U.S. Beer Industry Overview

Sometime in 2009, perhaps in the summer, the ‘€œGreat Recession’€ ended. Or perhaps not. Just as it took economists a while to determine officially that this financial crisis began in December of 2007, the National Bureau of Economic Research’€”the body that adjudicates such matters’€”has been slow to pronounce the recession over.

It doesn’€™t feel over: not to the un- or under-employed, not to home owners worried about foreclosure, not to local officials trying to square their budgets, and certainly not to beer drinkers, who are represented in all these groups. Granted, the economy seemed to be healthier on paper, but any recovery was accompanied by hesitation: 2009 saw a return to corporate profitability, but a reluctance to spend on new hiring. The watchword in many industries, beer included, was ‘€œefficiency.’€

The consumer was also wary, saving more, going out less, shopping for value, and generally waiting out a jobless recovery.

Craig Purser, president of the National Beer Wholesalers Association (NBWA), summed up the challenge. ‘€œThe real problem with beer, from an economic standpoint, is unemployment,’€ he says. ‘€œWe’€™re used to seeing beer as an affordable luxury. But it’€™s only an affordable luxury if you have a job.’€

The Big Sales Picture

Beer sales in 2009 reflected business and consumer uncertainty. Over the past three years, the total volume of beer sold in the U.S. slipped from modest growth in 2007 to flat in 2008’€”the height of the recession’€”to a loss of 2.1% in 2009 (data from Beverage Information Group, or BIG).

Sales of domestic beer fell by 1.4% in volume. Domestic premium brands continued their losses, slipping by over 9%, according to BIG. Among the leading premiums, the two top-selling brands, Bud Light and Budweiser, posted losses, while Coors Light eked out a small gain. At MillerCoors, Miller Lite also saw sales fall, even as MGD Light 64 had a successful 2009, hitting sales of 12 million cases. Yuengling Traditional Lager (up 10.4%) and Bud Ice also showed gains.

Americans maintained their infatuation with low calorie or low carbohydrate brands, which still account for more than half the beer volume sold. Light beer brands occupied half the ranks in the top twenty domestic premium beers. This includes the new Bud Select 55, touted as ‘€œthe lightest beer in the world.’€ Imported light beers that posted appreciable growth include Corona Light (up 4.9%) and the smaller-volume Tecate Light.

But as the premium category’€™s troubles have persisted, sales of sub-premium or ‘€œpopular’€ brands continued to post positive numbers, according to Eric Schmidt, research director for the Beverage Information Group. Led by Natural Light and Busch Light, nine of the ten top-selling beers in the segment posted sales increases last year. Notably, Pabst Blue Ribbon and Keystone Light increased volumes by 19.8% and 12.7%, respectively, while Miller High Life gained 3.6%.

And at the high end, craft beer volume continued to grow, even though the segment still represents less than 5% of all beer sales. New Belgium’€™s Fat Tire Amber, Magic Hat No. 9 and Harpoon IPA all showed robust growth, and the popularity of seasonals was evident in strong growth from Samuel Adams, Sierra Nevada and New Belgium.

Domestic superpremium beers also increased. Michelob Ultra maintained its number one position with a modest sales increase, followed by fast-growing Bud Lime Light. Interestingly, among the category’€™s strongest performers were beers that clearly show the influence of the craft beer styles on bigger brewers. These include three beers in the once-obscure Belgian witbier style: Blue Moon (MillerCoors), the new Bud Light Golden Wheat and Shock Top Belgian White (Anheuser-Busch), plus the Blue Moon and Leinenkugel seasonals and Yuengling’€™s Black and Tan.

Progressive adult beverages, or PABs, also known as flavored malt beverages (FMBs) or ‘€œmalternatives’€’€”slipped by more than 6% last year. However, newcomer brands Joose and Four Loco, both of which combine caffeine with very high levels of alcohol, showed robust growth, and Twisted Tea, Mike’€™s Hard Lemonade and Smirnoff Ice did well. Malt liquor category volumes were nearly flat, although Schlitz High Gravity VSL grew significantly and other individual brands, including Hurricane High Gravity, Camo Black Ice and St. Ides, grew by double digit percentages.

Imports, which slipped into negative numbers for the first time in 2008 after five years of growth, saw even larger losses of 6.9% in 2009, due once again largely to the declines of 8.4% and 10% by the category leaders, Corona Extra and Heineken. Dos Equis, however, grew by nearly 20%, and Stella Artois, benefiting from expanding distribution, grew by more than 4%.

Understanding the Consumer

Beer drinkers’€™ responses to the economy pushed beer purchases up in some channels and down in others. ‘€œThe channel that really took a beating in the past couple years of this recession is the convenience channel,’€ notes IRI’€™s Wandel of the largest beer-selling channel.

He draws a contrast with the first year of the recession. ‘€œYou might recall, in 2008 we were dealing with pretty high gas prices, particularly in the back half of the year. That was not necessarily the case in 2009, despite the tough economy. Consumers were very value-driven and, because the gas prices were moderated, they were willing to drive great lengths to get values and to visit more channels, or make more trips.’€

Consumers were ready to shop around. ‘€œThat tended to work well for larger pack sizes, which continue to be in high demand,’€ says Wandel. ‘€œThe value that those packages have on a per-serving basis was something that appealed to consumers.’€

Beer consumers increasingly stayed home, and on-premise sales remained lax, with food, drug, and liquor channels appearing to benefit. Brewers, wholesalers and retailers struggled to devise programs and promotions that would lure the consumer out.

A Functioning Duopoly

The year 2009 marked the first full year of operations by newly-formed Anheuser-Busch InBev, and the second full year for MillerCoors, creating a duopoly that dominated about 80% of the domestic beer market. All 10 top domestic brands belonged to one company or the other, with A-B owning six and MillerCoors, four.

Wandel says the two big brewing companies have come through the year with good numbers. ‘€œVolume was down for both MillerCoors and A-B InBev, but if you look at their profitability, it’€™s a tremendous success story,’€ he says. ‘€œBased on the synergies they’€™ve been able to recognize through joint ventures and acquisitions, combined with their pricing, it was a very profitable year for both brewers’€”and the domestic segment.’€

Reviewing the year, industry analyst Harry Schuhmacher, publisher of Beer Business Daily, noted that there was no price discounting, despite the soft volume.

‘€œThere was no discount war,’€ he said. ‘€œIn fact, they raised prices much faster than the consumer price index. So while the rest of the consumer goods actually decreased prices, the beer industry said, ‘€˜We’€™re going to raise prices.’€™’€

Schuhmacher counted off two main reasons that big brewers could maintain prices. First, he said, ‘€œIf you look at the past 10 years, the beer industry has lagged in pricing compared to other consumer goods. At the same time, the cost of the stuff that goes into making beer has gone up much faster than beer pricing has gone up. So now, they’€™re trying to play catch up, and get their margin back where it was years ago.’€

He also noted that there is no excess capacity in the industry, as was the case in the Eighties or Nineties, and so, no opportunity for an outsider to undercut major brands with cheap beer’€”because there’€™s no place to brew it.

From his different vantage point at the helm of Boston Beer, the country’€™s largest craft brewery, Jim Koch commented on the business approaches of the mainstream brewing companies.

‘€œThe big brewers today in the U.S. have become very profitable by driving efficiencies at the same time as they’€™ve maintained prices in real dollars,’€ Koch says. ‘€œThat’€™s their business strategy right now: maintain healthy pricing and take costs out of their businesses, become more efficient. And that’€™s not a bad thing. They’€™ve become world-class efficiency experts.’€

He summarizes the essential difference between that world and his own: ‘€œThey’€™re trying to figure out, ‘€˜How do we deliver the same beer at the same price for a lower cost?’€™ and we’€™re trying to figure out, ‘€˜How do we make Sam Adams and craft beer in general more desirable, even if it means making much more expensive beer?’€™’€

In St. Louis, Dave Peacock, president of Anheuser-Busch, Inc., anticipated in 2008 that the Anheuser-Busch InBev merger would offer synergies, and 2009 confirmed it, particularly in the sales and marketing organization. ‘€œWe implemented a lot of changes,’€ he says of this first year. ‘€œSome were things that were scoped prior to the merger, things we wanted to do anyway, and others were a byproduct of the merger.’€

Peacock stresses that the process of integrating the two companies was rapid. ‘€œWe didn’€™t want this to be a three- or four- or five-year integration,’€ he says. ‘€œThe good news is that, as we stand today, the integration is 90% or more complete in how we’€™re operating.’€

At the same time, Peacock points to what hasn’€™t changed. ‘€œWe had 12 breweries in the U.S.; we still have 12 breweries in the U.S. We had 500-plus wholesalers in the U.S.; we still have 500-plus wholesalers in the U.S.’€

Above all, the longevity of the Anheuser-Busch name is its strength. ‘€œAnheuser-Busch has been in business for over 150 years,’€ he says, ‘€œso we think long-term. This downturn may be longer than some, but we want to remain as focused as possible on the long-term and not overreact to the short term situation.’€

He sees the company’€™s broad portfolio as a particular asset in times of change. ‘€œWe’€™ve got sub-premium brands like Busch and Natural Light, and brands all the way up to Stella,’€ he says. ‘€œSo we’€™re able to appeal to a broad group, and as the economy ebbs and flows, we’€™re able to capture consumers across that spectrum.’€

The other pillar of the duopoly, MillerCoors, is one year further along the path after the integration of its parent brewing companies. As Harry Schuhmacher points out, these two founder U.S. companies, Miller and Coors, had more functional overlaps at the time of their merger than American Anheuser-Busch and Belgian/Brazilian InBev had when they merged.

Tom Long, president and CCO of MillerCoors, says of 2008, ‘€œWhen we created MillerCoors, we said our ambition was to be a stronger, more competitive player in the U.S. beer industry.’€ Performance in 2009 seems to support that ambition, with ‘€œdouble-digit underlying earnings growth.’€

Long observes, ‘€œWe did it despite a challenging fourth quarter, easily the most challenging quarter I’€™ve seen in the beer business, with persistent high unemployment and depressed industry volumes which, in turn, affected our sales.’€

The new company achieved savings through reducing overlap in the MillerCoors brewery network and reducing freight by 45 million miles, as well as cutting overlapping staff positions.

Long downplays the potential competition between brands from the two companies, stressing their essentially complementary nature. But Coors Light enjoyed volume growth in 2009, whereas Miller Lite lost volume.

Blue Moon and the Leinenkugel brands have been vibrant, so much so that an entire craft and import division has been established under the leadership of Tom Cardella, one of the company’€™s top executives.

Long concludes ‘€œThough sales were down, this performance during the toughest economy since the Great Depression demonstrated the wisdom of forming MillerCoors a year and a half ago. There is no question we are better positioned to compete in this environment than we otherwise would have been.’€

Imports Under Pressure

Just as the domestic market is largely in the hands of two major players, the big imports are similarly concentrated, with a handful of brands that essentially determine the health of the entire category. Soft numbers from Corona and Heineken affect the picture of imports as a whole.

Heineken has completed what is likely to be the final major acquisition of several in recent years, acquiring Mexican brewer Fomento Economico Mexican (CCM), or Femsa. This puts Femsa on stronger footing with respect to its rival, Grupo Modelo, and expands the portfolio of Mexican brands for Heineken NV.

Heineken USA, the American arm of the company, has dealt with the Femsa brands since a contractual agreement in 2004. The acquisition gives Heineken USA full distribution, marketing and ownership over those brands in the U.S. market, expanding the complete portfolio to include four of the ten top imports’€”Heineken, Tecate, Dos Equis Lager and Heineken Light’€”as well as the Newcastle Brown, Amstel, Sol and Carta Blanca beers.

Given that most of the beers fit into the international lager category’€”Newcastle Brown and Dos Equis Dark being the exceptions’€”differentiating the brands in the mind of the consumer is a critical marketing challenge that falls to Chris Steffanci, senior vice president of Sales, Heineken USA.

‘€œFor us, it’€™s about targeting different consumer bases,’€ Steffanci explains. ‘€œHeineken deals with a broad consumer base, so we sell Heineken in just about every market in the country, regardless of ethnicity or population. With consumers, it portrays certain disposable income and a certain point in their career.’€

Tecate targets Mexican newcomers who want a reminder of home, whereas Tecate Light targets second generation consumers.

By contrast, Dos Equis is aimed at a younger base, aged 21 through 30. Featuring a grizzled (though very sophisticated) lead character, the ad campaign ‘€œThe Most Interesting Man’€ has been wildly successful with the intended age group, contributing to the beer’€™s 19.9% growth, the highest of any import.

This target base is, logically, the most attuned to digital media, and Heineken USA jumped on social marketing relatively early. ‘€œDos Equis just surpassed Bud Light as the number one recommended brand on Facebook,’€ reports Steffanci. ‘€œBut Light is number two, and Heineken is number three. The Most Interesting Man is absolutely hitting our target audience.’€

Crown Imports, in Chicago, rival Corona’€™s American home, came into being in 2006 as a joint venture between Barton Beer and Constellation Brands. With 10 beers in 2009 from six breweries’€”Corona, Modelo, Negra Modelo, Pacifico, Tsingtao, St. Pauli Girl’€”Crown faced the same obstacles as Heineken, with soft numbers and brands that require clear differentiation for the consumer.

Bill Hackett, the company’€™s president, noted that ‘€œCrown’€™s Trifecta is made up of the young adult consumer, the Hispanic consumer, as well as consumers that have sufficient disposable income to be able to afford high-end brands.’€

Hackett is confident that Crown’€™s brands succeed due to ‘€œthe commitment and effort of the entire organization, from supply chain who continued to work tirelessly to source and ship product from every corner of Mexico, to the sales and marketing teams who have not only conceived the programs and support that have driven our results year-to-date, but continue to execute to a level that outdistances our competitors.’€

Crown’€™s Corona Extra dominates the imported beer segment, with sales of more than 100 million 2.25-gallon cases. The company’€™s Modelo Especial is the third best-selling import in the U.S. and saw sales rise by 7.8% in 2009. Corona Light was another gainer among the 10 leading imports, upping sales by 4.9%.

Small But (Still) Mighty

Inefficient, expensive, exclusive’€”is that the reality of craft beer, and the secret of its success? The category grows year by year, albeit from a small base, and its eclectic styles influence the decisions of big brewers and major importers alike.

Jim Koch, the founder of Boston Beer Co., makers of the Samuel Adams line of beers, celebrates ‘€œanother year of solid growth in America’€™s beer culture and the place of craft brewers in driving that culture.’€ He’€™s confident that craft beer has a secure place in the American beer landscape, with modest but sustained growth continuing the trend of the past near decade.

Koch makes a provocative point about the growth of craft beer: its supporters are probably not converts to craft beer exclusivity. ‘€œIf you’€™re a beer drinker, you probably drink craft beer sometimes. Maybe you’€™re having a good meal and you want a good beer, or you’€™re at a wedding and they’€™re serving some upscale beer, or you’€™re at a buddy’€™s house and they have a 12-pack of Sam Adams and they give you one.’€

His point is that somebody who is primarily a mass domestic beer drinker drinks craft beer on occasion. ‘€œGiven that there’€™s 100 million beer drinkers, perhaps half of them drink craft beer some of the time,’€ Koch concludes. This is where craft beer can grow.

Paul Gatza, director of the Brewers Association, the Colorado-based advocacy group for small brewers, agrees. ‘€œMorgan Stanley put out some survey data a few years back that showed that craft beer drinkers are fairly promiscuous with their buying habits,’€ Gatza writes. ‘€œThey have favorite breweries and brands that they buy from time to time, but also drink wine, spirits, imports, major domestics, water, coffee, tea, etc.’€ He calls it ‘€œthe right beverage for the right occasion.’€

Craft breweries continue to fuel the experimental side of the brewing industry’€”small volume ventures that keep the media writing and consumers willing to experiment.

Second Tier

Wholesalers stand between brewers’€”broad spectrum producers or specialists’€”and retail, and try to supply retailers with the appropriate mix of beer brands and styles that consumers want. Their local, often family-based history places them close to the changing demands of retailers and consumers.

Craig Purser of the NBWA looks at the efficiencies and greater values that characterized 2009 with satisfaction, but concludes ‘€œYou can’€™t increase efficiencies forever. You can’€™t costs-cut your way to prosperity.’€

Efficiencies for wholesalers, he says, means balancing the whole portfolio. ‘€œIf we look at this business as traditional boxes-in-and-boxes-out, that’€™s not the model that’€™s going to work exclusively anymore,’€ Purser says. ‘€œHow do you drive greater efficiencies by giving your customer the best mix?’€

Wholesalers are still coming to terms with the varied portfolio that seems to meet retailers’€™ and consumers’€™ needs. At their upcoming annual conference, the NBWA will devote three out of 20 educational seminars to craft beer, a growing category that members need to understand. ‘€œThat’€™s 15% of the seminars,’€ Purser says, ‘€œagainst a backdrop of everything from sales training to succession planning to taxes and legal to warehouse management and operation’€”subjects that are universal to our audience.’€

Wholesalers are still learning a new landscape, where ‘€œboxes-in-boxes-out’€ gives way, at least at the margins, to hand-selling.

The Policy Arena

This summer, Anheuser-Busch Inc. President Dave Peacock succeeds MillerCoors’€™ Tom Long as Chairman of the Board of the Beer Institute, the organization that represents the interests of the industry in Washington, DC. He takes over at a time of significant transition: long-time president of the Beer Institute, Jeff Becker, died in January 2010, after a long illness. Becker’€™s successor will be Capt. Joe McClain, until recently the director of the Navy Liaison Office to the U.S. House of Representatives.

Peacock paid tribute to Becker as an industry professional and close friend, and expressed his belief that McClain would prove as capable. ‘€œHe brings leadership and what I’€™d call people and influencing skill,’€ says Peacock. ‘€œAnd because of the service he’€™s given to the country, something I have a very high regard for, he brings a good level of discipline and the ability to prioritize.’€

Peacock counts among the Beer Institute’€™s strengths the collection of industry data. ‘€œBecause of its fragmentation at retail, in the past the beer industry was one in which it was difficult to wrap your hands around sales data.’€

Other issues of concern will depend on congressional action. ‘€œWe are very focused as a group on responsible advertising, responsible marketing and responsible consumption,’€ he says. ‘€œWe’€™re asking, ‘€˜How as an industry can we improve on what are already very good statistics?’€™ We’€™ve seen, for instance, drunk driving deaths decline dramatically over 20 years, and we’€™d like to see that trend continue. How as an industry can we work to make that happen?’€

Peacock is alert to the threat of taxation, a concern the Beer Institute shares with the NBWA. The NBWA’€™s Purser looked back at 2009, and highlighted the debate over health care reform as pivotal. He points out, ‘€œOne of the things the industry should be proud

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