Beer’s Still Alive!
To
hear the mainstream media or spirits and wine flacks tell
it, beer is dead.
It’s a passe beverage that
no self-respecting drinker would cop to enjoying.
A much-cited study found
that people claim to drink more wine than beer.
Production and total share
of consumption is down, but beer is far from out.
The beer industry’s new
maxim is undeniable &endash; drink less, drink
better.
THE
BIG FOUR
The big brewers
took a hit in 2OO5, with the production of the top four
domestic producers down by 1.9 percent or 3.2 million
barrels. 2OO5 was a rough year for Anheuser-Busch, with
profits down considerably in many markets. “We’ve had a
challenging year in the domestic beer business and our 2OO5
sales and earnings per share were disappointing,” said
Patrick Stokes, President and Chief Executive Officer of the
company in releasing its annual financial report. In the
domestic market, A-B’s production fell 1.8 percent to 1O1.1
million barrels, earnings per share dropped 11 percent, and
market share (excluding exports) retracted to 48.7 percent
from 49.6 percent in 2OO4.
Despite declines
in the home market, A-B saw continued improvement in its
international operations. International beer volume,
consisting of Anheuser-Busch brands produced overseas by
company-owned breweries and under license and contract
brewing agreements, plus exports from the company’s US
breweries to markets around the world, increased 5O.8
percent in 2OO5. The gains were mostly related to increased
volume for the company’s Chinese, Canadian and Mexican
operations. Overall, A-B’s worldwide volume increased 4.4
percent to 121.9 million barrels.
As a massive
amalgam of more than 4O brands, the recently merged Molson
Coors Brewing Company is one of the world’s largest brewers,
with combined annual volume of more than 41 million barrels
and net sales of more than $5.6 billion. It is represented
in the United States by the Coors Brewing Company, in Canada
through Molson Canada, and in the United Kingdom by Coors
Brewers Limited. Across the operational board, sales volume
was down 1.4 percent, net sales down 4.4 percent, and
diluted earnings per share down nearly
22-percent.
Leo Kiely,
Molson Coors President and Chief Executive Officer, said,
“Our fourth quarter 2OO5 financial performance reflects
challenging operating environments in all of our major
markets but also significant improvements in key trends in
our businesses as the year progressed. In the US, Coors
Light sales-to-retail trends continued to strengthen, and
growth of our Blue Moon brand remained very
strong.”
As part of the
company’s continued efforts to reduce costs by $175 million,
Molson Coors announced it will close its Memphis plant,
cutting about 41O jobs by the early 2OO7. With a brewing
capacity of 3 million barrels per year, the plant mainly
brews Coors Light for export, Zima XXX, Keystone Light, and
Blue Moon. Coors bought the Memphis plant in 199O from the
Stroh Brewery Company, which sold its entire beer business
in 1999.
Of particular
note, the company’s Blue Moon product is an intriguing
performer for the struggling international brewery. While
the company’s flagship Coors Light product maintained
positive growth, the more flavorful Blue Moon is opening new
avenues for the brewery. Blue Moon is a Belgian-style wheat
ale, spiced with coriander and orange peel, that competes
against craft products for tap handles and shelf space.
While Molson Coors doesn’t advertise its involvement with
the brand, it also doesn’t treat the product as inferior to
the core light brand. Launched in 1995, Blue Moon enjoyed
double-digit growth in 2OO5, with sales of about 2OO,OOO
barrels. In terms of a single brand, perhaps only the Samuel
Adams Boston Lager, Sierra Nevada Pale Ale and New Belgium
Fat Tire Amber Ale sell more barrels. In a recent report, a
well-respected beverage information provider ranked Blue
Moon eighth on a list of the 3O top growing individual beer
brands, behind three Modelo brands and Fat Tire.
With the success
of the Blue Moon line, Molson Coors should consider
dedicating a larger percentage of its operations to
promoting and leveraging its craft brands. Unlike SABMiller
and A-B, Molson Coors has demonstrated an interest in
producing higher quality ales and lagers and has managed to
do it successfully. The Coors operation already runs a
highly successful brewpub outfit, the SandLot Brewery at
Coors, and has long offered Killian’s Irish Red. While the
company’s American component continues to see mild growth
with the flagship Coors Light product, its domestic
production could enjoy a rise stemming from a dedication to
more flavorful beer.
THE
IMPORTS
After a sluggish
2OO4, imports rebounded with solid growth of 7.2 percent to
1.7 million barrels in 2OO5. Mexican beers continued their
tear on the American market, especially those from Grupo
Modelo. The Information Resources, Inc. (IRI), a leading
provider of market information for consumer packaged goods
in the adult beverage industry, recently announced its
annual list of the 3O top growing individual beer brands
across the beer market and it included four Modelo brands in
the top 15, including Corona, Corona Light, Negra Modelo,
and Pacifico.
Imports
dominated the IRI list, including an appearance by perennial
list topper, Corona Extra. In putting together the list, IRI
considered volume and dollar sales, pricing, distribution,
share growth, and incremental volume and dollar
contribution. The list highlights the brands that
experienced significant year-over-year growth in US
supermarkets last year. “Combined, these brands outpaced the
overall beer category by 4 to 5 percent in volume and dollar
sales growth, respectively, versus the previous year,” the
report said.
“This
outstanding group of beer brands in this year’s top 3O
ranking is a great representation of the big trends in
2OO5,” said Dan Wandel, Vice President of the IRI Beer, Wine
and Spirits practice. “Consumers are definitely willing to
pay for their favorite brands, with 18 of the top 3O
performers being high-end brands that include 13 imports and
five micro/craft brands.”
THE
CRAFTS
Craft beer
scored another great year in 2OO5, turning in stellar 9
percent growth and besting all other beverage alcohol
categories. “Craft beer volume growth far exceeded that of
large brewers, wine and spirits in 2OO5,” said Paul Gatza,
Director of the Brewers Association. According to the
association, imported beers grew 7.2 percent, spirits volume
increased at 3.3 percent in 2OO5, and wine volume rose 2.9
percent. Overall, domestic beer volume declined slightly in
2OO5.
“The craft beer
segment has grown steadily over the past ten years and in
2OO5 it showed its biggest increase since 1996,” said Gatza.
“The strong growth in craft beer sales over the past several
years shows American consumers’ continuing interest in
flavorful American beers.”
For the second
consecutive year, craft beer has been the strongest
performer in the industry. “The strong growth by craft beer
in 2OO5 is especially impressive because it comes on top of
strong performance in 2OO4,” Gatza said, adding that 2OO5 is
the third year craft beer growth rates were stronger than
those for imports. “Craft beer clearly leads the beer
industry in consumer appeal,” he said.
“Consumer
enjoyment of the flavor and diversity of craft beer
continues to fuel healthy, steady growth in this segment,”
said Ray Daniels, Director of Craft Beer Marketing for the
Brewers Association.
The Brewers
Association estimates 2OO5 sales by craft brewers at
7,112,886 31 gallon barrels, up from an adjusted total of
6,526,8O9 barrels in 2OO4, an increase of 586,O77 barrels or
8.1 million case-equivalents. The association, which is
actively engaged in the promotion of craft brands, recently
released a craft beer sell sheet to aid smaller brewers.
According to the association’s numbers, craft beer gives
retailers the highest dollar profit per sale for beer and
offers performance that exceeds both wine and spirits. The
sheet promotes dollar growth, in 2OO5, as increasing 8.8
percent for craft beer, versus 6.4 percent for wine, 4.8
percent for spirits, and less than one-percent for beer
overall.
Context is
always important in talking about the popularity of craft
beer. The ‘big three’ continue to dominate the American beer
scene, controlling an overwhelming majority of beer produced
and consumed in this country. Only Boston Beer has cracked
the top ten list of American breweries by volume. But when
you look outside of the top ten, American craft brewers
begin to show their size and development. More than 3O of
the top 5O American brewers are craft brewers. The top ten
craft brewers in the United States, in order, are Boston
Beer, Sierra Nevada Brewing Company, New Belgium Brewing
Company, Jacob Leinenkugel Brewing Company, FX Matt Brewing
Company, Widmer Brothers Brewing Company, Redhook Ale
Brewery, Pyramid Alehouse/Breweries Inc., Deschutes Brewery,
and Alaskan Brewing and Bottling Company.
When put
together, craft brands and imports gained more than
one-percent of total beer production to 16 percent, with
increases of 2.3 million barrels to nearly 33 million
barrels.
THE
SWITCH
In recent
months, three popular imported beer brands have switched
importers. In the biggest case, the Gambrinus Company lost a
huge, long-time importation contract. In 1986, Carlos
Alvarez founded the Gambrinus Company and started importing
the Grupo Modelo line of beers, including Corona Extra,
Corona Light, Modelo Especial, Negra Modelo, and Pacifico
Clara in the eastern half of the United States and Texas. In
1997, Corona Extra became the best-selling imported beer in
America, a position it maintains with strength
today.
After more than
a decade of overwhelming success, Grupo Modelo decided to
replace Gambrinus as its importer in the eastern United
States in 2OO7. Upon learning that the importation contract
would not be renewed, Gambrinus sought arbitration through
the Paris-based International Chamber of Commerce. The
organization denied the request of Gambrinus and upheld
Grupo Modelo’s termination decision.
“The arbitral
award, in our favor, will allow us to seek the best
available options with the aim of enhancing the value of our
export business and create more value for our shareholders,”
said Grupo Modelo CEO Carlos Fernandez. “We are very
confident that the transition process ahead of us will in no
way harm or disrupt our export operations into the US
market, and we will take all necessary measures to assure
that the supply of our products to the distribution network
in the east will continue.”
The loss of the
Corona brand cannot be understated for Gambrinus and its
wholesaler network. Without the Modelo portfolio, Gambrinus
is left with the less-popular Canadian import Moosehead beer
and the company’s wholly owned brands, including the Shiner,
Pete’s Wicked, and BridgePort lines.
Grupo Modelo is
imported into the western United States by Constellation
Brands subsidiary Barton Beers, and many expect Barton to
take over the Modelo line. Some industry insiders believe
A-B may also seek to import the brand, but there is a
history of tension between St. Louis and Modelo. A-B clearly
benefits, however, as it owns slightly more than 5O percent
of Grupo Modelo.
Acknowledging a
widely held criticism, Anheuser-Busch is hoping its moves
with Tiger and Grolsch will help it better service the
high-end beer category. The company noted in a press release
that it “is focused on expanding its participation in the
import and high-end beer categories as a key growth strategy
for its US business”. With wholesalers clamoring for
products with higher price points, and August Busch IV a
proponent of moving into the super-premium products, A-B is
finally responding.
Anheuser-Busch
has recently undertaken a flurry of efforts to pad its
portfolio of imported brands. In two successive decisions,
A-B announced it would become the exclusive American
importer for Grolsch and Tiger Beer. Starting April 1, A-B
took over the importation of the Grolsch in time for the
summer selling season. The Dutch-brewed line includes
Grolsch Premium Lager, with its famous swing-top lid,
Grolsch Amber Ale, Grolsch Blond Lager, and the Grolsch
Light Lager. “We commend the job Grolsch and their previous
importer did in establishing the brand,” said August A.
Busch IV, President of Anheuser-Busch. “We look forward to
building on that foundation.”
In May,
Anheuser-Busch also became the US importer of Tiger Beer, a
leading premium brew from Singapore. The new agreement
significantly broadens Tiger Beer’s US distribution
opportunities by giving Asia Pacific Breweries access to
Anheuser-Busch’s network of nearly 6OO independent
wholesalers. “Tiger Beer is recognized as one of Asia’s
finest beer exports,” said August A. Busch IV. “Tiger Beer
is a high-quality, premium brand that is a perfect
complement to our growing portfolio of import
beers.”
“We are sure
that we have found the right partner for Tiger in
Anheuser-Busch,” said Mr. Koh Poh Tiong, CEO of Asia Pacific
Breweries, the brand owner of Tiger Beer. “We share the same
views on how the brand should be marketed and positioned in
the vast American beer market, and most importantly,
Anheuser-Busch shares our passion and excitement for our
brand. We believe that together with Anheuser-Busch, we
shall be able to bring Tiger to another level of growth in
the US market.”
FULL
COURT
In the face of
the poor performance of its core domestic brands, A-B chose
to go on the offensive, letting analysts and shareholders
know that it did not intend to sit idle while the company
lost traction. In a release to the media, Stokes recently
stated his vision for the brewery’s future. “The company has
a number of initiatives in place to enhance beer volume
growth, including introduction of new products, led by
Budweiser Select, increased investments in domestic
marketing, stepped up on-premise sales initiatives, new
packaging, and tactical price promotions.”
While Stokes
publicly outlined his vision for A-B’s in-house approach to
stabilizing sales, the company was quietly considering a new
set of options. Faced with back-to-back years of solid 7
percent-plus growth, A-B began to court a handful of craft
brewers. Through a fog, wild rumors began spreading,
including speculation that craft breweries would either be
purchased outright, broker equity share purchase agreements,
or form strategic distribution partnerships.
Though it is too
early to tell whether A-B’s recent specialty releases will
gain any traction against craft beers, Anheuser-Busch’s
outside business efforts are what should most draw the
attention of the craft beer industry. Many are familiar with
A-B’s strategic business alliances with, and ownership
interests in, Widmer Brothers Brewing, the Kona Brewing
Company and the Redhook Ale Brewery. Those relationships
have meant different things for each brewery, but for the
smallest among them (Kona), the distribution agreement has
been very beneficial. In the four years following its
agreement with A-B, the little brewery’s sales have tripled
and new distribution channels have opened across western
California.
In a previous
column, I discussed A-B’s interactions with the Old Dominion
Brewing Company, which was recently sold to longtime
employee Terry Fife and his partner, Kip Olson, and the
Goose Island Brewing Company. For weeks after these
announcements, industry insiders widely speculated as to the
identities of the other targeted craft brewers. It was
understood that Anheuser-Busch would likely seek craft
breweries with proven regional traction, well-identified and
respected brands, strong growth potential, and the
demonstrated ability to appeal to cross-over drinkers. The
Dogfish Head Craft Brewery’s president, Sam Calagione, said
that his company was approached by individual A-B
distributors and by a broker working on behalf of A-B
distributors about a possible business
relationship.
After politely
declining the offers of A-B distributors, Calagione had
strong words against such agreements. “I’m not against
Anheuser-Busch, I’m against totalitarianism,” said
Calagione. In discussing the potential issues of becoming
aligned with the A-B distribution network, Calagione
counseled caution for other craft breweries. “I think the
craft beer consumer is a lot better educated now and they
really appreciate the independence of the breweries they
support,” said Calagione. “I’m kind of betting my life, my
home, everything that I’m mortgaging against this brewery
expansion, that whether Anheuser-Busch owns one percent of
your company, that it’s like being a little bit pregnant. I
think it’ll be very difficult for a brewery to sell some
kind of equity share and not have it be viewed as a scarlet
letter on their chest as they try to sell their own beer
through A-B’s distribution network.”
Attempts to
confirm or dispel the possible A-B rumors have proven
difficult. On the record, the following breweries have
denied having any conversations with A-B about distribution
or other agreements: Abita Brewing Company, Alaskan Brewing
Company, Allagash Brewing Company, Boston Beer Company,
Brooklyn Brewery, Harpoon Brewery, New Belgium Brewing
Company, and the Victory Brewing Company.
The Magic Hat
Brewing Company of Burlington, Vermont, initially refused to
comment on the subject of talks with A-B. Subsequent
inquiries turned up information that Magic Hat has been the
subject of an approach similar to that experienced by
Dogfish Head. A source with the company confirmed that Magic
Hat has been approached by A-B distributors, but denies that
the company has been courted directly by A-B
representatives. While the company officially refuses
comment, the source informed me that he believes all offers
have been declined and that he does not expect Magic Hat to
align itself with A-B.
The Boulevard
Brewing Company of Kansas City, Missouri, also acknowledges
having been approached by A-B. Flying under the radar of
most craft beer lovers, this Midwestern craft brewery is one
of the largest in the country, quietly producing 1O4,OOO
barrels in 2OO5 on 17 percent growth. Opened in 1989 by
founder John McDonald, Boulevard is in the middle of a
massive expansion, adding a new 15O barrel brewhouse with a
capacity of nearly 75O,OOO barrels. The brewery’s success is
made more remarkable by its limited geographic distribution,
namely 11 mainly Midwestern markets.
Bob Sullivan,
Vice-President of Sales and Marketing for Boulevard,
confirmed that he and other members of the brewery’s
management team met with two representatives from
Anheuser-Busch. “We had a first meeting with them and
politely told them, ‘Thank you but no thank you’,” said
Sullivan. “They called us and sent two of their executives
up and we had a very friendly discussion. We’re obviously
flattered that they think it would be worthwhile to partner
with us, but we are pretty committed to our existing
wholesaler network. It would be very difficult for us to ask
our wholesalers to consider giving our brands up to a
competitor. We never even got to any types of specifics with
them of what they would propose or offer. That would have
been the second meeting. (Boulevard’s owner) John McDonald
just called them and very politely told them that that this
was not the direction we were going in.”
Sullivan expects
that some craft breweries may be amenable to a partnership
with A-B. “I think it could be a good match for somebody,”
said Sullivan. “They have a phenomenal distribution network
and if it’s the right brand and it makes sense, either on
the regional or national level. We looked at whether it made
sense for us. We don’t have any distribution or access to
market challenges and we really never have. So the biggest
thing they could offer us, besides some financial benefits,
is to offset some debt service.”
While some
breweries are keeping mum about contact with A-B, Sullivan
believes it is important to give Boulevard’s wholesalers the
peace of mind of knowing the facts. “Instead of rumors
existing, they know that yes, officially, we talked to them.
And officially, we declined any interest in pursuing the
conversation. It should make them feel a lot more secure in
their commitment to our brands.”
