Beer: 2011 State-of-the-Industry Report

If we ever had any doubts about the identity of the classic beer drinker, we don’€™t any more. Beer enjoys popularity across a broad spectrum of adult consumers, but the heart and soul of the beer market is, we now see, the guy the economic recovery has left behind.

Dave Peacock, president of Anheuser-Busch, is blunt: ‘€œClearly the economy has had a major impact. We’€™ve seen volumes in a lot of industries impacted: ours may be disproportionate because the median household income for our average consumer is around $50,000 a year. That’€™s pretty low, relative to other categories.’€

Young adults are hit particularly hard says Craig Purser, president of the National Beer Wholesaler’€™s Association (NBWA). ‘€œThe thing is not to just focus on unemployment, but on 21- to 35-year-old male unemployment, which is disproportionate, followed closely by underemployment. It goes to sectors of the U.S. economy, like housing, like construction; those industries where beer drinkers tend to work. You can blame the weather if you want to, but the real fundamental is unemployment.’€

Peacock speaks for Anheuser-Busch, but he might as well be speaking for the industry as a whole when he says, ‘€œYou have these factors affecting our economy. Like any company, we’€™re having to say, OK, we can’€™t control this. How do we manage our business and how are we successful in this environment?’€

Strategies vary. For the big brewers, give core audiences plenty of choice, so there is a beer to fit any wallet: this includes forays into the high end, as well as budget brands. Connect with beer drinkers through meaningful promotions; that way, brands can maintain market share, even when volumes are down. Look to smart marketing to move smaller brands or reach specialized audiences. Provide variety and excitement to stem the defection to other alcohol beverages.

And wait for the economy to turn around.

By the Numbers

The total volume of beer sold in the U.S. fell by 1.9% in 2010, according to data from the Beverage Information Group. This compares with flat sales in 2008, at the height of the recession, and a loss of 2.1% in 2009. However, unlike 2009, when overall figures were dragged down by a big hit to the imported beer category, in 2010 import sales were positive, and weaker domestic beer sales accounted for the negative total. Among the top-selling 10 domestic beers, seven brands showed losses for the year. Every category of beer lost volume, except for progressive adult beverages, craft and imports.

Domestic premium sales fell by 7.6%, better than the 9% loss of the previous year, with the country’€™s second best-selling brand, Budweiser, taking the biggest volume hit with a decline of 8.0%.

As ever, light beers ‘€” whether sub-premium, premium or superpremium ‘€” dominated American drinkers’€™ selections, comprising seven out of the ten top domestic brands, even as sales for the light category fell by 1.9% overall. Among standard light beers, Coors Light and Keystone Light showed modest growthith all other top-selling lights showing sales declines.

The two ‘€œmicro-lights’€ headed in opposite directions: MGD Light 64, introduced in 2008, reversed its good 2009 fortunes, and suffered a 10.0% loss; newer Budweiser Select 55 grew by 120% to 11 million 2.25 gallon cases. This volatility hints that the audience for super-low calorie beers may be rather fickle, moving on to something new when it comes to market

Among superpremiums, Michelob Ultra Light, the category leader, showed barely positive numbers. Blue Moon, Coors’€™ reliably successful interpretation of the Belgian wit beer style, was a steady winner again with growth of 30.4%; Shock Top Belgian White, A-B’€™s much newer offering in the same style, continued growing at 25.0%.

The value of novelty was felt by both winners and losers: Miller Chill and Bud Light Lime’€”highly successful new launches of 2007 and 2008’€”suffered losses of 33.2% and 10.1%. Bud Light Golden Wheat’€”A-B’€™s 2009 rollout’€”enjoyed an 100.0% increase in sales. Seasonal offerings from Blue Moon and Leininkugel underscored the appeal of variety, with growth of 22.4% and 35.3%.

Sales of sub-premium or ‘€œpopular’€ beers fell in 2010 by 4.1%, suggesting that losses in premium beer sales are not generally being picked up by sub-premium alternatives. Major brands suffered across the board, with the exception of Pabst Blue Ribbon, which continued to ride its hipster credibility to a volume growth of 16.9%.

The imported beer category returned, barely, to positive numbers after two years of negative growth. Losses in volume sales by leaders Corona and Heineken were offset by the double-digit growth enjoyed by Modelo Especial, Dos Equis, and Stella Artois. Those three beers have little in common beyond the fact that they are brewed outside the U.S., and they cultivate different audiences.

At the end of the list of categories are the smallest but most vigorous classes.

Unique among beer categories, craft beer has enjoyed positive growth every year since 2003. In 2010, the category returned to double-digit growth with a 12.6% increase (data from SymphonyIRI Group (IRI), a Chicago-based market research firm). Boston Beer’€™s flagship Sam Adams Boston Lager gained 7.7% to 14 million 2.25 gallon cases, according to Beverage Information Group. Other growing well-known craft brands include Sierra Nevada Pale Ale (up 9.0%) and New Belgium’€™s Fat Tire Amber ale (upa 15%). Indeed, 18 of the top 20 ‘€œcraft families’€ experienced positive growth (IRI).

At a 17.1% increase, so-called ‘€œprogressive adult beverages’€ (PABs) were 2010’€™s fastest-growing beer category, though representing an even smaller niche than craft. Starting in 2006 and 2007, the Four Loco and Joose brands shook up the category by adding caffeine and other stimulants to high alcohol, fruit-flavored beers. Under scrutiny from federal agencies, legislators and universities, the companies reformulated the brands late in 2010, clearing the way for PAB perennial Mike’€™s Hard brand family to lead the category.

Finding Beer’€™s Place

Once again in 2010, trends in wine and spirits sales outpaced beer. Industry analyst Harry Schuhmacher, publisher of Beer Business Daily, sees wine growing relative to beer for two reasons: first, wine is no longer as daunting. ‘€œPeople aren’€™t scared to buy wine any more,’€ he says. ‘€œIt used to be kind of a snob thing: they were intimidated by so many bottles. Today’€™s younger consumer gets a lot better help, even in a grocery store.’€ intimidate

And wine is available in a wider range of channels than before. ‘€œYou can even buy wine in a lot of states in a gas station or a convenience store, and, wow, they have funny critter names, much more approachable. That’€™s been wine’€™s game,’€ he explains. ‘€œPlus there’€™s been an ongoing grape glut, so you can get wine more cheaply.’€

So, in accessibility, availability and price, wine has encroached on beer’€™s traditional territory.

Spirits, meanwhile, are offering the variety that consumers crave. Dan Wandell, SVP, beverage alcohol client solutions with IRI, makes a point about the diversity available in different drinks categories: ‘€œIf you look at a category like vodka, it is almost like the craft segment in terms of the number of brands that exist. It clearly offers the most brands within the total spirits spectrum.’€

He draws another parallel: ‘€œThere’€™s been an explosion of different flavors, much like we’€™ve seen with progressive adult beverages in beer. And now we’€™re beginning to see rum expanding its flavor profiles.’€ Categories beyond beverage alcohol, including energy drinks and isotonics, also rely on innovation in novel flavors and variation.

Spirits are making inroads on beer’€™s affordability, as well. Schuhmacher describes a value proposition unfolding at the lower end of the spirits market. ‘€œSay you’€™re going out for a night and you’€™ve always been a beer drinker, because beer is relatively cheap,’€ he says. ‘€œBut the big brewers have taken six price increases in five years. Now value vodka is actually cheaper than beer as an ethanol vehicle. Historically, that hasn’€™t been true, because the taxes on spirits are so much higher. But beer prices increased so much that now spirits are in the game.’€

Shelf appeal is clearly needed. Wandell observes that beer has slipped in some retail channels where it traditionally does well. ‘€œFor the first time in at least five years, the category failed to increase its case sales in the food channel in 2010,’€ he says. ‘€œThat contributed to the decline overall, when you look at the fact that beer continued to struggle in convenience stores, which has been going on for the last several years.’€

‘€œAs A-B InBev Goes’€¦’€

A-B InBev and MillerCoors made up about 80% of the beer industry in 2010. One brand, Bud Light, held over one-fifth of the domestic market. So, even the smallest fluctuations in the fortunes of the biggest brands colored the numbers for the entire industry.

Changes in these companies, such as the mergers that brought Anheuser-Busch together with InBev, or created MillerCoors, have repercussions that extend deep into communities. And when state of the economy affects these brewing behemoths, the strategic choices made by the companies have wide-reaching effects.

Dave Peacock, president of Anheuser-Busch, has been with the company for 19 years. Following the 2008 merger with InBev, the company now has a portfolio that includes brands from every category of the industry, sub- to super-premium, malt liquor to craft. Deploying that variety effectively is a challenge.

‘€œWe continue to increase our investment behind our core brands, because even in a difficult economy, you want to win on the occasions when consumers are choosing to purchase beer,’€ he says. ‘€œTo me, that’€™s job number one, the market share game.’€ That means highly visible promotions like the 2010 Bud Light sponsorship deal with the NFL, or the on-going Budweiser ‘€œHere’€™s To Heroes’€ tribute to the military.

At the other end of the category spectrum, A-B is branching out in support of its ‘€œexplore’€ agenda, which focuses on new markets, and high-end domestic and imported beers. ‘€œMission Six’€ is the company’€™s term for the its elite brands: Shocktop, Land Shark, Hoegaarden, Leffe, Stella and Becks. To this cluster, the company now adds a premier craft brewery, following A-B’€™s purchase of Chicago’€™s Goose Island Brewing Co.

The company is looking to these top-shelf beers to attract some of the consumers with more disposable income. ‘€œA lot of people ask, well, why would crafts grow now, if they’€™re more expensive?’€ Peacock says. ‘€œWhat we see is that households with over $100,000 a year have largely not been impacted in this economy.’€ Those consumers can afford an expensive six-pack of beer, which is still a bargain compared with the top selections in other drinks categories.

MillerCoors is juggling a similarly broad selection of brands. Dan Wandell says ‘€œI think probably the brand that sticks out most right now from the domestic mainstream in its performance is Coors Light. It’€™s up slightly in volume and up almost 2% in dollars in supermarkets, and that’€™s a big brand. So that’€™s encouraging for MillerCoors.’€

Last year, MillerCoors created a separate craft and import company, Tenth and Blake. Blue Moon, the beer that introduced the Belgian wit beer style to a wide American audience, is the jewel in that particular crown. Leinenkugel, the Wisconsin heritage brewery, gives Tenth and Blake craft-like caché, although true craft-style innovation may ultimately come from tiny AC Golden, housed on the giant Coors brewing campus. A handful of medium- to high-end imports complete the catalog, and give MillerCoors the potential to insert a brand into any niche.

The Import Scene

The import category has returned to positive growth this year, up 0.9% overall. Certainly, imports as a class face some shared issues’€”international transportation concerns or currency exchange rates’€”that do not affect domestic beers as a class. At the same time, the two biggest imports, Corona and Heineken, occupy positions six and eleven on the list of all top-selling beers in the U.S. They have much in common with domestic premium beers, whereas smaller, more specialized imported brands probably have more overlap with craft or specialty beer.

Crown’€™s president, Bill Hackett, looks back on 2010 with qualified satisfaction. ‘€œWe didn’€™t perform as well as we could have, had the economy been back on track,’€ he says. ‘€œThat being said, we still did better than the rest of the marketplace. We ended the year up by 1.8%, against the overall industry that was down 2%.’€

But the company’€™s six major brands come from Mexico, and that’€™s ‘€œa double-edged sword’€ for the company. ‘€œWe draw a significant portion of our consumers from blue-collar and grey-collar workers, specifically Hispanic workers,’€ a group that identifies with that particular aspect of the brands, Hackett says. Many of these consumers are un- or under-employed, and this may have contributed to the small loss for Corona and the big gains for Modelo Especial in 2010.

‘€œIn many cases, the consumers are one and the same: they drink Modelo on one occasion, they drink Corona on another occasion. They previously might have consumed Modelo Especial through the week and Corona on the weekend. Maybe now they’€™ll stay with Modelo Especial, just because disposable income is down.’€

But Crown has also identified a bridge to more expensive and craft-inspired beers for the right audience. They introduced the oldest beer in Mexico, Victoria, to American markets last year.

In contrast to Crown’€™s positioning relative to the national origin of its brands and at least some of its customers, Heineken is scarcely identified with its Dutch roots. Instead, Heineken reaches out to the traditional ‘€œimport’€ audience, young adults with more disposable income. Recognizing that many beer drinkers’€”particularly craft enthusiasts’€”are more knowledgeable than ever, Heineken USA recently launched Passion 4 Beer, an educational program that drew on its international brewmasters to educate the U.S.-based staff on core fundamentals of beer knowledge. The program is likely to be extended to distributors and key retail accounts.

Another HUSA brand, Newcastle, plumbs its English heritage to connect to the specialty beer consumer. This year, following documented trends in the craft sector, Newcastle is introducing a range of seasonal beers, all ales, for the first time. And the company’€™s Amstel Light has just announced the launch of Amstel Wheat Bier.

Even though HUSA, like Crown, has a half dozen Mexican beers in its portfolio, the success of its most prominent Mexican brand, Dos Equis, has less to do with Latino culture, and everything to do with ‘€œThe World’€™s Most Interesting Man.’€ This classy series of TV, web and print ads is a refreshing departure from the girls-and-sports cliché, and has paid off handsomely in sales growth of 19.1%.

Over the years, Guinness, the Irish brewer, has limited its offerings to the eponymous stout and a few other brands: Harp Lager and Smithwicks in the U.S. The company has flirted with other styles from the craft catalog’€”among them Breó, a wheat beer that could have been the breakout wit beer before Blue Moon explored the style’€”but none made a mark. The brewery has recently announced its U.S. debut of Guinness Black Lager, a black lager that combines the taste of a lager with the traditional character and flavor of Guinness, the company says.

The Growing World of Craft

Craft beer, despite having less of the market in total than, say, Corona Extra, remains the creative engine that keeps American beer evolving. Its sales figures’€”eight years of positive, sometimes dramatic growth’€”have inspired envy and imitation from larger players.

Jim Koch, founder of the largest of these small breweries, Boston Beer of Sam Adams fame, maintains that ‘€œcraft beer drinkers’€ are not consumers who hew exclusively to craft brands. Rather, craft selections have made their way into many refrigerators otherwise full of mainstream brands. ‘€œCraft beer has entered the portfolio of the majority of American beer drinkers,’€ Koch insists. ‘€œIt’€™s no longer confined to homebrewers, beer geeks and dabblers, like it might have been 15 years ago. It has become a part of most beer drinkers’€™ occasional or even regular beers.’€

Koch is confident that the creativity of the craft beer movement can draw consumers to beer. ‘€œI’€™m excited about the possibilities of craft brewers’€™ offerings winning back some of the confirmed wine and spirits drinkers, and perhaps more importantly, slowing down the migration of 20 and 30 year olds towards wine and spirits,’€ he says.

As craft beer has grown from a local oddity to a major influence on the beer industry, the craft sector, itself, is changing. Faced with the seeming contradiction of local appeal and national demand, some craft brewers are building partnerships that extend the reach of their brands without’€”they hope’€”compromising character.

The most dramatic example is the sale of award-winning Goose Island Brewing Co. to Anheuser-Busch. A-B picks up one of most creative craft breweries in the country. Goose Island joins the nation’€™s most sophisticated distribution network, but it loses it’€™s ‘€œcraft’€ status, due to the strict definitions of the Brewers Association, and may also lose the support of some craft-only supporters.

Other small brewers are hoping to extend their reach’€”and, probably, their financing’€”without losing their souls. For example, in 2010, Rochester, NY-based North American Breweries purchased Independent Brewers United, owners of Magic Hat and Pyramid, two of the largest craft brands, plus the MacTarnahan beers.

The Three Tiers Interact

Just as the large brewing and importing companies have broadened their portfolios to respond to changing consumer needs, the nation’€™s wholesalers have adapted, as well. Not only do they have to manage a greater range of products from a single brewery; many of them deal with a number of breweries, large and small, to supply a local market.

Three years ago, Craig Purser, NBWA president, predicted at his association’€™s annual meeting that wholesalers would soon be ‘€œtransitioning from being brand-dependent beer wholesalers to that of brand-building beverage distribution companies.’€

He explains, ‘€œFor years, there was an absolute dependence, almost exclusive, on a distributor’€™s primary beer brand. These member distributors, 20 years ago, whether they were exclusive or not, sold 96% of their volume with their primary brewer. That’€™s a very different scenario from most members today.’€

That transition has changed somewhat the relationship between producers and distributors, but it is a relationship that is always adjusting.

The most contentious issue dividing the producing and distributing tiers is the reintroduction of the CARE Act, which is supported by wholesalers and opposed by brewers. First introduced in 2010 and revived this year, the legislation is a response to court cases, especially the Granholm v Heald decision in 2005, which ruled that states could not restrict out-of-state shipping of beverage alcohol and allow in-state shipping. The CARE Act seeks to make the Commerce Clause of the Constitution secondary to the 21st Amendment, which in effect gave states the right to regulate alcohol.

In appeals to the public, supporters of the CARE Act stress the importance of local decision-making to safeguard how alcohol is sold in the community. Opponents of the act point to the limitations on consumer choice if states can restrict direct shipment. However, at the root of the conflict are state regulations that could benefit beer wholesalers and inhibit the actions of brewers’€”and possibly retailers.

Joe McClain, the new president of the Beer Institute, the trade association for large breweries, restates the Beer Institute’€™s support of states rights under the 21th Amendment, but adds, ‘€œWe think things are working fairly well, the courts work they way they’€™re supposed to work, and challenges to the three-tier system are handled. Frankly, we think the CARE Act is a solution in search of a problem, and that problem does not exist.’€

On other issues, the two tiers’€”and their two powerful advocacy organizations’€”are in accord. Specifically, both groups are pushing once again for passage of the BEER Act, which would repeal of the 1990 doubling of the excise tax on beer. Looking at the consequences of that action, McClain says ‘€œBack then [1990], we lost 60,000 jobs in brewing, distributing, retailing, tourism and related industries when that price jumped up. We feel that the excise tax on beer remains regressive at the federal level.’€

NBWA president Craig Purser is determinedly upbeat. ‘€œThe industry has a great story to tell,’€ he says. ‘€œWe have a system that is successful not in spite of itself, but because of itself. Regardless of occasional disagreements, the fact is that this is a successful system that allows tremendous access to market, it allows new entrants to get established and grow. When we look back at it, that’€™s what brings a smile to your face.’€

It’€™s tempting to focus, as industry executives must, on year-to-year fluctuations in reported sales. But despite a difficult couple of years, and economic conditions that have taken their toll on beer’€™s most dependable consumers, millions of people still find a place for beer in their lives.

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