Under pressure: buffeted by war and recession in 2003, the U.S. beer industry also faces inroads by spirits and growing pressure on the three-tier system

Modern Brewery Age, March 29, 2004

Beer may be recession-proof, but the combination of recession with a shooting war, bad weather, a surge in distilled spirits sales and the Atkins diet managed to suppress beer volume in 2003. With the possible exception of the weather, the same negative factors remain in place as 2004 begins, with the added bonus of a powerful assault on the three-tier system in the state of Washington.

Domestic barrelage was down 0.6% in 2003, to an estimated 179,400,000. Anheuser-Busch surfed along, but Miller, Coors and Pabst were down.

Anheuser's +0.69% performance, which netted it +700,000 barrels, put Miller in the shade, as the Milwaukee brewer lost an estimated 2,370,000 barrels, down almost 6%. Bud Light continued to perform strongly, offsetting the continued sunset of Budweiser. Michelob Ultra also did more than its share to counterbalance any declines, chalking up an estimated 3 million barrels.

Miller's portfolio of declining brands was offset late in the year by improved Lite volume, but not enough to turn things around. And it is clear that the much-vaunted turnaround by Lite will have to be supported strongly to make it more than a blip in the history of a declining brand.

Coors Brewing Co. dropped 314,000 barrels in 2003, namely because its flagship Coors Light took a hit.

Pabst, the brewer with no breweries, declined again in 2003 (about 7%, on a drop of 600,000 barrels) no surprise there.

In contrast to the grim news for others in the top five, the D.G. Yuengling Brewing Co. of Pottsville, PA had another banner year. The Pennsylvania brewer continues to confound the analysts, chalking up a 9.7% increase in 2003 to an estimated 1,300,000 barrels. The company surpassed Boston Beer in 2003 to become the number five brewer in the U.S.

Speaking of Boston Beer, that specialty bellwether lost 56,000 barrels in 2003, a pretty good indicator that the high-end was not immune to broader trends. That was confirmed by the continuing import slowdown. Overall imports managed a positive perfomance, up 1.9%, but this was down from the 6% growth of 2002, 8% in '0l, and the double digit growth of the late '90s.

Imports varied country to country, largely based on the fortunes of a few big brands. Imports from Canada were down 2%, while imports from Mexico were up 4.2%. Shipments from the Netherlands increased 1%, while imports from Germany were down 2.7%. Imports from Ireland were up 34.7%, while imports from the U.K. were down 19.3%. Imports from Belgium increased 38.4%, as Interbrew continued its push to build its home country franchises, including Stella Artois.

Besides Boston Beer, the domestic specialty segment was a mixed bag. Stability was the rule. Most of the big specialty brewers were up, at least a bit--Sierra Nevada, Redhook, and Deschutes all posted positive numbers. A few were down slightly, including Pyramid, Full Sail, and Portland. The standouts were New Belgium Brewing Co., which produced 285,200 barrels, an increase of 11.7% on a decent base, and Widmer, which knocked out 169,806 barrels, an increase of 20%. A number of other prominent crafters also chalked up nice double-digit percentage increases, including Alaskan Brewing Co., Boulevard, Shipyard, Summit, Kalamazoo and Flying Dog.

Many brewpubs reported declines in 2003, the result of continued tough sledding in the on-premise sector. Quite a few brewpubs closed, although we haven't come up with a final tally.

The year 2004 may well prove to be a transformative one for the beer industry. Consolidation at the top is approaching completion, but the other shoe is yet to drop. Miller's structural problems might take another year or two to iron out. In the meantime, whither Coors? The idea of a Miller-Coors merger was once advanced only by wild-eyed radicals like Robert S. Weinberg of St. Louis. The notion of such a merger is now bruited by many financial analysts with an air of inevitability. No approach has yet been made, according to the parties, but the combination makes sense given the disparity between the number one and the lagging two and three brewers.

SAB's presence in the U.S. market points to the growing internationalization of the U.S. beer market. With imports now pushing towards 12% of the market, this has also caused structural changes in brewery rankings. In volume terms, five of the top ten beer sellers are now importers--Heineken, Gambrinus, Labatt USA, Barton and Guinness. The industry's second tier is now made up of international importers, followed by a third tier of smaller domestics.

Even the great eminence A-B begins to look beleagured. Budweiser may now be ubiquitous all over the world, but suddenly Anheuser is no longer the largest world brewer, and the Interbrew/Ambev deal frustrates A-B's stated desire to be a dominant power in Latin America.

On the domestic consumption front, the Atkins diet may be having a greater impact than first thought. A decline in beer sales was not supposed to occur just now, but with so many adults cutting carbs, beer could be paying the price. For everyone who picks up a low carb Michelob Ultra or Rhinebecker Extra, another is choosing spirits as a no-carb alternative.