About this time last year, all indicators pointed to clear sailing for a beer industry that saw its share of upheaval during the ’90s. The economy was booming, overcapacity in the industry had been largely eliminated, and demographics were shifting in the industry’s favor.
This year has been a mixed bag of good news and news that, while not all bad, has had brewers scratching their heads in bemusement. Volume growth that was predicted to maintain the increased pace it started to pick up in the first half of last year hasn’t materialized. But price increases are holding, contributing to higher margins.
A large number of brands, particularly in the import and light beer segments, are seeing tremendous growth. But even the rising tide in those waters isn’t raising all boats.
The continued contraction within the distribution business has made it even more difficult for any brand that isn’t owned by Anheuser-Busch to get attention. But even small brands admit that stronger, healthier wholesalers provide better benefits and market opportunities.
Election to Blame?
Most of last year was shaping up to be the best in a long time for the industry, with volume up and the analysts forecasting 1.5% growth or better this year. It didn’t last.
“We came off a terrific year last year — at least for the first 10 months,” said Leo Kiely, president and chief operating officer of Coors Brewing Co. “The industry was doing great, but sales slowed in November.”
“With the emergence of the energy drink and malt alternative categories, the battle at the retail level has intensified.”
— August Busch IV, group vice president, marketing and wholesale operations Anheuser-Busch, Inc.
Some in the industry chalk up the slowdown to the distraction of the Presidential election. While the bizarre proceedings in Florida and Washington, D.C., last fall likely qualify as the year’s biggest spectator event, unlike a football game there were no beer vendors handy. People watched but didn’t imbibe.
“What was supposed to be a big first quarter this year was terrible,” said Jeff Coleman, president of Paulaner North America. “People had a hangover from the election that lasted through March. It was very soft, but we’re starting to come out of it now.”
At about the same time last year, the economy started to turn south, giving consumers something else to worry about. But the downturn has had much different effects on both consumers and the beer industry than those in the past.
“The economy has been a depressant for everyone,” said John Bowlin, president and chief executive officer of Miller Brewing Co. “It’s a different sort of slowdown; everyone is getting hurt by either layoffs or rising energy costs. Surprisingly, the bottom end of the industry is getting hurt the worst. Imports are not suffering as they usually would in a downturn.”
To top it off, the weather this year has been uncooperative to beer marketers, and if some could blame Bush for that, too, they might. A cool, wet spring in many places dampened beer sales, and they are just now beginning to catch up.
Demos Defy Predictions
Soft sales also surprised many in the industry who expected that increasing numbers of legal age drinkers would bump volume. The new generation of young adults isn’t flocking to beer like preceeding ones did, however, and marketers are trying to figure out why.
“The article of faith that the echo of the baby boom would have consumption patterns of historic norms may not be panning out,” said Paul Shipman, president of Redhook Ale Brewery. “New consumers may be faced with more choices, leading to fragmentation, or maybe demand patterns are different. Maybe they’re more moderate; maybe they’re buying differently.”
“We’re in an environment that no one totally understands, but it’s still a solid category. Demographics are solid, and as soon as disposable income issues are resolved I think growth will come back.”
— Leo Kiely, president & COO
Coors Brewing Co.
While there isn’t a lot of research available yet, there are a lot of theories floating around about why entry level drinkers aren’t starting out with the traditional entry level drink — beer. First and foremost is the fact that there is a lot of competition for the dollars these young consumers spend. The slow economy may be causing them to cut back their spending somewhat.
“The most vulnerable channel is on-premise,” said Kiely. “If young consumers go out one or two fewer nights a week, that has a real impact.”
There are also a lot of products competing for consumers’ attention. The sheer size and scope of the beverage market, not just beverage alcohol, has grown tremendously in the past two decades. This generation has grown up being barraged with media messages from marketers hawking everything from sports drinks to plain water.
“We realized we have to get people to choose our products no matter what the competition does. Our pricing has held because we’ve become more disciplined to help re-establish our premium position.”
— John Bowlin, president & CEO
Miller Brewing Co.
“Over the past year, we’ve seen the economy soften, yet consumers continue to show a willingness to pay for high-end beverages including energy drinks, malt alternatives and imports,” said August Busch IV, group vice president, marketing and wholesale operations, Anheuser-Busch, Inc. “With the emergence of the energy drink and malt alternative categories, the battle at the retail level has intensified. Shelf space and overall presence in on-premise and off-premise accounts is at a premium as brewers such as Anheuser-Busch are finding themselves competing not only against rival brewers but against wine and spirits companies as well.”
“I think slowing growth is partly due to mixed drinks and alco-pops, but nobody is able to say to what extent,” agreed Frans Van Der Minne, president of Heineken USA. “You and I can only drink a certain volume of liquid a day, and there are so many more products on the market than 10 years ago. The beer industry has to be able to figure out how to get younger [adult] drinkers to turn to beer.”
In the “malternative” category, for example, Smirnoff Ice was introduced with $25 million in advertising in the first six months of the year and as much as $50 million in total support. Hard lemonades, which have been around for a few years, also continue to gain distribution and retail support.
“You and I can only drink a certain volume of liquid a day, and there are so many more products on the market than 10 years ago.
— Frans Van Der Minne, president Heineken USA
“The demographics in this country favor continued growth of the overall beer industry for the next three to five years,” said James Thompson, vice president marketing, Guinness/Bass Import Company. “But people are drinking a wider variety of beverages like high-end spirits and wines, which is why products like Smirnoff Ice and imported beers are doing so well.”
“The segment we have to keep an eye on is [Smirnoff] Ice and [hard} lemonades,” agreed Bill Hackett, president of Barton Beers, Ltd. “The generation now coming of age has grown up on a variety of products with a sweeter taste profile, like soft drinks and flavored waters and teas, so these products really appeal to them. They’ve gotten some dramatic volume and are getting attention at retail. They’re getting features, which are coming from somebody else.”
“When a malternative sells more in one week in a particular market than Corona, it’s something to pay attention to,” asserted Carlos Alvarez, president of Gambrinus. “Their growth has been more rapid than the growth of the specialty segment. It’s a bigger category than we’ve seen in the past.”
“People are drinking a wider variety of beverages like high-end spirits and wines.”
— James Thompson, vice president, marketing Guinness/Bass Import Company
Today’s consumers, even entry level drinkers, also are better informed and more refined than in the past. They actively seek out, and are willing to pay for, quality. Because they also tend to have more discretionary income at the same age than their parents did, they’re not afraid to step up to premium and ultra-premium brands quickly in all categories, not just beer.
“This is a generation that hasn’t known bad times,” Thompson said. “It thinks life is good and expects good times. They don’t drink the same things as their parents. They like brands and will chose quality, but will pick what they like. They’re more experimental and sophisticated.”
That sophistication and demand for quality has been a boon for marketers of high-end wine, spirits and beer, and is one of the reasons imported beer continues to grow at a double-digit rate.
“I think minimum legal age drinkers may experiment with brands and then go to imports as they earn more,” said John Lennon, president of Beck’s N.A. “There are more products for them to try, but clearly many of them are starting with imports. Young people are much more experimental now. They have more discretionary income, so imports are more of an everyday drink.”