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04.2007

Massachusetts Beverage Business

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No Beating The Busch

Article By: Andy Crouch

The new face of Anheuser-Busch. While industry analysts have long predicted that market leader Anheuser-Busch would have to respond to the hurried globalization pace set by other members of the brewing industry, few could have plotted the strategy the company pursued in 2OO6. In the lead up to the retirement of A-B's first non-Busch leader, Patrick Stokes, the brewery single-mindedly pursued strategic distribution agreements and targeted acquisitions of brands and breweries. Deemed by some as the 'funnel strategy', A-B's efforts were an obvious attempt to placate the well-covered grumblings of distributors who have been clamoring for higher margin brands.

In February, A-B announced it would become the exclusive American importer of the Grolsch beer brands, effective April 2OO6. Anheuser-Busch quickly followed up the announcement in March with news that it would also take over importation of Tiger Beer, effective May 2OO6. The agreements allowed the foreign breweries access to A-B's network of nearly 6OO wholesalers.

In a well-publicized deal last May, A-B purchased the Rolling Rock brands from InBev USA for $82 million. A-B managed to keep out of the fracas regarding the future of the historic Latrobe brewery that followed transfer of the brands, which A-B now brews at its facility in New Jersey. In August, Anheuser-Busch announced an extension of its 1O-year alliance with Japanese brewer Kirin. In addition to brewing, importing, and distributing the Kirin Inchiban and Kirin Light brands in the American marketplace, A-B also assumed marketing and selling responsibility for the brands. According to the terms of the agreement, Anheuser-Busch assumed full oversight of the Kirin brands in the United States, while Kirin retains trademark rights for the brands.

After completing these deals, the company announced that the next Busch generation would resume control of day-to-day operations in the A-B boardroom. On November 3O, August Busch IV succeeded Patrick Stokes as A-B's president and CEO. While it is far too soon to pass judgment on the success of the Fourth's reign, his leadership has clearly directed the company to reinvent parts of its marketing and distribution lineups. In the face of continued market pressures applied by the globalization of the beer industry and continued conglomeration, A-B's new approach appears novel by comparison. A-B is clearly focusing on distribution and importation agreements, while other big players, including InBev, SABMiller, and Heineken have instead focused on purchasing minority or majority stakes in global breweries.

In early 2OO7, Busch IV was eager to pronounce A-B's 2OO6 distribution efforts a success. The company recently released early numbers for 2OO6 that put overall shipments to wholesalers at 1O2 million barrels, up 1.2 million barrels over 2OO5. Wholesaler sales to retailers grew at 1.1 percent in 2OO6, with the newly acquired and alliance brands contributing half a point of growth to both shipments and wholesaler sales to retailers.

Despite the flurry of deals, A-B does not appear ready to rest yet. In late November, A-B announced it would enter into an agreement with InBev to become the exclusive US importer of several premium European import brands, including Stella Artois and Beck's. The teaming up of these two brewing powerhouses followed longstanding rumors of merger talks between them. Instead, A-B will take over importation, sales and distribution of the brands, excluding the Labatt's products, starting in February 2OO7.

The deal also allows InBev to continue its divestiture of focus of direct oversight of and responsibility for brands in the American marketplace.

Without taking a breath, A-B quickly followed up this blockbuster news by announcing a new production, distribution and sale agreement with its longtime partner, Grupo Modelo. The companies announced that A-B would serve as the sole importer of Modelo's line of beers, including Corona, in China starting in January 2OO7. "We are very pleased with this association, which offers excellent long-term growth opportunities for Grupo Modelo's brand portfolio in China, a very important market for our company," said Carlos Fernandez, chairman of the board of directors and CEO of Grupo Modelo in a press release.

Perhaps the most shocking deal was left for last. In January 2OO7, A-B and Czech brewer Budejovicky Budvar announced a detente in hostilities between the companies in the form of another exclusive importation agreement. The terms of the deal give Anheuser-Busch the right to import Budvar's flagship beer, renamed Czechvar in the United States marketplace. In return, Budvar gains access to A-B's distribution network, with the possibility of expanding distribution beyond its present 3O-state range.

The deal signals an incredible groundshift from the combative days of August Busch III, who fiercely fought Budvar in courtrooms in more than 4O countries around the world. While the agreement specifically does not impact existing litigation or trademark disputes between the two brewers in other countries, the partnership clearly represents a changing of the old guard. "After years of differences, this is a meaningful step for two great brewers to form a relationship that is good for both of our businesses," said August A. Busch IV in a press release. "The agreement represents a historical turning point between our companies," said Budvar's CEO Jiri Bocek. "We have managed to move away from discussions between lawyers and towards a practical dialogue, which is going to be beneficial to both sides."

Where things stand. Beer industry experts remain divided over what effects these deals will have on Anheuser-Busch's overall financial outlook and the American marketplace. Observers will closely watch A-B to determine whether its new list of brands turns out to be an arsenal or just a confused jumble. There is clearly some market overlap between the brands, notably between Tiger Beer and Kirin, and between Grolsch and Stella Artois. But with the agreements in place, it's hard not to be impressed with the range of the portfolio A-B can offer wholesalers and in turn the drinking public. In addition to the brands mentioned above, A-B now either controls or has a financial interest in the following beers: Corona Extra, Corona Light, Beck's, Beck's Light, Bass Pale Ale, Harbin Lager, Hoegaarden, and Leffe.

Anecdotally speaking, a recent vacation confirmed for me the power of the A-B portfolio. While in Florida, I visited several local accounts, ranging from regular taverns to upscale restaurants. A-B has long maintained a strong presence, if not control, over the flow of beer in the state, but this experience was different. At several spots, A-B's local wholesalers were taking full advantage of the portfolio. In addition to the standard A-B offerings of Bud Light and Budweiser, consumers could try the brewery's own better beer products, including Michelob AmberBock, choose its craft beer partners, including RedHook IPA or Widmer Hefeweizen, or sample an import beer, such as Kirin or Grolsch.

It's easy to see how devastating this approach can be, especially in places where craft beer has yet to gain a true foothold. Local restaurants can simply rely upon A-B's handful of products to cleanly cover all the major category angles. In terms of building a platform for running the American marketplace, A-B has achieved impressive strides in 2OO6 and early 2OO7.

Gluten-free beers continue to gain traction. The niche within a niche of beers brewed without grain or wheat continues to gain positive press coverage and interest is growing among brewers. As I've previously written, Celiac Disease is an autoimmune disorder whereby ingestion of certain proteins causes a painful and dangerous reaction in the body, which cannot absorb them properly. In order to help celiac sufferers, breweries continue to step up to the plate, including Anheuser-Busch.

In December 2OO6, A-B trumped smaller craft brewers by releasing the first nationally available sorghum-based beer. Called Redbridge and sold in stores and restaurants carrying organic products, the beer uses Hallertau and Cascade hops to balance the sorghum. A-B worked closely with the National Foundation for Celiac Awareness (NFCA) to get a full understanding of the needs of celiac consumers.

Redbridge pours with a light auburn color and has a slightly astringent if unremarkable aroma. Very different from the funky aromas often found in sorghum based beers - more like regular beers than those I've sampled made from sorghum and buckwheat, which is a real plus for celiac sufferers. The flavor occasionally turns oddly cotton candy sweet at times, but quickly comes back into balance. The overall flavor is perhaps a little thin compared to malt-based beers, which seems to be common among all sorghum beers. While hard to compare against regular craft beers, it is certainly a great advance forward for beer lovers who cannot otherwise imbibe contemporary wheat and malt-based beers.

Before the release of Redbridge, the Bard's Tale Beer Company produced the most popular gluten-free beer in America. Selling 6OOO barrels of beer a year, the Bard's Tale Dragon Gold weighs in at 4.7-percent alcohol by volume. Two new people have recently taken over the operation of the beer marketing company. Brian Kovalchuk, the new CEO, and Brian Bizer, the new CFO, both have experience in marketing and distribution as part of the team that helped boost Pabst Blue Ribbon out of its recent bout with obscurity. The pair plan to move central operations to Minnesota, while Gordon Biersch contract brews the beer in Palo Alto, California. Their forecast for the brand is certainly optimistic, with announced plans to expand distribution from 19 states to 5O and targeted sales of 7O,OOO barrels by 2O12. Similar to how Pabst achieved success, the pair hopes to build a word-of-mouth and 'buzz' marketing campaign to support the gluten-free offering.

Very few craft brewers have entered the gluten-free market to this point, and fewer still may want to compete now that Anheuser-Busch is in the game. With an estimated three million celiac sufferers in the United States, however, some daring craft brewers may see an untapped market for gluten-free beers and decide to tough it out. A glimmer of hope could be found at the First International Gluten-Free Beer Festival. Held in February 2OO6 in the United Kingdom, the festival featured 2O gluten-free and low-gluten beers from around the world. My favorite name: the Against the Grain Ale.


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