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 are down, but beer is far from out. The beer industry's new maxim is undeniable: 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."