State of the Beer Industry…

Posted on

If you read the end of the year reports for any major beer producer, the song remains the same: 2009 was a challenging and complicated year in the beer industry, stemming from a depressed economic environment, tightening credit markets, and continuing cost pressures. Overall, beer sales in the United States were down 2.2 percent, a loss of $101 billion, for a total of more than 205 million barrels.

Anheuser-Busch InBev’s Wild Ride

The combined operations of the world’s largest brewing company remains a case study in enormity. When the two companies joined forces, the possibilities for synergy and cost savings were massive. Sure enough, A-B InBev accrued more than one billion dollars in synergies in 2009, from consolidating some brewing operations to merging administrative and marketing efforts. The company expects to benefit from an additional cost savings in the amount of five hundred million dollars in 2010.

Despite the economic downturn, and in light of the cost savings, Anheuser Busch InBev’s revenues increased organically 2.5 percent in 2009, with the company’s “focus brands,� Antartica, Brahma, and Skol in Brazil, the Bud Light family in Canada, Budweiser and Harbin in China, and Stella Artois in the United Kingdom, growing 1.9 percent. With that said, production volumes dropped nearly one percent, with greater growth in the fourth quarter. In the United States specifically, volumes dropped two percent in 2009 and 2.2 percent in the fourth quarter, with sales to retailers falling nearly two percent.

The company’s recent product releases, including the Bud Light brand extensions of Bud Light Lime and Bud Light Golden Wheat, continued to show relatively strong growth, as did Budweiser American Ale, but each suffered substantial downturns in the final quarter of 2009.

Overall, the company expects to see continued declines in 2010, at least until the second half of the year. In his letter to shareholders, A-B InBev’s chief executive officer Carlos Brito reassured employees and others that the company “either met or exceeded the commitments we made at the time of the combination, and our sense of ownership drives us to continue delivering. We accomplished these milestones in spite of a challenging global economic environment, as well as the complexities of uniting two major companies, divesting assets and deleveraging the balance sheet.�

The Molson Coors Experience

As with all big brewers, 2009 was a challenging year for Molson Coors. Five years after the merger of brewing giants Molson and Coors, the breweries are beginning to enjoy real benefits of scale in their operations. For the full year 2009, Molson Coors achieved $92 million of cost savings as part of its now-completed Resources for Growth cost savings program. The company has enjoyed more than $270 million in cost savings through this program, with $24 million in the fourth quarter. Over the entire year, worldwide volume dropped 3 percent.

While the company enjoyed a rise in earnings due to a one-time tax issue, its leadership acknowledged hurdles in the business. “Behind the headline number, our results were affected by weak volumes across all markets, cost inflation in the U.S. and U.K. and brand investments in Canada,� said Peter Swinburn, Molson Coors president and chief executive officer in a press release. “Overall consumer demand remains sluggish, and we see these conditions continuing to impact volume and mix in the near term. Our strategy remains consistent, however. We are focused on investing in innovation and our brands and ensuring we maintain a strong balance sheet, so that when market conditions improve we are better positioned to accelerate our growth and capitalize on opportunities.�

With respect to the future, Molson Coors is hoping to see an uptick in business. “Looking to 2010, we expect volume to remain challenging, especially in the first half, but we are focused on continuing to establish a strong brand base to our business that ensures we not only manage the current market but that we take full advantage of revenue upsides when momentum improves,� said Swinburn.

The Performance of MillerCoors

The separate division of MillerCoors, now two years old, achieved significant additional synergies in 2009, to the tune of $245 million, with a total of $273 million since beginning operations. The company plans to “continue to aggressively optimize production across its breweries over the next few months to realize synergy commitments,� with expectations of achieving $750 million in total synergies and other cost savings by the end of 2012. Sales to retailers declined 3.6 percent in the fourth, due in part to the economic downturn and industry conditions, and were down 1.7 percent for the entire year. The company’s total net revenue dropped 1.6 percent to $1.7 billion compared to 2008 and net sales revenue decreased 2.1 percent to $1.5 billion.

“It’s tough out there, and we saw the effect of ongoing economic pressure and unemployment on beer sales, especially in the fourth quarter,� said MillerCoors CEO Leo Kiely in a press release. “But we stayed focused on our strategy and invested to grow four out of our six national focus brands in 2009. Our people made it happen, delivering strong profit growth and exceeding our synergy commitments in the midst of a recession.�

In a review of the brands at MillerCoors, the fourth quarter saw drops in the biggest flagship offerings for both partners, with Miller Lite and Coors light experiencing mid-single digit declines. The below premium portfolio continued to drop, despite the economic downturn, with losses from Keystone Light, Miller High Life, and Milwaukee’s Best. The company reported slight losses in its craft and imported beer portfolios, with significant drops in Miller Chill and Killian’s Irish Red. On the positive side, Blue Moon continued its growth pattern, with high single digit growth.

Imports

Imprted brands continued their declines in 2009, with a drop of nearly ten percent and on a loss of 2.8 million barrels. Category leaders Heineken, Corona, and Guinness all took single-digit hits as the brands struggled to maintain their price points against less expensive domestic brands and to stanch the growing success of the craft brand competitors.

The Craft Brewers Alliance

Primarily comprised of the Redhook Ale Brewery and Widmer Brothers Brewing Company, along with subsidiary brands Goose Island Beer and partner Kona Brewing, the Craft Brewers Alliance managed to turn a profit after years of sustained losses, especially on the Redhook side of the ledger. As expected, the company’s main sales and profits were led by an increase in shipments to Anheuser-Busch, which acts as the primary distributor for the company. The Craft Brewers Alliance shipped 573,200 barrels to A-B in 2009, which represents 61 percent of its total production capacity of 939,000 barrels.

Craft Beer Continues To Surge

Despite the economic downturn and the topsy turvy marketplace, craft brewers managed to maintain the only bright light in the beer category. The volume produced by craft brewers rose more than seven percent in 2009, with an impressive ten percent growth in dollar sales compared to the previous year, all on sales of more than nine million barrels. Craft brewers now enjoy 4.3 percent of the beer market by volume and 6.9 percent by dollars. Craft beers continued to do well in the convenience and grocery store channels as well, accounting for nearly 6 percent of total sales. Craft beer sales rose 12.4 percent in these channels, according to IRI data. The 1,595 craft brewers, the highest total since before Prohibition, accounted for an estimated seven billion in sales in 2009.

“Beer lovers continue to find great value and enjoyment in fuller flavored craft beers,� said Paul Gatza, director of the Brewers Association, in its annual release. “Americans have an increasing appreciation of craft beers, and the growing number of brewers behind them. They’re eager to try the latest seasonal release and to sample a variety of beers from different breweries.�

Craft beer leader Boston Beer Company saw revenues increase in the fourth quarter on a year where the company enjoyed a 4 percent increase in revenue on approximately two million barrels of a beer, a slight decrease from the previous year. The brewery’s success was in part due to continuing increases in the Samuel Adams Seasonal collection and the Brewmaster’s Collection, which helped to offset decreases in Samuel Adams Boston Lager and Sam Adams Light. According to industry data, Boston Beer has also managed to bring nearly 95 percent of its production in-house at its breweries around the country, including Ohio, Pennsylvania, and Massachusetts.

Jim Koch, Chairman and Founder of Boston Beer, told his shareholders in a letter accompanying the annual report, “Looking to 2010, we are excited about the introduction of our new spring seasonal, Samuel Adams Noble Pils, a hoppy pilsner beer brewed with a recipe that calls for all five varieties of Noble hops, which has initially been well received by drinkers, retailers and wholesalers. While it is too early to judge repeat consumption, we believe that its introduction and our twenty-fifth anniversary celebration are helping us start 2010 strongly and our challenge is to maintain this momentum as we continue to face increased competition from expanded distribution of domestic specialty brands and regional craft brands. We continue to explore ways to improve our sales execution, our brand strength and our position within the craft category and remain positive about the future of craft beer and our potential for future growth.�

Martin Roper, the Company’s president and chief executive officer, similarly commented that “[s]ince the end of the first half of 2009, we have seen an improvement in the trends of our brands. The brands may have responded positively to the redesign of our packaging and the increased investment in media advertising and our sales force, but it is also possible that some of the drinkers of the competitive variety introduced in the last twenty four months may be returning to our beers. Looking forward, we have no certainty that these trends will continue, but we feel we are in a good position to compete effectively through the strength of our brands and our sales force.

Closer To Home

Frank Anzalotti, executive director of the Massachusetts Package Stores Association remains on the fence about the prospects for the beer industry in 2010. “I think in general sales were flat last year due to the economy and its decline caused most of that,� he says.
“I’m starting to see a trend downward in excise taxes which tells me that the flow of alcohol through the system has declined somewhat. I can’t rule out that the economy is not good and consumer confidence is not good. There are a lot of contributing factors here. What will continue to happen is really a crap shoot.�

At Liquor World in Cambridge, beer buyer Joe Grotto has seen some ups and downs in recent years. “We’re up but have definitely slowed from the year before,� he says. “While we were up quite a bit two years ago, we’re up a little less last year. We’re not seeing as much growth as 2007 and 2008 though.�

Overall, Grotto cannot point to the economy as the sole factor in the slowing of sales
“I am not sure how much the economy has to do with it because we usually do better when things get kind of crappy,� he says. “But people might shift from buying a thirteen dollar six pack to buying a fifteen dollar twelve pack. So maybe the more elaborate and expensive stuff does not sell as well. For example, I don’t remember the last time I sold a Belgian four pack because they are close to twenty bucks a pack.�

While Grotto sees a slight shift in consumer buying habits, they have not abandoned higher quality products and remain focused on quality. “I think people are perhaps drinking a little more pedestrian in terms of price but not quality,� he says. “Our mixed twelve packs have been doing really well since last fall and that is an indication of the bad economy. The Victory, Troegs, Smuttynose twelve packs are way up. Smuttynose especially, people know it is a quality beer at a reasonable price and they are just trying to find that craft bargain.�

With respect to beer in particular, Anzalotti believes that the category has taken a stronger hit than others due to a combination of the sales tax increase and the economy. “Beer has taken one of the more significant hits perhaps because we have a deposit on it,� he says. “Pretty much, across the board, the consumer has probably traded down a bit. A lot of customers are telling me that the same dollars are going into their cash registers but six and a quarter percent of it is not there any more, it’s going to the state. Where the consumer may have bought a fifteen dollar bottle of Brand X, now he is buying a thirteen dollar bottle of another brand so that he is not spending any more than fifteen dollars.�

The Lingering Effects of the Sales Tax

In addition to the problems caused by the economy, Anzalotti also pointed to the extension of the sales tax to beverage alcohol products as a contributing factor in the decline of sales. “When the sales tax hit in August there was a considerable drop off in business, attributable to a number of things, including the economy,� he says. “The other being this knee-jerk reaction to an additional six and a half percent being applied to the sale of alcoholic beverages. The effect of the sales tax had wider effects across the state. “Most of the stores at that point in time suffered some level of dropped sales,� Anzalotti says. “It varied depending upon the geographic location and the demographic but for the most part, sales dropped over all. When we hit November and December and holiday times, the reports I received were that sales were down even more significantly.�

As for 2010, Anzalotti believes the sales tax increase will continue to hurt retailers. “While the knee-jerk reaction in 2010 may not be so significant, the customers are coming back for the small sales, almost to a person, my retailers are telling me they are losing the big sales, the weddings, the events, the holiday purchases. That kind of sale is shifting northward or south to Rhode Island.�

The Outlook for 2010

Overall, Anzalotti has not seen any return to normalcy yet. “When it comes to the beer industry in particular, a lot of it is going to be driven by the weather and the weekends and just the general mental state of the consumer and how free he is going to want to be with his money. I think that question is yet to be answered,� he says.

On the package store level, Grotto also sees a leveling out in the consumers after getting used to higher quality products. “In the last few years, we have focused on getting higher quality wines, better cocktail ingredients, and higher end craft beers in the store,� he says. “At some point in the future, we expect that to cap off with our consumers. Unless you can continue to get a new audience involved, that is expected to happen. Those people continue to come in but it is harder to draw in new people.�

Grotto also plans to continue the store’s focus on brewers from around New England. “People have been very willing to support their local market lately,� he says. “I think there is a lot of local loyalty. We have done really well with Mayflower this past summer and fall and with Pretty Things.� For their part, local brewers have continued to perform well even in a down economy. Fresh back from attending the Craft Brewers Conference in Chicago, Jon Curtis, head brewer at The Tap Brewpub in Haverhill is looking forward to 2010. The brewery has continued to expand its operations beyond the walls of the brewpub and into off-premise and on-premise accounts from Boston to Amherst. “We have been pushing this year to get more on-premise accounts but we’re also starting to sell more in Worcester and western Massachusetts,� he says. Brewing more than 53 styles nearly six days a week, The Tap is considering opening a production facility in the future to keep up with the demand. “We keep having better years every year in the pub but it is incremental,� he says. “We are presently working on getting a better bottling line so that we have more flexibility with our bottle sizes.�

Despite the local loyalty, consumers also remain interested in products from further away, Grotto says. “I have sold almost fifty or sixty cases of the Troegs Nugget Nectar in a month and have only one six pack left. I have sold more of that than Harpoon IPA even.�

Grotto also believes that breweries may have to shift their thinking when it comes to releasing certain beer styles and packaging types. “There has been this trend in recent years towards the big twenty dollar bottles of beer,� he says. “I think it will get more popular with the breweries and less popular with the consumer. Once people have bought their sixth four pack of Kentucky Breakfast Stout, they may not be so keen to take two hours off of work to come pick up their seventh for twenty five bucks a six pack. That is especially when there are many other breweries doing these high priced, limited release beers.�

Along these lines, Curtis also plans to continue its production of reasonably priced specialty releases. “We’ve had good success with our twenty-two ounce packaging,� he says. “Our six-packs having taken off a lot in the last year but beers such as our imperial stout have taken off. It’s a little bit of a shot in the arm to sales every other month. I like having the six packs out there but also have the brewpub brewer mentality of letting people try new beers every few months. We’re trying to share more of our unusual beers with the public including beers that can age a while.

Liquor World is also trying to assist consumers transition into different styles of beer. “I have been starting to notice that people who have grown up with these big, crazy, blown out beers have really started to mellow out in the last few years,� Grotto says. “I am hoping that starts trickling down to newer craft beer drinkers so that they think that just because something is a session beer that it is not interesting or good. I think Mayflower is a good example of that. I have customers who have been walking out with a twelve percent alcohol crazy beer in one hand and a Mayflower Golden Ale in the other hand.�

–Article appeared in the June 2010 issue of Beverage Business Magazine.

Be Social:

The Long Trail/Otter Creek Sale Press Release…

Posted on

Not a lot of new information here but the parties have decided to release a joint statement today making public what I and others have already reported. Understandably at this stage of the proceedings, the breweries have not released details of how their merged enterprises will operate in the future, including about any brand changes.

TWO VERMONT CRAFT BREWERS PLAN TO JOIN FORCES

(Bridgewater Corners, VT) Excitement reigns at two local Vermont breweries in Middlebury and Bridgewater Corners, as word comes of a signed Letter of Intent by Long Trail Brewing Co. to acquire the Otter Creek Brewery, home to Otter Creek and Wolaver’s Certified Organic brands. Long Trail anticipates the completion of the diligence process in the coming weeks.

“We are excited about the potential of two great Vermont companies joining forces,” according to Long Trail Brewing’s CEO, Brian Walsh, “We hold the same, proud Vermont traditions as creators of award winning craft beer. Our roots are in Vermont, and we are looking forward to growing our business together.”

Long Trail and Otter Creek are Vermont’s oldest craft breweries, with a combined brewing history of nearly 40 years. The brands are poised to continue to grow and develop in Bridgewater Corners and Middlebury, Vermont. As Mike Gerhart, Otter Creek and Wolaver’s Brewmaster puts it, “We’re all extremely excited about the partnership with Long Trail. There’s a lot of creativity and talent in this building. Now, we’ll have the resources and tools to up the ante and make each other stronger, pushing the craft beer envelope. At the end of the day, it’s about making great beer.” Bill Hill, Chief Financial Officer at Otter Creek added, “This is a great opportunity for each of Otter Creek’s constituencies; our consumers, our distributors, our suppliers, and our associates.”

Long Trail received the 2009 Vermont Governor’s Award for Environmental Excellence, recognizing the brewery’s innovative approach to preserving and protecting the environment. “Wolaver’s is a natural extension to our ECO Brewingâ„¢ program,” said Walsh, “to have a brand with such strong commitment to sustainability, and being one of the first certified organic craft beers in North America.”

Two great, local, craft breweries are now looking toward the future as they continue to develop all three brands, right here in Vermont.

Be Social:

Welcome to the Age of Craft Brewery Consolidation: Long Trail To Buy Otter Creek Brewing…

Posted on

In recent years, craft beer industry folks and beer geeks alike have been focused on the efforts of big breweries to co-opt the mojo of craft brewers or worse yet, take over their operations entirely. About a year ago, in the context of the sale of the Old Dominion Brewing Company, I wrote about how craft beer enthusiasts should get used to an era of consolidation, not involving big brewers but other craft brewers. Around that time, I also wrote about Magic Hat’s purchase of Pyramid Breweries and the consolidation of the efforts of Widmer, Redhook, and Goose Island. I also counseled that craft beer fans should get used to a new age of brewing operations.

But the nature of the industry itself is also changing in other ways. Many craft beer pioneers are now elder industry statesmen. Fritz Maytag bought Anchor Brewing 43 years ago; Ken Grossman started Sierra Nevada 28 years ago; Jim Koch toted his briefcase from bar to bar 24 years ago. Beyond these well-known figures, many founders of regional breweries have been in the business for 20 years or more now. And as with any other small business, many are owned by one person or a small group of aging entrepreneurs who’ve long been toiling in the brewhouse, glad-handing distributors, and hawking product every weekend at beer festivals. For these hard working individuals, vacations are few and downtime almost non-existent.

Consolidation, either with other craft breweries or with larger brewing concerns, will be the norm not the exception. And while we can all appreciate how far craft beer has come since its early days, it’s time to contemplate the business realities that lie ahead.

It is with this shifting paradigm in mind that I report that the Long Trail Brewing Company of Bridgewater Corners, Vermont, is in the process of purchasing the Otter Creek Brewing Company, of Middlebury, Vermont. The parties are in the process of perusing all the relevant financials and a deal would give Long Trail access to necessary additional capacity, while leaving Otter Creek and its brands in an unknown position. Details regarding the actual sale remain pretty closely held.

Opened in November 1989 by the somewhat elusive former owner Andy Pherson, Long Trail produces an eclectic array of mainly German influenced beers. In writing The Good Beer Guide to New England, I said of the brewery’s location:

The former hay field where the new brewery sits is a beautiful place, but a logistical nightmare for an industrial business. In the small town of Bridgewater Corners, there is only a general store, a post office, and a brewery. Beyond the natural beauty, it’s hard to see what Pherson saw in the place. The staff had to install three power poles to provide electricity to the site and drill two bedrock wells 200-feet deep to secure brewing water.

Opened in March 1991, Otter Creek is also one of New England’s oldest breweries. The Middlebury brewery was purchased struck an important business deal in 1998 to begin producing the Wolaver’s line of certified organic ales. In May 2002, the Wolaver family purchased the Otter Creek Brewing Company and kept its name and products.

Comprised of two very different beer brands acting in concert, the Otter Creek Brewing Company was originally founded by passionate homebrewer Lawrence Miller. Starting as a one-man operation, Miller released his signature Copper Ale on March 12, 1991. Rob Tod, of Allagash Brewing, got his start here washing kegs and soon decided he wanted to dedicate his life to beer.

I interviewed Miller several times early in my work for Beverage Magazine after moving to Boston. Characteristic of Otter Creeks spirit, he was a passionate advocate for turning consumers on to craft beer. Some of his memorable quotes include:

I think beer education starts with me. I continue to go to a lot of beer technical conferences. I drink a lot of other peoples’ beer, both domestically and abroad and try to keep learning. The wonderful thing about brewing is that, depending on how much detail you want to get into, it can be as complex as you ever want it to be. So it is really neat in that respect. You can virtually continue your education forever.

And perhaps this one, which celebrates all beer.

Lawrence Miller also focuses on the importance of tact in field representatives. “Our field reps are expected to introduce not only Otter Creek, but also to place the other brands that restaurants sell in context in a positive light when they go to do server education.” In restaurants, the field representatives should talk about the beers and how the styles compliment certain foods. Miller notes that if field representatives do their jobs well, their education efforts should pay off in higher gratuities for the servers.

This interview was given nearly ten years ago. I’m not sure we’ve yet even met this standard.

In the coming decade, craft beer fans should indeed expect to see many of their favorite breweries change hands. In some cases, that may involve a transition from father or mother to son or daughter, but in many others, as with many other closely held corporations, outside suitors will be the best or only possibilities. While we do not know what the purchase of Otter Creek holds for its brewery, employees, and brands, let alone those of Long Trail, this sort of business consolidation will quickly become routine in this industry of nearly 1500 small, often family run breweries.

Be Social: