Heads are turning and it’s no surprise considering the remarkable success of the craft beer segment.  A year after the popular press presided over beer’s funeral, allegedly done in at the hands of spirits, craft producers and their double-digit growth rates continue to resuscitate beer’s maligned image.  “One of the things we are clearly seeing is that the American consumer is heading towards more flavorful beers,� says Paul Gatza, director of the Brewers Association (BA), a group representing the interests of American craft brewers. 

Beyond consumers, craft beer’s appeal has also piqued the interest of competitors in the beer industry.  “The large brewers pay attention to market trends and part of that response is paying attention to specialty beers,� Gatza says.  “It doesn’t surprise me that the large brewers are offering specialty beers and getting involved in distribution deals with craft brewers.�  Of the large brewers, industry volume leader Anheuser-Busch, Inc., has been especially quick to address the gains made by craft brewers. 

A History Lesson

More than a decade ago, when craft beer experienced its first meteoric rise in popularity, Anheuser-Busch (A-B) initiated a series of efforts many believed were designed to address gains made by craft brewers.  In 1994, the company created its Specialty Brewing Group to compete with the growing craft segment.  The group developed more than a dozen releases.

The first foray into the better beer market included the Elk Mountain and Red Wolf lines, followed quickly by the Michelob specialty series, including the Amber Bock, and an American Originals line.  The brewery also released the ZiegenBock Amber, to compete with rival Shiner Bock in Texas, and Pacific Ridge Pale Ale in California to compete with Sierra Nevada Pale Ale.

To support its entry into the craft beer marketplace, the normally guarded brewery also decided to court beer writers.  The brewery took a group of nearly 40 journalists on an expense paid trip to watch the hop harvest at its Elk Mountain Farm in Bonner’s Ferry, Idaho.  Anheuser-Busch pampered the gathered writers with meals and samples of its new specialty beers.  According to one report, Senior Brand Manager Bob Franceschelli told the group that A-B’s efforts were designed to provide a one-stop-shop for its wholesalers.  “We think we can satisfy all their demands between our portfolio and our alliances, if not now, then in the future,� Franceschelli said.  Of the specialty beers enjoyed that day, only the Amber Bock and ZiegenBock survived. 

Franceschelli’s comments reflected a well-timed change in the way A-B dealt with its wholesalers.  As A-B introduced its new releases, it also instituted a distribution exclusivity program called the “100-percent share of mind� campaign.  It called for A-B distributors to direct their full attention towards the sale and promotion of the brands of the brewery and its affiliates, to the exclusion of others, including many small brewers.  In a time when craft brewers fought desperately for the attention of distributors, the program effectively slammed the door in their faces. 

In the most controversial component of its defense against the encroachment of craft beer, A-B forged distribution alliances with some of the strongest players in the craft beer segment.  In 1994, A-B announced an equity partnership that gave it a 25-percent stake in the Redhook Ale Brewery in exchange for access to its nationwide distribution network.  In 1996, A-B Chairman and CEO August A. Busch himself traveled to Oregon to strike another equity partnership with the Widmer Brothers Brewing Company.  In return for a 27-percent stake, Widmer also received access to A-B’s nationwide distribution system. 

Déjà Vu All Over Again

When craft beer sales hit a wall in the late-1990s, A-B’s interest in the better beer segment also tailed off.  Fast-forward a decade to the present and A-B is dusting off its old playbook in response to craft beer’s renaissance.  In 2006, A-B revived its relatively dormant Specialty Brewing Group to develop a slew of new products to compete with craft brands.  The brewery resurrected the old Originals and Michelob specialty brand names to house the brands and initiated a seasonal draft beer program.  It held a series of competitions allowing consumers to pick a trio of flavorful new draft beers and developed products targeted at the organic and gluten-free niches.  The brewery even released a few experimental offerings, including its BrewMasters’ Private Reserve and Celebrate series.

To support the release of these beers, the brewery followed the old script and renewed its flirtations with beer writers.  In August 2006, A-B’s employees recruited more than a dozen journalists for a return trip to the brewery’s Idaho hop farm.  In between lunches by the Kootenai River and dinners at a resort, the beer writers learned all about A-B’s latest better beer offensive.

Anheuser-Busch refused requests for a live interview in connection with this article, but agreed to answer three written questions.  When asked whether the new releases were designed to compete with craft beers, Dave Peacock, Vice President of Business Operations, wrote, “Anheuser-Busch has been brewing specialty beers throughout our history.  From our Bock beer of the 1870s to today’s new releases, our commitment to creating beers that appeal to the diverse taste preferences of our consumers will continue.�

Playing With Goliath

Beyond competing with its own more flavorful beers, Anheuser-Busch has also renewed its pursuit of distribution alliances with producers of better beer.  With the ascendance of August Busch IV, Anheuser-Busch looks poised for a new era.  The 100-percent share of mind program has been recast as the “funnel strategy�, which calls for A-B to act as a conduit providing distributors with a diverse portfolio of beers.  Last year alone, A-B signed importation deals for the Tiger Beer, Grolsch, Stella Artois, Beck’s, Hoegaarden, and Leffe brands and purchased Rolling Rock.  A-B also struck a surprise peace treaty in the form of an importation deal with longtime litigation rival Budejovicky Budvar, brewer of the Czechvar and Budvar brands.

A-B also quietly contacted at least half-dozen craft brewers about distribution deals.  Many craft brewers, including the Boulevard Brewing Company, politely rejected A-B’s advances.  Two craft breweries, the Goose Island Beer Company and the Old Dominion Brewing Company, joined forces with A-B and its craft beer partners.  In June 2006, Goose Island announced an equity agreement with Widmer that allowed it access to the A-B distribution network.  Under the terms of the deal, Goose Island sold 40-percent of its business to Widmer, A-B’s alliance partner. 

“The involvement of Widmer worked out really well,� says Goose Island’s brewmaster Greg Hall.  “When we opened the brewery in 1995, we raised money from family and friends. It worked out perfect because we basically swapped out the family and friends portion of ownership for another brewery.� 

Shortly after the Goose Island deal made headlines, word leaked out that the Old Dominion Brewing Company of Virginia had finally found a buyer.  Long rumored to be on the selling block, Old Dominion’s production has languished in recent years despite record sales in the craft beer industry.  According to sources with knowledge of the terms of the sale, the Coastal Brewing Company, a partnership between A-B and the Delaware-based Fordham Brewing Company, purchased Old Dominion for nearly $5 million, including an assumption of debt.  Under the partnership, A-B will own 49-percent of Old Dominion, with Fordham taking a 51-percent share. 

The effect the A-B partnerships will have on the veteran craft brewers remains to be seen. Workers at Old Dominion, who have been largely kept in the dark about the sale, are apprehensive. “The only thing that I do know is that it won’t be good for those of us that have put their hearts and souls into Old Dominion for many years,â€? says one concerned employee on the condition of anonymity.  In response to a question as to the level of influence the brewery exercises over the alliance breweries, A-B’s Dave Peacock wrote simply, “We do not brew these beers and play no role in their management, marketing or operations.â€?

“We’ve had some really good growth in the short time we’ve been in their system,� says Goose Island’s Hall.  “They give us zero direction whatsoever, we’re making all of the calls.  We’re the furthest thing from a subsidiary of either Anheuser-Busch of Widmer you could dream of.�

While A-B and Widmer only need focus on whether Goose Island can produce enough beer to meet demand, the Coastal partnership will need to resurrect a wounded brand and rebuild employee morale.  In 2006, Old Dominion’s beer sales were down more than 15-percent, with only contracted brands enjoying growth.  A-B and its partners have made clear that they plan to reduce Old Dominion’s portfolio of beers from nearly 30 offerings down to three to five plus seasonal beers.  The Old Dominion pub will also now stock the A-B products, including Bud Light.

The Next Step

The irony of A-B’s sudden increase in attention is not lost on craft brewers.  “A few years back, we were discussing Anheuser-Busch and the big question was the zero-share-of-mind,� says Tomme Arthur of the Port Brewing Company.  “I think it’s inevitable that if craft beer continues to grow at this rate, the big brewers are not going to just sit back and wait.� 

In light of their recent successes, the craft industry remains sensitive about A-B’s interest in the better beer segment.  While many craft brewers profess a lack of fear over the prospect of competition from A-B’s homegrown products, the distribution side of the equation has always caused their tempers to flare.  In an October 1994 interview with Inc. Magazine, Jim Koch, of the Boston Beer Company, derisively referred to Redhook as ‘Bud Hook,’ called the Redhook/A-B alliance announcement a “declaration of war,� and pronounced that “the cozy fraternal days of the microbrewery business are over.�

While the loss of collegiality was of grave concern then, craft brewers today are responding to the recent Goose Island and Old Dominion deals with a new focus of concern.  “I think the verdict is out about how genuine their interest in our segment is,� says Sam Calagione, president of Dogfish Head Craft Brewery. “I’ll be happy to be proven wrong.  But I know that their goal is to approach a finite number of brands, whether they are craft brands, quasi-craft brands, or imports, and bring them into distribution at the expense of breweries that are not brought in.�

Calagione also challenges the notion that the funnel strategy materially differs from the 100-percent share of mind program.  “Their goal is to make sure they are the only one-stop-shop in beer distribution,� he says.  “It’s up to all of us small breweries and all the non-A-B distributors and the A-B distributors that don’t want to be told by St. Louis what to put on their trucks, to make sure that doesn’t happen.�

Goose Island’s Hall strongly disagrees.  “We haven’t seen that at all, in fact just the opposite,� he says.  “The distributors we talk to want access to more beers they can’t get.  It’s a reality that in most markets, A-B probably calls on as many or more accounts than someone else.  I can’t see where it’s a bad thing that you can get your beer into more people’s hands.�

Hall acknowledges he has encountered some critics of the brewery’s involvement with A-B, but he has a response line at the ready.  “I tell them, ‘Can’t you taste the beechwood in there?  Don’t you think it makes it taste better,’� he jokes.  “We’ve gotten some backlash but we tell them the truth, that the beer is coming is coming on a different truck now, but it’s the same beer from the same brewery and people.� 

Bridging the opinion divide, brewer Tomme Arthur believes brewers should carefully consider their options but understands the decision to join A-B’s distribution network.  “In some ways the change is good because some breweries are going to gain access to the market that they didn’t have,� he says.  “Access to market is one of the biggest concerns for most brewers.�

With the benefit of experience at their sides, craft brewers plan to carefully consider Anheuser-Busch’s renewed interest in the better beer segment.  In surveying the new landscape, Arthur suggests that all craft brewers should maintain their focus on what made them successful.  “How a brewery responds to a larger group giving them access to market, and the integrity of the product, is what matters most,� he says.  “The consumer will be left to decide whether the things being done from here on out still merit their consideration.�

–Article appeared in June 2007 issue of Beverage Magazine.