise to eternity, looked at the price-value relationship and thought, ‘€˜Wow I can get an American beer for a lot better price that’€™s probably fresher.’€™ That the kind of thing that happens when economies go bad, and people head back to value.’€

As for the shift to sub-premiums, Schuhmacher points out, ‘€œThe problem with the big brewers is, for all intents and purposes, it costs the same to make, ship, deliver and store a sub-premium brand as it does a premium brand. The only difference is the price. That’€™s a margin squeeze. Although they’€™re happy to keep everyone drinking beer, they’€™ll make less money.’€

Hot Selections

Anheuser-Busch InBev, with about half of the U.S. beer market, plans to invest heavily in Bud Light, America’€™s’€”and the world’€™s’€”largest-selling brand. Indeed, it’€™s been reported that the brand, which posted a scant 0.2% gain in 2008 to 571 million 2.25-gallon cases, saw sales decrease by 3.0% in the first six months of 2009, and is planning on changing the brand’€™s marketing emphasis. Sales for the number two beer, Budweiser, fell by 5.3% in 2008, a larger loss than the premium category as a whole. Nevertheless, Dave Peacock, president of Anheuser-Busch, promises strong support behind ‘€œour American icon.’€

But the real action for Anheuser-Busch InBev was Bud Light Lime, with a launch year of 30 million 2.25-gallon cases in 2008. Indeed, it was the most dynamic new beer introduction in quite awhile, far surpassing Miller Chill’€™s successful launch in 2007. Budweiser American Ale, which debuted later in 2008, also saw success.

Schumacher sees consumer enthusiasm for two opposite ends of the beer flavor spectrum: extremely heavy or extremely light. On the light end, ‘€œMGD 64 is outrageously hot, and it’€™s not a small brand. They never expected it to be this big this fast. And they have repeat buys, which is surprising.’€

But Anheuser-Busch is taking light beer lighter still with Bud Select 55, the lightest beer in the world at 55 calories. The brand is doing well in test markets. ‘€œAnd Coors Light, which is the lightest tasting beer of the big three, is still growing’€ adds Schuhmacher. ‘€œI think there are a lot of people that may not necessarily like beer, but they drink it, so they drink these very light beers.’€

At the other extreme, among more flavorful beers, the consumer’€™s favorite ‘€œstyles’€ continue to be seasonal beers and variety packs’€”not beer styles at all, but expressions of a predilection for novelty and diversity.

With over two decades in the beer business to draw upon, Boston Beer’€™s Koch finds there is a rhythm to consumer preferences. ‘€œThere have been times when we’€™ve grown with seasonals and variety, and other times when the consumer has kind of been over-saturated with variety and has gone back to some of the great, reliable beers,’€ he says, citing his own company’€™s Boston Lager, as well as Sierra Nevada Pale Ale and New Belgium’€™s Fat Tire.

‘€œFrom the early 1990s until ‘€˜96 or ‘€˜97, we couldn’€™t make enough new beer styles,’€ Koch continued. ‘€œThen, after people had tried everything, they came back to Boston Lager. Now they’€™re infatuated with variety again.’€

IRI’€™s Wandel points to the success in 2008 of new beers such as Sam Adams’€™ Irish Red and Deschutes Green Lakes Organic Ale, a well as the New Belgium variety pack, but notes that new varieties and seasonal brews have caught on with the big brewers, as well, with Coors’€™ Blue Moon and Michelob coming out with seasonal flavors.

Wandel predicts that ‘€œfrom a craft perspective, the Alaskan White is something that may do very well.’€ This would continue the growing popularity of Belgian-style white or wit beers, a once-obscure style that has attracted craft drinkers and was first popularized on a large scale by Blue Moon. Dave Peacock’€™s description of the new Bud Light Golden Wheat’€”’€œa premium light, unfiltered wheat beer brewed with wheat malt, coriander and citrus peels’€’€”makes it clear that A-B is exploring the same refreshing but flavorful style.

Multiple Mergers

The national and international beer industry was reshaped by two major consolidations that were finalized in 2008, creating two companies that control about 80% of the American market.

The purchase of Anheuser-Busch by Belgian-Brazilian brewing conglomerate InBev created Anheuser-Busch InBev. While the combination was only completed in November, the process of integrating the two giants had been felt for more than a year.

The purchase price of about $52 billion left the newly-merged company with burdensome debt financing costs, and Chief Executive Carlos Brito quickly embarked on a vigorous campaign of cost reduction. Job cuts and buy-outs reduced the U.S. work force by around 3,000, and non-core assets were slated for sale.

For Anheuser-Busch, a company with a reputation for sparing no expense on staff perks, high-quality promotions and brand building, the new management direction has come as a shock, say some industry observers. But A-B president Dave Peacock finds the new union ‘€œis a combination of old and new’€”a revered adherence to quality traditions that made this company great, while putting in place new management practices that have made the global company one of the preeminent leaders in people and financial management.’€

Peacock sees synergies in the two companies coming together. ‘€œWe’€™re sharing best practices with our colleagues worldwide’€”from learning from InBev in the area of waste water efficiencies to A-B employees traveling to China, Brazil and Western Europe to share ideas on optimizing energy and utilities.’€

The second major realignment created MillerCoors, when parent companies SABMiller and Molson Coors (themselves each recently-blended companies) combined their American operations, an agreement that was announced in late 2007 and brought to fruition in 2008. The merged company accounts for just less than one-third of the U.S. beer market. MillerCoors realized substantial savings through the year, largely through efficiencies of scale and by using the brewing facilities of both companies to brew beer closer to its destination, slashing transportation costs.

These two mergers have put corresponding pressures on distributors. Craig Purser at the NBWA observes ‘€œA beer distributor is by definition a representative for the brands they carry and, to a certain extent, if you’€™re going to be that agent, you replicate the culture of that product. MillerCoors is an emergent culture as they put together two very different animals. Miller is an arm of SAB, and the former owner was a tobacco company. And, goodness, Coors’€™ history and traditions are very Western, very family.

‘€œObviously, with Anheuser-Busch, we have a culture that was well-known, and InBev, Brazilian by way of Belgium, very international, very focused on bottom line results, very focused on ROI, with a real emphasis on cost reduction’€”quite a shift from the old Anheuser-Busch. So you’€™ve got distributors dealing with those changes.’€

Still, the results of these mergers have been significant among wholesalers. Just as MillerCoors brought together two formerly competing American companies, the brewer is now cutting the ranks of formerly competing distributors in many communities. Purser estimates that over 40 former Miller or Coors distributors across the country were not offered new agreements with the merged company. Given the consolidation that is already reducing the numbers of wholesalers, this is a substantial loss.

Relationships between Anheuser-Busch InBev and its distributors have been less fraught. A-B’€™s Peacock observes, ‘€œOur relationships remain strong, with few, if any, changes’€¦

In fact, amid the uncertainty and potential for distraction that year, both A-B employees and wholesalers did a phenomenal job of staying focused on the business and delivering a really successful year for the company.’€

Still, there’€™s a sense that distributors are waiting for the other shoe to drop. Schuhmacher explains, ‘€œThey’€™re afraid A-B-InBev will do what they’€™ve done in other countries, which is to try to eliminate the wholesalers or diminish their power or margin. There’€™s a lot of strife about that.’€

NBWA’€™s Purser doesn’€™t acknowledge that threat explicitly, but he’€™s adamant about any efforts to bypass the second tier. ‘€œBetween the state-based system and appropriate federal regulation, we have a system that has worked for 75 years. That’€™s why we’€™re so passionate about defending the states’€™ role and ensuring that the federal role remains appropriate, because it has worked so well.’€

And he points to the role of the wholesalers in a new area: consumer safety. He cited the recall by Boston Beer last year of defective bottles. ‘€œIt couldn’€™t have been handled better. It was fast and transparent, says Purser. ‘€œAnd do you know who knew where that stuff was? The beer distributors. They knew exactly where that stuff was. Compare that to the California meat incident, where they couldn’€™t even find where the hamburger went that had ended up in the public school system!’€

Purser recognizes the inevitability of change. ‘€œThere’€™s going to be consolidation, no doubt. The big producers want it,’€ he says. ‘€œBut for those businesses that want to stay in this business, there’€™s a place for them. You’€™ll see some other models develop’€”such as specialty distributors. Maybe there was an unconsolidated Miller or Coors house, and someone wants to come back and build the business in the specialty direction.’€

Paul Gatza, director of the Brewers Association, the trade association for small brewers, gives some credit for the growth of craft beer to distributors and retailers who increasingly ‘€œget it,’€ and see the value of adding specialty beer to their portfolios.

Harry Schuhmacher finds this a natural fit, observing that distributors are starting to find more in common with the small brewers than with the large brewers. ‘€œDistributors and small brewers will always have that one thing they won’€™t agree on, and that’€™s state franchise laws,’€ he says. ‘€œBut beyond that, they’€™re both small businesses, they’€™re both domestic and American-owned, and they both have a lot of political power these days. Big companies are out: small, family-owned, regulated America companies are in. It’€™s much different than it was even a year ago.’€

Taxing the Pour

One subject where the entire beer community’€”brewers, distributors and retailers’€”come together is the threat of raised excise tax. With government budgets at all levels under strain, bailouts and ambitious reforms ballooning the deficit, and two foreign wars to be waged, the alcohol industry as a whole has been eyed as a source of revenue.

Anheuser-Busch InBev, whose lobbying efforts are as impressive as their distribution system, has worked quietly, particularly at the state level where state legislators are looking to increase ‘€œsin taxes’€ to make ends meet. A-B’€™s Peacock notes, ‘€œWe recognize state and federal governments are confronting a number of budget challenges, but beer consumers already are overtaxed and don’€™t deserve to be penalized or singled out to fix these problems.’€

The issue of fairness’€”that beer is already heavily taxed in comparison with other consumer goods’€”has been a central rallying point. Peacock and others have also emphasized ‘€œthat raising beer taxes threatens jobs, increases consumer costs and jeopardizes the business operations of brewers, wholesalers, retailers and suppliers that rely heavily on the industry.’€

NBWA’€™s Purser, with an office near Washington, DC, is keenly aware of ongoing discussions in the capitol.

He describes one of the many options presented to the Senate Finance Committee, that would equalize the taxes levied on beer, wine and distilled spirits, based on alcohol content’€”a policy that has been favored by the spirits industry.

According to the NBWA, the proposal to equalize the rates would have meant an increase of 20% to 25% for distilled spirits, an increase of 149% for beer, and an increase of 200% for wine, a disproportionate increase on the two lower-alcohol products. For the moment, the House and Senate discussions do not include the equalization provision. However, Purser added, ‘€œThings can change very quickly.’€

Not only in government. Rapid, unexpected change has been the watchword of the last year. As the economy recovers and new business relationships take shape, the beer industry will certainly not return to its pre-2008 form. But no one would object to fewer surprises and a little more stability.

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