The big picture: Analyst Robert S. Weinberg takes another look at changes in the structure of the market - The Weinberg Lectures, A series

Modern Brewery Age, March 25, 2002

Robert S. Weinberg, principal of the St. Louis-based Office of R.S. Weinberg, has been watching the U.S. beer market with a gimlet eye since his departure from Anheuser-Busch in 1971. Although he now spends more time on his studies of naval history and national security issues, ever so often he will emerge from his private library, like Cincinnatus, to reenter the fray. In the interview below, Mr. Weinberg talks about some of the trends that pique his interest and concern.

Modem Brewery Age: What do you find most striking about the shape of the beer market at present?

Robert S. Weinberg: By last July, I was becoming increasingly concerned that the cumulated impact of a series of small, seemingly ordinary and unexciting events that have been taking place since 1965, could be leading to a sea change in the structure and competitive organization of the malt beverage market. I have been working for the last six months to satisfy myself that my concerns were valid. If this change is taking place, its implications are enormous.

There have been three things that have disturbed me. Malt beverage share of total alcoholic beverage servings has declined from a peak of 60.8% in 1994 and 1995, to about 59.7% in 2000, This probably reduced malt beverage demand in 2000 by about 3.5 million barrels, and may explain the 'slowdown" in the growth rate for total malt beverage demand. I believe it's that simple.

Point two: The inter-segment composition of total malt beverage demand shows two disturbing trends. One, the decline in core products percentage share of total malt beverage demand, beginning in 1991. Two, the continued decline in consumer preference for domestic "image" brands, and the corresponding increase in demand for imports. Let's say a couple of things about this, I am using the Weinberg definition of total malt beverage demand. Some of the malternatives are not in my numbers. Smirnoff is not in my numbers. I don't know why. Possibly because I don't think I know what the demand for Smirnoff is. I'm not sure I believe the numbers that are floating around. It's very easy when you are looking at products on the edge to puff things up a bit.

However, I will note that Zima is in my numbers now. I'm looking at reexamining this, but I don't think it has a material effect on my results.

To measure these trends, I take total malt beverage demand, and estimate what I call prestige brands. Prestige is comprised of three segments--imports, domestic specialties and image brands [Note: domestic specialty brands are specialty products produced by regional specialty brewers, microbrewers, contract brewers and pub brewers; image brands are the super-premium and niche specialty-type brands produced by the major brewers]. I sum image, domestic specialty and import brands in barrels. I subtract that from the total, and what remains are the core brands. Core brands were 91.2% of the market in 1991. They are down to 83.2% of the market in the year 2000. The prestige brands share of total malt beverage demand was 8.8% in 1991 and 16.8% in 2000. In 1991, of the 8.8% held by prestige, 4.2% was held by image brands, 4 by domestic specialty and 4.2 for imports. In the year 2000, it was 3.8, 2.8 and 10,2. The percentage share of prestige in 1991, was 47.4% for image, 5.1% for domestic specialty and 47.5% for i mports. By 2000, it was 22.6% for image, 16.6% for domestic specialty and 60.8% for imports.

What is the significance of this change?

What has happened is this. The growth in total prestige brands is a continuation of a long-term trend. In part, it's a measure of the changing beer drinker. In part, it reflects the fact that until very recently, the relative price of beer has been declining. A whole host of factors have coaxed the consumer to trade up to the higher priced beers. That is not something that I think is particulary interesting. The decline of the core brands is perfectly reasonable and orderly. There is nothing startling about it The growth in prestige brands, which compliments the decline in core, is also orderly. The thing that is troublesome is the fact that imports are replacing image brands. And, for all practical purposes, domestic specialty has flattened out Right now, it looks like domestic specialty is in a position of competitive equilibrium. Their share of prestige is flattening out, and I think this is significant. They are at about 2.6-2.7% of total demand. It was up a little in 2000, but I believe that this increas e involved some errors in the data. I know there was at least one player that was carried in the data at a much higher level than deserved--perhaps a 100,000 barrels of air in the numbers. So instead of slight growth in 2000, I think domestic specialty was sideways.

What do you see happening for domestic specialty as they go "sideways"?

There is no beer marketer shrewder than Jim Koch. But he is in a bit of a box now. Jim was stupendous when he was expanding geographically. Then he got there, and there was nowhere else to go. Look at the folk at New Belgium. They have an interesting beer, and the market is still wide open for them. They will go like gangbusters. Sierra Nevada can also go like gangbusters. But I think there will be a flattening out in total demand for domestic specialty. There should be opportunity. As prestige products grow, domestic specialty players who are on their toes should be able to get some of that