Beer 2012: State-of-the-Industry Report

When beer company executives, wholesalers and retailers converge on San Diego’€™s Manchester Grand Hyatt for the 75th annual National Beer Wholesalers Association show they’€™ll get an eyeful of a once compact market that has fragmented immensely over the past decade. These days San Diego County counts itself as home to more than 40 craft brewers, from local pioneers Karl Strauss and Pizza Port to Stone Brewing, which has built an international reputation and even talked of opening a brewery in Europe. That’€™s in a market where domestic premiums vie for supremacy with a broadening array of imports that includes even Aussie beers and those from Mexico’€™s burgeoning craft scene across the border. It all makes for an unprecedented stew in a metro whose beer preferences not so long ago reflected its general image as a sleepy, Republican beach town.

Travis Markstein, executive vice president and general manager of Markstein Beverage, which distributes Anheuser-Busch, Crown Imports and others’€™ brands in about two-thirds of San Diego County, marvels at the transformation of the scene there: All the new bars sporting dozens of tap handles (including a couple of dozen ‘€œcrafty crafters’€ that won’€™t even carry Stone’€™s Arrogant Bastard, let alone Bud Light); the inroads craft brands have made into even that blue-collar redoubt, the independent liquor stores; the local media’€™s newfound fascination with beer. These days, he said, it’€™s rare for a week to go by that Stone isn’€™t the focus of an article somewhere locally. Within a few miles of the distributor’€™s San Marco base you can find such highly regarded brewers as Ballast Point, Firestone Walker, Lost Abbey and Green Flash.

That’€™s certainly transformed his own operations: it has picked up 20 A-B skus just since the first of the year, and another 30 from other suppliers, including Sierra Nevada extensions and craft newcomers like Oceanside Ale Works, Hangar 24 and Golden Road. The total in the shop now is close to 450 skus and ‘€œI don’€™t see that ending,’€ Markstein said. Though it brings any number of headaches, it has upped the excitement in beer to a level not seen in recent memory.

That sentiment is echoed even by executives at companies that currently don’€™t play in craft at all. By elevating the image of beer and broadening the range of occasions, craft beer overall ‘€œhas been good for the beer business,’€ argues Crown Imports’€™ chief marketing officer, Jim Sabia, who earlier in his career helped launch MillerCoors’€™ craft darling Blue Moon.

Kaumil Gajrawala, who watches the beer sector for banker UBS, expects beer to move from a defensive mode (complaining about the competition) to offense (launching more products that will directly steal consumers from wine and spirits). ‘€œInevitably, that will lead to a couple of homeruns ‘€“ some really big wins like Blue Moon,’€ he figures, as the idea of being agile and innovative takes greater root, and distributors become more efficient at managing complexity and quickly adopting new categories and subsectors like cider. With even a moderate economic tailwind, ‘€œwe could be going into a bit of a renaissance with beer,’€ he argues. But to be in a position to enjoy that, ‘€œit’€™s important to be there,’€ in the game in the first place.


Is San Diego just an anomaly? Until recently, that case could be made simply by nodding at the sleepy beer scene in the bigger metro just to the north, Los Angeles. But that’€™s changing too as beer entrepreneurs from other parts of the country invade a market that is clearly underdeveloped given its economic might and cultural and culinary vibrancy: Meg Gill has moved from the Bay Area to open Golden Road Brewing even as the Northeast team of Magic Hat founder Alan Newman and Boston Beer founder Jim Koch, via their Alchemy & Science alliance, have invested in the city’€™s Angel City Brewing. Similar stories are unfolding in other craft-backward regions: a full-fledged craft boom is under way in sun-drenched light beer meccas like Texas and the Southeast, and not just of training-wheels entries. At last fall’€™s Great American Beer Festival, brewers from rural Georgia to Oklahoma were pouring challenging styles like tripels and sour beers, saying that’€™s what their customers are demanding these days.

High-End Options Thriving

Chalk it up perhaps to Whole Foods, The Food Network and social media, but it all bespeaks an increasing fragmentation of the U.S. beer industry, where premium and below-premium segments continue to struggle even as high-end options thrive and proliferate. Though the economy is struggling, the trend seems to encompass more than the sliver of affluent consumers who so far have proved relatively immune to the effects of recession. It’€™s an environment that few industry people argue is going to significantly reverse any time soon, whether or not there is a shakeout of some players or brands, and despite the challenges it brings, most retailers and wholesalers have come to embrace it as adding profit and excitement to a category that has struggled to reclaim drinking occasions from wine and spirits. In that new breed of bar with dozens of tap handles, ‘€œeven if many of them are not ours, it’€™s good for the beer business, it gets people excited about beer rather than spirits,’€ said Markstein, the San Diego distributor. In that sense, it helps to grow the entire portfolio.

It’€™s a market where once-reliable engines, like light beers, have sputtered, even as full-calorie domestic premiums and superpremiums continue their long decline. But flavored malt beverages (FMBs) continue to advance, and craft beers ‘€“ seemingly impervious to the ongoing economic malaise despite six-pack prices that can top $15 ‘€“ explode. FMBs rose 3.8% to nearly 43 million cases, while craft beer surged 14.1% to about 179 million cases, good for a 6.4% share (see table). Though not strictly a beer, cider has claimed a more visible spot on the store shelf and at the bar, seemingly out of nowhere. Most of these growing segments tilt higher in price, making them an oasis of profitability in an economic environment that has not offered much help to brewers. ‘€œDespite the economic challenges of the past four years, the upscale segment is the only area driving growth in the beer industry,’€ noted Heineken USA chief marketing officer Lesya Lysyj, which has managed to keep Heineken relatively steady even as its Mexican brand Dos Equis breaks out. For its part, Heineken USA aims to capitalize on this by elevating the marketing initiatives behind its core brands while innovating more and pushing harder to own the group of consumers it calls ‘€œmulticultural millennials,’€ who happen to be most receptive to new brands and experiences. Like everyone else, it’€™s proliferating skus, from an Amstel wheat beer to Newcastle’€™s limited-edition beers like Werewolf.

As 2012 progressed, challenges for major premiums continued, with three of the four megabrands down again, although Bud Light and Miller Lite had moderated their decline from those of recent years, noted Benj Steinman, publisher of trade newsletter Beer Marketer’€™s Insights. Budweiser’€™s trend had not improved, but Coors Light was solid, except in the Northeast region.

Imports have bounced back a bit, said Steinman, who was speaking as Labor Day approached. Though shipments were only up 1% as of mid-summer, sales to retailers were probably more like 4-5%, he figured. Even Corona and Heineken were showing slight growth after a prolonged slump. The hot brands continued to be Stella Artois (from A-B InBev), Dos Equis (Heineken USA) and Modelo Especial (Crown Imports).

Rational Pricing

In one encouraging sign for all beer’€™s tiers, there seems to be fundamentally rational pricing, give or take the odd skirmish. Take Florida, where domestic premiums and mainstream imports still retain most of their market dominance. When couponing got out of hand the major brewers were quick to put a stop to the practice. And in mid-August Crown disclosed that it would be levying significant price increases on brands like Corona and Modelo Especial, the first in many years but moves that would maintain the price gap versus domestic premiums, which had earlier announced increases. That seemed to attest that marketers were determined to keep beggar-your-neighbor price wars a past memory, particularly as the economy hopefully edges closer to prosperity.

‘€œThere’€™s plenty of room for pricing in beer,’€ believes UBS’€™ Gajrawala. He expect 3% pricing increases per year to continue. ‘€œCorona pricing should finally move and give the entire industry a little more space,’€ he noted, speaking just before Crown announced the price hike in Florida.

The Good News

The good news is that all this ferment, though immensely complicating the business, also is extending a halo over the entire segment, in a manner that may actually help with the task of making brands like Budweiser and Miller Lite reclaim their relevance in sophisticated environments where wine and spirits have captured the momentum. That’€™s the view of Crown’€™s Sabia, who’€™s targeting a trove of Mexican brands like Corona, Modelo, Victoria and Pacifico at various demographic niches. Take the issue of food pairings. Sabia feels chefs’€™ pairing of food with beer and cooking with beer has created avenues to better compete with wine, and by now Crown has undertaken food-pairing efforts behind its Negro Modelo and Victoria brands. Next up: a play on the Mazatlan roots of Pacifico, with seafood-related efforts grounded in the beer’€™s prominent presence in local pescaderias.

Sabia is among those who feel the current trend toward proliferation of beers won’€™t be reversing any time soon. ‘€œThink back 15 years ago and the brand set of a consumer might have been a favorite and two others,’€ he said. ‘€œNow, it’€™s a favorite and five others.’€ Further, legal drinking age consumers are going straight to imports and craft, when in past years their tastes may have taken years to evolve to an appreciation of those kinds of beers.

Hand in hand with that fragmentation is a parallel shift in the media landscape, which has splintered in a manner that craft proponents feel has evened the playing field. ‘€œThe splintering of media and growing importance of free media/social media is a great boon to craft beer ‘€“ such a better fit than for lager beers,’€ contends Brooklyn Brewing co-founder Steve Hindy. The big brands’€™ domination of the last 30-40 years ‘€œhas had a lot to do with the domination of media channels. It’€™s much more complicated to get a message across, and craft is a better fit.’€

More Sophistication for Mainsteam Brands

So what about mainstream premium brands then? What’€™s in the cards for them? The marketers of these mass brands seem to be edging toward greater urbanity and sophistication in their marketing, and ‘€“ as with Bud Light Platinum ‘€“ looking to offer line extensions that don’€™t garner just a temporary novelty-driven lift, but actually help to elevate the image of the core brand. It’€™s too early to say whether such efforts will be successful or sustained, but they represent a dramatic response to a segment that in recent years ‘€“ high-end beers aside ‘€“ has seemed mainly to be in a defensive crouch against wine and spirits.

They’€™re also getting more savvy and agile about playing in up-and-coming segments. Take cider. In the past, the major beer companies might have waited longer to see whether the segment really pans out ‘€“ after all, an earlier charge into the category led by Gallo in the 1990s brought few responses from other major companies and ultimately didn’€™t pan out, leaving cider as no more than a profitable little niche of similarly formulated and positioned brands. This time, several bigger companies reacted quickly and decisively. Sam Adams marketer Boston Beer quickly restaged its Hardcore brand as the more artisanally positioned Angry Orchard. MillerCoors acquired the upstart brand making the most noise in the marketplace, Crispin, and folded it into its fledgling Tenth & Blake brand-incubation unit. Tenth & Blake president Tom Cardella noted that he met Crispin creator Joe Heron for the first time last November and they had a deal by February ‘€“ blazing speed by the standards of major companies. Just a few weeks ago, Heineken USA signed a deal to bring into its core operations Strongbow, the world’€™s best-selling cider and No. 2 in the U.S., after nine years of partnering with Vermont Hard Cider Co. ‘€œBy growing our core and investing in innovation, we will continue to enhance our position as the industry’€™s leading upscale importer,’€ said Heineken USA president Dolf van den Brink, in explaining the rationale for the move, effective in January.

Do the big companies realistically have a chance at playing the niches? Recall that going back to first craft boom in the 1990s, they’€™ve tried plethora of strategies ‘€“ from so-called ‘€œstealth’€ micros to outright acquisitions ‘€“ that often were rich with ingenuity but yielded modest results at best. This time, though, they seem to be pushing for more fundamental cultural change within their own ranks to prevent the types of disconnects that doomed earlier efforts to play in craft. ‘€œIt’€™s all about understanding and being part of the culture to position you to be able to participate,’€ said Tenth & Blake president Cardella, who’€™s made that a key focus of his stewardship of the company. (See sidebar.)

The splintering scene is putting stresses on each tier of the business: marketers who have to provide resources and attention to an increasing array of brands, wholesalers who must find space on their trucks for them while appeasing the sometimes-warring interests of their suppliers, and retailers who must balance the value of crafts and imports as a traffic generator against the greater tonnage generated by Bud Light and Heineken.

Balancing Act for the Majors

For the major companies, it’€™s a balancing act between wanting to play in these high-growth, high-margin, halo-inducing segments while not neglecting their bread-and-butter brands. Thus, Anheuser-Busch has been advocating a ‘€œbalanced portfolio approach’€ even as MillerCoors pushes hard against its ‘€œpower of premium lights’€ message, putting chain-account executives through a three-day program that arms them with the data they need to bang that message home.

For distributors, sku management has taken on a higher priority, with seat-of-the-pants decision-making and a reliance on relationships increasingly buttressed by more rigorous analytics. ‘€œWholesalers are learning how to react to the growing fragmentation,’€ said Steinman. ‘€œSome are doing better than others. All must address it. It is a key concern as well as a formidable opportunity.’€

The powerful Reyes Beverage Group of MillerCoors wholesalers, for example, has been accumulating elaborate histories of the display activity its receives in support of feature ads at its major food and drug accounts and, more recently, at convenience stores and independent Hispanic accounts, with the ‘€œstretch’€ goals of winning displays for 90% of its primary ads and 60% of its secondary ads. It also surveys tap handles for use in targeting accounts with specific brands, using a specially devised mobile app to execute against those opportunities, say, by showing a retailer on the spot the higher profit expected by installing one tap handle over another.

Tenth & Blake has initiated a three-year planning process with distributors called Apollo that runs about three months, with staffers taking a deep dive into the operation and measuring the portfolio against trends at the city, regional and national levels, with a view to insuring the portfolio is balanced. It’€™s a deliberate process, with just 50 distributors navigating the process after two years. At Markstein, most reps by now are Master of Beer Appreciation-certified and the company has been expanding its cold space and bringing in technology to better track the mounting sku’€™s in the back room.

Such initiatives are invaluable in getting heard amid the din, although, as Crown’€™s Sabia pragmatically noted, distributors still ‘€œsell what’€™s selling.’€ In other words, marketers who provide their brands with a compelling brand proposition and adequate support don’€™t need to worry as much about winning their wholesalers’€™ share of mind. That hasn’€™t changed.

How Far Can Craft Go?

How far can craft go? There was a time, during the segment’€™s first boom in the 1990s, when 5% was considered the realistic limit. And that was before a raft of poorly made entries and big brewers’€™ retaliatory efforts popped the balloon, causing the segment’€™s first major shakeout (though overall volume plateaued rather than suffering an actual decline). Craft observers point to a number of reasons that this is less likely to happen again. For one, the vast majority of new entrants appear to be launched by home brewers or those who’€™ve apprenticed at other craft brewers, bringing a deep appreciation for the brewing process into the mix. The target demo also has broadened. Most notably, women have come into craft in a big way, thanks to more approachable entry points (such as barrel-aged beers that offer similarities in taste to wine), more congenial beer-drinking settings and the greater emphasis on beer’€™s role as an accompaniment to food. Fully half the participants at Brooklyn Brewery events these days are women, Hindy noted.

The next frontier, Hindy added, is ethnic minorities. Demographically, ‘€œwe’€™ve done very little to reach the Latino or African American market, and we know how important they are for the mainstream lager and import markets,’€ particularly for brands like Heineken and Corona at the high end. ‘€œAt the Great American Beer Festival, we’€™re virtually the only company with African American people serving beer.’€ Brewers are starting to respond to that opportunity. The year-old 5 Rabbit Cerveceria, which is targeting Latinos, is building its own brewery in a southwest suburb of Chicago and recently lured Goose Island veteran John J. Hall to its team. Formative efforts are underway in areas like Harlem in New York. A successful effort to bring in minorities could add another leg to craft beers’€™ growth.

UBS’€™ Gajrawala believes craft beer can get to 10%: ‘€œit’€™s a legitimate category, and the idea of high-flavor, high-end beers will continue,’€ though a consolidation of breweries may be at hand. There are simply too many brewers out there selling small batches in a high-capital-intensity business who are struggling to survive.

Brooklyn’€™s Hindy? ‘€œI think it could go beyond 10% of the market ‘€“ we’€™ve seen comparisons with ice creams and artisanal breads having 30%,’€ he said.

With the peak unclear, brewers like New Belgium and Sierra Nevada have been adding vast increments to their brewing capacity, and even startups seem to get to 5,000 barrels or more very quickly these days. Especially for those whose memories stretch back to that earlier 1990s boom and bust, the trend can seem unsettling. But Hindy, who’€™s taken a conservative tack in building his business over the past 30 years, feels the time is right.

‘€œIt’€™s the most exciting moment I can remember of craft brewers investing and banking on future growth: we’€™ve always been dealing with out-of-stocks, short projections, not enough capacity, always been chasing demand,’€ he said. ‘€œThis is the first time across the industry really building significant capacity.’€ He added: ‘€œI think it’€™s warranted ‘€“ we’€™re doing it ‘€“ but absolutely it’€™s a big risk. Probably some will get it right and some get it wrong. The capacity being built now will get us well beyond 10%.’€

Still, there are occasional signs that things are getting ahead of themselves. Markstein notes that some independent liquor stores in San Diego, responding to all the noise about specialty beers, have added warm shelves full of 22-oz craft entries priced at $6.99, despite the fact that their clientele is still mainly blue-collar. Typically, most of those bottles are covered with dust. And some new brewers are opening with what seems to be a very casual approach to distribution: they start brewing, open their tap room doors a few days a week, and take it from there. Those that opt to self-distribute, he notes, are finding that it’€™s hard to instantly turn on 60 new accounts if a chain like Von’€™s comes through with an authorization.

Marketing Strategies

The erosion of premium and mainstream-import beers at the hands of craft beers on the one hand and wine and spirits on the other seems to be encouraging marketers of mainstream brands to rethink their marketing strategies, with a tilt toward greater sophistication and wit rather than the sophomoric humor that’€™s too often defined the genre. Even Heineken USA ‘€“ whose marketing over the years generally has been more elevated than that of domestic premium rivals ‘€“ is determined to raise the tone of its marketing to conform to the new ethos. ‘€œOur approach is to reinvent beer marketing through aspirational campaigns, with an increased focus on the digital medium, that speak directly to confident, millennial, multicultural consumers,’€ said Heineken USA’€™s Lysyj. ‘€œOur breakthrough campaigns such as Heineken’€™s ‘€˜Open Your World’€™ and Dos Equis’€™ ‘€˜Most Interesting Man’€™ break from the traditional ‘€˜beer codes’€™ that rely on sophomoric humor.’€

Though the verdict is still out on the Heineken brand’€™s ‘€œOpen Your World,’€ which is centered around engaging, worldly men, there is no doubt that ‘€œMost Interesting Man’€ has had a galvanic effect on Dos Equis’€™ sales, to a degree that some had thought was no longer possible in beer. The relevance of those two brands to consumers is attested to by their vast arrays of Facebook fans, with nearly 8 million worldwide for brand Heineken and 2 million for Dos Equis. The latter weigh in by the thousands on new most-interesting tropes.

The explosion has forced even the most established craft and import names to strive continually to reestablish their credentials. As Beer Marketer’€™s Insights’€™ Steinman noted, ‘€œseveral of the biggest craft brands are challenged in an environment where the consumer always wants something new.’€ Thus, Sierra Nevada, which for many years stubbornly nurtured a mere handful of flavors, was able to bring in 40-odd brands, some of them one-offs, for a recent tap takeover in New York. New items like its canned Torpedo have won broad followings. Boston Beer, whose Sam Adams can claim much credit for bringing craft to prominence in the first place, has reached outside its own walls to stoke its innovation, recognizing that its brand name can be a limitation with some younger consumers. It’€™s teamed up with Magic Hat founder Alan Newman on an incubation company, Alchemy & Science, whose first initiative was the foray into LA via an investment in Angel City. More recently, Boston Beer has even teamed with craft beer pioneer Jack McAuliffe to bring his legendary New Albion brew back for the first time in 30 years. Rogue has gotten out in front of the move into terroir, touting its Rogue Farms barley- and hop-growing initiatives while also offering cutting-edge brews via such stealth outposts as its Buckman Botanical Brewing spinoff in Portland, Ore., where it counters the hop-extreme tendencies of locals with low-IBU entries that may contain no hops at all. Among the importers, Heineken USA has offered a wheat beer under its Amstel brand, while Diageo has offered a more intensively flavored Guinness Export Stout that has garnered good reviews from geeks.

A-B Seeing Successes

Certainly Anheuser-Busch can boast its share of successes playing where spirits roam. Stella Artois continues to surge, thanks to sophisticated marketing that ties the brand and its chalice glass to the upscale rituals of on-premise consumption. It seems to have a bona fide hit ‘€“ limited by production constraints ‘€“ with Lime-A-Rita Margarita with a Twist of Bud Light Lime, which goes directly after a spirits-consumption occasion. And even as A-B has sought to contemporize the marketing of its flagship Budweiser brand by showing it in the hands of more cutting-edge consumers, it’€™s also sought to place it more squarely in the spirits debate with the Bud Light Platinum extension, which lifts key packaging, positioning and promotional cues straight from spirits. It boasts of ‘€œtriple filtered, smooth finish, top shelf taste,’€ and is packed in a cobalt blue bottle with a silver strip that wouldn’€™t be out of place on a bottle of gin. Though it’€™s still early days, ABI ceo Carlos Brito has told Wall Street that he believes a significant share of Platinum’€™s business is coming from ‘€œhard liquor’€ and another 5% from ‘€œoutside the alcohol category’€ entirely. That suggests it’€™s meeting its strategic goal, even at the cost of some cannibalization of Bud Light. UBS’€™ Gajrawala goes so far as to say that Platinum ‘€œis still a great idea even if it’€™s 100% cannibalistic of Bud Light’€ because it’€™s doing so much to ‘€œpremiumize’€ the image of the brand. ‘€œPlatinum is having a halo effect on the strength of the brand,’€ he said.

Tenth & Blake

MillerCoors’€™ Tenth & Blake brand incubation unit celebrated its second anniversary in August with signs of solid progress on both its bigger and niche brands. It can arguably claim to be the No. 1 craft company thanks to brands like Blue Moon and Leinenkugel, and has been aiming to hit 8.5 million in craft and import cases this year. It’€™s been cranking up the Blue Moon seasonals, already up 40% in 2011, while boosting the brand’€™s TV presence. Leinie’€™s is adding flavors to its Shandy and Big Eddy sublines. It’€™s tripling capacity of recently acquired Crispin Cider, getting ready to roll out Batch 19 on draft nationally and boosting Pilsner Urquell’€™s quality via a cold-shipping initiative. Though that’€™s a varied and ambitious slate, Tenth & Blake president Cardella plainly prefers to talk about his efforts to foment cultural change at the unit, most of whose employees are longtime MillerCoors people. Even the right business moves, he believes, will be fundamentally undermined if Tenth & Blake staffers don’€™t absorb the culture of the specialty beer segment.

He’€™s been working in both formal and informal ways to get there. He’€™s seeded the staff with execs with longstanding ties to craft, as with 18-year Boston Beer vet Jeff White ‘€“ ‘€œmy true-north compass,’€ Cardella said ‘€“ who manages supply chain issues as senior director of strategy and operations. Every staffer is required to take a beer-merchant training series to develop a basic understanding of beer’€™s history, styles and brewing process, then has six months to pass the Cicerone server-level course. (As one of the first Tenth & Blake staffers to take the test, Cardella was pleased enough with the passing grade of 82 he attained on his first try, only to find that grade surpassed by most others who took the test, he noted with pleasure.) With many staff members brewing their own beer, Cardella encourages them to form teams ‘€“ there were 23 last year ‘€“ to vie to have their brew selected for pouring at the Great American Beer Festival. T&B has created Brewers Unleashed events (the name it first proposed, Brewers Gone Wild, was vetoed by corporate) where a particular brew will be put on draft at corporate pubs in Chicago, Milwaukee or Denver, with local beer bloggers invited and perhaps a noted local publican like Haymarket’€™s Pete Crowley in Chicago coming in as guest bartender. Or he’€™ll take the entire staff out to a craft-centric bar like Hop Leaf to solidify relationships, educate the staff and, just maybe, d


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