Article By: Lew Bryson
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.