Beer 2013: State-of-the-Industry Report

Eighty years ago this past spring, President Roosevelt signed the Cullen-Harrison Act into law, the first step in rolling back the 13-year disaster known as National Prohibition. The Act legalized the sale of beer with an alcohol content by weight of 3.2%. Restoring beer to American drinkers was overwhelmingly popular, and underscored beer’€™s place as the beverage for the American Everyman.

The past several years have subjected Everyman to some painful shocks, denting the spending power of the beer market’€™s most loyal demographic groups. At the same time, the consumer’€™s preferences seem to be shifting to more flavorful beverages, such as craft and import beers that can be justified as an ‘€œaffordable luxury’€ in tight times.

With the economy seemingly in recovery, it’€™s hard to say whether the changes in consumer behavior brought on by tough times will be permanent. But the entire beer industry is behaving as if they will.

Sales Trends

Total U.S. beer consumption in 2012 was virtually unchanged from the year before (Figures from The Beverage Information Group).

Mainstream categories’€”whether super-premium, premium, light, popular or malt liquor’€”lost volume across the board, with the super-premium and premium category and malt liquor falling by 3.1 and 3.0%, respectively. By contrast, imports grew by 1.5%, flavored malt beverages by 7.8%, and the craft beer sector by 14.6%.

For the past decade, the top-ten list of domestic beers has been remarkably consistent, and membership in the top five unchanged. Bud Light has been the number one beer throughout, with sales so far above its rivals’€”roughly two and a half times that of the next closest brand’€”as to make its lead position unassailable for now. It accounts for around 40% of Anheuser Busch’€™s total volume.

Year after year, four other brands shuffle through positions two through five. Though Budweiser has generally placed just below its lighter sibling, in 2012 for the first time, Coors Light moved into the number two slot after eight years of growth, ahead of Bud, Miller Light and Natural Light.

Of the top-selling domestic beer brands, only Coors Light and Michelob Ultra (at number ten) grew market share, by 2% and 7% respectively, while the other eight brands fell, five of those by more than five percentage points (figures from IRI, a Chicago-based market research firm).

Also continuing a consistent trend, American consumers have once again made light beer their top choice of beer style, with seven out of ten of the top beers falling in the light category. Looking at the top 20 domestic beers, light styles account for more than 60% of beer consumed.

Of concern to the mega-brewers, however, are signs that the preference for light beers may be softening. A mid-summer survey conducted by ConsumerEdge documented waning enthusiasm for light beers and growing consumer interest in more flavorful beer’€”including both imports and craft.

Top import selections bear this out. American beer drinkers confine their preference for light beer to domestic choices’€”or, put another way, the consumer who turns to imports may be looking for a different experience. When it comes to imported beer, only one light beer, Corona Light, cracks the top ten. Also hinting at differences between domestic and import consumption: in contrast to top domestic beers, which are all either pale lagers or their light variants, three of the top imports’€”Dos Equis, Guinness Stout and Newcastle Brown Ale’€”represent other styles.

Of course, imports and craft beer represent a fraction of beer sales when compared with the mainstream staples. But the big brewing companies know which sectors have the momentum, and are paying attention.

The Big Guys

In 2012, Anheuser-Busch was responsible for about half the beer sales in the U.S. and MillerCoors for another quarter, or, by volume, a combined 80% of the beer consumed. No other domestic vendor accounts for even 2% of the U.S. market (IRI). Despite these huge volumes, annual growth for the two big brewing companies was nearly flat, a condition that must be painfully familiar to their executives.

Anheuser-Busch has faced the most demanding changes in recent years, with the acquisition of the company by Belgian-Brazilian conglomerate InBev in 2008. Early last year, Brazilian Luiz Fernando Edmond, Zone President North America for parent company Anheuser-Busch InBev, was also named president of Anheuser-Busch, assuming the position held by Dave Peacock since the acquisition. Peacock presided over the transition that followed the merger, overseeing a difficult period of cuts and efficiency measures.

Heading a leaner AB, Edmond grapples with stubbornly sluggish sales figures. However, according to Paul Chibe, Vice President, U.S. Marketing, ‘€œIn 2012, our sales-to-retailers increased 0.4%, the first positive year since the economic downturn began in 2008. The increase was driven by a number of factors, including a best-in-class pipeline of innovation, a rebounding economy and favorable weather.’€

The Bud Light family introduced two new line extensions, Bud Light Platinum and Bud Light Lime Lime-A-Rita, which were the numbers one and two new products in the beer category. And the company recently added to the Lime-A-Rita line with newly introduced Bud Light Lime Straw-Ber-Rita.

The company rolled out ten new products in 2012. ‘€œInnovation is a key strategic initiative in growing our brands,’€ according to Chibe. ‘€œA strong innovations pipeline creates opportunities for our brand families to evolve alongside consumer preferences.’€

The most successful roll-outs came at a higher price point, echoing the strength at the high-end of AB’€™s line, where Stella Artois and Shock Top, the Belgian wit-styled beer, grew by 18.4% in 2012.

MillerCoors also realigned their portfolios to emphasize higher-end brands, termed the ‘€œabove premium category.’€

According to Media Relations Manager Cat Corrigan, ‘€œBlue Moon Brewing Co. delivered double-digit growth for 2012, and has continued that success to date with 46 consecutive quarters of growth.’€ Also operating out of Tenth and Blake, MillerCoors’€™ specialty beer unit, ‘€œthe Jacob Leinenkugel Brewing Co. delivered double-digit growth and Summer Shandy nearly doubled in volume.’€

Redd’€™s Apple Ale and Third Shift Amber Lager were new launches focusing on the higher-margin, fast-growing segments of the industry.

Looking ahead, most innovations at MillerCoors are aimed, logically, at new consumers, who seem to be drawn to both novelty and higher quality. ‘€œToday’€™s 21-34 year olds, the millennials, over-index in craft and imports,’€ Corrigan wrote. ‘€œWe expect them to continue to choose these brands disproportionately as they age.’€

That age group now comprises only 25% of the legal drinking age population, meaning that the bulk of the company’€™s consumers are assumed to be less skewed presently to craft and imports. However, the future trend seems to be clear. ‘€œIn ten years, millennials will make up over 36% of legal drinkers, and over 70% of those aged 21-49. We expect that as this cohort grows in its share of legal drinkers, so will their preferred segments grow in share of the beer category.’€

Imports

Two companies, Crown Imports and Heineken USA, have led beer imports in the U.S. for years, with Corona Extra from Crown and Heineken Lager holding the top two spots. The two importers are responsible for seven of the top ten brands between them. Despite this strength, the companies’€™ domination of the import field is not as complete as that of Anheuser Busch and MillerCoors on the domestic front, with other top-selling brands among the top 20 imported through Diageo, Anheuser Busch-InBev and SABMiller.

In 2012, Crown’€™s total volume grew by 4.7%, and Heineken’€™s by 4.5%, outpacing the beer industry as a whole, domestic brands and the broader import category. (Figures from the respective companies.)

According to Crown president Bill Hackett, ‘€œThe return to growth within the import segment in 2012 illustrates that consumers continue to value the high-end brands that imports represent.’€ He also sees similar factors driving the sales of craft and imports. ‘€œContinued growth of the craft segment also suggests a very strong forecast for the health of the high-end business.’€

Hackett must be relieved to be able to concentrate on beer sales after an eventful year for Crown, the top beer importing company in the U.S. and third-ranking in beer sales overall. Crown was established as a joint venture between Constellation Brands in New York and Mexican brewing company Grupo Modelo. Grupo Modelo brands (Corona, Modelo and Pacifico) make up the bulk of Crown’€™s portfolio, which otherwise includes Tsingtao and Somersby Cider.

Last year, Anheuser Busch-InBev, already the owner of 50% of Grupo Modelo, announced the purchase of the other 50%. Faced with this further consolidation of the beer industry, the Department of Justice filed an anti-trust suit, which was resolved only recently. As part of the deal, Grupo Modelo sold its share of Crown Imports to Constellation Brands, making that company the outright owner of Crown.

After a period of doubt about Crown’€™s future, Constellation/Crown is now the permanent brand-owner in the U.S. market for the Modelo brands. Hackett explains ‘€œConstellation has been granted a perpetual license to produce, import and distribute in the U.S. all of the Modelo brands Crown currently sells, with exclusive rights and freedom to develop brand extensions and other innovations for the U.S. Market.’€ He stresses Constellation’€™s independence: ‘€œABI will not have any influence whatsoever over the marketing, sales, pricing or distribution of the Modelo brands in the U.S. Instead, Corona will be sold in the U.S. by Constellation’€™s Crown Imports beer division.’€ Modelo beers for the U.S. market will be brewed at Piedras Negras, a Mexican brewery recently purchased by Constellation. With its concentration on brands from Mexico, Crown logically sees the young Hispanic consumer as an important part of its audience. Jim Sabia, Chief Marketing Officer for Crown, credits millennials with driving the growth of Crown brands. ‘€œMillennials currently account for approximately one quarter of the U.S. population and 35% of beer volume,’€ he explains. ‘€œOf course, a big portion of these millennials are Hispanic. In fact, one out of every five millennials are Hispanic. They are so important to the beer industry because of their size, purchasing power and influence.’€

Sabia also pointed to the demographic importance of what he called ‘€œmulticultural consumers,’€ noting, ‘€œThere are literally dozens of U.S. markets where Corona is number one among African Americans, Asians and Hispanics, which is exciting given that most trends start at the core of urban areas. These urban city areas are multicultural, they are younger and they will be driving the growth of the U.S. LDA [legal drinking age] population in the next decade. Hispanics, millennials and urban consumers are the key to our current and future success.’€

Lesya Lysyj, Chief Marketing Officer at Heineken USA, has her eye on a similar audience. She observes, ‘€œWe believe the promise for future growth lies within the upscale import beer segment. Import beers are growing at a phenomenal rate, especially with the increasingly influential millennial and multicultural segments. As an example, the multicultural demographic traditionally favors import beer and is forecast to represent 70% of category growth up to 2020.’€

The brand portfolio of Heineken USA is less geographically focused than Crown’€™s, although over half their brands are also brewed in Mexico. The most successful of these, however’€”Dos Equis’€”relies not on Mexican cultural connections but on the enduring appeal and sophistication of the ‘€œMost Interesting Man’€ campaign, which debuted in 2006.

Each Heineken USA brand is pitched at a specific audience. As described by Lysyj, the original Heineken ‘€œspeaks directly to the ‘€˜Men of the World’€™’€”25- to-34 year old progressive thinkers who are confident, adventurous and open to new experiences.’€

Newcastle Brown Ale, by contrast, appeals to young male drinkers ‘€œwho appreciate the beer’€™s humorous and refreshing dose of honesty.’€ Taking a leaf from the craft book, where seasonal beers still rank number one in surveys of consumers’€™ favorite beer ‘€œstyles,’€ Newcastle has been releasing limited-editions seasonals.

Another potential parallel exists between imports and craft. Given the vigorous growth in American craft beer’€”which enjoyed double-digit growth in dollars sales again for the seventh consecutive year in 2012’€”industry watchers started several years ago monitoring craft as a separate category from premium or super-premium domestic beers. This raises the issue: to the extent that the import drinker seems to be drawn to more unusual and high-end flavors than the domestic drinker, it seems fair to wonder whether the slice of imported beer that might qualify as ‘€œcraft’€ or ‘€œspecialty’€ has enjoyed similarly robust growth within the all-inclusive import category. Unfortunately, no single foreign specialty brewer approaches the size or visibility of the largest of the American craft brewers, and the aggregated growth of many smaller (mostly European) breweries is not captured in conventional analysis.

Craft and Crafty

Around 2,400 craft breweries operated in the United States in 2012, ranging in size from segment leader Boston Beer, with 2.7 million barrels in annual production, down to ‘€œnano-breweries’€ churning out a few barrels at a time. The average production was 500 barrels a year, and while growth across the entire category is the envy of the industry, it is strongest among craft’€™s smallest members. (Figures from the Brewers Association, the trade association for American craft breweries.)

This growth has spurred craft brewers to add capacity, in the hopes of keeping up with the growth trajectory. For many’€”including Delaware’€™s Dogfish Head, Stone in California and Bell’€™s pioneering brewery in Michigan, among others’€”this has meant ambitious expansions.

Other companies, however, have taken the bold step of opening second breweries in new parts of the country. The mountains of North Carolina have proved attractive to three of these companies: Sierra Nevada, New Belgium and Oskar Blues. Lagunitas, the fastest-growing craft brewery in the country, will build in Chicago; and San Diego’€™s Green Flash will break ground in Virginia Beach.

Brian Grossman, whose father Ken founded Sierra Nevada Brewing Co. in Chico, CA, in 1979, is overseeing construction of that company’€™s new facility in Mills River, NC. Initially, the new brewery will take some pressure off the over-extended Chico facility. ‘€œOur sales are roughly 50% east of the Mississippi and 50% west of the Mississippi,’€ says Grossman, ‘€œand our current growth trends show that the area east of the Mississippi has more of the growth, so that’€™s where the barrels will come from to scale this brewery to its ultimate capacity right around the 750- to 800,000 barrels mark.’€

Grossman, and all the other brewery executives hoping to manage continuing growth, is face-to-face with the craft beer paradox: the die-hard craft beer enthusiast loves local brewing and is suspicious of growth, but still wants easy access to hot brands. Grossman explains, ‘€œWhen you’€™re successful in business, people buy your beers, which then in turn makes you larger and larger, and you get to the point where a lot of people say, ‘€˜Well, now they’€™re too big.’€™’€

He believes that Sierra Nevada’€™s strength is that the company hasn’€™t changed its approach to its beers. ‘€œWe make the finest beers and sacrifice nothing,’€ he says. And, despite being the second largest craft company in the country, critical decisions are still made over the dinner table: ‘€œWe are a family-owned, family-run company, and that’€™s one of our biggest things’€”community, family, grass-roots. That’€™s how we got to where we are today. It would be awkward for us to change.’€ The company may not change fundamentally, but innovation is important to keep consumers from taking the omni-present Sierra Nevada for granted. Torpedo IPA, named for a novel piece of equipment that optimizes the utilization of hops in the brewing process, has become the number one-selling India pale ale in the country by grafting new technology onto a revered beer style.

At Boston Beer, home of the Samuel Adams beers, founder Jim Koch is confident that the qualities that have generated growth for craft brewing are here to stay. ‘€œIt may sound simple, but just boil it down: craft beer is the new wine,’€ he explains. ‘€œTwenty-somethings are adopting craft beer the way their boomer parents adopted wine 30 years ago. No one needs to worry whether craft beer is a fad. It is a permanent and increasingly important part of the beer landscape and is today the principal driver of energy and dollars.’€

Boston Beer has a swelling portfolio of year-round and seasonal beers, augmented by extreme, imperial and barrel-aged beers that are as inspiring as any in the industry. If the craft beer sector is the engine of creativity for the beer world as a whole, Boston Beer has kept its position of leadership.

But in 2012, Boston Beer’€™s most striking innovation was not an extreme beer, but a specially-designed can for its flagship Boston Lager. Koch, who had been a notable holdout as the craft segment embraced canning, needed to be convinced a can would deliver all the flavor of his beer in a glass. ‘€œReinventing the generic beer can to improve the flavor and aroma of craft beer was quite a challenge,’€ he says. ‘€œIt involved sensory understanding of the craft beer experience, along with the taste impact of the generic beverage can, and understanding the parameters of can manufacturing. So that was a challenge’€”it took two years.’€

The can has been well reviewed: the larger lid and the shape of the opening force the drinker to open the mouth wider and take in some air along with the beer. Koch promises the can ‘€œwill enhance any full-flavored beer where the aroma is an important part of the taste experience.’€ And, as with many efforts that Boston Beer is uniquely placed to pursue, Koch is willing to share with the industry. ‘€œWe’€™re starting to make it available over the next six months to all other craft brewers,’€ he explains. ‘€œAnybody who fits the Brewers Association definition of a craft brewer can use our patent and design for free.’€

This definition of a craft brewer has exercised the beer industry once again over the past year. With so many players, and such a range in their size and reach, it might be expected that some rifts would appear in a community known for its camaraderie. And, yes, there has been some unease over the likelihood that, in the words of New Belgium Brewing Co. founder Kim Jordan, ‘€œresources will become tighter’€ as a growing number of craft brewers compete for ingredients, distribution, and well-trained staff.

But drawing a clear line between craft brewers and mainstream brewing companies is a cause that brings the craft community together. Particularly rankling in 2012 was the fact that the two largest selling beers in the craft beer mold, Blue Moon and Shock Top, were actually brewed by MillerCoors and Anheuser-Busch InBev, but packaged in a way that obscured the beers’€™ origins.

In December, the Brewers Association issued a statement titled ‘€œCraft vs. Crafty,’€ airing the BA’€™s concern that large brewers ‘€œappear to be deliberately attempting to blur the lines between their crafty, craft-like beers and true craft beers from today’€™s small and independent brewers.’€

Adding to the concern was the acquisition over the years of formerly independent craft breweries by large brewing companies, such as AB’€™s purchase of Chicago’€™s Goose Island. The BA statement continued ‘€œWe call for transparency in brand ownership and for information to be clearly presented in a way that allows beer drinkers to make an informed choice about who brewed the beer they are drinking.’€

A fight erupted over who, exactly, is entitled to call themselves a craft brewery and their products craft beer. To the Brewers Association, a craft brewery is ‘€œsmall, independent and traditional,’€ a definition that combines brewery size and governance structure, as well as the types of beers brewed, their ingredients and the intentions behind using those ingredients.

To the big brewers, the parentage of a particular beer is irrelevant if the beer itself is good, and AB or MillerCoors is as capable of producing a craft beer as the local brewpub down the block. Mincing no words, a MillerCoors source called Blue Moon ‘€œthe country’€™s biggest single craft beer.’€

Jim Koch takes a more conciliatory’€”and realistic’€”approach that recognizes that big brewers’€™ small beers are here to stay.

‘€œOne of the problems here is that no one’€™s come up with an acceptable name for those beers,’€ says Koch. ‘€œCalling them ‘€˜crafty’€™ doesn’€™t advance the industry unity that we all need. I think there ought to be a better alternative for the specialty beers brewed by the mass domestic producers. I’€™ll call them ‘€˜domestic specialty’€™ and if you look at that as a category, it is growing as fast, or faster than craft beer. Once you get some clarity around it, and get away from the polemics, you can see that the big brewers have done a good job with their entries and they will continue to use their enormous advantage in retailer clout and distributor leverage to grow their position.’€

That’€™s certainly what big brewers, themselves, hope. Midway through 2013, more cautionary news. A midsummer Gallup poll suggests’€”and media have reported rather hysterically’€”that beer is losing favor among American drinkers, with a shift to wine and spirits. The trend is marked among young drinkers, with a 30% drop in those who chose beer as their preferred beverage, and among non-whites. But it’€™s possible to counter the crepe-hangers with the most fundamental conclusion of the study: beer may not regain its unassailable position, but it is still the most popular beverage alcohol, particularly among the groups who make up the consumers of the future.

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