More of the Same

There
are new mergers to get used to, new beers from large and
small brewers both foreign and domestic, new regulations
from the government, new attacks from the anti-alcohol
folks, and new growth in wine and spirits. But it looks like
the only new growth you might see is in craft brewed beers
and light beers, a kind of dual split away from the middle
that seems puzzling on the surface.

It might be best
not to look for trends this year, a year when there are no
strong trends to follow. Rich Doyle at the Harpoon Brewery
gives good advice: “I don’t look at trends so much as I put
my head down and execute.” Let’s do that now.

BIGGER
and BIGGER BREWERS Big
brewery consolidation continued in 2OO4 and brings two big
new conglomerates to the market in 2OO5: Molson Coors and
InBev. Both are familiar companies, except for perhaps
InBev’s South American partner, AmBev, the brewer of Brahma.
But dynamics will be changing as the mergers take
hold.

The Molson Coors
merger concluded on February 9, bringing months of public
acrimony to an end. Some members of the Molson family were
anything but eager to conclude the deal and fought it, but
in the end, the deal went through and the two companies
became the world’s fifth-largest brewery. The
rationalization has started already as the new company moves
to close the Coors brewery in Memphis, Tennessee, that has
been brewing Zima XXX, Blue Moon, and Coors Light for
export.

The man who
swung the axe was Leo Kiely, a Coors man who is now CEO of
Molson Coors. “I thank the Memphis community and its leaders
for their support of our company over the last 15 years,”
Kiely said. “The beer business today is incredibly
competitive and, unfortunately, tough decisions like this
one must be made to compete and grow.” What differences will
the market see? Consolidated distribution, much of which has
already taken place, and perhaps bigger marketing support
should be about all.

InBev, the
merged companies of Interbrew and AmBev, is competing, and
certainly growing. In terms of volume, InBev became the
world’s largest brewer, although Anheuser-Busch remained the
biggest in dollar sales. The dichotomy is indicative of
AmBev’s lower-income market in South America, and the fierce
price competition in an over-capacity Europe that has sent
the price of pilsner under six Euros a case.

And so InBev
continues to push two of their flagships in the US, Stella
Artois and Beck’s, and has introduced a new Beck’s Premium
Light at a drastically low 64 calories: to reap some higher
profits in a market where $25 is not at all uncommon for a
case of imported beer. If the beer’s already made, it only
makes sense to sell it where you’ll get the best
price.

Profits like
that are the driving force behind InBev’s recent launch of
Brahma, the flagship of AmBev. “Brahma captures the
authenticity of Brasil and aspires to bring the Brasilian
attitude and lifestyle to consumers worldwide,” says the
InBev press release for the launch, a simultaneous event in
15 countries.

“Brahma will
break existing beer paradigms,” it continues, “and is a
strong visible sign of the power of the combination of
Interbrew and AmBev as InBev. Rather than just a new brand,
Brahma brings an entirely new experience and an exciting new
attitude to the category. Its taste is light and refreshing,
and has a clean and crisp finish with a papaya after-note.”
Now, that is different: try to remember the last time you
heard a tropical fruit mentioned in a major beer brand’s
taste description.

Brahma is a bit
of an X-factor in the market, as mentioned here last month.
Mexican beers are in some disarray with new business
arrangements and bumps in old ones. Brazilian style is
heating up in the US, and InBev has already proven with
Stella that they are willing to spend some money to make a
brand familiar.

TURNING
on the LIGHT The idea
of a familiar brand has enticed Heineken into finally
launching Heineken Premium Light. After holding off for
years – years in which Amstel Light became the best-selling
imported light beer in America – the company has wrapped its
iconic name around this new brand. Two questions dominate
the speculation that has sprung up in the vacuum created by
a detail-free announcement by the company. What will this do
to Heineken, and what will it do to Amstel Light?

The concerns are
that there will be cannibalization of the line, and that it
will dilute the power of the Heineken brand. There probably
will be cannibalization, but with light beers continuing to
climb the ladder to dominate the beer market in the US –
2OO4 saw them hit 47% of the market – Heineken almost has to
get into the market with its brand standard. Where that
leaves Amstel, what their plans are for Amstel, is anyone’s
guess.

The final big
boy launch is also causing plenty of speculation on
reasoning: Budweiser Select. A light beer with taste but no
aftertaste? Budweiser, and a light beer, but not Bud Light?
The favorite theory – and one that dovetails with some
leaked information about shelf positioning strategies – is
that Budweiser Select is out there to go directly after the
suddenly revived Miller Lite, which showed strong growth on
the shoulders of an aggressive ad campaign and the bold
direction of beer-drinking, straight-talking Norman
Adami.

Which gives us
major new product launches for Beck’s Premium Light,
Budweiser Select, Heineken Light, and the “light and
refreshing” Brahma – all chasing the growing light beer
segment along with Corona Light, Sam Adams Light, Amstel
Light, Labatt Blue Light, and all the established light
brands.Where is the logical conclusion of this rush to be
lighter and lighter?

“Bottled water?”
asks Harpoon’s Rich Doyle, tongue firmly in cheek. “That’s
not my problem. Go for it boys, put ’em in 3O-packs.” Doyle
and Harpoon represent one very bright segment of the beer
market, craft brewing. Craft brewing boomed out 7% growth in
2OO4, beating the general beer market, imported beer and
even wine and spirits. Larger regional brewers like Harpoon
actually out-paced their smaller brothers, with a growth
rate just over 1O%. Time to break out the party hats and
noisemakers.

HAND-CRAFTED
GROWTH Or, maybe not.
Doyle was feeling good, but not euphoric. “We’ve been
trending pretty well, but solid, not off the charts,” he
said. “2OO4 was a very good year, but not an off-the-chart
year. It’s not a trend. It’s not a 5O% increase, it’s a low
double-digit solid increase. What happened? I don’t really
know. A little bit of winnowing of competition, good
fundamentals in the industry, good demographic fundamentals.
But I can’t point to any one thing.”

Whatever one
thing it may or may not have been, it was working for
Massachusetts brewers.

Paul Gatza, head
of the Brewers Association (the organization formed earlier
this year by the merger of the Brewers Association of
America and the Association of Brewers), noted that while
2OO4 was a great year, craft brewers had their work cut out
for them to equal that growth in 2OO5. “There will be tough
year-to-year comparables to meet,” he said. “The economy
being stronger in mid-decade than earlier in the decade has
helped boost the perception of accessible pricing. For what
it’s worth, 2OO4 was a leap year, which will have a small
affect on individual companies, but is worth over half a
million barrels for the beer industry as a whole. With
overall beer consumption growth being small, that comparison
will make a difference.”

Jim Koch, at
Boston Beer, was, as always, in a more meta-perspective.
“Consumers’ desire for the authenticity of a small brewer’s
beer is what’s driving the growth,” he said. “Nobody else
owns Boston Beer, I’m still running it. The beer’s still
being made in the same uncompromising way it’s always been
made.

“At the opposite
end of the spectrum, ” he said in contrast, “there are very
sophisticated marketing companies who’ve been able to create
great brands around imported beers like Bass, or Stella, or
Pilsner Urquell. They’re owned by some of the biggest
powerhouses in the world. They may not have authenticity,
but they’ve got great marketing, they’re great
brands.

“Both of those
things are satisfying consumers’ desires,” he concluded,
“for products that have flavor, variety, and an interesting
story around them – a provenance. When you think of the
brands that are doing well, they have a good story. But the
mass domestic brands are having trouble. The
mega-mass-marketing behind Budweiser, Miller Lite, Bud
Light, Coors Light: consumers are getting more and more
impervious to that marketing.”

Gatza puts it
more to the flavor of the beer. “The main factor is that
more consumers are getting more interested in the flavor and
diversity of craft beer,” he said. “Craft brewers have
developed consistent quality, and craft beers are seen as a
local product with lots of flavor at a fair price. People
are trading up and buying a beer that is special over buying
quantity. Retailers are making the connection that craft
beer results in strong retailer margins and higher basket
sales for other products for off-premise retailers that
aren’t liquor stores.”

BEER
from BOTH SIDES But if
people are getting interested in flavor and diversity, and
yet at the same time light beers are dominating the market,
what’s going on? “It has to do with a shift in taste,” said
Doyle, simply. “Overall, light takes over the mainstream,
while specialty moves in and takes over the full calorie
market.”

“My sense is
that in beer, like in many things, consumers are gravitating
towards the low end or the high end,” said Koch. They’re
headed to either Wal-Mart or Whole Foods, and the grocers in
the middle are drying up. They’re thinking, ‘Why should I
have a Bud or a Coors Banquet or an MGD? They don’t taste
that different from the lights, but they taste a whole lot
different from the better beers. I’m either going to have
something with a lot of flavor, or I’m going to save
calories; why stop in the middle?'”

Gatza has some
different spin on it, but agrees, “We’ll see the current
trends out of the middle continue. Light beer consumers feel
better about their beer drinking when they drink light beer.
But it will be interesting to see how the “no aftertaste”
marketing of certain brands plays out. On the more flavorful
craft beer side, we even see consumers heading toward the
more flavorful of these. When one looks at some of the
breweries who are posting double-digit growth, the beers
they are innovating with tend to be loaded with either hops,
malt or both. Double IPA is being brewed by more and more
breweries.”

That kind of
leaves low-carb beers hanging in limbo, which is about where
they are. Miller Lite took a lot of the wind out of Michelob
Ultra’s sails, with help from Bud Light ads that urged
people to choose on taste. Reports from the field indicate
that Ultra has slowed considerably, along with the quieting
of the carb-hounds on the Atkins Diet.

Malternatives
(FMBs, alcopops, whatever) are facing some serious diets of
their own: alcohol diets. The ATTTB, the ATF’s successor,
finally laid down a ruling on the makeup of these drinks, a
contentious issue between distillers and brewers because of
the different tax rates on distilled versus brewed alcohol.
Manufacturers were accused of using more distilled alcohol
in the drinks than the small amounts used for “flavoring”.
The problem with that is two-fold. Distilled alcohol is
cheaper to produce than brewed alcohol, but is taxed at a
much higher rate.

The ATTTB
believed that manufacturers were trying to score the best of
both worlds, by using mostly distilled alcohol but selling
it as a brewed beverage to get the lower tax rate. No actual
fingers were pointed, but manufacturers have till January
2OO6 to comply with a new rule that 51% of the drink’s
alcohol must be brewed. Don’t joke about this being a good
excuse for this category to dry up and blow away. There are
still bright spots. Mike’s Hard was up about 15% in
Massachusetts in 2OO4, for example, and the Smirnoff Twisted
V line is eking out some good numbers.

CHALLENGES
to COME These drinks
are the favorite whipping boys of the anti-alcohol forces,
who call them alcopops and paint them as aimed directly at
underage drinkers. The “new drys” haven’t gone away. They
continue steady pressure on issues like keg registration
laws, lowering the legal limit for driving to O.O5% BAC, and
“drunken mommy” laws that would treat O.O2% BAC as legally
intoxicated if children are in the vehicle.

“The
Neo-Prohibitionists will continue to throw up challenges,”
said Gatza. “The current drum beaten is beer advertising
during televised college sports, no matter that 9O percent
of college sports viewing audiences are of legal drinking
age. There are several lawsuits out there attempting to
claim beer is marketed to underage people, even though the
industry has adopted the Beer Institute’s code of not
advertising unless an audience is 7O percent or more of
legal drinking age adults, which is 2O percent higher than
requested by regulators.”

Speaking of
legal drinking age, MADD is starting a new campaign on
underage drinking, which may have actually backfired by
opening the debate on lowering the legal drinking age to 18.
Five state legislators in Vermont recently introduced a bill
to do just that in the Green Mountain State, and Pete Coors
brought it up as an issue in his unsuccessful bid for a US
Senate seat in Colorado.

Tax increases
continue to be sought, whether by anti-alcohol forces or
simply by legislators looking for sources of additional
revenue. “The draft US budget calls for $29 million in new
“user fees” to be collected from label applications,” said
Gatza. “This plan disregards the purpose behind a portion of
the beer taxes already being (used) to include industry
regulation, and is essentially an additional tax on the
manufacturer. If enacted, these fees would have a chilling
effect on the small breweries who want to have a variety of
beer styles in the marketplace and the ability for a brewer
to release seasonal beers in bottles, unless a certain
volume is produced to offset the new fee.”

Taxes always
come up when you talk about the competition between brewers
and distillers. “Distillers and brewers, that’s a battle to
watch,” said Doyle. “Distillers have been effective, and
they’re really working on the tax side. That’s where it’s
going to be ugly.”

“The hard liquor
industry will be seeking excise taxes based on the alcohol
volume in a drink,” Gatza agreed, “rather than to also
reflect the cost of production. This anti-competitive
practice will hurt breweries as spirits can be priced much
lower at the expense of breweries and wineries, and would
send responsible drinking out the window.

“For the beer
business overall,” Gatza expanded, “I see that brewers will
need to figure out the balance of pricing and profitability,
where the next large brewer innovation is going to come from
and what it is, where they are headed with marketing. There
has been an expressed commitment to on-premise.”

Doyle stuck to
the basics that have made Harpoon the Massachusetts
powerhouse it is. “There are always two challenges in this
business,” he said. “It’s incredibly competitive, so other
brewers are always looking to challenge you. It’s no place
to rest on anything. Draft lines, shelf sets, they’re always
being challenged. The other challenge is to get better at
what we do. It’s a product that’s difficult to make,
package, get on the shelf, and keep the QC at world-class
level at all stages. That keeps us on our toes. It’s a great
challenge every day, and that’s what makes it something to
wake up to every day.”

That much, at
least, hasn’t changed. Get up each day, do the job the best
and the brightest you can, stay on top of the competition.
It’s not rocket science, as a brewer told me a few years
ago: showing up is half the game.