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Survival of the fittest.

Midde-tier breweries seek new opportunities in niche markets.

In the '70s, as the large American breweries embraced mass-marketing principles in earnest, low-volume regional brewers found themselves caught between a rock and a hard place.

Lacking the economies of scale and marketing dollars to compete with the expansive nationals, regional brewers relied on consumer loyalty, which sometimes proved fleeting in the face of multi-million-dollar advertising campaigns.

"Regionals have never had the funds available to match the major breweries in television and other advertising," points out Henry King, the new chairman of the Brewer's Association of America, "and that has made it very difficult to compete one-on-one."

As mass-marketed national brands began to flood every state, many local brewers watched market share erode, barrel by barrel. Eighty independent regionals entered the '70s, but of those, only 18 survive today. The others were subsumed into larger brewing entities, or forced to close.

Surviving regional breweries now occupy the middletier, flanked by the megabreweries above, and microbreweries below.

"Five major brewing companies produce 95 percent of the beer sold in this country," says Ken Lichtendahl, president of the Hudepohl-Schoenling Brewing Co., of Cincinnati, OH. "You have a situation where billions of cases are coming out of ultramodern beer factories. If that is the benchmark, then smaller breweries have to compete on the periphery."

On that periphery, many old-line regionals are finding niche markets where their products can be competitive.

"Clearly, a regional brewery has to be a niche marketer," says Michael Graham, vice president of sales and marketing for Pittsburgh Brewing Co. "We have to position ourselves strongly in our own markets, and we have to find opportunities to do the things that larger brewers can't do."

For some breweries, these opportunities have come in the form of non-alcoholic products.

The F.X. Matt Brewing Co. of Utica, NY, is a good example. Matt produces two non-alcoholic beers, together with sodas and flavored spring waters. "We are trying to divert ourselves into niches," says marketing manager Fred Matt, "and the non-alcoholic end of the business is the fastest-growing niche we've identified. If I said that 50 percent of our business would be non-alcoholic in a few years, I don't think I'd be far wrong."

For Gabe Podlucky, president of the Jones Brewing Co. of Smithton, PA, non-alcoholics also hold potential. The company now produces Birell N.A. under contract. "Non-alcoholics are an area where we compete very well," he says, "and they will start to make up more of our business."

Specialty beers are another market niche that has enjoyed a surge in recent years. Many regional brewers have been employed in producing specialty beers for contract brewers, a boon for breweries burdened with excess capacity.

As an example, the Boston Beer Co. (the most successful of the contract brewers) sold 165,000 barrels last year. Most of this barrelage was brewed in the kettles of three regionals - the Pittsburgh Brewing Co., the F.X. Matt Brewing Co. and the Blitz-Weinhard Brewing Co.

Niche Brands

Although contract production can be profitable, Fred Matt does not see it as a panacea for regionals. "You may get to heaven being a contract brewer," he says, "but you'll never get rich. By serving as the middle-man, we don't get the long margins that we get for niche brands that we can sell ourselves. I think the greatest potential for us is in brands like our Saranac, which can compete successfully in the microbrew segment."

F.X. Matt's all-malt Saranac is one of many regional-brewed specialty brands now on the market, as regional breweries dust off traditional recipes for a new generation of consumers.

The Anchor Brewing Co., of San Francisco, CA, could serve as a model for today's regional brewers as they plunge into the specialty beer niche. When Fritz Maytag bought a failing local brewery in 1965, the future did not look terribly bright for his Steam Beer Brewing Co.

With single-minded commitment, Maytag revived traditional all-malt recipes, and began brewing "specialty" beers before the category existed.

It took years of hard work but Maytag succeeded. Today, the Anchor Brewing Co. stands as one of the nation's premier craft breweries, selling over 70,000 barrels last year.

Anchor's success has paved the way for a new generation of regional craft breweries, including the Sierra Nevada Brewing Co. of Chico, CA, the Redhook Ale Brewery of Seattle, WA, and the Full Sail Brewing Co. of Hood River, OR. These companies started out as microbreweries, producing under 15,000 barrels a year, and gradually transcended the small-scale category. All three have found success in brewing traditional beers that diverge substantially from the mainstream.

"Fritz Maytag was telling everybody years ago that the way to make it was to switch to specialty products," says Paul Camusi of the Sierra Nevada Brewing Co. "As he pointed out, you can't compete with the big brewers by producing light lagers. The best ways to do it is by filing a niche with a specialty product."

Fred Matt reports that the F.X. Matt Brewing Co. will be working to fill those niches. "Our strategy has been to use our low-end products to keep the trucks rolling in here," he says, "and pushing our high-end niche beers strongly, because the margins are better."

For some brewers, the emphasis on niche markets is changing the way they define themselves. "We don't think of ourselves as a regional brewery any more," says Hudepohl-Schoenling's Ken Lichtendahl. "We are a specialty brewer of items that our distributors can sell. We are producing products that have differentiation. That's what we've been able to do with brands like Little Kings Cream Ale and Christian Moerlein."

The same success in product differentiation is being enjoyed by other regionals, including the Dixie Brewing Co. of New Orleans, LA. There, the introduction of Blackened Voodoo Lager has helped the brewery get over some financial rough spots.

The Texas Alcoholic Beverage Commission briefly banned the sale of Blackened Voodoo Lager in the state, and provided the brand with reams of free national publicity. The brewery has taken the bottle, so to speak, and run with it.

"We cannot keep up with demand," says president Kendra Bruno. "and it keeps mushrooming by word-of-mouth. We had a good product, and we designed a strong package for it, but we didn't have much of an advertising budget. Now Voodoo is in 17 states and it's coming on strong. We've had to take on more people just to handle the calls."

According to Bruno, the brand will be exported to Europe and Japan, and other specialty brands will follow. The success \of Dixie's foray into specialty beer has made a convert of Bruno. "Based on our experience," she says, "super-premium beers are the way to go."

For those breweries that never stopped producing specialty-type brews, profitability can simply be a matter of repositioning. "We made a decision not to try to compete on the popular level," says Ken Shibilski, president of the Stevens Point Brewery of Stevens Point, WI. "We have developed a nice line of products and we brought the prices up so that we didn't have to compromise quality."

The Spoetzl Brewing Co., of Shiner, TX, now owned by Gambrinus Importing Co., is taking a similar tack. The company has changed the pricing level for its Shiner Bock, and moved to support the brand with advertising and promotions. "Sales of Shiner Bock are picking up unbelievably," says Tess Liberto, Spoetzl division assistant at Gambrinus. "It was a product that used to be sold by word of mouth, but now we're building more consumer awareness and introducing it into new markets."

High-Quality Marketing

The best example of product repositioning might be Rolling Rock Premium Beer, produced by the Latrobe Brewing Co., of Latrobe, PA. When Labatt's U.S.A. purchased Latrobe, the company found itself with a strong product, but one without much market reach. Labatt's U.S.A. set out to change that.

"Rolling Rock had always been considered a special product," says Rich Vassos, vice president of marketing for Labatt's U.S.A., "but it had never benefited from high-quality marketing. That's what we tried to give it."

Over the past five years, Vassos says, increased marketing efforts have allowed brand growth of 15 to 30 percent each year. In 1987, sales stood at 514,000 barrels. This past year, the brewer sold 803,000, and the brewery is expanding capacity by 25 percent to keep up with demand.

"We've walked right into a trend," Vassos says. "There's a new interest in |home-town' quality. Rolling Rock has that. The brewery has a lot of pride in its product, and that comes through."

Vassos says that the brand's package has been an important part of its imagery. "We know the power of the painted label," he says. "When retailers carry the paper-label bottle it sells at 1/3 the rate of the painted-label long-neck."

Latrobe decided that the brand's pricing should match its imagery. "We raised prices to premium level," Vassos says, "which raised some eyebrows among our wholesalers. They weren't sure we could price at Budweiser levels, and even go over them.

"We told them that we aren't in direct competition with the national brands," Vassos says. "We're not trying to sell a billion cases a year, so we don't have to reach when one of the national brewers drops their prices. The big guys are in a battle for volume, and they haven't shown much interest in niche brands."

Many Americans received their first introduction to specialty beer through an import, and imports continue to hold a strong position in the U.S. market. to exploit this, at least one brewer has become an importer. Hudepohl-Schoenling now imports a line of specialty products that include Mackeson Stout, Whitbread Ale and a full line of specialties from Munich's Hofbrauhaus. The brewery serves as a break-bulk facility, bringing in container-loads, but selling to distributors in smaller quantities.

"We are satisfying a distributor need to buy imports in pallet-load quantities," Ken Lichtendahl says. "By helping minimize the risk for our distributors and keeping the product fresh, we help them make a pretty good dollar."

Overarching Concerns

Whatever strategies are used to bolster an individual brewery's business, however, the condition of the national beer market can make for difficulties. "The last two years were not particularly bright for the entire beer market," Henry King of the Brewer's Association of America points out. "Sales have stabilized, or,in some instances, are down."

King also points to the impact of the excise tax on the general downturn, although smaller regionals have escaped unscathed. As King points out, however, the recent GATT (General Agreement on Tariffs and Trade) panel recommendation cited the small-brewer tax break as a possible restraint on trade. "It would be devastating for the small local and regional brewer to lose these tax breaks," he says, "and particularly since these tax breaks have in no way inhibited prospects of imported beers.

"This issue will take a lot of time and attention," King says, "and it won't be resolved in the next year or so. When it comes time, however, Congress will have to be encouraged to do what is necessary to protect the legitimate interests of American brewers."

In the meantime, King remains optimistic about the prospects for the country's regional brewers. "Those breweries that are well-managed, with a franchise in their home area, will stay in business," he says. "In spite of the difficult business climate, regional breweries have a place in the U.S. market, and they will continue to survive and grow."
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Title Annotation:1991 Statistical Study: Issues & Trends; regional beer breweries
Publication:Modern Brewery Age
Article Type:Industry Overview
Date:Mar 16, 1992
Previous Article:Whitbread debuts its "new look" labels.
Next Article:Fighting the good fight.

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