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Merrill Lynch report notes concern on beer industry performance.

Merrill Lynch recently released a report on U.S. brewers, titled "Concerns in U.S. Beer Industry Remain." Authored by analyst Christine Farkas, the report addressed the key issues impacting future beer industry performance.

Farkas attended the recent Beer Marketer's Insights conference in New York, and from those proceedings she identified several areas of concern. Number one, she said was spirits.

"Spirits growth remains a key concern [for brewers]," she wrote. "The beer industry is cognizant that they appear to be losing the image battle to spirits and dining occasions to wine. The aging baby boomer population, with a greater interest in healthier beverages, has disposable income and continues to switch to wine and spirits. The younger demographic appears to be attracted to the variety and creativity offered by spirits, notably on-premise."

Farkas noted that brewers would seek to bolster beer's image in the near term. "Strategies included promoting the quality of beer, focusing on draught beer in on-premise channels and enhancing its on-premise presentation (unique glassware, pouring rituals)," she wrote. "Anheuser-Busch indicated that in 2005, it intended to focus on expanding the drinking occasions for beer, promoting its product along with food (ie. on cable cooking shows). Further, it will double the amount of manpower directed to marketing and servicing its on-premise accounts."

Ms. Farkas noted that cost pressures continue to rise, due to higher marketing expenditures and costs for raw materials, fuel and packaging materials.

On the positive side, Ms. Farkas noted that price growth continues unabated. "[Anheuser-Busch] indicated that price growth in the premium (and above) end of the market appears to be as strong as last year, while price growth in the sub-premium end of the market is modestly lower than last year," she wrote. "The company noted that in the premium segment, a 2% to 3% annual price increase does not appear to be meaningfully impacting the price gap with sub-premium brands. The wholesalers that we talked to suggested that the absolute price level of beer may be having a greater impact on volume growth rather than the rate of price growth."

Ms. Farkas also noted that consumers remain interested in high-end beers. "In 2003, volumes in the high-end category (which includes imports, craft/microbrews, malternatives and other specialty beers) accounted for over 20% share of total beer volumes, rising by 3% over 2002," she wrote. "This represents slower growth than the 7% growth in 2002. [Anheuser-Busch] remains committed to the malternative space, and launched a high-end caffeine/energy beer called B(e). Coors views its Zima platform as a critical part of its innovation success, notable its Zima XXX and flavors. Similarly, Diageo views malternatives as a key part of its marketing efforts to ethnic groups."

Ms. Farkas noted the introduction of the low-carb, low-calorie Budweiser Select in several markets. "We are a bit skeptical on the brand's potential to drive volume and mix growth," she wrote, "given that it may well cannibalize its Bud Family volumes, and is introduced at a time when its high-end Michelob Ultra volume growth has slowed, suggesting negative mix."

Ms. Farkas noted that Miller seems to be pushing its sub-premium brands more strongly. "In our view, this may be in part to (i) the composition of its existing portfolio (some 40% of Miller's volumes are in the sub-premium category), and (ii) an underlying view that continued price growth in premium brands may be difficult to achieve," she wrote. "Anheuser-Busch pointed out that retailers tend to make better margins on the premium and above beer categories, suggesting that retailers may be less enthusiastic about promoting sub-premium brands."

For the future, Ms. Farkas noted that different breweries views on product innovation could color the market. She said Anheuser-Busch and Coors remain committed to new products, while Diageo and Miller take the view that "innovation should be centered on the packaging and (onpremise) delivery of existing brands. Innovation should not be relied upon if the core brands are under pressure."

Ms. Farkas said that imports will be worth watching this year. Miller plans to increase distribution of Peroni, while InBev will be pushing Beck's hard, and has hopes for Brahma as "a great crossover brand."

In conclusion, Ms. Farkas, wrote, "We remain concerned over price and volume growth for the domestic beer industry. Beer price growth has been uncharacteristically high relative to inflation over the last five years. In our view, this price growth continues to suggest uncertainty for brewer price increases in the intermediate-term. (While we expect overall Beer CPI will continue to rise, we expect the rate of growth to slow.) Over the next 1-2 years, we think that continued aggressive beer price increases may not hold. This factor, along with limited volume growth and competition from other alcoholic beverage segments, is a key reason for our Neutral rating on Anheuser-Busch and Coors."
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Title Annotation:planning and trends of Anheuser-Busch,Coors, Diageo and Miller
Publication:Modern Brewery Age
Geographic Code:1USA
Date:Nov 22, 2004
Previous Article:Brewers events.
Next Article:SABMiller chalks up potent numbers in first fiscal half.

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