Craft brew has a stalker.
Usually, Anheuser-Busch – the nation’s largest brewer – isn’t one found to be slinking
around in the shadows. But these aren’t usual times.
Beer, that staple of Friday frat parties and Saturday tailgates, is flatlining. According
to Information Resources Inc., a market researcher, total beer sales grew by just 0.7
percent for the 52-week period ending Dec. 3, 2006. That followed similarly lackluster
expansion in each of the previous two years.
Beer’s slump has come, ironically, at a time of near-record consumer spending.
While shoppers have shown an almost insatiable appetite for $5 lattes, $500 shoes
and $5000 televisions, brewers have somehow failed to connect with the nation’s unholy
passion for consumption.
Or have they? One segment of the beer market that has been cruising along is “microcraft,”
or specialty brewing market. Usually sold at a 25 percent premium over most mass
produced brews, micro-craft beers grew by 17.2 percent over the same 52-week period,
to $453 million, according to IRI. In fact, for many craft brewers, 2006 may go down as
the year their sales broke through the copper ceiling: at year’s end, it made up more than
5 percent of the United States’ $8.7 billion in annual beer sales.
“Overall, the beer market is having its challenges, but people are going for high-end
products that offer a more substantial flavor profile,” said Steve Harrison, vice president
of the Sierra Nevada Brewing Co. Founded in 1980 by Ken Grossman and Paul Camusi,
Sierra Nevada is the nation’s top-selling micro-craft beer, at about $53 million.
As trailblazers like Sierra Nevada know well, this isn’t the first craft beer surge.
In 1996, U.S. craft brewers increased output by 26 percent. That year brought the end
to a half-decade of growth that peaked in 1995 at 51 percent, but things ended poorly,
with the industry awash in product and extra brewing equipment, a classic case of
too much to soon.
But this time, brewers agree, something feels different. Not only are survivors like
Sierra Nevada, Boston Beer Co., and Colorado’s New Belgium Brewing Co. more
seasoned and battle-tested, but independent brewers have the sneaking suspicion they
aren’t alone. The big brewers are looking over their shoulder, studying their moves,
looking for a way into the game.
Somebody’s Watching You
Ken Hehir, 42, works for Molson/Coors, not that the company has any interest in
letting you know that. He oversees the brand and marketing promotion of two lines:
Blue Moon Belgian White and Killian’s Irish Red. Neither one is marketed strongly
as a Coors brand, as today’s picky beer drinker doesn’t necessarily associate mass production
with high quality.
In fact, many off-premise and on-premise retailers mistakenly sell Blue Moon
and Killian’s as imports, despite the fact that they have been Coors products for years
(in Blue Moon’s case, from the start).
It’s a legacy of the first microbrew boom: during the mid-1990s the nation’s Big Three
brewers launched a bevy of high-concept specialty beers, many of which were revealed to
be poor imitations of the burgeoning craft scene. One of the only ones that survived was
Blue Moon. It was launched in 1995 by a Coors master brewer who had earned his PhD
in Belgium and wanted to recreate the country’s fruity, almost-sweet wheat beers.
Since 1995, Blue Moon has steadily gained momentum and market share, but
it’s really taken off lately, growing by 115 percent in the first 10 months of 2006 alone,
according to the Rocky Mountain News. According to industry estimates, the company
was on track to sell between 400,000 and 500,000 barrels of Blue Moon in 2006, which
would have made it the equivalent of the third- or fourth-largest craft brewer in the
U.S., behind Boston Beer; Sierra Nevada and New Belgium. But it's never been
promoted as a Coors product.
“We’ve had a lot of success
with word-of-mouth
for Blue Moon without having
to beat people over the
head with it,” Hehir said.
“I think it’s because people
like to reward themselves by
trading up a little bit. But
while they do want to trade
up, they don’t want to trade
up too far in terms of flavor.
They don’t want a beer they
can’t cope with.”
The other major breweries are also trying to find the sweet spot held by
unique but familiar-tasting beers like Blue Moon. Global brewing giant
SABMiller, which bought the Miller Brewing Co. in 2002, recently scored
a hit with its Fredrick Miller Chocolate Lager, which one reviewer called
one of the “best new beers of 2006.” Miller also owns Henry Weinhard's,
which recently launched an organic offshoot. A-B has put out regional
brews, developed by its brew masters in St. Louis and New Hampshire,
distributing them across the Northeast and the Midwest.
Not only are major brewers encouraging their own employees to
get crafty, they are also lapping up smaller, independent brewers at a
rapid pace. In May, Anheuser-Busch announced it was buying Latrobe,
Penn.-based brewer Rolling Rock from the InBev, but it also owns
large shares in regional craft brews such as Chicago’s Goose Island Beer
Co., Seattle’s Redhook Ale Brewery Inc., and Portland, Ore.-based
Widmer Brothers Brewing Co.
St. Louis Craft Fair
To hear that Anheuser-Busch is focusing on high-end products is to invite
snickers, but Pat McGauley, vice president of innovation at Anheuser-
Busch, doesn’t let it worry him. To craft loyalists who openly question
whether a beer can be considered micro-anything if it is brewed by A-B,
McGauley long ago came up with a counter-argument.
“We tell them to taste our beer and tell us it’s not meeting their standards.
Anheuser-Busch has some of the best brewers in the world and
we are winning the skeptics
over,” said McGauley, 43.
But winning the skeptics
over, no matter how well
qualified its brewers are,
means that the St. Louis behemoth
has to take the micro-
craft boom seriously.
In many respects, it has.
In addition to backing
Redhook and Widmer,
last year, Anheuser-Busch
launched two organic beers,
Stone Mill Pale Ale and
Wild Hop Lager. The giant
brewer also came out with a
line of four seasonal specialty brews in bars, including Spring Heat Spiced Wheat, Beach Bum Blonde
Ale, Jack’s Pumpkin Spice Ale and Winter’s Bourbon Cask Ale.
“This is a building-block type approach,” McGauley said. “We don’t
expect these beers to pay off right away, but the news we are generating
in the market is very, very positive. These beers are all about creating
excitement in the beer category,” he said.
Anheuser-Busch is also looking to reinvigorate its organizational structure
by giving its network of breweries the authority to make and distribute
regional beers to a limited area. Last year, those companies brewed
beers like Mule Kick Oatmeal Stout in St. Louis and the Demon Hop
Yard Ale in Merrimac, NH. These items, while only available in restaurants
and bars, were a way of giving brewmasters throughout the organization
the flexibility to work with more specific flavor profiles and recipes,
while creating a sort of local pride of ownership. Next year, the program
will expand to all 12 of the company’s regional breweries.
“Beer is absolutely an emotional purchase so we are always trying
to make sure there is an emotional tie between our products and customers,”
McGauley said. “This is all about giving some control and brand
ownership back to the consumer.’
Backlash
The big-beer ownership behind these brands has led some independent
brewers and their supporters to deride them as “stealth beers”
or “pseudo crafts.”
Jim Koch, president and founder of Boston Beer, the nation’s largest
craft brewery (and a company that is derided on occasion as having
gotten too big itself ), argues that the definition of a craft brewery is small,
independent and authentic, meaning it can’t produce more than 2 million
barrels, and can’t be owned by a larger brewer.
But Coors’ Hehir argues this definition ignores the care and steps
a brewer takes in brewing his or her beer.
“It’s carefully-crafted, it’s a complex recipe and it takes a lot of time
to brew,” Hehir said of Blue Moon.
Whatever words get used to paint the picture, it’s clear the brewing
landscape is changing.
Mark Selner, beer buyer for Surdyk’s Wine and Cheese Shop in the
Twin Cities, sees the end result of that every day.
Even though Surdyk’s is just a few short miles from the University
of Minnesota’s campus, an increasing portion of the store’s beer sales
are driven by craft or specialty beers. Selner, who started at the store in
1973, said there were maybe a few dozen beers in the early days, mostly
old regional favorites like Augsberger. Today, Selner estimates the store
carries close to 300 different kinds of beer, largely to accommodate
the never-ending search to try something new.
“People are into the unusual. Highest this, most that; the beer with
the sharpest hops, the most alcohol,” he said.
And small liquor stores aren’t the only ones taking notice. Greg Maurer,
executive vice president for the Heidelberg Distributing Co., points
to large grocers and discount clubs such as Pittsburgh’s Giant Eagle Supermarkets
that are restocking their coolers in states that allow beer and
wines sales to reflect a more diverse offering.
“If nothing else it is a statement they are making that they are willing
to service their customers’ needs and wants,” Maurer said.
Building a bigger ring
Brewers and wholesalers often point
to one of two factors to explain the recent
surge in craft brews and imports. One is
a growing wealth of upper-middle class professionals
who often work hard and spend
even harder. The other is the so-called
identity factor. With more disposable income,
consumers are looking for brands or
products that set them apart, that communicate
their likes and dislikes, their social
status. Maurer sees both factors at play.
“It’s that high-discretionary-income, young consumer. They’re doing
it partly for the identity factor, partly because of high income, and partly
because of flavor. It becomes ‘Who am I?’ and ‘Can I define who I am
by what I drink?’” Maurer said.
Convenience stores and other off-premise retailers can benefit greatly
from this kind of soul-searching. While a six-pack of 12 oz. Budweiser
or Miller bottles may cost retailers $4 and retail for $5.49 plus deposits,
the same six-pack of Sam Adams or Flying Dog may cost $5.25 and sell
for anywhere from $7 to $7.50. That’s roughly the same profit as import
beers, and is at least 16 percent better profit than most mass domestics.
“It’s a good volume and it’s a really good ring, so it’s a high margin item
that moves pretty well,” Harrison said.
Like many, Coors’ Hehir sees Starbucks as an example worth emulating.
While Starbucks redefined coffee as a luxury item at $5 per cup, it has also
created a luxury lifestyle: customers who stop in for a latte often leave with
a cookie, a compact disc, or a book. Beer drinkers who spend more per
bottle also will make impulse buys, something that retailers appreciate.
“I think people let the situation guide them. Sometimes it’s a craft
brew. If they are mowing the lawn and just want something that’s easy-todrink
and refreshing, it might be a Coors. The ideal is for them to
walk out with both,” Hehir said.
Loud footsteps
In 1990, Jim Koch predicted “better beers,” crafts and imports, would
account for 20 to 30 percent of domestic beer sales and craft beers would
account for “at least a third of that” by 2010.
With three years to go craft brewing still has a way to go, but it has
pushed its head above the 5 percent mark for the first time.
“To me great beer is a great beverage,” Koch said in January. “I think
people are thirsty for quality, flavor, variety and authenticity in their beverages
and that is where I think the growth is.”
But there’s something different in this craft boom than the one Koch
rose to prominence in during the1990s. For one thing, he said, the
brewers are a lot more professional.
“In some ways crafts grew so fast in the beginning of the 1990s that I just
think there was an adjustment to a more modest growth spurt,” he said.
While specialty and craft brewers may be the toast of the town now,
they have reason to be looking over their shoulder, said Maureen Ogle,
author of Ambitious Brew: The Story of American Beer.
Ogle notes that for all their growth, craft brews still account for only
6 percent of the nation’s beer. The other 94 percent comes from Big
Brewers. Anheuser-Busch alone accounts for half the beer sold in the
U.S. Budweiser, 18 percent.
The reason big brewers seemed to fail during the first craft revolution
during the nineties was partly because they didn’t take it seriously,
Ogle said. Brewers like Anheuser-Busch seemed to think they could
find any pre-Prohibition beer recipe, slap an old-timey label on it and it
would sell regardless of what it tasted like.
Fifteen years later, Ogle thinks they’ve smartened up. Gone is the
haphazard approach to brands; back is massive influx of investment that
characterized the post-World War II era, when brewers like Anheuser-
Busch, Coors and Miller survived a sustained drop in beer consumption
by adding capacity, exploiting every possible niche or fad imaginable and
innovating until the Baby Boom reached legal drinking age.
Ogle sees gluten-free beers, like Budweiser’s RedBridge, as an example
of the sound, long-term investment big brewers are making.
“They are just getting a lot smarter,”
Ogle said.
Consolidation is also helping reinvigorate
the brewing industry, Ogle said. South
African Breweries 2002 purchase of the
Miller Brewing Co. from Philip Morris
started that company on a track to rediscovering
its brewing roots. Successes like the
company’s chocolate lager show, in a limited
way, how much the Milwaukee brewing
company is refocusing itself on beer. So
does A-B’s regional beer program.
If major brewers were to get organized, independent brewers and retailers
would have plenty of reason to be worried. With their vast distribution
networks, big brewers can exert tremendous control over retailers and the
beer they stock, even pulling their major brands if a retailer isn’t cooperating.
That, combined with acquisition and advertising budgets that would
make most European countries quaver, mean things could get a lot nastier
before they improve.
“Anheuser-Busch and Miller could be way more aggressive exploiting
their marketing advantage and throwing their advertising dollars around. I
think a lot of those small brewers are going to go away,” Ogle said.
Like any small business, independent craft breweries also face questions
about succession. Many of the nation’s craft brewing pioneers are
graying. Grossman, Koch, and Anchor Steam’s Fritz Maytag are all nearing
retirement age.
How long can craft brewing’s growth last? Like Koch and other craft
brewers, Ogle can’t say for certain, but she doesn’t see beer drinker’s
thirst for the unusual drying up any time soon.
“Now, kids are used to going into the grocery store and seeing 35 different
kinds of beer from 34 different brewers. I don’t see that going away.
I think there is always going to be a segment, a small segment of the
market that always gravitates to choice, just like they want 500 channels
on cable,” she said.
What might change, though, is that the big brewers seem to be pretty
interested in making some off-beat programs of their own.