2004 Beer Report

Highlights for 2003 in the beer industry were less than high in most brewers’ eyes and hard on bottom lines. However, while the Top 10 brands lost market share and both domestic and per-capita consumption took a turn for the worse, analysts are predicting an upswing in 2004. Producers are moving into high-gear recovery after an unpredictable 2003 and taking advantage of American consumers’ taste for premium beer.

Excluding non-alcohol beverages, Davenport & Co. LLC estimates domestic consumption dropped 0.7 percent in 2003. Furthermore, the company’s preliminary estimates from the U.S. Census Bureau show a per-capita consumption decrease from 21.9 gallons per person in 2002 to 21.5 gallons per person in 2003 — the first drop in per-
capita consumption since 1997. However, what consumers are drinking is costing them more money as they continue to prefer premium beers.

Going global

A stagnant U.S. market staring many brewers in the face in 2003 spurred growth in other parts of the world and initiated important business decisions for the future. Recent announcements of mergers and investments abroad only heighten awareness of the growing issues affecting the brewing industry locally and the changing state of the beer industry worldwide. Among the areas of interest for major brewers, global brewers pursued countries such as China, regions of the world such as Eastern Europe and continents such as South America, with visions for increased profits in 2003. China, one of the four largest beer markets in the world, beat out the United States as the world’s largest beer market by volume in 2002, according to reports in The Wall Street Journal. Current data shows that China, Brazil, the United States and Russia maintain the top spots for beer consumption in the world, according to Euromonitor. In February, Heineken reported its earnings growth for 2003 was driven primarily by acquisitions in Eastern and Central Europe. Focus on European markets through its investment in BBAG, an Austrian brewer, offset the increasing difficulty the company faced in its No. 1 market, the United States, due to a weakening dollar. Starting in 2003 with the acquisition of a 50 percent stake in the Lion Group in Malaysia, Interbrew SA announced its plans in March to merge with Brazil’s Campanhia de Bebidas das Americas (AmBev), creating the largest brewer in the world by volume. InterbrewAmBev, the separate holding company formed after the $11.2 billion deal, is expected to sell 13 billion liters of beer annually and edge out No. 1 Anheuser-Busch. Forecasters at Euromonitor also predict that Latin American beer sales will grow by more than 14 percent during the next five years. While Anheuser-Busch takes a back seat to Interbrew’s entrance in markets to the South, it recently announced the acquisition of approximately 30 percent of Harbin Brewery Group Ltd., a brewer in Northeastern China, to compete with the Belgian giant in China. The acquisition serves as the company’s second venture into the Chinese market after its investment in Tsingtao Brewery Co. Ltd. two years ago. Part of its growth direction after the merger of South African Breweries and Miller Brewing Co. two years ago, SAB Miller plc focused its 2003 investment dollars on claiming a large stake in Italian brewer Peroni.

Davenport attributes consumer trade-up to the beer industry’s recent focus on innovative product offerings and packaging vs. the rate increases that were more likely to occur in the past. And the analyst group estimates high-priced, super-premium and premium brands in aggregate maintained market position last year.

Imports came out on top with a 1.9-percent increase in consumption during the past year and 0.2-point market share gain in the category. This is a trend that Davenport expects to continue in 2004.

The strength of imported premium lagers in the United States pales in comparison to the robust standard lager market, which is predicted to reach 13.5 billion liters in sales by 2008, according to Euromonitor International. In fact, standard lager’s overpowering status among the beer styles in the United States is expected to protect it from economic uncertainty. However, Euromonitor also expects its volume sales to decline by 4.1 percent from 2003 to 2008. Fortunately, the light beer trend is contributing to a slowdown in the decline of domestic standard lager consumption in the United States.

Imported premium lagers are expected to see diminishing volume growth through 2008, however Euromonitor predicts reductions will be slight due to Americans’ penchant for spending money on luxury items. Furthermore, premium lager sales are predicted to grow by 36.5 percent between 2003 and 2008.

Dark beer is forecasted to decline over the next few years due to economic trends and retail maturation. From 2003 to 2008, dark beer volume sales are expected to grow by 14.8 percent. Experimentation with dark beer continues to be a trend among U.S. consumers, however unfamiliarity and the long tradition of lager-style beer continues to be a hurdle for dark beer in this country, according to Euromonitor.

Anheuser-Busch, St. Louis, Mo., maintained top honors as the No. 1 brewer in the United States in 2003. It reported shipments of 103.3 million barrels, which was an increase of 0.8 percent compared with the previous year, and it increased its market share points by 0.7, according to Davenport. While the introduction of Michelob Ultra set off a chain of followers that ultimately gave the U.S. beer market a needed innovation and sales boost in 2003, the brand had a cannibalistic effect on Bud Light’s growth. Bud Light’s shipments reportedly grew 2.5 percent in 2003, down from the 8.2 percent growth it experienced during 2002. Budweiser also declined in shipments to 31.8 million barrels, accounting for a 3.6 percent decline last year. As the first-to-market producer in the low-carb craze, Michelob Ultra was the company’s top performer and took 1.5 percent market share, reporting an estimated 3 million barrels shipped vs. the 0.5 million barrels it shipped the previous year.

In 2003, the company also launched Bacardi Silver Raz, the raspberry-flavored sibling of the Bacardi Silver O3 orange-flavored malternative, and World Select, Anheuser-Busch’s pilsner beer.

In addition to implementing cost-controlling measures by "removing barriers between brewers, wholesalers and retailers," Anheuser Busch’s "Brewery of the Future" initiative is expected to help the company produce more beer using fewer resources.

Sliding into the No. 2 spot is Miller Brewing Co., Milwaukee, part of the SABMiller family of companies. The company reported volume at approximately 37.7 million barrels, down from 39 million barrels in 2002. Losing 0.5 points of market share, Miller has focused its efforts on reviving the Miller Lite brand through new packaging and advertising suggesting that it’s a low-carb alternative. As a result, Davenport is reporting that shipments of Miller Lite could increase by double digits early this year.

Craft Beer Sees Growth

Celebrating 34 years of consecutive growth, the craft beer segment in the United States continues to shine amid a dim reality for mainstream brewers. Craft beer experienced a 3.4 percent growth in production in 2003, according to the U.S. Association of Brewers. “2003 was a difficult year for the beer industry, but it was another solid year for craft breweries,” said Paul Gatza, director of the Association of Brewers, in a recent statement. “… Craft beers are increasingly making headway in the areas of market share and consumer enjoyment.” The organization reports that in 2003 there were 81 brewery openings compared to 73 brewery closings, brewery size and distribution continued to expand, restaurants with breweries started bottling or canning lines and brewpub owners opened second and third locations. The shift in consumer interest for microbrews also was apparent at the cash register. The association found 2003 sales at off-premise locations increased and regional specialty brewers experienced 10 percent growth.

Moving forward under new leader Norman Adami, appointed president and chief executive officer last February, Miller will be focusing on strengthening its sales and distribution efforts, prioritizing local markets and improving channel management, according to the company.
The Adolph Coors Co., Golden, Colo., also was among the companies reporting lackluster results for 2003. Shipments were down 1.3 percent from the previous year, and Davenport estimates the brewer lost 0.1 points of market share compared with 2002. While cornerstone brand Coors Light’s shipments decreased by approximately 1.8 percent last year, Keystone Light showed notable growth.

It’s unclear whether the introduction of Aspen Edge, Coor’s low-carb lager, will further take away from Coors Light or enhance the portfolio of products for the company. Analysts at Smith Barney predict the slow rollout of Aspen Edge and the timing of the introduction to the low-carb market is not expected to be a big boost for the company’s profits in 2004.

Interestingly enough, the low-carb beer introduction downpour seems to have slowed to a trickle. In recent months, many brewers have decided to test the craze with advertising messages that divert attention back to light beer brands. Experts say it’s possible that consumers are confused by the low-carb trend and therefore sticking to their low-calorie light beers. However, Michelob Ultra clearly shows that a first-to-market strategy can offer big payoffs among consumers thirsty for something new.

Similar to last year’s malternative trend that wore off, 2004 could be the year brewers see a downslide in the popularity of low carb.

Global beer sales by value (millions of dollars rsp/hsp*)
Subsector	1998	2003	2008
Lager	312,731.7	340,212.8	374,145.4
Premium lager	72,475.9	89,806.0	111,815.6
Standard lager	205,351.1	203,392.9	208,479.1
Economy lager	34,904.8	47,013.9	53,850.7
Dark beer	22,979.6	23,180.1	23,436.8
Stout	6,904.3	8,167.6	8,295.3
Non-/low-alcohol	4,646.1	5,077.2	5,990.4
Total	347,261.7	376,637.7	411,868.0
*rsp/hsp=retail selling price/horeca (hotels, restaurants, catering) selling price Source: Euromonitor International - Global Beer Market Information System, 2004

Global beer sales by volume (million liters)
Subsector	1998	2003	2008
Lager	120,370.8	138,370.2	159,400.6
Premium lager	17,740.8	21,478.8	26,093.3
Standard lager	71,035.6	74,384.3	80,770.7
Economy lager	31,594.3	42,507.1	52,536.5
Dark beer	6,297.3	6,342.8	6,385.1
Stout	1,488.2	1,805.2	2,047.8
Non-/low-alcohol	1,713.9	1,841.6	2,143.4
Total	129,870.1	148,359.7	169,976.9
Source: Euromonitor International - Global Beer Market Information System, 2004

U.S. beer sales by volume (million liters)
	1998	2003
Lager	22,423.0	23,176.6
Premium lager	3,075.2	4,091.8
Standard lager	13,471.9	14,124.0
Economy lager	5,875.9	4,960.8
Dark beer	371.7	455.5
Amber Ale	42.4	65.1
Other ale	149.7	152.4
Pale ale	121.7	165.4
Weissbier/weizen/wheat beer
Weissbier/weizen/wheat beer	51.1	62.3
Other dark beer	6.8	10.3
Stout	95.5	113.7
Non-/low-alcohol	191.0	133.5
Beer	23,081.2	23,879.3
Source: Euromonitor International – The Market for Alcoholic Drinks in the USA, 2004

U.S. beer sales by value (million dollars)
	1998	2003
Lager	56,671.7	68,376.6
Premium lager	12,134.1	18,545.8
Standard lager	32,160.8	38,005.7
Economy lager	12,376.8	11,825.1
Dark beer	1,577.3	2,171.2
Amber Ale	178.7	310.1
Other ale	630.5	723.3
Pale ale	495.7	757.6
Weissbier/weizen/wheat beer	229.9	306.6
Other dark beer	42.5	73.6
Stout	429.3	575.5
Non-/low-alcohol	350.2	267.9
Beer	59,028.5	71,391.2
Source: Euromonitor International – The Market for Alcoholic Drinks in the USA, 2004

Estimated brewers’ production (million barrels)

Domestic Brewers

1999

2000

2001

2002

2003E

2003E
(Capacity)

Anheuser-Busch(c)

96.8

99.2

100.4

102.5

103.3

109.0

SABMiller(d)(h)

41.3

39.8

39.6

39.0

37.7

54.8

Coors

22.0

22.9

22.7

22.3

26.5

Pabst(d)

13.3

10.7

9.3

8.8

8.2

0.0

Yuengling

0.8

0.9

1.0

1.2

1.3

3.0

Boston Beer(e)

1.2

1.3

1.2

1.6

Latrobe

1.1

0.9

2.0

Genesee/Highfalls

1.4

1.3

1.0

0.9

3.5

Pittsburgh

0.3

0.5

1.0

Hudepohl Schoenling

0.4

0.6

Stroh/Heileman(a)(d)

-

Heileman(a)(b)

-

All Others

7.8

7.9

8.1

7.8

7.5

10.8

Totals

186.4

185.7

185.3

186.2

184.2

212.8

Less Non-Alcoholic	1.7	1.6	1.6	1.5	1.4
Less Tax-free Exports and Military	5.1	4.7	4.5	4.3	4.2
Domestic Shipments	179.6	179.4	179.2	180.4	178.6
% Increase/(Decrease)	1.3%	(0.1%)	(0.1%)	0.7%	(1.0%)
Imports	17.8	20.0	21.8	23.1	23.5
Shipped for Domestic Consumption	197.4	199.4	201.0	203.5	202.1
% Increase/(Decrease)	2.0%	1.0%	0.8%	1.2%	(0.7%)
Per capita consumption (gallons) (g)	21.8	21.9	21.9	21.9	21.5

(a) Stroh acquired Heileman in July 1996.

(b) Beginning in 1991, excludes Pittsburgh. For 1990, had Pittsburgh been excluded,

comparable volume would have been 11.3 million barrels.

(c) Anheuser-Busch announced a 1.1 million barrel inventory adjustment in 1995.

(d) Pabst acquired Stroh in 1999 except for Henry Weinhard and Mickey\'s which Miller pur-chased. Miller also purchased Pabst\'s Old English and Hamm\'s brands. Miller announced a 0.2 million barrel inventory reduction in the fourth quarter of 2000. Pabst closed its last remaining brewery in 2001. All brands are now brewed under contract by Miller.

(e) Beginning in 1997, Boston Beer shipments include third-party contract brewing.

(g) Based on preliminary data supplied by Bureau of the Census. Subject to revision.

(h)South African Breweries merged with Miller Brewing Company in June 2002 to become SABMiller.

Sources: Bureau of Alcohol, Tobacco and Firearms, U.S. Department of Commerce, Bureau of Census, Beer Institute, Davenport estimates

Estimated brewers’ market share of domestic consumption(a)
	1999	2000	2001	2002	2003E
Anheuser-Busch	49.0%	19.7%	50.0%	50.4%	51.1%
Miller(b)(c)	20.9%	20.0%	19.7%	19.2%	18.7%
Coors(c)	11.1%	11.5%	11.3%	11.2%	11.1%
Pabst(b)	6.7%	5.4%	4.6%	4.3%	4.1%
Boston Beer(f)	0.6%	0.6%	0.6%	0.6%	0.6%
Yuengling	0.4%	0.5%	0.5%	0.6%	0.6%
Latrobe	0.6%	0.6%	0.5%	0.5%	0.4%
Genesee/Highfalls	0.7%	0.7%	0.5%	0.4%	0.4%
Pittsburgh	0.2%	0.2%	0.2%	0.2%	0.2%
Hudepohl Schoenling	0.2%	0.2%	0.2%	0.2%	0.2%
Stroh/Heileman(e)	-	-	-	-	-
Heileman(d)(e)	-	-	-	-	-
Others, Net	9.6%	10.6%	11.9%	12.4%	12.6%
(a) Domestic consumption includes imports and excludes tax-free exports, military and non-alcoholic brews.
(b) Includes brands acquired from Stroh in 1999.
(c) Miller acquired rights to distribute Molson in U.S. in 1993. Coors acquired rights to diStribute Molson in January 2001. Both Miller and Coors market share exclude Molson USA.
(d)Helleman includes Schmidt, acquired in May 1987, and Pittsburgh.
(e) Stroh acquired Helleman in July 1996.
(f) Beginning in 1997, Boston Beer includes third-party contract brewing.
Source: Davenport & Co. estimates

Top 10 domestic brands (million barrels)
Brand	1999	2000	2001	2002	2003E
Bud Light	28.4	31.5	34.2	37.0	37.9
Budweiser	36.5	35.4	34.3	33.0	31.8
Coors Light	15.9	16.7	16.8	17.0	16.7
Miller Franchise*	16.6	16.5	15.8	15.4	15.9
A-B Natural Light	7.7	8.0	8.2	8.3	8.3
Busch	8.0	7.8	7.6	7.3	6.9
Miller High Life	5.4	5.2	5.6	5.8	5.7
Busch Light	5.2	5.3	5.5	5.7	5.7
Milwaukee’s Best	6.3	6.1	5.9	5.7	5.4
Miller Genuine Draft	5.8	5.5	5.5	5.2	4.4
Total	135.8	138.0	139.4	140.4	138.7
Source: Davenport & Co. estimates

Top 10 micro/craft beer brands
Brand	Dollar sales (in millions)	% change vs. year ago
SIERRA NEVADA PALE ALE	$44.7	4.7
SAMUEL ADAMS BOSTON LAGER	$43.4	(1.9)
SAMUEL ADAMS LIGHT	$20.6	72.4
SAMUEL ADAMS SEASONAL	$16.7	(3.1)
NEW BELGIUM FAT TIRE AMBER ALE	$14.9	15.0
REDHOOK ESB	$13.9	(1.0)
SHINER BOCK	$13.5	(1.9)
WIDMER HEFEWEIZEN	$12.5	21.6
PYRAMID HEFEWEIZEN ALE	$6.4	(0.5)
ALASKAN AMBER	$6.1	19.9
Total	$383.1	3.6
Source: Information Resources Inc., Total U.S. Food, Drug and Mass Merchandise (excluding Wal-Mart) for the 52 weeks ending Jan. 25, 2004. Products ranked by current 52-week dollar sales.

Top 10 import beer brands
Brand	Dollar sales (in millions)	% change vs. year ago
CORONA EXTRA	$428.1	4.0
HEINEKEN	$257.4	6.4
CORONA LIGHT	$96.7	12.4
TECATE	$74.7	6.5
LABATT BLUE	$58.9	2.8
AMSTEL LIGHT	$45.1	7.3
BECKS	$43.7	2.4
FOSTERS LAGER	$43.3	(8.8)
GUINNESS DRAUGHT	$38.1	8.8
PACIFICO	$34.5	6.6
Source: Information Resources Inc., Total U.S. Food, Drug and Mass Merchandise (excluding Wal-Mart) for the 52 weeks ending Jan. 25, 2004. Products ranked by current 52-week dollar sales.