Despite a year of great economic and social uncertainty, the beer industry continued its slow growth movement with a half-percent increase in overall production volume in 2001.             

Imports, light beer and the malternative segment fueled much of this growth. On-premise sales were down, especially in the LAST quarter, mainly due to a reduction in travel and going out in the wake of the September terrorist attacks. Despite the sagging economy, there is still great evidence that people are trading up to higher margin super-premium, specialty and import products.

What the numbers show is that while people are not drinking more, they are drinking better. This willingness by consumers to pay more for beer benefits players from imports to crafts and big domestic producers. Anheuser-Busch (A-B) successfully instituted a series of price increases which helped raise the company's revenues per barrel by nearly three percent per year for the last three years. Even during tough economic times, beer drinkers sought out a range of products at different price points.


The major American domestic brewers continued in the roles they have perfected in recent years. Global powerhouse Anheuser-Busch nearly broke the 100 million-barrel domestic production mark, according to its own numbers. A-B celebrated a 1.2 percent increase in production along with their domestic volume record. Combined with production for export, A-B became the first brewer to produce 100 million barrels of beer in a year (a far cry from the early days, 150 years ago, when the new company produced a mere 50 barrels of beer). The company now commands 48.8 percent of the US market, with Miller trailing far behind at 19 percent and Coors treading water at 11 percent.

Anheuser-Busch executives and stockholders should be happy for several reasons. Besides a strong, continuing growth trend, financial analysts believe the company is likely to produce substantial growth over the next few years. One area A-B marks for growth is the prospect of taking the Budweiser line international. Despite setbacks with Bud Light in the British market, Budweiser is gaining share in Ireland, China and Canada.

Minor international stumbling aside, Budweiser's younger sibling bested his older brother in the most important way in 2001. Half way through the year, Bud Light surpassed Budweiser to become the world's best-selling beer for the first time. The brand registered an 8.1% increase last year. Considering the brand's huge base, some 475 million cases, this level of growth is nothing short of phenomenal.

Things have not gone as well for America's other top tier brewers. In Milwaukee, Miller Brewing reported a 2.4 percent decline in production and the company's market share fell below 20 percent for the first time since the mid-1980s. Miller's below-premium brands constituted much of the volume loss, while premium brands, such as Miller Lite and Miller Genuine Draft, dropped slightly.

One of Miller's few highlights, backed by a substantial marketing investment, was the performance of Miller High Life. The brand's volume increased by 4.1 percent in 2001 based upon an ad campaign that actually seemed to work for its target market. Miller's other bright spot was the performance of Foster's Lager, which was up almost 14 percent. The Australian brand brewed by contract in Canada, which Miller distributes in the US, continued its record of strong domestic growth.

While Miller's continued decline made news, the industry's focus on the company in early 2002 was for an entirely different reason. Earlier this year, Miller executives sent out signals that parent company Phillip Morris wanted to put the brand on the auction block. While Miller has been the focus of sale talks in the past, this year's rumors solidified when international brewing giant South African Brewers (SAB) announced it was in talks to purchase America's second largest brewery. Talks heated up in April, with many industry analysts expecting a purchase announcement during Miller's quarterly conference call. At the time of press deadline for this publication, talks were still underway and the companies had yet to strike a deal.

Many in the brewing industry are surprised such a sale did not occur long ago. "Miller is definitely hurting, and the rumors you hear about SAB looking to buy Miller make sense," says Paul Gatza, Director of the Institute for Brewing Studies in Boulder, Colorado. "If I was Phillip Morris, I'd be looking to dump that asset while it still had value." Gatza notes that Miller's problems have been building for a while. "They have been struggling for years with getting anything that is sort of trendy or even funny. It's just not seen as the cool beverage. Bud, Bud Light and the Silver Bullet are the cool beverages. Miller Lite, while it is still the fourth biggest brand in the US, is only the third largest light beer."

The deal also makes sense for SAB, according to Gatza. "Their value will increase from this if they make some major changes in the way Miller is marketed. I really see that as Miller's primary problem - their marketing. I think it will be a worthwhile move for [SAB]." SAB may be considering reasons other than Miller's potential value in the purchase of the large American brewer. "SAB is fighting to try and keep up with Anheuser-Busch, Heineken and Interbrew," says Gatza. "When other beverage markets consolidate, they tend to do so toward two or three major players. So SAB will eventually, in 5, 10 or 15 years, get swallowed up by one of the three larger global players. It may not even take that long . . . they are basically seeing Interbrew gobble up brewery after brewery around the world and they are not keeping up with the Jones unless they make some big deals like this."

While Miller busily seeks out a lifeline, America's other top tier brewer is attempting to break out on its own. While Coors weathered a domestic volume decline of around one percent, it returned higher net sales in 2001. While the brewery historically has focused a myopic majority of its attention on the US market, Coors surprised many with its December purchase of Carling, one of the UK's top brewers. When the European Union forced Interbrew to divest itself of Carling to secure its purchase of Bass Brewers, Coors came to the table. With the purchase of Carling, Coors enjoys the ability to spread its risk over a larger geographic sphere, especially one out of the range of A-B. While normally averse to taking on corporate debt, the Colorado-based brewer has publicly stated its intention to continue the consideration of future acquisition opportunities.


Despite economic downturns during 2001, import brands continued their strong growth trend, though at a slightly slower pace than in previous years. Import volume was up a solid 8.5 percent, with growth driven by strong sales among the top ten brands. According to numbers released by the Institute for Brewing Studies, imports sold nearly 22 million barrels last year, capturing nearly 11 percent of the total domestic consumption market. At this rate, the market share of import brands will surpass that held by Coors in the next year. As it currently stands, the US imports 10 times the amount of beer that it exports.

Among many success stories, Grupo Modelo shines the brightest. Modelo's brands gained 18 percent in 2001, its third consecutive year of double digit growth. At the head of the class, perennial top-student Corona grew by nearly 15 percent. At a much smaller volume, the Corona Light brand experienced growth of more than 30 percent. Modelo also enjoyed substantial growth with the Pacifico and Modelo Especial brands. Pacifico grew by 27 percent, while Modelo Especial entered the import top ten list with a nearly 27 percent volume increase.

The Mexican-based brewer is not the only one smiling at the performance of its portfolio. Behind the scenes, a familiar American mega-brewer reaped significant benefit from Modelo's success. In its annual report, Anheuser-Busch highly touted its 50 percent ownership interest in the brewery. On the strength of Corona, A-B plans to institute price increases of about two percent this year. The big Corona price increase in March should create a good umbrella for increases in A-B's premium products.

Other familiar large import brands continued their success in 2001. Heineken was up seven percent, while sister brand Amstel Light rose nearly 13 percent. Labatt USA scored success with Dos Equis, which grew nearly 13 percent, while Labatt Blue gained eight percent and Labatt Blue Light increased a stunning 38 percent.


The craft industry grew by a respectable 1.2 percent in 2001, gaining a 3.14 share of overall domestic production. Contract brewers produced less beer for the fifth consecutive year, while production by small microbrewers dropped one percent. "The craft brewing movement is still seeing growth every year," notes Charlie Papazian, President of the Association of Brewers. "The percentage growth has leveled off, but we have seen continued growth over the years. Generally, [the craft beer market] has shown that it has strength and there is a great foundation laid. The health of the industry, by the numbers, is that there has never been a drop in the national production levels of the craft brewers. We have always seen some growth over the years."

Aftershocks from the late-nineties shakeout continue to subside. "The shakeout is pretty much over," counsels Paul Gatza. "We look at openings versus closings. There were 59 pub openings and 53 closings last year. There were also 17 packaging brewery openings and 21 closings. The number of openings and closings are dropping off by about 25 percent a year and that trend is going to continue. The players that have made it this far are probably going to make it."

As many lesser players continue to leave the game, the players remaining on the field continue to enjoy sizable growth. In 2001, regional specialty brewers led with a strong growth rate of five percent. "The craft breweries are really liking that the shakeout has passed and there aren't these tire-kickers and wannabes in the industry anymore," notes Gatza. In today's craft market, strong regional brewers quickly take up the slack left by exiting breweries. "One of the things we are seeing is that some of the microbrewers who aren't making it for business reasons are consolidating and the volume is being taken up by regional brewers who are going beyond the 15,000 barrel level to 30, 60, 100, or 400,000 barrels a year," says Charlie Papazian.

To succeed, regional craft brewers must balance proper branding practices, attention to their local markets and a high-quality of product. "They've done an outstanding job of branding their products and are definitely getting serious penetration and awareness in their markets," says Paul Gatza. "[Regional craft brewers] have developed, I wouldn't exactly say consumer loyalty, but product awareness and consumers are turning to their products from time to time. They're well known and are doing better on the distribution side in terms of shelf space. And because they are moving a lot more beer, they are getting more distributor attention to their brands. These things all play into it. It's almost like, once it gets going, it starts going faster."

Quality of product and geographic market expansion are also important, connected issues for regional craft brewers, says Gatza. "Most are learning the lesson of a few years ago, that you don't go where you can't support the quality." This lesson advises brewers to prudently evaluate thoughts of geographic expansion. "The regional powerhouses are not moving into new areas. A lot of them are taking the attitude that they have to be really great in their own markets," continues Gatza. "They are really worried about maintaining quality rather than sending the beer six or eight states away, where it can sit on the liquor store shelves for half a year, and they lose control of the quality. New Belgium [Brewing Company], for example, grew by 38 percent this year. It's only distributed in eight states. They could go everywhere in the country but they're really concerned about the quality and knowing that where there beer is sold, that it's being taken care of."

Consumers reward those craft breweries that successfully control the quality of their products. Paul Gatza points to New Belgium as a success story. "They have developed a quality and a consistency - so when you buy a New Belgium product, you know you are going to get an outstanding beer." Charlie Papazian also highlights the importance of the quality of a brewery's product and points out a few more success stories. "It's really nice to see the quality of the beers, whether it's Redhook, Sierra Nevada, Boston Lager or some of the other larger craft brewers."

While no individual stories can adequately express the performance of the diffuse lot of craft producers, a few stories stand out. The biggest craft success stories of 2001 were certainly the growth of the Yuengling Brewery and by New Belgium. Yuengling shipped over a million barrels, up 11 percent. With its substantially increased capacity and continued growth, Yuengling is preparing itself to become one of America's top ten brewers.

While Yuengling's continued growth is impressive, the biggest story in the craft beer industry continues to be the quirky, laid-back New Belgium Brewing Company based in Fort Collins, Colorado. This once small brewery has quickly built a huge reputation for itself. In the brewery that Fat Tire built (beer lovers of all rank routinely ask friends traveling to Colorado to bring them back cases of the amber ale), New Belgium grew 38 percent in 2001 and surpassed Anheuser-Busch partner Redhook to become the nation's fifth largest craft brewer. Things are in flux at this exciting brewery, where capacity will soon be tripled to 750,000 barrels. To facilitate the brewery's dedication to experimentation, the brewers plan to reinstall New Belgium's small, original brewing system to be used for test batches. The secret of New Belgium's success is three-fold: a big-chested flagship with strong legs, a burgeoning reputation for eclectic, quality brews and the a slow, methodical and well-considered plan for expansion. Much to the dismay of New Belgium's growing fan base, the brewery shies away from sending Fat Tire and the its line of artisanal beers to all corners of America. New Belgium currently distributes to 12 central and western states, from Missouri to Arizona to Washington State.

At the top of the craft market, Boston Beer Company's sales were down two percent while production was off six percent. This current year may not prove to be any better for the company, which is burdened by increased advertising and other costs related to the slow regional roll-out of Sam Adams Light. While the brand entered new markets recently, most notably Illinois, caution regarding the possibility of national distribution is the company's primary priority.

By the numbers, there is also another interesting story developing between two craft brew giants: the volume competition between Sam Adams Boston Lager and Sierra Nevada Pale Ale. While production at Sierra Nevada failed to match the brewery's usual double-digit growth, its SNPA continued to rack up huge gains of nearly 10 percent. The leading craft beer, the Sam Adams Boston Lager, grew by nearly five percent in 2001. In the last five years, Sam Adams Boston Lager grew at a rate of 15 percent, while SNPA increased 79 percent. While SNPA is only at 60 percent of the volume of the Boston Lager, that level is up from 39 percent five years ago. It will be interesting to watch how this battle of the craft beer titans unfolds over the next five years, especially in venues such as supermarkets and convenience stores.

For the craft brew industry as a whole, Paul Gatza has some predictions for the coming year. "The success of the branding of the regionals means they will continue to grow and grow. Micros will probably stay level. Brewpubs are pretty much at build-out. I feel that pretty much where there should be a brewpub, there is a brewpub. Another trend I'm seeing is that the brewpub groups have ceased their plans for aggressive expansion and are pretty much on hold for expansion. If they are going to expand, they will probably not build new facilities, but instead purchase existing facilities in desirable locations. That would be on a very limited scale, however, for the foreseeable future."


The biggest story in the beer industry last year was unquestionably the explosive growth of the so-called ready-to-drink (RTD) or malternative segment. Malternatives finished 2001 with a bang, and are fast out of the gate again in the first quarter of 2002. The segment accounted for more than five million barrels in 2001, with Diageo's Smirnoff Ice accounting for more than 30 percent of the total. After pulling in over $600 million in sales of the blockbuster product in 2001, sources say Diageo expects to sell 100 million 2.25 gallon cases of Smirnoff Ice this year.

Malternatives have everyone in the industry a bit scared - supporters fear failure, while competitors fear success of the segment. "(Malternatives) will cause a short term flurry," said Boston Beer Company's Jim Koch during a recent conference call. "Certainly, Smirnoff Ice was a successful launch by all standards. It grabbed somewhere on the order of one percent of the beer market. So as a result, we will see over the next three months a veritable flood of new products." This year, consumers will be inundated with new malternative choices, including Captain Morgan Gold (Diageo), Bacardi Silver (Bacardi/Anheuser-Busch), Skyy Blue (Skyy Spirits/Miller Brewing) and Sauza Diablo and Stolichnaya Citrona (Miller/Allied Domecq). These new brands will cause some trouble for wholesalers fighting for shelf space and for retailers attempting to choose their product offerings.

The staying power of the malternative segment is the main issue on the industry's mind. While some producers inevitably follow beverage fads from one to the next, others are betting hard on the long-term success of this segment. With a current market share of three percent of total beer sales, the combined advertising spending on malternatives may reach more than $350 million this year alone (including spots during the Super Bowl).

Diageo is attempting to market Smirnoff Ice and its growing malternative portfolio as beverages suitable for all drinking occasions. In arguing for its potential ubiquity, Diageo compares the new segment to the introduction of lager as a significant participant in the UK's premium drink market. "We do not see RTDs as a separate segment," said Jim Grover, Director of Group Strategy for Diageo, at the recent Global Beverages Conference (GBC). "It doesn't take market share only from beer. It takes 40 percent from non-beer products . . .We see no reason why a well-marketed RTD segment cannot grow to the equivalent of 10 to 15 percent of total beer consumption in markets such as the US and Great Britain."

The most striking evidence of Diageo's devotion to the burgeoning alcohol segment is the company's stated desire to divest itself of other interests, such as the Burger King restaurant chain. Acquisitions are also on hold for the company. Amid rumors to the contrary, Grover stated at the GBC that Diageo has no interest in a straight acquisition of a US brewery. The company will instead seek to engage in further strategic alliances, such as relationships with Heineken in Asia and distribution agreements for Carlsberg and Budweiser in Ireland.

While Diageo and other producers gaze up in search of the segment's ceiling, others suggest the malternative craze will inevitably plummet through the floor. "I don't see (the malternative trend) continuing," says Paul Gatza. "It is a fad, but a fad that will probably have a four year lifespan in this country. I know stories of a major New York focus group firm that had a group that didn't like the products based upon their taste. So the idea is that the marketing is building that market . . . It's a fad and it'll go away. Dry beers went away. Ice beers went away. Wine coolers went from 20 percent of the wine market in the early eighties to less than half a percent in a decade."

Regardless of the long-term viability of the segment, all players agree that in the near future, the malternative segment will continue to attract consumers away from existing beer products. "What's hurting craft brewers is that these people, when they hit that 21 to 27 demographic, instead of trying craft beers and maybe using them as their main source of social beverage, they are hooking into (the malternative) trend," says Gatza.

"They're clearly going to take some volume, and it appears that maybe two-thirds of their volume is coming from beer and one-third from spirits," suggests Jim Koch. "I think short term it's going to get share of mind of wholesalers. Long term, it could certainly grab a couple of percent of the beer business. Whether it will hold that or not nobody knows." But Koch is hopeful for the future prospects of brewers. "In the experience of wine coolers with all the advertising and branding and excitement that came with them, it quickly subsides and people go back to drinking beer."

Paul Gatza agrees that non-malternative beer products will continue to be strong, but offers the only incontestable truth. "That said, there's going to be another fad around the corner and we don't know what it will be. In two, three, four or five years there will be something else that is really trendy and popular among younger people."

Other issues Brewers and analysts alike continue to keep their eyes focused upon a variety of issues facing the beer industry. Venues for alcohol sales continue to evolve, with consumers placing less focus upon liquor stores in favor of centralized consumer centers. "The growth areas are club stores," says Paul Gatza. "Supermarkets are growing in their sales quite a bit, and convenience stores are growing just a little bit. It seems like off-premises are starting to leave the traditional liquor stores and beer distributor outlets and are moving towards other traditional customer centers."

The industry also continues to be shaken by a steady stream of consolidations and acquisitions of major brewing players. Besides the Coors/Carling and possible SAB/Miller deals, foreign and domestic breweries continue to seek out areas around the world for expansion. Chief among the expanding global brewers, Interbrew continues to pursue its strategy of being the "world's local brewer". Interbrew approaches the brewing industry as one dominated by local products, so it purchases strong regional breweries that typically run first or second in their respective markets. On top of its local offerings, Interbrew promotes additional beers from its international premium line, which includes Stella Artois and Beck's. Interbrew continues to tout its "growth through acquisitions" approach.

On the domestic front, the issue of reducing the federal excise tax on beer returned to the legislative spotlight in April. Backed by the brewing industry lobby, members in Congress introduced a bill to roll back the tax on beer to its pre-1991 level. Arguing in part that the tax unfairly targets lower and middle class drinkers, supporters seek to reduce the tax burden by $18 per barrel, or approximately 33 cents per six-pack.

Opposition to the measure was fast, furious and well organized. The opposition lobby, which includes groups such as Mothers Against Drunk Driving, the National Governors' Highway Safety Representatives and the Consumer Federation of America, offered a two-prong argument against the tax decrease. First, the groups argued that cutting the tax on beer would cut off a valuable revenue stream in a time when tax coffers are low. Second, opponents argued that the reduction would have "dire and deadly consequences for adults and youth with respect to drunk driving, underage drinking and alcohol problems in general".

While brewing industry lobbyists appear hopeful that 2002 will be the year the tax roll back will pass, the forces aligning against them are waging a strong campaign to scuttle the measure.

In 2001, the US brewing industry weathered acquisitions, segment changes and a challenging sales environment due to the September terrorist attacks. In securing solid growth numbers in a year of great uncertainty, the industry proved its continued strength. As social and economic trends continue to turn in favor of higher margins and volume, retailers, distributors and brewers can hopefully look forward to an equally strong performance in 2002.

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Article appeared in the June 2002 issue of Beverage Business Magazine. For information on reprinting any of the above articles, please contact Andy Crouch.

All materials, content, and articles remain under copyright held by Andy Crouch.  2002-2006 © Andy Crouch.