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Beer: state-of-the-industry report: just about everyone agrees that the beer industry is having problems, but the troubles are more frustrating than they are fatal.

In May, the magazine cover the beer industry wants to forget asked. "Is Beer Dead?" Inside, in an article entitled "U.S. Beer Business Continues Decline," Ad Age probed the social and demographic factors prompting a shift from beer to wine and spirits, and beer's falling numbers.

After three years of lackluster beer sales, analysts had exhausted milder analogies that compared beer's fortunes to perfect storms, battlefield encounters or bouts of illness. It was only natural, if premature, to start talking about the death of beer.

The overall figures are certainly depressed, but this is more frustrating than it is fatal. And, while aggregate figures may indicate that the category has problems, they also mask a lot of variation within the category, including strong performances by some brands or segments that might be instructive for the rest.

The big picture is this: in 2004, the beer category grew overall by 0.7%, according to Adams Beverage Group research, solidifying in hard statistics the developing perception that the beer industry is a stagnant giant. While premium and sub-premium beers are hurting, imports put on a brave show (up 1.8%), and there was growth in what might be thought of as the two extremes of the beer spectrum: light beer at one pole, and specialty or craft beers at the other.

In 2004, mergers further internationalized the beer landscape, government regulations brought clarity to the long dispute over the formulation of malternatives (flavored malt beverages), and spirits and wine caused more handwringing at the brewery.

But beer still claims over half the dollars Americans spend on beverage alcohol. And, considering that it is less expensive per drink than spirits or wine, beer is clearly the leading adult beverage choice by a good margin.


In 2004, Americans pursued their attraction for products that promise health through reduced calories or carbohydrates. Despite the fact that the low-carb phenomenon seems to be waning, light beers overall grew by 4.4%.

Just as Diet Coke has become the habitual selection for a substantial number of soda drinkers, dieters or not, light beers seem to be the reflexive beverage of choice for a large number of beer drinkers, oblivious to the irony of pairing these beers with an order of super nachos.

Six of the ten top-selling domestic brands--and nearly half the beers consumed in the country--are light beers, and five of those posted increases in 2004. Bud Light retained its number one position, growing by 3.7%.

The next light beer in the top-ten ranking, number three brand Miller Lite, grew by an impressive 11.1%, a gain that would have been unheard of a few years ago for the perpetual second-place brewer.

When A-B's Michelob Ultra burst on the scene two years ago as the leading low-carbohydrate beer, Miller was slow to capitalize on the fact that their flagship Lite happened to be low in carbs as well as calories--and always had been. The aggressive repositioning of Miller Lite as a low-carb brew, and the leadership of new Miller president Norman Adami, seems to have breathed new life into the company.

Coors Light fell by 2.0%, but the remaining light beers in the top ten--all A-B products--posted growth that ranged from barely significant (Natural Light: 0.7%) to breathtaking (Michelob Ultra, growing 39.8%, from an admittedly smaller base).

The sustained health of these "healthy lifestyle" beers has inspired new light brands. Despite fears of cannibalization, A-B launched Budweiser Select; Heineken risked Amstel Light by launching Heineken Light and Beck's released its first light beer.


Just as top-selling light brands nearly all fared well, their full-carb and -cal siblings slumped: Budweiser (the number two brand overall) was down 4.5%; Busch (number six), down 3.1%; Miller High Life (number eight) down 2.1%; and Miller Genuine Draft (number 10) down by a painful 9.1%.

Contrast this with the sales of the big imports, where eight out of the top ten gained sales, some significantly. Corona Extra (up 1.9%) led a contingent of Mexican beers that for several years now has seen business expand--in 2004, for example, Tecate grew 0.4%, Modelo Especial increased a hefty 18.2%, and Corona Light upped sales 6.4%. Part of the explanation is that they are in the sweet spot of demographic trends, with a continuing surge in the Hispanic-American population. But other imports--such as Guinness, Heineken and Amstel Light--also continue to grow, so there has to be more to it. Clearly, the sophistication of an import and the appeal of a lifestyle beer make a powerful combination.

Interestingly, it can be argued, almost counter-intuitively, that some of the top-selling imported beers--Corona, Heineken, Labatt Blue and Beck's, for instance--do not differ very much from mainstream American beers. They are all of the same, dominant international style as Bud or Coors, and are sold alongside their domestic counterparts. In a sense, these are no longer "foreign" beers: they are marketed and consumed as global products--perhaps even as stealth domestics.


Soon, it may be even harder to tell domestics from imports. Interbrew had already blurred the distinction: for example, the Belgian conglomerate sold a number of its brands in the United States through Canadian brewer Labatt. Now with the merger of Interbrew and South American AmBev, the newly-titled InBev, headquartered in Belgium, is the largest brewing company by volume in the world. (Anheuser-Busch is the largest brewer by sales, reflecting the lower price of many of AmBev's South American brands.)

Inbev boasts ZOO local brands, which it divides into global flagship brands (Stella Artois, Brahma and Beck's) global specialty brands (Leffe, Hoegaarden) and multicountry brands (Bass, Staropramen). It's a useful distinction that U.S. beverage analysts may want to emulate. Mainstream and specialty beers, as well as light brands, behave differently abroad just as they do at home: lumping them into a category called "imports" is as useful as a single figure for domestic beer sales would be.

Following Coors' first ambitious international moves in 2002, 2004 saw a protracted wrangle over the merger of Coors and Molson, which concluded early this year with the creation of Molson Coors to form the world's fifth largest brewing company. Interestingly, it is the union of two companies both still in the hands of their founding families.

SAB/Miller, formed by the purchase of Miller Brewing Co. by South African Breweries in 2002, is now a mature venture. Miller brought its American brewing legacy to the deal; SAB brought an understanding of selling beer in developing country markets, plus plums like the Czech classic, Pilsner Urquel. The new company has extended its reach with purchases in Western Europe, Eastern Europe, Central America and China.


In 2003, for the first time in eight years, the specialty beer segment grew at a faster rate than the other relatively small, exclusive segment, imports. In 2004, specialty beer growth at 7.2% was greater than any other segment of the alcohol business. About one-tenth of America's specialty brewers enjoyed double-digit growth in 2004.

The specialty segment, comprising so-called "craft beers," made by local brewpubs, microbreweries, and traditional regional companies, represents only 3.2% of the total beer industry. But it occupies a disproportionate share of media and public attention, as witnessed by recent coverage of high-end, high-priced beers in The New York Times and The Wall Street Journal. Paradoxically, at a time when big brewers are discounting, the media has become enamored over the prices charged by high-end beer.

By two different measures, Colorado's New Belgium Brewing Co. stands as a good example of this segment. Information Resources Inc. (IRI) recognized its flagship beer, Fat Tire Amber Ale, in IRI's 2004 Beer Power Ranking of 25 top beers, all distinguished by a combination of volume, growth and profitability measures. And the Brewers' Association included the company on its list of "Tiger Breweries," based on size and growth performance.

With distribution in 15 states, New Belgium, which grew 16% in 2004, is at capacity for their current facility. Asked why specialty beer is blossoming, Kim Jordan, co-founder and CEO, said "I have my hunches, though they sound pretty pat. For years we've been saying that people have been trading up. They are more comfortable investing in small pleasures: lattes, fresh bread, specialty beer. I think this is borne out in all the enthusiasm for cocktails: people want more interesting products; they're willing to pay more for them. We fit in with that desire. The economic situation in this country is not all that fabulous, so people aren't doing terribly extravagant things, but they are interested in these small luxuries."

The brewery recently launched its first TV commercials to limited markets. The series show a young man finding a vintage bicycle at a garage sale, renovating it, then riding it at sunset, with the tagline: "Follow your folly. Ours is beer."

The TV commercials mark a certain coming of age by the specialty brewer. "They are meant to grow our relationship with customers over our brands," said Jordan. "We're committed to the idea that branding is more than just showing up in the marketplace. Maybe this applies to the whole segment. Small brewers used to think, 'our beer is so good, all we have to do is make it.' Now we know we have to do more for our brand. What you focus on is where you go."


Christine Farkas, beverage analyst with Merrill Lynch, relates beers lagging fortunes to a number of factors: beer pricing, an aging population, the "Sex in the City" cocktail culture, and the tendency among young adults to be more adventurous and less loyal.

According to Farkas, "For 50 years, beer prices lagged behind the rate of inflation. Since 1999, beer has been pricing itself ahead of inflation in a way that's unsustainable. But price growth as measured by CPI really started to slow in mid-'04."

In addition, the young adult group, beer's prime demographic, was forecast to grow from 2000 to 2010. But, instead of taking up beer, "there's the appeal of the cocktail culture to the fickle 21-27 group," said Farkas.

Finally, she added, the population is aging: "The over-55 group is growing faster than the 21-27. They tend to move towards wine and spirits, partly for health reasons, and partly because they are 'trading up.'"

In the past five years, beer sales fell from 56% to 53% of the U.S. alcohol beverage market, while spirits sales rose from 28% to 31% (according to the Distilled Spirits Council of the U.S. or DISCUS). That's a 3% loss for beer, and a 3% gain for spirits: 3% of a $48 billion market.

From top to bottom, the beer industry worries this particular bone, but especially among the big brewers, who have lost the most.

August Busch IV, president of Anheuser-Busch, noted, "While the gains of wines and hard liquor have grabbed headlines, keep in mind that beer far outsells all of their products combined (2.5 to 1) and offers attributes that wines and hard liquor don't. Beer is pure refreshment, has a moderate alcohol level and a fun image. Those are strong advantages."

Miller's Norman Adami, in a keynote speech to the Brewers' Association of America last November, had a central, cautionary point to make as he warned a standing-room only audience: "I believe the single biggest threat facing the American beer business today is the possibility that we will allow the American consumer to get bored with beer."

If so, Adami now sits at the helm of one of several big companies that in years past contributed to the boredom by promoting a public image of beer that had everything to do with affect, and nothing to do with flavor. At this gathering, he urged members of the industry" to stand up for beer, to "get loud and proud about your uniquely pleasing product."

Adami presented five ways to push back wine and spirits gains. He was addressing small brewery owners, but the suggestions can apply to the whole industry.

First: brewers need to have a clear idea of who they are. This is a significant point at a time when Miller seems to have remembered that they sell beer, not images. The company's "I can't taste my beer!" TV ads in 2004 were genuinely funny, but they were also a welcome return to an emphasis on flavor.

Second: brewers should play to their strengths, the qualities that make beer special. These include strong connections to a long tradition.

Third: brewers shouldn't pretend to be something they're not. Industry analysts have noted that the beer-based malternatives that carried spirit-branded labels may have helped individual breweries, but hurt the category as a whole.

Fourth: innovate, in flavors, packaging and marketing. Here, Adami was speaking directly to the audience that has pushed the envelope in this respect.

Filth: give distributors meaningful alternatives, meaning that distributors need big brewers for revenue and small brewers for diversity.


Dave Eickholt, President of Diageo-Guinness U.S.A., draws some very specific lessons from other beverage alcohol sectors: "The spirits and wine grays have been successful in a very important area--the spirits guys for about five years, and the wine guys for about ten--and that's the effort to raise and premiumize the image of their category.

"If you look at wine, it's the $9 and above bottles of table wine, or the $15 bottles that are selling. In spirits, the same story plays out. All growth is at the top end, and none at all at the bottom end. If you go into a store and look at vodka, you can spend $5 a bottle or $32 a bottle, and it's the $32 bottles that are selling.

"This didn't happen overnight. They've been laddering up, educating consumers to pick better Scotch, pick better vodka, pick better bourbon. Better products are what the consumer is indulging in."

Eickholt feels that Diageo's three major beer brands--Guinness, Smithwick's, and Red Stripe--have benefited from this approach. "Premiumization" he points out, has to do not only with the presentation of the product, but with elevating the occasion of consumption.

For its part, A-B has embarked on a commitment to elevate beer's image. "Our new applied plastic labels for Bud Light and Budweiser Select show a more sophisticated side of beer," said August Busch IV. "Our aluminum bottles have a similar effect--they keep the beer cold and give cool imagery to beer, which makes it fit in at clubs, restaurants and high-end bars. Showing beer's quality in ads with high-quality imagery and messaging romanticizes beer's pure ingredients and is attractive to people who want the best in all of their products--including their beer."


Sitting in Washington, D.C, David Rehr is one step farther away from the brewery and one step closer to the consumer. As president of the powerful National Beer Wholesalers Association, he looks at what both brewers and wholesalers can do to improve the health of the whole category.

He sees the beer industry's problem as a question of how to compete in a marketplace with increased competition, and undefined cultural shifts to contend with: "We went out for lunch today, and on other tables I saw one Cosmopolitan, two Martinis, iced tea and Diet Coke. Culturally there's something going on. The Cosmo or the Martini are the equivalent of two to three beers, yet it's culturally OK now to have them at lunch."

Rehr's solution has a near-religious ring. "We need a positive aggressiveness: fewer corporate businesspeople, and more entrepreneurs who are evangelical for beer. You can't let any opportunity slip by, in your personal life, your business life, at your neighborhood picnic. When other people are talking sports, you talk beer. Beer has to make tradition cool again."

He sees what the smaller segments have achieved: "In a way, the micros have led that fight for years, the evangelism for beer. Jim Koch [Boston Beer] and Kim Jordan [New Belgium] have achieved it. The intense personalization. We have to fight for every drinker over age 21."


Brewers large and small come together in their concern over regulation, and the domestic social environment in which they do business.

The NBWA's David Rehr is particularly attuned to the risks ahead for the industry. He identifies a few landmarks of the past year.

First, the Supreme Court case on direct shipping of wine carries good news and bad for beer, or at least, for its wholesalers. "We have clarity. The Supreme Court decision confirms the fundamental legitimacy of the three-tier system. But we also have ambiguity: the decision says that whatever laws there are have to apply to everybody. We don't know how that will play out state by state."

It is not clear that all brewers and all wholesalers will be on the same page as these issues unfold.

Next, Rehr points to the Costco case, which also challenges the three-tier system. "From a supplier's perspective, it's all about the diversity of beers. They [Costco] want it on their terms: their price point, and their control of the brand. Big suppliers will lose control of their brands, and diversity. Small suppliers will be left in the street."

On the winning side, Rehr points to successes in keeping neo-prohibition interests at bay, in particular, efforts by University of Nebraska coach Tom Osborn and others to pass a motion to eliminate alcohol ads at NCAA sporting events.

Additional issues concern Busch IV at A-B: "One of the greatest issues we are confronting is a battle that has been waging for decades, and that is the attempts by the hard liquor industry to perpetuate the myth that 'alcohol is alcohol.' Anyone who has had a light beer and a martini know that they are far from equal. In addition, despite what the hard liquor companies say, there is no such thing as a 'standard drink.' When it comes to alcohol content, beer, wine and hard liquor are not created equal. In fact, when compared to a beer, a mixed drink with hard liquor may contain up to 10 times the concentration of alcohol by volume. Clearly, these beverage types should not merit equal treatment in the eyes of the law."


At the end of 2002 and 2003, analysts could conclude the year's retrospective on a hopeful note. Terrorism would abate, wars would end, the weather would improve, cocktails would cool--in short, all the elements that conspired against beer's numbers would recede, and sales would rebound.

It hasn't happened, yet. Where are the opportunities for beer in the year ahead? "Beer can look to product innovations, price discounts and on-premise promotions to turn things around," said Merrill Lynch's Farkas.

But certain problems are more tenacious than they seemed at first. Big Beer really has lost ground, and the efforts to rebuild its strong base have not yet borne fruit. As the NBWA's Rehr said, "We used to think we were so big that no one would ever mess with us: well, they're messing with us. If there were a single, simple solution, A-B or the NBWA would have done it. The gauntlet has been thrown down--by fate, by our competitors or of our own making--it's for us to figure out how determined we will be."


Through 2004, the debates raged over the composition of flavored malt beverages (FBM) or malternatives. The fight concluded on January 3, 2005, when the Tax and Trade Bureau (TTB) adopted a final ruling on the formulation of these beer-ish beverages.

FMBs are sweet, low-strength alcoholic beverages that are technically classified as beer for tax and distribution purposes because they are malt-based. However, the category ran into trouble as an increasing number of brands in the nineties associated themselves with spirit companies--in effect, giving spirit brands commercial access in sales and advertising arenas where only beer was allowed.

Further examination revealed that the beer base of these beverages, on which their lower tax status and market access was based, could be less than 1%. The alcohol content of the beverage was derived almost entirely from approved flavorings that were spirit-based.

Realizing that the historic distinction in U.S. law between beer and spirits was blurred by this ambiguity, TTB published proposed new regulations on the formulation of FMBs. The comment period on the proposed ruling closed in October of 2003, by which time the TTB had received over 16,500 responses, a record for any TTB rule-making.

Two dominant positions emerged on the proposed regulations: One side, represented by the powerful Beer Institute, the NBWA; and the far smaller Brewers' Association of America (BAA), supported the so-called 90/10 composition standard, under which 90% of the alcohol content in a malt-based beverage must be derived from malt, with only 10% coming from a distilled source.

The opposing side, represented by the Flavored Malt Beverages Coalition, an organization of FMB manufacturers, advocated a so-called 50/50 standard, which in practice meant that a majority (51%) of the alcohol in a malt-based beverage would have to be the product of the brewing process.

In the end, the TTB ruling supported the 50/50 standard. Affected industry members have until January of 2006 to reformulate their products, something they would have faced under either regime.

FMB sales are volatile, even before the new regulations roll out. Despite that, Diageo, the category leader, is in its fourth year of volume growth in malternatives.

"FMBs are about new brands and flavors, more than is the case with beer, wine or spirits," says Diageo-Guinness' Dave Eickholt. "These consumers live for the newness of the moment, but I think that's typical of any category in its infancy. The challenge is to build in some stability and sustainability."

With some brand extensions growing by three and four figures, and others falling by double digits, stability sounds like a bit of a reach. However, the kind of stability Diageo has attained comes through creating a regular stream of new flavors to appeal to young adult drinkers who find novelty to be the most attractive characteristic of a beverage. Certainly, the success of Smirnoff Twisted V--green apple, mandarin orange and cranberry--and the new Bacardi Silver Raz suggests that the category has long-term prospects.

How to keep the category fresh? "You can innovate or imitate," said Eickholt. "If you innovate, there's a chance for that kind of [double digit or greater] growth. If you imitate, you can get very diluted results."


The beer industry has been quite active in confronting underage drinking.

Industry leader Anheuser-Busch has spent more than a half-billion dollars since 1982 in community-based programs and national advertising campaigns to promote responsible drinking and help prevent drunk driving and underage drinking.

A-B's August Busch IV reported: "When it comes to fighting underage drinking, we support programs that help parents talk with their children about drinking; that help retailers educate their employees on how to properly check IDs and prevent sales to minors; that remind adults not to provide alcohol to minors; that assist schools in reminding teens about the importance of making smart, responsible choices; and that support law enforcement officials in enforcing the law."

Julie Johnson Bradford is the editor of All About Beer magazine.
Leading DOMESTIC Beer Brands

(000 2.25-Gallon Cases)

Brand Brewer 2003 2004

Bud Light Anheuser-Busch 517,000 536,000
Budweiser Anheuser-Busch 404,000 386,000
Miller Lite Miller Brewing 217,000 241,000
Coors Light Molson Coors Brewing 228,950 224,370
Natural Light Anheuser-Busch 115,000 115,800
Busch Anheuser-Busch 96,000 93,000
Busch Light Anheuser-Busch 80,500 81,500
Miller High Life Miller Brewing 72,500 71,000
Michelob Ultra Anheuser-Busch 41,500 58,000
Miller Gunuine Draft Miller Brewing 59,400 54,000
Total Leading
 Domestic Brands 1,831,850 1,860,670
Others 658,550 644,830
Total Domestic Beer 2,490,400 2,505,500
Total Beer 2,817,400 2,838,400

Brand Brewer % Change

Bud Light Anheuser-Busch 3.7%
Budweiser Anheuser-Busch -4.5%
Miller Lite Miller Brewing 11.1%
Coors Light Molson Coors Brewing -2.0%
Natural Light Anheuser-Busch 0.7%
Busch Anheuser-Busch -3.1%
Busch Light Anheuser-Busch 1.2%
Miller High Life Miller Brewing -2.1%
Michelob Ultra Anheuser-Busch 39.8%
Miller Gunuine Draft Miller Brewing -9.1%
Total Leading
 Domestic Brands 1.6%
Others -2.1%
Total Domestic Beer 0.6%
Total Beer 0.7%

Source: Adams Beverage Group.

Leading IMPORTED Beer Brands

000 2.25-Gallon Cases)

Brand Supplier 2003 2004

Corona Extra Barton Beers/Gambrinus 96,105 97,930
Heineken Heineken USA 62,500 63,125
Labatt Blue InBev USA 15,075 14,192
Tecate InBev USA * 13,464 14,600
Guinness Stout Diageo-Guinness 10,987 11,390
Modelo Especial Barton/Gambrinus 9,288 10,951
Amstel Light Heineken USA 9,980 10,400
Corona Light Barton Beers/Gambrinus 8,142 8,705
Beck's InBev USA 7,500 7,900
Foster's Miller Brewing 8,500 7,300
Total Leading Imported Brands 241,521 246,493
Others 85,479 86,407
Total Imported Beer 327,000 332,900

Brand Supplier % Change

Corona Extra Barton Beers/Gambrinus 1.9%
Heineken Heineken USA 1.0%
Labatt Blue InBev USA -5.9%
Tecate InBev USA * 8.4%
Guinness Stout Diageo-Guinness 3.7%
Modelo Especial Barton/Gambrinus 18.2%
Amstel Light Heineken USA 4.2%
Corona Light Barton Beers/Gambrinus 6.9%
Beck's InBev USA 5.1%
Foster's Miller Brewing -14.1%
Total Leading Imported Brands 2.1%
Others 1.1%
Total Imported Beer 1.8%

Source: Adams Beverage Group

* Marketed by Heineken USA as of January 2005

Beer CONSUMPTION By Category

(000 2.25-Gallon Cases)

Category 2003 Share 2004

Domestic Beer
 Super Premium, Craft & FMBs 206,000 7.3% 203,900
 Premium 504,000 17.9 477,500
 Light 1,343,000 47.7 1,402,500
 Popular 279,000 9.9 264,800
 Malt Liquor 67,400 2.4 63,750
 Ice 91,000 3.2 90,050

Total Domestic Beer 2,490,400 88.4% 2,505,500
Total Imported Beer 327,000 11.6% 332,900
Total Beer 2,817,400 100.0% 2,838,400

Category Share %o Change

Domestic Beer
 Super Premium, Craft & FMBs 7.2% -1.0%
 Premium 16.8 -5.3%
 Light 49.4 4.4%
 Popular 9.3 -5.1%
 Malt Liquor 2.2 -5.4%
 Ice 3.3 2.3%

Total Domestic Beer 8.3% 0.6%
Total Imported Beer 11.7% 1.8%
Total Beer 100.0% 0.7%

Source: Adams Beverage Group

Leading BEER Suppliers

Anheuser-Busch 49.5%
Miller Brewing 18.6%
Molson Coors Brewing 11.2%
Barton/Gambrinus 4.7%
Pabst Brewing 3.6%
InBev USA 2.8%
Heineken USA 2.6%
Others 7.1%

Source: Adams Beverage Group

Note: Table made from pie chart.
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Author:Bradford, Julie Johnson
Publication:Beverage Dynamics
Article Type:Cover Story
Geographic Code:1USA
Date:Sep 1, 2005
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