Chronicle of the beer wars: R.S Weinberg ponders a half century of beer market competition.
Modern Brewery Age: When did you come up with the concept: of "beer wars"?
Bob Weinberg: I used the term beer wars for the first time at a meeting of the security analysts federation in St. Louis in March 1978. This was contemporaneous with the first Star Wars movie, and I think that was the inspiration. I was for looking a catch notion, and thought I would call them beer wars. The thing that is interesting here, is that this is an institutional history. Any business is shaped by a number of institutional factors. These are factors over which the players have little direct control. Economic and social institutions establish how the game is played. You try to arrange things to have it played in your favor, but by and large, old man river just keeps on rolling along.
Historically, what I call the seven original beer wars occurred in sequence. You started with brewers trying to restart after Prohibition. Many players were just trying to get rich quick. That was the First Beer War, during the period 1933-1947. The Second Beer War, between 1947-1973, we saw the emergence of the national and super-regional brewers and the decline of local brewers. There were a number of things that determined this. A large portion of the U.S. beer drinking population was in the armed forces in World War II. If you were in the armed forces, odds are you were exposed to brands like Schlitz, Pabst and Budweiser. People sampled these beers, and I think the public's idea of beer changed forever.
I wonder if the beer that made it overseas would convert people, having traveled across the Pacific on the decks of Liberty ships, exposed to extreme heat ...
If you were overseas in combat conditions, almost any beer would have tasted good. The can was also a big thing. It allowed you to ship beer further. It became feasible to move beer great distances.
After the war, the relocation and increased mobility of large blocks of the population favored the creation of the super regionals and large national brewers. You may have been completely satisfied with your local beer, but when you moved it was no longer available, so you had to try a new beer. You must also consider demand and technological factors. There were new economies of scale with the introduction of cans, high-speed packaging lines and improved material handling systems. The savings could be used to increase profits and marketing expenditures.
Then, in the 1950s, along came TV advertising, and that was phenomenal. That created a barrier to entry, only surmountable by the larger brewers. These factors created that second beer war, which lasted a long time.
In the 1950s, the brewing industry was a club. Everyone knew each other. Everyone played the same game. In die immediate post-WWII period, many personal relationships were such that brewers disliked their principal competitors more than they liked profits. All sorts of things were done that made no rational sense at all. Several of the big brewing families had borrowed money prior to Prohibition, and later lost their breweries because their cash flow stopped and they couldn't pay their debts. As a result, post-Prohibition brewers were loath to borrow money.
Major expansions were financed out of retained earnings. If a family-owned brewer paid a high dividend to finance his lifestyle, at the expense of retained earnings, that company's future growth would be constrained. They would be at a disadvantage with competitors who were willing to accept lower dividends to plow money back in.
The period 1973-1977, which I call Beer War III, was triggered by two words that changed the competitive equilibrium--Philip Morris. No one in the brewing industry had ever spent so much money all at once. Philip Morris spent over a billion dollars on bricks and mortar in the short run. This forced serious competitors to build more capacity. All of a sudden there was a huge spurt of capacity. This squeezed people out.
The Fourth Beer War, 1977-1980, was a realization that the U.S. beer market would be competition among the few, an oligopoly. The Fifth Beer War, 1980-1991, marked the "new" competitive equilibrium. The brewers underwent consolidation for survival, all of them scrambling to attain critical mass. Critical mass is how much do you need to maintain a competitive marketing program. Convert that into how many barrels it will take, and there's your critical mass.
The period 1991-1995, this was interesting. You started to get very creative market development, because brewers had to achieve competitive advantage, and an acceptable level of company and industry growth. Then, Beer War Seven, between 1995-2004, what I call the "internationalization and super-internationalization" of the market. The best example of this is what just happened, with a major brewer gobbling up another major brewer. It's startling.
The interesting thing now is that those first seven beer wars were evolutionary steps. You went through them. There is overlap, but by and large, one happened, and then the other happened.
Now there are four areas that will happen concurrently. The first is redistribution of consumer's beer dollar. This will be a sticky wicket. Closely related is the rise of super retailers, and the assault on the three-tier system. Wal-Mart accounts for 20-25% of all of Procter and Gamble sales in the U.S. When you have a bilateral oligopoly you have an interesting market structure that we know very little about. An oligopoly is a couple of sellers. An oligopsony is a couple of buyers. And when a couple of buyers face a couple of sellers, you have a bilateral oligopoly. This will change things. Historically, the political power of wholesalers locally is phenomenal. But now the giant retailers will have a great deal of power. And, in theory, the giant retailer is out to give the consumer beer at a lower price. That's hard to argue with. At the moment, the three-tier system is secure, but the future of this system may well be decided by the courts.
The other thing that is happening, is that we are seeing shorter product lifecycles. We have a "new product blitz" strategy. You have new products coming out, coming out, coming out. Throw enough stuff on the wall and see what sticks.
The oligopoly now turns into a pseudo-duopoly. You have two major players, and a lot of small guys around the edges of the market. This leads to the rise of an interesting new kind of local brewer.
As change accelerates, there will be a need for new business models, which reflect changes and scale economies, and changes in player productivity. This will make things different. Who are the long run survivors? Clearly A-B is a long-term survivor. Then you look at some of the great smaller brewers. Sierra Nevada, and others.
When I speak of who will survive, I mean survive independently. When breweries develop a large enough base, they become acquisition targets. But while old breweries may die, old brands can live forever.
Overall, I have never seen a situation where things are so confusing. All the possibilities have enormous implications. There are new scale economies, and there are new factors that determine player productivity. These things, which were always important, now become strategically extremely important.
To make a mistake in a confusing, changing environment is an example of "to err is human." Making an original mistake is understandable. Remaking someone else's mistake is malpractice. In this industry, there has been an extraordinary pride of product. Ballantine is a marvelous example. That was my beer when I was a young man in New York. I liked a heavier beer, and that's what they made. But that company went belly-up. The owners felt the public did not understand what beer was supposed to be. They felt that God was punishing their non-customers by denying them that fine beer. This is the only business I can think of where most brewers believed that the good Lord gave their father or grandfather the recipe for a perfect beer. If consumers didn't realize the perfection of the product, they were unworthy of the product. And not drinking it, that is their punishment [laughs].
There are two things that set beer apart from other consumer products. One is that everyone who can afford to drink beer can afford to drink even the most expensive beer on special occasions, if not regularly.
The second thing is that beer drinkers are very influenced by their friends. When a beer heads south, this is not because the beer drinker suddenly thinks the beer is bad. It happens when his friends say "you're still drinking that piss?" He is embarrassed and changes his brand. You are interested in what your friends think of your beer. This is an unusual dynamic for a consumer product.
The big brewers seem to be alarmed by the resurgence of spirits, but I notice on your projections of spirits and beer, the actual and expected lines coincide.
Look at the chart Beer Wars Chart 5, malt beverage share of total servings. You have decline through post WW II. You went from over 60% to something around 50%. In Beer Wars Chart Six, you see as the major trend in malt beverages goes down, the major trend in distilled spirits goes up. When spirits turn up, malt beverages turn down. There is generally a correlation them.
If you look at Beer Wars Chart Seven, they level off. In the parlance of economics, they are in a competitive equilibrium. You see beer is drifting down modestly, and distilled spirits are moving up, modestly.
Look at the chart showing actual vs. expected alcohol beverage demand (Chart 10) based on a simple demographic model 1948 to 2002. It's funny, the scale obscures it. You can see 1990, that bump due to the excise tax. Total growth is small, so a slow-down in penetration hits you harder.
Are there other reasons for the periodic decline of malt beverage, and the ascent of distilled spirits?
Take a closer look at this phenomenon. There was a curtailment of good distilled spirits during World War II. You have to age distilled spirits, so this had an impact for a decade or more after the war. Apologies to the brewers, but beer you turn on and off. The distilled spirits industry gradually recovered, and distilled spirit share rose until 1969. One could argue, and I may yet do that, that there are natural cycles of these things.
So you think the current concern about the impact of distilled spirits is overwrought?
The beer market is growing slowly, and there is ferocious competition. So statistical movements that are a wiggle, that would have been ignored five years ago, are suddenly significant.
Starting about 1972 or 1973, I started collecting advertising data. What I've done is take McCann Ericson data, and constructed media price indices. I can tell you how much was spent in current dollars. How much is spent in constant dollars based on media. I look at this, and I have to make an assumption I don't want to make. It costs X dollars to launch a new brand. Look at measured media advertising, which is horrible, lot of warts on that princess, but I think my numbers are consistent, so I think this is instructive. So I think I know what it costs to introduce a new brand. I'm looking at competition among the light beers. I see A-B's spending on Bud Light has been less sensational than Coors or Miller at some points in time. But then I add in the Budweiser dollars. This is institutional spending for Budweiser and Bud Light.
I don't know any ad exec worth diddly-squat, who doesn't sincerely believe that if he had enough money he could reverse any downward trend for a declining product. If he doesn't believe that, he's in the wrong business. If you have people who have no institutional memory of the beer business in the American market, they hear that XYZ is a great agency, and XYZ makes a great presentation to them, and they give XYZ X million dollars to market their beer. Everyone is operating in good faith. Both parties are ignorant &precisely what has happened in the past, but they are operating in good faith. So you have a situation where you have industry specific dynamics, that require knowledge of the industry, and you have institutional dynamics. You have people telling each other stories and believing it.
In this environment, there is only one brewer that can afford to make big mistakes. That is Anheuser-Busch. Historically, they are the least likely to make those big mistakes. In the past, they have calculated things well. They rarely have done things that are flat-out wrong.
So you don't think we'll see another Schlitz, where a big brewer totally blows it ...
I think that situation was unique. The money changers got into the temple. The one thing you don't want to screw around with is the beer. Oddly enough, the most modest expenditure in operating a large national brewery is producing the beer. The two executives who put Schlitz on the road to ruin had limited industry experience. They wanted to increase profits by reducing the cost of manufacture, a fatal mistake in the brewing industry. They lost control of the product, in a competitive environment. And that was the end for them.
The beer business is an amazing industry, because there are just enough things that are different, many of which are non-intuitive. And that's why people who enter the industry from other fields can be led astray.
I cannot think of any larger brand turned around without significant repositioning. Period. No matter how much is spent. There are two things that can happen. If you are a non-national brewer, you can expand geographically until the rubber brand snaps. Or you can reposition your product. For example, Anheuser-Busch repositioned an unsuccessful premium light beer as a popular priced beer, and it has had a reasonable life as a popular. That was Natural Light.
And repositioned again as a low carb beer ...
Low carb is one that I was wrong on. I never imagined it would be successful. I may or may not be wrong in the long run. This is a good case study of why forecasting is very difficult, especially about the future [laughs].
So you do not see the next beer war as a conflict with spirits?
No. this is a continuing cycle. I think much of this is explained by brewers and wholesalers. They are looking for a fall guy, so the consumer is disloyal and distilled spirits are up. I don't think it is a structural change, I think it is a normal cycle.
Perhaps accelerated by the malternatives with spirits branding?
Yes, that's part of it. I'm not all-knowing, but I have a lot of data, and an enormous amount of history. I think my successes have been reflected not mathematical pyrotechnics, but are based on my ability to count things. You look at things, and you ask why it happened, and then you start counting.
All of your analysis might not tell you what to do. It will tell you what you shouldn't do. Let's say you have 10 instances, and 9 of 10 it worked or didn't work. That's reason enough to do it if situation looks the same, or not do it if the situation looks the same. That's my defense of history.
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|Title Annotation:||Robert Weinberg|
|Publication:||Modern Brewery Age|
|Date:||Mar 29, 2004|
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