Beer volume impacted by resurging spirits sales in 2003

Modern Brewery Age, Feb 9, 2004

AP--Beer drinkers might need to be careful the next time they raise their mugs in toast. Those frosty mugs will likely clank a few more delicate martini glasses than in the past.

Market-share gains by Anheuser-Busch Cos. not withstanding, the past year has been no party for the beer industry. The final numbers aren't in yet, but most market watchers estimate that brewers' shipments to wholesalers declined about 1 percent from 2002. Merrill Lynch analyst Christine Farkas estimated in a recent report that beer volume this year will rise about 1 percent.

A sluggish economy, the war in Iraq and poor weather, especially during key summer holidays, hurt beer-volume growth in 2003.

The Distilled Spirits Council of the United States estimates that spirits volume rose 3 percent in 2003 and that it will rise another 3 percent this year.

"It's a real issue," said Benj Steinman, president of industry newsletter Beer Marketer's Insights, of the rise in spirits volume. "It affected each and every (brewer)."

The growth in spirits volume isn't a new concern for the beer industry as spirits volume has been increasing more then beer since about 1997. "But it seemed to accelerate this year," Steinman said.

The sizes of the two markets have to be kept in mind, Legg Mason analyst Mark Swartzberg said. Per capita consumption of spirits is still lower than beer on an annual basis, he said. That means that a small loss in beer volume can represent a "meaningful rise" in spirits growth.

"Nonetheless, this is a multiyear phenomenon of beer losing share to spirits," he said.

Beer volume accounts for 84.7 percent of the total U.S. alcoholic industry, dwarfing the 4.8 percent for spirits, according to a recent report by Smith Barney analyst Bonnie Herzog.

There are a lot of factors driving spirits volume growth, including demographics, increased advertising, the popularity of flavored alcoholic beverages, and more states allowing spirits sales on Sunday. There is also a factor that some are calling a "cocktail culture."

The number of people 55 and older is expected to grow 2.6 percent annually between 2003 and 2010, compared with a 1.2 percent growth in the number of people between the ages of 21 and 27, Farkas pointed out. Young adults have higher per capita consumption of all alcoholic beverages. However, wine and spirits tend to make up a greater portion of alcoholic consumption of those 55 and older than those 21 to 27, she said.

Demographics will help beer, too. The 1.2 percent annual increase in the number of people between 21 and 27 is a reversal from the past decade, when the percentage declined, Farkas said.

After a nearly 50-year self-imposed ban on television advertising, spirits companies took to the airwaves in 1996, Distilled Spirits Council spokesman Frank Coleman said. Spirits ads are now on 500 stations--including more than 400 network affiliates--compared with 50 and 75 stations three years ago, Coleman said. The companies don't advertise on the major networks.

"Not being on TV was a huge impediment to spreading the message about spirits to a wider adult audience," Coleman said.

The success of flavored alcoholic beverages may also be giving a boost to the spirits industry, and the major brewers may have had a hand in that, Smith Barney's Herzog said in her report. Anheuser-Busch, for example, partnered with Bacardi in 2002 for Bacardi Silver. Miller Brewery teamed up with Skyy Spirits LLC for Sky Blue in 2002.

"The brewers helped the spirits companies by advertising their names," Beer Marketer's Insights' Steinman said.

The flavored drinks may have made it more appealing for younger males--the biggest beer drinkers--to try spirits "since non-flavored spirits are an acquired taste," Herzog said. The drinks also put the spirits brands in the minds of an age group that is developing loyalties that will affect their choices for years to come, said David Kopeck, a portfolio fund manager with Victory Capital.

The spirits companies have been more innovative and creative in recent years with their products offerings and the events they have at bars and restaurants, Steinman said. Brewers need to do more of that, he said.

Farkas agrees. "They need to remind consumers of their options in beer," she said. "They have cocktail and martini menus in bars and restaurants. A similar focus seems to be often lacking in beers."