2005 was also the year when beer industry executives publicly admitted that their actions had bruised the public image of beer and thus dented their bottom lines. The mainstream media continues to hammer the notion that beer is passe and that consumers are tumbling over one another to get their hands on spirits and wines. While it isn't entirely clear whether the rise in other categories is driven by a general increase in their popularity or as a result of the dumbing down of beer's image, beer industry insiders are agreed on one thing: things will be different in 2OO6.
The WAKE UP CALL
In one of the most interesting and underappreciated stories of the year, executives at Anheuser-Busch and SABMiller issued public mea culpas for years of destructive advertising campaigns. In the staid pages of the wall street journal, the executives decried their prior actions and talked of new plans for the future. While today may be a far cry from the days when a brewery touted their beers with quaint, wholesome print ads, it's worth remembering that breweries didn't always advertise their products with scantily clad women and crude jokes. Even the original "girls and humor" campaigns quickly devolved into "bimbos and slapstick", as Tom Long, Miller's chief marketing officer, noted in the article. In a spiraling decline into disturbing one-upsmanship, the big three breweries associated beer with cat fights, flatulent horses and bikini-clad twins.
While the ads were often effective for the core base of young male consumers, they also succeeded in tarnishing the public perception of beer. As very little advertising focused on the flavor of the products, such points of differentiation were lost on consumers. The importance of hops and malts was replaced with a relentless series of similar ads in poor taste, each selling an interchangeable widget of a product.
Whether the result of such debasing ads was the defection of even young drinkers to wine and spirits, it's widely recognized that public image of beer has a split lip and a pair of black eyes. "People will tell you that beer is not sophisticated enough, or stylish enough, to compete with wine and spirits," says Miller's Long in the journal article. "Why do they think that? Well, I believe it's because we told them to."
Industry insiders often cite the sophisticated images cultivated by the spirits and wine industries as a source of their increasing popularity. Peaking in 1995 at 61 percent of the beverage alcohol market, beer's share fell to 58 percent by 2OO4. Conversely, spirits increased a point and wine rose two percent in the same timeframe. Baby boomers and women have turned to wine and spirits in greater numbers as have a larger contingent of young drinkers.
According to at least one beer industry executive, the problem is easily corrected by an abrupt reversal in the focus of the ad campaigns. "We've marketed our way into this problem," Long told the wall street journal, "And we can market ourselves out of it."
It's unclear at this point how much of this is pure public relations lip service on the part of SABMiller. After federal and industry regulators heard cross-complaints regarding advertising by both companies early in 2OO5, the ad war temporarily cooled down. But just a few weeks after Long made his conciliatory comments to the wall street journal, SABMiller fired another salvo in the battle. In a recent series of ads, Miller claimed that Anheuser-Busch had altered the flavor profile of Bud Light to make it more bitter and carbonated. A-B immediately denied those claims and took their complaints directly to the cable networks showing the ads. After reviewing A-B's challenge to Miller's claims, many of the networks pulled the ads and asked Miller to provide substantiation of the claims. Miller subsequently dropped the claims and went another direction with a reformulated ad.
For its part, Anheuser-Busch seems to be taking the issue of beer's bruised image seriously. Working through the Beer Institute, A-B is considering several ad concepts for the promotion of beer. The campaign, akin to the dairy industry's popular "Got Milk?" ads, will promote beer as a quality beverage and not as a vehicle for cheap laughs. While it has taken some hits at the expense of Miller's ads, A-B is publicly acknowledging that future ad spending will be less focused on television. The brewery is redirecting ad spending away from such staple events as the Super Bowl and is instead focusing more on cable and the internet. Anheuser-Busch also appears to be honoring its public truce with Miller.
As an industry referee, the Beer Institute has long promoted guidelines for the advertising of beer in America. Starting January 1, the Beer Institute added an independent, third-party complaint review process to review and consider violations of its Advertising and Marketing Code. Three basic principles make up the heart of the code. "First, beer advertising should not suggest directly or indirectly that any of the laws applicable to the sale and consumption of beer should not be complied with. Second, brewers should adhere to standards of candor and good taste applicable to all commercial advertising. Third, brewers are responsible corporate citizens, sensitive to the problems of the society in which they exist, and their advertising should reflect that fact. Brewers strongly oppose abuse or inappropriate consumption of their products."
DETHRONING the KING
Anheuser-Busch is not satisfied with simply trying to maintain its traction in the domestic beer market. A-B's chief executive, Patrick 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."
The brewery is busy releasing a series of specialty seasonal draft beers to fill out the portfolios of wholesalers. Following on the heels of Jack's Pumpkin Spice Ale, a spiced, cinnamon scented beer, is the new release, Winter's Bourbon Cask Ale. Weighing in at 6 percent ABV, the beer is brewed with dark roasted caramel malts and aged on toasted bourbon oak casks with whole Madagascan vanilla beans. "Winter's Bourbon Cask Ale was carefully crafted to appeal to adults who are looking for a new drinking experience this season," said A-B brewmaster Florian Kuplent.
While it is too early to tell whether A-B's specialty releases will gain any traction against craft beers, Anheuser-Busch is also undertaking some intriguing efforts to blunt the progress and success of craft breweries. You may be familiar with A-B's strategic business alliances and ownership interests with Widmer Brothers Brewing, the Kona Brewing Company and the Redhook Ale Brewery. In the four years following its agreement with Kona, the little brewery's sales have tripled.
In seeing sales of its flagship products decline and flagging sales and earnings across the domestic board - one contributor to the online investing journal, the Motley Fool, called it the dethroning of the king of beers - Anheuser-Busch is reportedly looking to form additional strategic relationships or acquisitions with other craft breweries. In the vein of "if you can't beat 'em", A-B is reportedly in talks with several major craft brewing players. The earliest reports leaked out of the Old Dominion Brewing Company in Ashburn, Virginia. On an industry list of brewers in 2OO4, Old Dominion was the nation's 45th largest brewery and produced 26,7OO barrels. According to general manager Terry Fife on BeerAdvocate.com, A-B engaged the craft brewer in mid-2OO5 in a dialogue regarding a possible equity ownership and distribution agreement. Fife confirmed this was not the first time A-B approached the brewery and that the company was making similar overtures to at least a half-dozen other craft breweries. The discussion included the possibility of adding these regional craft beer powerhouses to A-B's distribution network.
A few weeks later, word from Chicago added the Goose Island Brewing Company to the list of possible craft beer partners. In late December 2OO5, Goose Island president and founder John Hall confirmed to the chicago tribune that his company was in talks with Anheuser-Busch regarding a possible distribution agreement. The craft brewer, which produces around 5O,OOO barrels annually, is one of the biggest craft players in the Midwest. Hall refused to provide the tribune with any additional details regarding the negotiations.
With rumors confirmed for two breweries, industry insiders are left to guess at the identities of the other targeted craft brewers. 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. Possible targets could include the Brooklyn Brewery, Great Lakes Brewing Company, Long Trail Brewing Company, and the Abita Brewing Company.
With rumors swirling, some craft breweries have felt compelled to deny their involvement with A-B. Rich Doyle, the chief executive officer of the Harpoon Brewery, denied that his brewery was one of the targets. While denying involvement on an industry beer website, Doyle considered both sides of an alliance with Anheuser-Busch. "A distribution alliance can be a big blessing or a huge curse" he wrote. "If you lose control of your distribution channels to an indifferent or malevolent 'partner' you will have a tough time selling your beer. An interested or benevolent partner of course can be helpful."
ASSESSING the SITUATION
While A-B's alliance efforts have raised eyebrows in the craft beer industry, from a business vantage point, the moves shouldn't shock anyone. Facing the inevitable hurdles posed by new product launches to the general public and the considerable consumer skepticism of its attempts to court craft beer drinkers, for Anheuser-Busch, strategic alliances or equity ownership agreements make a lot of sense. While craft breweries have flown beneath the industry radar for much of their existence, cultivating local markets and generating and exploiting geographic or flavor niches, they are beginning to grow too large to remain in the shadows. While their collective market share has stalled at just above 3 percent, the craft beer industry continues to generate solid growth in terms of volume, all while the big three continue to lose traction. Profitability also makes many craft brands the hidden gems of a wholesaler's portfolio, assuming roles that remain unmatched by products from the larger breweries. Anheuser-Busch has seen little success in its own forays into the craft market.
On the other side, craft breweries will soon reach a sobering crossroads. While some of these breweries celebrate their tenth, fifteenth and even twentieth anniversaries, the beer business is tougher than ever. Many craft breweries have hit unexpected glass ceilings in their growth in home markets and have retreated after failed attempts to expand their distribution to new markets. After redoubling their efforts, the regional craft beer powerhouses now sport solid operations that manage their breweries like businesses. While there is more room for growth, craft breweries continue to have difficulty in terms of achieving full share-of-mind of distributors. As the regional craft breweries continue to grow, distribution will weigh more heavily on their minds and business operations.
Old Dominion's Terry Fife confirmed the attractiveness of access to A-B's distribution network for a craft brewery. "Dominion would have access to A-B distributorships, and A-B would have a greater arsenal at their disposal in the Mid-Atlantic, if not beyond," he wrote. "Since distribution is a constant concern for craft breweries, a partnership like this could provide us with great peace of mind. Provided that Old Dominion was able to continue making quality beers without interference, this would ostensibly be a great situation for both companies and consumers as well."
It remains to be seen whether any of the above-mentioned craft breweries will eventually partner with Anheuser-Busch, either as part of a distribution alliance or an equity share ownership agreement, but it seems a likely scenario for some craft breweries. The age of innocence is over. Craft breweries have a tough, brutal road ahead for increased volume and market share. It will take even more work than ever before. For some breweries, whose owners have been fighting for ten or even twenty years, an agreement with a larger brewery - while for some may seem like a deal with the devil - may be the right move at the right time.