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What's brewing? Consolidation, pricing pressures, new flavors, light brew strength, superpremium power, more distributor involvement--it all adds up to positive sales growth and a changing landscape for the U.S. beer market.

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The past year may, in retrospect, turn out to be a pivotal one in the world of beer. Two years after Ad Age's melodramatic headline announcing the death of beer, beer came back.

Following several years of stagnation, beer accented its 2006 gains by following up with an overall sales increase again in 2007, and regained its Gallup-sanctioned spot as the preferred American adult beverage. Much of the credit for this return belongs to the sectors that have stayed robust throughout--craft beers and imports--and the extent to which larger brewers, distributors and retailers have learned from their smaller colleagues' successes.

The hand-wringing in the beer industry over the growth of wine and spirits at beer's expense seems to have been replaced with smart, beer-oriented solutions that recognize the pre-eminence of the consumer, the appeal of variety and the continuing power of "trading up."

And then there were the sensational acquisitions and joint ventures of the past 18 months--most obviously, the pending purchase of Anheuser-Busch by Belgian-Brazilian brewing conglomerate InBev. To make matters more interesting, the beer industry's unique concerns--such as a worldwide shortage of hops--combined with macro economic issues, such as the problem of rising costs and consumers struggling with a sagging economy, to cast a shadow over the brightening results.

Indeed, recent developments have reconfigured the beer landscape, through which all industry partners are now feeling their way. True, beer may be back, but back where?

Light Beer Rules

Taken as a whole, the beer category grew by 1.2% in 2007, with domestic beers up 0.9% and imported brands gaining 2.8 %, according to the Beer Handbook 2008, recently published by Beverage Dynamics' parent company, The Beverage Information Group. The overwhelming popularity of light beer is still the major dynamic driving the beer industry today. In fact, light beers made up 51% of total U.S. beer consumption last year, up 2.3% from 2006. Eight of the 10 top-selling domestic beers were light, with Bud Light topping the list, notching 570 million, 2.25-gallon cases, a 1.8% increase. The other leading domestic lights also gained, with Miller Lite up 2.2 %, Coors Light climbing 3.6% and Natural Light notching a 1.0% increase, to name a few. In contrast, there were only two light brews among the 10 leading imported beers, perhaps suggesting that the appeal of the import category is different from the domestic: Corona Light, which continued growing at double-digit rates (up 10.5%, to almost 12.2 million cases), and Heineken Premium Light (up 25.3 % to 9.4 million cases).

Indeed, the strength of the light category has inspired some companies to launch what Dan Tearno, Heineken USA senior vice president, calls "luxury light"--premium light beers that flirt with greater flavor and high-end appeal--evidenced by Heineken Premium Light's success in its second year of nationwide availability. Large microbreweries offering light brands in the craft vein include Samuel Adams Light, Shiner Light from Spoetzel and Skinny Dip from the New Belgium Brewing Co.

Among other major segments, domestic premiums continued to falter, with Budweiser sales declining 5.0% to 321 million cases. On the other hand, Miller High Life increased its volume by 2.5% to 68.4 million cases. The overall popular-priced beer segment likewise declined (down 2.1%), though, again, there were individual brands that saw increases.

In the import category, Mexican beer continued to dominate--with five of the top 10 beers--including top-seller Corona Extra, with sales of more than 115 million cases, followed by Modelo Especial (up 14.3 %), Tecate (plus 8.6%), the aforementioned Corona Light, and Dos Equis (up 16.0%). [Interestingly, large domestic brewers are piggybacking on Mexican beer's popularity with their launch of three new brands that seem to constitute a new Mexican-themed category all their own: the chelada or michelada, a class of mixed alcoholic beverages using beer rather than spirits as the alcohol base. Miller Chill, a lager with lime and salt, was the most successful new beer of 2007. Anheuser-Busch's two entries, both called Chelada, blend Budweiser or Bud Light with Clamato and lime, debuted earlier this year and by all accounts have seen immediate success. In addition, A-B has launched another line extension, Bud Light Lime, this summer.] Overall, though, imports slowed from 12% growth in 2006 to 2.8% last year, no doubt under pressure from a weak dollar. Still, Heineken expanded to 69 million cases and Guinness grew by 4.2% to more than 12.5 million cases.

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Superpremiums and craft beers shined as another bright spot for brewers, with crafts continuing its run of consistent growth with another year of double-digit increases.

Michelob Ultra dominated the superpremium/craft segment by volume, but the most dramatic numbers belonged to two beers from the Blue Moon stable, Belgian White Ale and Harvest Pumpkin, together with Leinenkugel's Sunset Wheat. Newcomer Landshark Lager from Margaritaville Brewing Co. got off to a promising start.

A couple of things are notable about these four successful beers: three of them are unconventional styles--a Belgian wit, a pumpkin beer and a wheat beer--and all four are brewed by a specialty division or a subsidiary of the big brewers: MillerCoors and Anheuser-Busch, respectively.

Since the parent company is somewhat disguised from the consumer, this begs the question, are consumers drawn to new beer styles they find exciting, or to the appeal of what they think are microbrewed beers? Or is it Jimmy Buffett?

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Price Pressure and Consolidation

As this year marched on, galloping increases in the price of all inputs tested the whole industry from top to bottom. In his debut speech as the new president of the Beer Institute, Tom Long, president and chief commercial officer of MillerCoors, warned, "As we keep pace with the changes and try to get ahead of them, the biggest issue we face is escalating costs, including health insurance, commodity prices and transportation."

Harry Schuhmacher, editor and publisher of Beer Business Daily traces almost all the financial pain to one source: the high price of oil. "People talk about the Reinheitsgebot and the things that go into beer," he observed. "But, you know, oil is the biggest thing that goes into beer. And not just because beer is heavy relative to its price, and it takes a lot of fuel to move it around and to make, but also because fuel competes with grain for biofuels and ethanol. Virtually every component that goes into beer has gone up double digits--triple digits in some cases."

Schuhmacher recalls a conversation with Frits van Paasschen, where the former Coors president and CEO graphed on a napkin the way the existing pricing and product mix would soon drive brewer margins to zero unless something dramatic happened. "He said, 'This is not sustainable.' It's kind of like the airlines: it's just not feasible to keep going like this."

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The result was an increasing pressure on brewers to merge, partner or buy.

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Tom Long acknowledged the economies of scale that made the 2007 joint venture between Miller and Coors compelling. Calling that joint venture and the in-play sale of Anheuser-Busch to InBev, "the two biggest structural changes our industry has ever seen," he recognized that "there has been more drama in the U.S. beer industry [than we've seen] since Prohibition. The timing of these two events is hardly random."

Increase Efficiency, Investment

Long invited brewing companies to face new circumstances with two principles in mind: "First, we must become more efficient and cost effective, at the brewer level and at the wholesaler level. And second: there has never been a more critical time to invest in business. Otherwise, all cost cutting is for naught. We are a brand-driven business. When we differentiate our beers, business grows. Consumer demand continues to fragment, and we have increasingly educated, discerning consumers. We have greater opportunity for growth."

Looking at the union of Miller and Coors, Long found "two highly complementary companies with synergies. If we only harvest savings without investing in them, we'll be in trouble."

Schuhmacher concurred: "The consolidation certainly makes the economics look a lot better. It's a lot better to ship Miller and Coors together from nine breweries than to ship them separately. They're all going to the same places. Fuel's a big part of that."

The impact of oil prices on the strength of the dollar helped to create the conditions that made giant Anheuser-Busch vulnerable to InBev, the Belgian-Brazilian powerhouse, this year. Through 2007, Anheuser-Busch seemed ready to diversify into non-beer beverages, with feelers into bottled water, Korean soju spirits, tequila, vodka and the Brazilian spirit cachaca. A-B appeared to enjoy a partnership of equals with InBev, distributing the Belgian company's brands in the U.S., with particular hopes for Stella Artois, the high-end European lager.

But the purchase of A-B by InBev was to come about in the first half of 2008, after a brief fight and a defection by shareholders. David A. Peacock, vice president of marketing for Anheuser-Busch, has stressed that the change in ownership will have no consumer consequences: "What matters to consumers are brands. The consumer doesn't care about consolidation, or who owns who."

Jeff Becker, president of the Beer Institute, is resolute in the face of change. "Consolidation across the industry is dynamic, and I'm asked repeatedly 'What does this mean?' It means that our values remain the same," he said. "The beer industry will continue to play a central role in the American economy, as a significant force for jobs and for the social good." Distanced from the commotion caused by the Miller/Coors, and A-B and InBev dramas, changes at a slightly smaller giant moved ahead at a stately pace. Heineken completed its largest ever purchase, Scottish and Newcastle, in coordination with Carlsberg.

"Things like these develop over a long period of time," said Heineken's Tearno. "The brands that are most desirable are those that have both margin and velocity. Now we have a terrific portfolio that has the best of European brands, and we think the best of Mexican brands."

The Craft Influence

In 2007, Garrett Oliver, the brewmaster at the Brooklyn Brewery, found a platform in the New York Times to declare that the U.S. has the most exciting beer culture in the world, based on the innovation of our craft brewers.

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This small niche in the beer world has enjoyed steady growth, into double digits, for many years, demanding the attention of much bigger producers.

According to Paul Gatza, director of the Brewers Association, "Craft brewers grew by 12% by volume in 2007 and 16% by retail value." Although the superpremium category did better, craft brewers are enjoying their fifth year of healthy growth.

Jim Koch of Boston Beer observed, "2007 was a coming of age for craft beer. It was a second year of double-digit growth, and clearly craft beer was the belle of the beer ball, within the industry and even outside of it. It was the year when craft beer clearly entered the mainstream."

Koch sees craft beer in only the early stages of its growth. He cites a now-popular phrase coined by Dana Cowin, editor-in-chief of Food and Wine Magazine: "Beer is the new wine."

Koch explained. "I take that to mean that craft beer today is where American wine was 30 years ago. It's gone from a sort of out-of-the-mainstream beverage for aficionados and geeks, driven originally by a handful of pioneering craft brewers who began in the '80s and 20 years later found themselves in cultural movements that were transforming Americans' perception of their beverage." American winemakers witnessed this transformation in the 1960's, and saw their segment mature in the 1980's, with an explosion of interest in wine.

"We [the beer industry] are where wine was in the early '80s," Koch speculated. "I think that means continued consumer interest in exploring beers of flavor and taste, and the development of new beer styles by brewers. It's a pyramid, widening at the base as popularity grows, with the top continuing to represent exploration and audacity."

It's hard to believe that a brewing movement that is already experimenting with highly-hopped beers, deliberately soured brews or extremes of alcohol content can find new directions to explore, but Gatza, of the Brewers Association, believes that craft brewers are leading the way there, too. He cites a presentation by Scott Mortenson from International Flavors and Fragrances, discussing which emerging flavors are next for consumer trends. "Guess what?" Gatza asks. "Craft brewers have been using a lot of the 'what's next' flavors already, such as goji berries, pumpkin spice, coriander, kafir lime, elderberries and flowers. Seems like craft brewers are ahead of the trend curve."

Schuhmacher credits the craft movement with driving much of the return of beer as a whole. "I honestly think it was because of the efforts of the craft brewers," he observed. "The long work of beer dinners, beer writing, writing about beer as wine writers write about wine, pairing beer with food--those efforts broke into the mainstream. You saw it on 'Good Morning, America,' in magazines, and the mainstream press was picking up on it. Not only was it cool to drink craft beer, but it was not uncool to drink beer, period."

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Trading Up

Brewers, distributors and retailers have noted the phenomenon of consumer "trading up" for several years now, and the trend appears strong, even as the economy stumbles.

Heineken's Tearno sees beer as having moved into the "affordable luxury category," where consumers will still indulge, even when they have to cut back in other areas. "Consumers say, 'I still like to have my Heineken or my Heineken Premium Light or my Dos Equis, when I can. It's another dollar, another dollar-fifty a six-pack; I can manage that.' The price-value equation for the consumer works."

In mid-2007, Daniel Wandel, senior vice president for beverage alcohol for Information Resources Inc., noted the durability of "trading up" and a concomitant consumer thirst for experimentation, as evidenced by the strength of seasonal beers, up 27%, and variety packs, up 56%.

Jim Schembre, of World Class Beverage, a specialty division of Monarch Beverage Co. in Indianapolis, IN, comes closest to quantifying the power of trading up, by comparing beer with other consumer goods. "Remember, nationally the craft category comprises 3 % to 4%, imports are about 13% to 14% of the market--and not all of those are in the 'better beer' category. Together, it's less than 17%," he explained. "If you go to any other premium food, whether it be flour or chocolate or tea or liquor or wine, [the superpremium category] is well over 20-22%. It's a lot higher than beer, but that's where we could go. The difference is, they've done a lot better job with the consumer and they've done a better job with access to the market."

Push Meets Pull

The brewing industry seemed to observe the phenomenon of trading up for quite a while before actually deciding to do something about it. The response from breweries has been to provide greater variety and quality, paired with a more elevated message about beer.

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According to Craig Purser, president of the National Beer Wholesalers Association, "The notion of sameness was part of the perceived problem with beer. That perception was mainly in the premium domestic category, where everything from advertising to marketing, from broadcasting to print ads, to the way the product was being pushed, was very similar. We were going with the lowest common denominator; there was almost a competition to see who could be the most funny, without emphasizing the attributes of the product itself. And what we've seen in the past couple of years is a great effort among the premium domestics to differentiate themselves, almost to steal a page from both imports and crafts to create their own identity."

Consumers sought out new beer experiences, and the industry tried to provide them. However, it's hard to look at the continuing growth in "better beer" and not look for some industry "push" to complement the consumer "pull." And Purser's own members, the country's beer distributors, have stepped into an important new position in pushing better beer.

Wholesalers have been subject to the same cost pressures as brewers, and have likewise responded with consolidations of their own. Beer Business Daily's Schuhmacher defined 2007 as the year when "the lines got drawn in the sand on whether you were an acquirer or an acquiree; the age of 2,000 distributors is over. Brewers let it be known that it's expensive dealing with so many distributors, and if you're selling less than 5 million cases a year, perhaps you should consider merging or selling."

But, as increasing costs encouraged the formation of what may in the future be the "billion-dollar mega-distributor," consumer tastes are moving distributors in the opposite direction, in favor of high-end beers, variety and lower volume with higher margins.

Purser alludes to the re-orientation of wholesalers' focus away from brewers and towards beer drinkers who demand greater diversity and selection. "Wholesalers recognized the importance to their own bottom line of a product portfolio and making certain that they've got all the right horses in their house to be successful. Distributors are looking at themselves as independent brand-building distribution companies. What we saw in '07 was distributors beginning to realize that in order to thrive in the future, they've got to look at things differently."

One solution is a specialty division within a large distributor, a step a number of distributors have taken. The NBWA awarded the first Craft Beer Distributor of the Year award at the Great American Beer Festival in 2007, in recognition of the new ground being broken by specialty distributors. The winner was World Class Beverages, the specialty division of Monarch Beverage Co.

Looking Ahead

Economic pressures are forcing brewing, distributing and retailing companies to form ever-larger global canopies that can be efficient, consistent and effective. But a lean global network risks losing the variety, quality and character that consumers have demonstrated they want.

At the same time, rising energy costs may drive the focus back to a more local scale. The field seems open for creative players to move in at the local level and serve as very visible intermediaries between the global industry and the beer drinker.

RELATED ARTICLE: The hops headache.

In addition to increases in inputs across the board, brewers have a headache all their own: hops.

By the fall of 2007, a chain of events led to a worldwide shortage of hops, the critical ingredient whose tiny cones give beer its floral aromas and the bitterness to balance the sweetness of malt.

Hops had been in surplus for a decade, pushing prices down and driving many hop farmers either out of business or into other crops, including some that could be diverted to ethanol production. The acreage devoted to hops production fell by as much as 30% worldwide. Here in the U.S., the Department of Agriculture estimated that our hops stores were down 22% from 2006, to the lowest point in over 25 years.

Then a warehouse fire in the Yakima, WA hop-growing region destroyed 5% of the U.S. harvest. Rogue hail storms in Europe had devastating local effects. Suddenly, there were no hops to be had.

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Farmers still in the hops business must have welcomed prices that went up by 20% for widely grown varieties and up to 80% for specialty hops. But brewers, especially craft brewers who were using specialty hops with abandon in highly bitter styles, were in a panic.

Still, there is a one-on-one relationship between hops and brewing, virtually the only industry where this crop is used. Otmar Weingarten, director of the German hops growers association, may be shedding crocodile tears about the soaring prices, but he knows his members' long term interests are in synch with brewers'. "High prices aren't really good for hop growers. They lead to less hop use, isomerized hops [chemically processed hops] for efficiency, and worse beer--which is all bad in the end."

Facing the shortage, farmers are scrambling to replant hops fields. But the rangy vines take at least two to four years to reach maturity, which leaves some thirsty years ahead. Brewers of the most highly hopped beers are already discovering how to wring more bitterness and aroma out of the hops they have.

Julie Johnson is the editor of All About Beer Magazine.
Leading Domestic BEER BRANDS

(Thousands of 2.25-Gallon Cases)

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Brand Brewer 2006

Bud Light Anheuser-Busch 560,000
Budweiser Anheuser-Busch 338,000
Miller Lite Miller Brewing * 246,700
Coors Light Molson Coors Brewing * 231,700
Natural Light Anheuser-Busch 124,000
Busch Light Anheuser-Busch 84,700
Busch Anheuser-Busch 84,500
Miller High Life Miller Brewing * 66,700
Keystone Light Molson Coors Brewing * 44,250
Michelob Ultra Anheuser-Busch 42,000
Total Leading Imported Brands 1,822,550
Others 672,650
Total Domestic Beer 2,495,200

Brand 2007 % Change

Bud Light 570,000 1.8%
Budweiser 321,000 -5.0%
Miller Lite 252,100 2.2%
Coors Light 240,000 3.6%
Natural Light 125,200 1.0%
Busch Light 87,500 3.3%
Busch 84,300 -0.2%
Miller High Life 68,400 2.5
Keystone Light 49,000 10.7%
Michelob Ultra 43,000 2.4%
Total Leading Imported Brands 1,840,500 1.0%
Others 678,100 0.8%
Total Domestic Beer 2,518,600 0.9%

* Merger of Miller Brewing & Molson Coors Brewing effective
July 1, 2008

Source: Beer Handbook 2008

Leading Imported BEER BRANDS

(Thousands of 2.25-Gallon Cases)

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Brand Brewer 2006

Corona Extra Crown Imports 116,218
Heineken Heineken USA 68,500
Modelo Especial Crown Imports 19,616
Tecate Heineken USA 17,775
Guinness Stout Diageo-Guinness 12,051
Labatt Blue Labatt USA 12,800
Corona Light Crown Imports 11,027
Blue Moon Molson Coors Brewing * 6,100
Heineken Premium Light Heineken USA 7,500
Dos Equis Heineken USA 7,500
Total Leading Imported Brands 279,087
Others 117,913
Total Imported Beer 397,000

Brand 2007 % Change

Corona Extra 115,179 -0.9%
Heineken 69,000 0.7%
Modelo Especial 22,417 14.3%
Tecate 19,300 8.6%
Guinness Stout 12,558 4.2%
Labatt Blue 12,500 -2.3%
Corona Light 12,183 10.5%
Blue Moon 10,000 63.9%
Heineken Premium Light 9,400 25.3%
Dos Equis Heineken 8,700 16.0%
Total Leading Imported Brands 291,236 4.4%
Others 117,064 -0.7%
Total Imported Beer 408,300 2.8%

* Merger of Miller Brewing & Molson Coors Brewing effective
July 1, 2008

Source: Beer Handbook 2008

Beer Consumption BY CATEGORY

(Thousands of 2.25-Gallon Cases)

Category 2006 Share 2007 Share
Domestic Beer
Super Premium & Craft 152,080 5.3% 165,160 5.6%
FMB 58,720 2.0% 51,840 1.8%
Premium 416,400 14.4% 400,400 13.7%
Light 1,459,700 50.5% 1,493,500 5.1%
Popular 236,800 8.2% 231,850 7.9%
Malt Liquor 78,200 2.7% 78,600 2.7%
Ice 93,300 3.2% 97,250 3.3%
Total Domestic Beer 2,495,200 86.3% 2,518,600 86.1%
Total Imported Beer 397,000 13.7% 408,300 13.9%
Total Beer 2,892,200 100.0% 2,926,900 100.0%

Category % Change
Domestic Beer
Super Premium & Craft 8.6%
FMB -11.7%
Premium -3.8%
Light -2.3%
Popular -2.1%
Malt Liquor 0.5%
Ice 4.2%
Total Domestic Beer 0.9%
Total Imported Beer 2.8%
Total Beer 1.2%

Source: Beer Handbook 2008

MARKET SHARE By Supplier 2007

Anheuser-Busch 48.7%
Miller Brewing * 18.7%
Molson Coors Brewing * 11.5%
Crown Imports 5.5%
Heineken USA 4.1%
Pabst Brewing 2.8%
Diageo-Guinness USA 1.4%
Others 7.3%

* Merger of Miller Brewing & Molson Coors Brewing effective July 1, 2008

Source: Beer Handbook 2008

Note: Table made from pie chart.
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Author:Johnson, Julie
Publication:Beverage Dynamics
Article Type:Cover story
Date:Sep 1, 2008
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