2009 Beer Report: Beer defies the odds
April 15, 2009
Domestic beer continued its recovery in 2008, thanks in large part to a renewal of mainstream brands, as well as growth in the craft segment. Estimated domestic brewer volumes were up 1.1 percent in 2008, and exports of U.S. beers to other countries increased 12.4 percent vs. 2007, according to the Beer Institute, Washington, D.C. Import volumes fell 3.4 percent for the year.
Craft beer volumes gained 5.8 percent in 2008, reports the Boulder, Colo.-based Brewers Association, which represents independent craft brewers. Craft beer’s share of the total market jumped from 3.8 percent in 2007 to a little more than 4 percent last year.
While smaller than 2007’s increases, beer’s gains in 2008 were significant in that they represent a second year of recovery, and they occurred despite the overall economic trends.
For early 2009, volumes are down 1.8 percent, the Beer Institute reports. Industry experts expect brewers to focus on pricing over volume gains in the remainder of the year, as well as taking share from other alcohol beverages. UBS Investment Research said in January that it estimates beer prices rose 3.5 percent in 2008, and believes solid pricing growth will continue this year.
“Given the challenging economic environment that everyone is in right now, the CPG industry being no exception, beer has held up remarkably well,” says Dan Wandel, senior vice president of beer, wine and spirits at Information Resources Inc., Chicago.
“What’s really helped beer, in particular, last year and going into this year, is we’re starting to see the domestic premium and sub-premium segment starting to grow again,” he adds. “Obviously, that is a big majority of the volume there.”
Roman Shuster, beer analyst in Euromonitor International’s Chicago office, agrees, adding: “One thing that beer has done in the past two or three years, especially the big brands, is they’ve got the public excited about drinking beer again.
“In 2005 and 2006, everybody was talking about the death of beer and how everybody was going to be drinking cocktails and wine,” he says. “In response to that, the beer companies didn’t give up. They put a lot more money into marketing, they spent more on advertising, they got really creative.”
The industry’s largest brand, Bud Light, maintained its leadership position during the past year, and achieved a slight 0.05 percent increase in its total share of market through IRI’s grocery, drug and mass merchandise outlets, (excluding Wal-Mart) for the year ending Feb. 22, 2009.
In all, IRI measured an increase of almost 5.4 percent in beer sales through food, drug and mass merchandise accounts. Some of the brands pulling in dollar sales increases include Bud Light, up almost 5.7 percent; Coors Light, which gained almost 9.5 percent; and Miller High Life, up 7.7 percent. In the double-digit club, MillerCoors’ Keystone Light picked up 19 percent in dollar sales, while Tecate gained more than 14 percent.
On the craft side of the business, IRI reported an overall 10.2 percent dollar sales increase through food, drug and mass merchandise channels. Variety truly is the spice of life in the craft segment, according to the data. Seasonal offerings pulled in more than 23 percent increases for Samuel Adams, 68 percent for Sierra Nevada, and 13 percent for Deschutes.
“Seasonals have been selling through the roof,” Wandel says. “We break the craft segment into 28 distinct styles, and pale ale has always been the top-selling craft style. Last year, for the first time ever, seasonals overtook pale ale as the top selling style for craft beer.”
Brewers Association Director Paul Gatza says craft beer’s continued growth can be attributed to consumers’ faith in its quality, which he believes has caught up with the reputation of imported brands. In addition, the local nature of craft brewers is a bonus, particularly with the perception of large corporations today.
“Small and independent don’t hurt right now,” he says.
But it’s not just the micro brewers that are keeping the higher end of the beer category going. IRI’s Wandel says super-premium brands such as Blue Moon and Bud Light Lime also are contributing to that tier’s success.
“These are segments that offer a lot of variety and different styles of beer,” Wandel says. “I think that’s really appealing to today’s consumers. I also think that these are segments that have had quite a bit of innovation over the last several years as well, in particular super-premium, where we’ve seen items like Bud Light Lime come out, which was a really successful product last year.”
While higher-end beers have held their own in the economic downturn, Gatza points out that the volume increases are down from the double-digit gains of the past several years. In a way, the category is both benefiting and suffering from a trading down phenomenon that has sub-premium brands drawing sales from higher priced brands, while craft and super-premium brands pull sales from wine and spirits.
“Instead of maybe buying all craft beers or imported beers, [consumers are] trading down a little bit there, but we’re also picking up share from wine and spirits right now,” Gatza says.
Other higher-priced beers, imports, have taken a bigger hit during the economic downturn. Shipments of imports were down in 2008 after a 2 percent increase the prior year, according to the Beer Institute. At retail, IRI measured a 1.9 percent increase for sales of imports in food, drug and mass merchandise accounts.
Individual brand results were more mixed, however, with some brands such as Tecate (up 14 percent), Stella Artois (up 44 percent), Modelo Especial (up 19 percent) and Dos Equis (up 21 percent) pulling in big increases.
Stella Artois likely has new distribution through the Anheuser-Busch system to thank for its gains, while some of the other brands are benefitting from a lower price point relative to the import category.
Wandel says some of the brands that may have taken a back seat to the big imports in years past are “really starting to assert themselves.”
Early-year results indicate 2009 may be a better year for imports, he adds. “We are seeing some stronger numbers coming out of the import segment for the first two months of this year.”
In addition to recessionary challenges, the beer industry underwent a seismic shift in 2008, with the merger between the North American business units of SABMiller and Molson Coors, and the acquisition of Anheuser-Busch by Belgium’s InBev.
Both mergers are expected to result in job cuts, and consolidation on the wholesaler front is expected to accelerate in response to the newly combined companies. In addition, IRI’s Wandel says brewers and wholesalers will likely move farther away from what was once a relationship-based business to one focused on efficiency.
“As those two organizations become more efficient, it’s going to really force everyone else, both in the supplier and wholesaler ranks, to do the same,” he says.
On a global level, the tight credit environment may require companies that took on debt to make big acquisitions to divest some of their businesses, says Spiros Malandrakis, beer analyst in Euromonitor International’s London office.
“The major concern of the majority of brewers at the moment is reducing their debt levels,” he says. “The credit environment is quite adverse. They might be forced into some divestments.”
Smaller companies with relatively lower debt loads, on the other hand, may find themselves well positioned in the current market.
Like they are in the United States, brewers the world over are dealing with recessionary factors in varying degrees. The beer markets in Western and Eastern Europe, for example, have been particularly hard hit, Malandrakis says. Growth in China and other developing markets has slowed, but is still comparatively high.
Not all of the slowdown is due to the economy, however. Malandrakis points out that many of these markets had slowed or were in decline before the recession. In the United Kingdom, for example, beer sales have been hurt by demographic changes in favor of older consumers, and a shift from on-premise consumption to take-home sales. The once legendary U.K. pub culture is seeing pubs close at a rate of five a day, he says.
“It became worse because of the economic situation,” he says. “But it was there before that.”
The good news for brewers everywhere is that ingredient costs seem to have stabilized for many items. Last year, brewers were worried about a hops shortage, but the Brewers Association’s Gatza says aggressive plantings by growers of the high alpha hops used for bittering have eased the situation. In addition, malt prices have leveled off, he says.
“It was a pretty good year agriculturally in 2008,” he says. “We are sort of at the mercy of Mother Nature, and after a couple rough years weather-wise, it was a pretty good harvest.”
Brewers still face a shortage of aroma hops, he says, which affects smaller brewers in particular. “For craft brewers, the aroma hops are where you can really differentiate your beers,” he says.
Euromonitor’s Malandrakis says input cost increases in any area from ingredients to packaging could impact smaller brewers particularly hard this year, as the tight economy leaves little wiggle room on pricing. “That would affect the smaller brewers much more since they would be almost unable to pass on to consumers any other price [increase].”
Last year saw giant beer company mergers, but America’s craft brewers have been doing a little partnering of their own on more creative terms.
“One interesting thing about the craft brewing industry is that people play well with others,” says Paul Gatza, director of the Brewers Association, Boulder, Colo. “They don’t really see, in many cases, their fellow brewers as competition as much as everyone trying to build the pie a little bigger so more people get to enjoy craft beer.”
One of those partnerships took shape last fall, with a collaboration between New Belgium Brewing, Fort Collins, Colo., and Elysian Brewing, Seattle. The brewers agreed to produce beer in each other’s facilities, and created a new beer series called The Trip.
New Belgium Brand Director Greg Owsley says the companies saw similarities in one another and looked for ways to collaborate that would benefit both businesses and inspire the companies’ respective consumer bases.
New Belgium took on production of some Elysian brands in its Colorado brewery, in part to put production closer to eastern markets. Elysian’s founder Dick Cantwell was on hand to ensure the scaled up production met the same standards as his brewpub operation in Seattle.
“It took a few rounds to go from his 20-barrel brewhouse to our 200-barrel brewhouse, to make sure that he was getting the beers exactly as he wanted them,” Owsley says. “It was a great learning experience for our brew crew here, too, to see that this is how we can take this beer and change the scale on it and still have it taste fantastic.”
Owsley says the Facebook and Twitter traffic it has received proves consumers are on board with the partnership. “It’s been fantastic that we’re doing this in the era of social networking, where beer drinkers from both Elysian and New Belgium are able to comment on both,” he says. “They love the idea. They’re totally behind it.”