That’s the phrase we hear from most distribs in recent years when we ask “how’s business?” No one wants the reverse, of course, and brewers and distributors alike are often more profitable than ever. But many industry execs remain in a funk about soft total volume, especially big brewers whose fates and business models are tightly tied to mainstream brands/styles. 2013 will be the 4th volume loss in 5 years, unprecedented in modern times. Since the formation of MillerCoors and AB InBev in 2008, those two brewers will have shed in the neighborhood of 17 mil bbls by the end of this year, and total industry shipments are likely to be at least 8 mil bbls lower than in that peak year 2008.
It’s no surprise then, that execs from AB (Dave Almeida), MillerCoors (Kevin Doyle) and Pabst (Kevin McAdams) all stressed at our Insights Seminar last month how important it is for “all segments” – including economy and premium, especially premium lights – to be healthy and growing, not just the high end. On the other hand, Crown’s Bruce Jacobson and Boston Beer’s John Geist, while agreeing on the need for big, lead brands to be healthy, seemed far less concerned about driving overall industry volume. Indeed, John talked about Boston being happy to grab some of the estimated 3 mil bbls dripping from the “leaky bucket” that’s mainstream beer right now. Recall too, John’s boss Jim Koch has pointed out that craft brewers define themselves, at least in part, in opposition to big brewers. That’s even while Kevin warned that losing a premium light beer drinkers is “especially” bad for craft since they are often the same drinkers. Kevin also mentioned that the “real issue” is declining per capita beer consumption, while wine and spirits per caps are growing.
Why is industry volume so soft? And what could/should be done to reverse the trend? The usual suspects for volume woes are:
- economic factors that have hit mainstream beer drinkers harder than craft/import drinkers poor weather comps (especially in early 2013)
- outperformance by spirits and wine
- more aggressive beer price increases, especially since 2008 and especially vis a vis spirits and wine
- less-than-spectacular marketing by big brewers
- a volume hit from craft as some consumers are drinking “better, but less”
In the past, AB execs have cited some of the above, adding the payroll tax as another 2013 hitch, but more recently have suggested that economics/labor force participation are by far the dominant factors. MC’s Tom Long recently suggested that a 2-point reduction in the unemployment rate would “dramatically help” the premium light segment. But I suspect each of the factors above (except weather in the long run) have played a significant role, though reasonable minds can differ about their respective impacts. Another issue, tied to marketing and the spirits/wine success: Heineken USA’s Dolf van den Brink, again at our Seminar, discussed the importance of forging much stronger ties between beer and multi-cultural and female consumers. (There’s a 23-point difference in the percentage of males and females who drink beer, 56% vs 33%, while the corresponding numbers for spirits are 44% and 42%.)
Not much can be done, by any brewer, about factors #1 and #2. Kevin, David and others have talked about “educating” retailers about some “basic math” of beer: it turns faster than other categories at retail and thus deserves more space and merchandising than it’s getting. AB and MC are spending vast sums of money to educate retailers. David showed some data that “proves” its “balanced portfolio” approach “works for retailers” to build the category. MC claims that where it’s the “category captain,” stores outperform. We’ll see whether these efforts impact space, merchandising and volume going forward.
Outperformance by wine and spirits has been going on for over a decade and shows little sign of an abrupt halt. The reasons for their outperformance are a combination of:
- pendulum swing (beer couldn’t kick spirits’ ass forever and American wine consumption couldn’t stay as low as it had forever)
- spirits companies’ decision to advertise on cable at a particularly ripe time when rates were low and channels exploding
- more impactful creative (in some cases)
- public policy wins (Sunday sales, etc)
- more aggressive beer price hikes, especially on subpremiums, which drove some consumers to drink something else (i.e. lower-priced spirits)
- on-premise efforts by spirits which helped give rise to cocktail culture and creative mixology
- popularity of flavored spirits
- those more balanced demographics
Again, how one weighs these factors can be debated, but they add up to a hit on beer. Big brewers have targeted spirits occasions with new products (Platinum, Ritas, Redd’s) with varying success and will likely do more of the same in the future. As one craft brewer recently said: “We’re doing our part,” by attracting wine/spirits drinkers to switch (on occasion), pairing beer with food and offering a higher-priced/image product. But don’t expect craft brewers, or major importers like Crown and Heineken USA, to do much to drive economy or premium light brands. They don’t sell them and craft/import growth is dependent in significant part upon cannibalizing that volume. And there’s still a ton of meat on those bones: over 140 mil bbls/yr, give or take. To the extent big import brands are “mainstream,” Crown and HUSA may be more concerned about overall volume than craft brewers, but not nearly as much as AB and MC.
Net-net: the top 2, and to a lesser extent Pabst, have a huge challenge on their hands. To keep their breweries running efficiently they do need to press against the entire business and a number of weak but still-large brands in their portfolios, while expanding innovation via new brands and packages. And each has also launched significant, separate on-premise initiatives. That’s a lot of balls to juggle, in addition to keeping an eye on the economy and Diageo, Gallo, et al. Crown is clicking right now, has a demographic tailwind in the growth of the Hispanic population and a large brewery to expand. Similarly, HUSA will be focused on the import drinker, multi-culturals and again exclusively the high end. Meanwhile, unless and until craft segment growth – which is coming in large part from mainstream beer – ends, craft brewers will no doubt continue to focus their efforts on a much more limited landscape: literally fewer geographic markets in some cases, a smaller population of drinkers and a much narrower band of marketing options for all. That’s even while simultaneously broadening their brands’ appeal. Competitively, they’ll be far more focused on big brewers’ craft-like entries and the endless stream of new craft brewers entering the market, not on ways to shore up total industry volume.
None of this bodes well for turning the volume tide anytime soon. Perhaps we’ll get that 2-point reduction in the unemployment rate. Perhaps AB has “cracked the code,” as it sez it has, on Bud Light marketing and MC will figure out how to fix some of the legacy Miller brands. Perhaps more women will discover the joys of beer and more adults will “come back” from spirits and/or wine. Maybe pricing trends will change to make beer a better buy in the eyes of entry level drinkers. But each and any of those would be a mighty big change. In the alternative, “dollars up, volume down” seems a more likely alternative, and perhaps the best we can hope for, in the short run.