2OO3 was a rough year for the beer industry.             

Flat growth for most sectors caused corporate executives, distributors, and retailers to point to every conceivable negative influence, however vague it might be. As one company put it, "US beer industry volumes were affected by low consumer confidence, a lackluster economy, recent world events, and poor weather." While the short version of the story is that growth was flat nearly across the board in 2003, the beer industry still has a few positive stories to tell and trends to watch.


While the macro-brewing sector was down .7 percent in 2003, Anheuser-Busch continued its reign as America's largest brewer for the 47th consecutive year, with an increase in domestic production to more than 102 million barrels. In an otherwise flat year for the big brewers, Anheuser-Busch reported an increase of .8 percent in total production, and an increase of 1.1 percent worldwide, amounting to 111 million total barrels. The company continued to push its domestic market dominance, with control of 49.8 percent of domestic beer, a .6 percent share increase over 2002. It now produces more than 2.5 times the volume of the Miller Brewing Company. With its solid growth, lack of domestic competition, and its corporate forecasts, Anheuser-Busch should push past the 50 percent mark by mid-2004.

"Anheuser-Busch had another excellent year in 2003," said Patrick Stokes, President and Chief Executive Officer of Anheuser-Busch, in a press release on the company's annual results. "The company's proven ability to leverage its substantial competitive strengths has led to these consistently strong results. The beer pricing environment remains favorable, and the combination of revenue per barrel growth and volume increases has driven continued increases in profit margins."

To complement its slight growth, Anheuser-Busch continued to aggressively implement price increases for its product line. The company institutes price increases in two phases each year, with the first stage of its pricing plan for 2004 in October 2003 in markets representing approximately 40 percent of the company's domestic volume. The price increases added value to the company's revenue per barrel performance, with gross sales up 4 percent. The company is presently implementing its second stage of 2004 price increases.

Anheuser-Busch is also touting its wholesaler exclusivity agreements as a reason for its continued growth. In 1996, the company sold 40 percent of its volume through wholesalers dedicated only to Anheuser-Busch's brands. Now, exclusive wholesalers account for 67 percent of the company's total domestic volume.

2003 continued to be another tough year for America's second largest brewery. With the purchase of the Miller Brewing Company by SAB in May of 2002, industry analysts expected that the South Africans would have their work cut out for them. This perhaps understated the situation. The company continues to lose domestic market share, down to 17.8 percent, and appears wayward in its reconstruction efforts.

The company remains tight-lipped about its performance. In contrast to previous years, the corporate current financial releases and figures are vague about production numbers and silent about specific brand performance. Miller's domestic volume production lost 6.2 percent before any adjustment. In its annual report, the company admitted that its "core brands have been losing market share for a number of years. However, the rate of decline increased over the past year, and we believe this to be due to a combination of factors including loss of management focus on core brands" after the release of four malternative products "and some understandable disruption during the transaction and subsequent integration into SABMiller." The company further warned that "Miller profitability will be impacted over the next two to three years by the current volume declines, adverse mix effects and the ongoing restructuring and reorganization necessary to establish our platform for growth."

The business situation also remains complicated for the family-controlled brewery in Golden, Colorado. Coors retained 11 percent of the domestic market, and saw a 2.8 percent increase in production across the company. Coors continues to see value in its European and Canadian expansions, which is helping to stabilize losses for Coors Light, the company's main product. The company is also bracing itself for the loss of Pete Coors, who is taking a leave of absence to run for the open United States Senate seat in Colorado.

"Overall, 2003 was a tough year for Coors Brewing Company," admitted Leo Kiely, President and Chief Executive Officer, in the company's annual release. "Our US business suffered from weak industry demand, increased popularity of 'low-carbohydrate' beers and product supply disruptions resulting from implementation of our new supply chain systems and processes late in the year. After a disappointing first half of the year, our UK business achieved solid earnings growth in the second half of the year, driven by strong volume and share performance from the Carling brand, improved pricing in both the on- and off-trade channels, favorable foreign exchange rates and significant improvements in operations costs compared to the prior year."


The big innovation in 2003 for the beer industry was the rise of the Atkins Diet-fueled low-carb movement. On the cusp of this trend, Anheuser-Busch released its highly successful Michelob Ultra product, after much test marketing around the country. Anheuser-Busch once again entered the market at just the right time to capitalize on the carb-counting diet. It quickly gobbled up a 2.2 percent share of the beer market and increased the high-end category by 6.6 percent.

Unlike previous beer trends, such as ice beers and the now comatose malternatives, analysts see some staying power with low-carb beers. "The number of people who are on some kind of low-carb regimen is around 25 million in this country and another 14 million dabble in it," says Paul Gatza, Director of the Association of Brewers. "I think it will have some staying power because it is consumer driven rather than marketing driven."

While it is touting the Ultra brand as its most successful product launch since Bud Light in 1982, Anheuser-Busch seems a bit startled over the ramifications of the popularity of the low-carb trend. First, Ultra is threatening the world's most popular beer. "With the case of Bud Light, it lost about 2 million barrels of expected sales to Michelob Ultra," says Gatza. "So while Ultra was up to 2.5 million barrels, only half a million was new sales for Anheuser-Busch. So to some degree, it is really cannibalizing that other brand."

While other brewers have slowly introduced copycat low-carb products, the second largest American brewer is reaping benefits from the trend without releasing an entirely new brand. The only bright spot in the Miller lineup continues to be its Lite product, which appears to be benefiting from the low-carb trend. "There is a sense that the repositioning of Miller Lite and then the rapid sales growth for Miller Lite, particularly from December and January, has perhaps made Anheuser-Busch realize that the low-carb market might not be theirs to win," says Gatza.

In an ironic twist, the company that gave birth to the low-carb beer segment now seeks to abort it. The executives at Anheuser-Busch took note of the cannibalization and quickly responded in a way that seems poised to suffocate Michelob Ultra. In March 2004, the company began heavily saturating media with a new ad campaign decrying the myth of low-carb beers. The campaign's theme is, "All light beers are low in carbs. Choose on taste."

Without even the faintest acknowledgment of its critical role in creating this "myth", Anheuser-Busch forged ahead with its indignant campaign to stem the low-carb trend. "The new Bud Light ads separate fact from fiction when it comes to low-carbohydrates and light beers," said Vice President of Brand Management Bob Lachky in a press release announcing the campaign. As the unfortunate messenger, Lachky then took a swipe at the seemingly flavorless Michelob Ultra product. "We want beer drinkers to know their favorite light beer can be consistent with a low-carbohydrate lifestyle, without compromising the taste."

Brewers are also learning that the segment is a fickle one. Low-carb beers are wildly popular with people over the age of 30 who are counting their carbohydrate levels. But consumers under 30 generally do not want to be seen drinking a low-carb product because it sends a sign to others that they are concerned with their weight.

In response to the success of Ultra, several other brewers have entered products into the market. Coors recently released Aspen Edge. This product is priced above Coors Original, as Michelob Ultra's price point exceeds that of Budweiser. Coors also plans an extensive media advertising campaign to support the brand, an action that will likely have a negative effect on its signature Coors Light brand.

The Coors brewers, however, are not simply following Anheuser-Busch's lead according to Gatza. He describes Aspen Edge as a more flavorful beer than the stock macro lineup, offering consumers a little color and body. "It's a different concept. It's not going for as light as it can be. The trend for the last twenty years is for American beers and beer drinkers on the mass level to go towards lighter and lighter. Three of the four top brands now are light beers. These products, like Michelob Ultra, are very light. There are probably a dozen of them out there now, some from imported concerns. They are going for the light thing and it struck me as real interesting that the Coors Aspen Edge isn't trying to go even lighter. Instead, it's trying to do a flavorful thing."


After several years of strong growth, the import segment slowed considerably in 2003, with a growth rate of 1.9 percent. "This was a tough year for the industry," said Victor Melendez, Director of Mexican Brands for Labatt USA. "It was a very tough year for the industry as a whole and for imports as well. Total import growth of 1.9 percent is certainly a lot less than it has been in the past few years."

Melendez points to several factors to explain the slowing growth. "There is a number of factors. The economy being so complicated this past year, the whole thing with Iraq, the weather was horrible last year and that affected the Northeastern and even some southern states. Even California had from floods to fires to you name it. Major chain strikes in the western side of the US impacted volumes. Nothing specifically that I can pinpoint, but there were a number of different factors. It's one of the toughest years for the beer industry in the last good number of years."

Overall, European import brands took a hit in 2003, while a surprising group of upstart brands helped prop up growth in the category. "The big thing for imports," says Gatza, "is that 90 percent of their growth happened out of Mexican beers. It's the European beers that are struggling." Gatza pointed to Interbrew's lead brand, Stella Artois, as one of the few European bright spots. "Stella is going up but they are still increasing their market penetration. It is not a national brand yet," he says.

This is a category trend with real growth potential, according to Melendez. He points to changing immigration demographics to support his theory that Mexican brands will continue to add growth to the import category. "The Hispanic population is now 13 percent of the population, and the estimates are that this population will continue to grow. We have very strong roots and are very grounded in this community. We have all the credentials you need as far as quality and respectability to support that."

The changing face of the American beer consumer also means a change in the face of the consumer purchasing import category products. "Tecate is one of the three leading brands in Mexico. It is very widely spread. It is available pretty much everywhere. It's well-known and has a lot of recognition and awareness like everyone here would know a Bud or a Miller. Everybody knows Tecate and Dos Equis in Mexico. The familiarity with our consumer, again being the recent immigrant coming from Mexico, they have awareness of this brand. That is why it has helped our whole strategy of talking to them when they are here. In the case of Dos Equis, even in Mexico, it is a more targeted brand. It is more targeted towards high-end consumers. It's more upscale and niche, although it is widely available. It is more of an upscale beer, while Tecate is more of a more widely available beer brand."

While the Mexican brands add volume to the import category, it remains to be seen whether they add price value. Traditionally, imported beers are priced higher than premium category products. With the addition of mainstream Mexican beers, however, the situation becomes more complicated. "Tecate is an import, so pricing-wise it is perceived as an import," says Melendez. "Although it is not a high-priced import, it is still within the import category. Being in that category impacts as the pricing in that category is obviously higher than a regular Budweiser or domestic would be. For our particular target, the income is a little bit less. It's not the high-end consumers but the blue collar consumers and workers who are more sensitive to economy or money issues. So that definitely affects the volume for Tecate, and it is a little bit stronger there than in the general market perspective."

Melendez sees several challenges for Mexican brands in the future. "Moving forward, our challenge is how to remain relevant for the immigrant and more cultured Hispanic," he says. "The more cultured a Hispanic becomes, the more his media and consumption patterns are more in alignment with the general market. So that is our challenge moving forward. We're going to need to evolve and change as our consumer base changes as well."

Melendez suggest that retailers who are looking for stability and value in the stagnating import section should look to Mexican brands. Labatt USA plans to increase its marketing efforts for its brands, while remaining focused on its core audience. "Advertising is targeted very specifically to a major group, in this case Hispanics," says Melendez. "It's been there and has been growing dramatically over the last few years. Being the number four import overall is a huge achievement for a brand like Tecate which is targeted only at Hispanics. That not only speaks about the potential but, from a general market perspective, I could see how that might fly under the radar. All the media vehicles that we use to communicate the brand, whether it is TV or at home, it is all in Spanish media. In the case of Dos Equis, the brand has been there but we haven't really been doing a lot of media support. This last year was the first year with national television advertising. This year we are coming with a more intensified media plan and heavier weights and continuing the national campaign to definitely help put us out there."


"It was kind of a rough year for the beer industry as a whole, but craft beer is the brightest spot in it," says Paul Gatza. American craft brewers grew at 3.4 percent in 2003 and slightly grew their overall market share. Contract brewing was down ten percent, while regional specialty brewers, those with production over 15,000 barrels per year, grew at almost 11 percent. "In a down year overall for the beer industry, I think what that is going to mean for the craft beer industry is probably growth over five percent 'in 2004' as these regional players continue to develop that brand awareness and sense of quality."

Gatza points to several trends in the 2003 results. "The war in Iraq really had a devastating first quarter effect on the beer industry. It was down almost two-percent overall in that run up to war. We're still seeing a bit of a shift in beer drinking habits from September 11. People are spending more time at home. So the shift has happened away from draft beer and towards packaged beer. That is a huge shift that has gone on. Draft beer sales have pretty much gone down. On the craft side, what that meant is that national craft brands didn't do as well because a lot of their sales are based on having draft accounts all over the country."

Craft brewers also continue to benefit from an increasingly discriminating public. "I think it has to do with the American public's tastes," says Gatza. "They know that craft beers are going to be quality, whereas they didn't have that guarantee 10 or 15 years ago. A lot of the brands have developed a brand awareness in their regions so that it is seen as a very successful brand. We're not seeing huge loyalty to a specific craft brand. We're still seeing people buying several different ones and having some options when they open their refrigerator. A secondary factor is that in restaurants, people are showing a tendency to buy up. So instead of having two or three domestic brewers traditional brands, they are having one or two of a craft brewery brand. That is a trend we are seeing."

According to Gatza, national craft breweries are facing considerable hurdles to growth due to their size. As breweries such as Boston Beer Company and Sierra Nevada Brewing Company have succeeded in attaining nationwide distribution, there is nowhere else to go. These brewers must now dedicate their efforts to deeper penetration in existing markets or to attracting new customers with products such as Sam Adams Light

Sales of the Boston Beer Company remained strong while its production numbers were off by 55,000 barrels, or 4.4 percent. The annual results were skewed compared to 2002 when Boston Beer ramped up its production to fill the pipeline with its new product, Sam Adams Light. The New Belgium Brewing Company continued to exemplify the strong regional craft brewer with a gain a 12 percent increase in production to 285,000 barrels. Since 1998, New Belgium's production has risen an amazing 171 percent.

On the West Coast, Redhook and Widmer have teamed up to form the Craft Brands Alliance. The new marketing company will manage the sales and marketing of both company's brands in western states. Both Redhook and Widmer have distribution agreements with Anheuser-Busch, though the Redhook alliance is up for review at the end of 2004. Widmer grew more than 20 percent to reach 170,000 barrels while Redhook rose 1.3 percent.

At the other end of the spectrum, Pete's Brewing Company continued its freefall. The company lost another 40,000 barrels this year to exit the top ten craft brewer's list.

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Article appeared in the June 2004 issue of Beverage Magazine. For information on reprinting any of the above articles, please contact Andy Crouch.

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