Breweries Are Losing Some Fizz

It's a sizzling summer in Germany, and a Biergarten is the place to be. In Munich, hearty Bavarian women hoist liter-size mugs for carousers belting out drinking songs. In Cologne's Altstadt, nimble waiters trot out glasses of the liquid gold to revelers rollicking near the Rhine.

But for brewers, it's not a time for merrymaking. Although Germans still savor more suds than anyone but Czechs, they are tipping back less than they used to, often reaching for mineral water instead. With nearly 30% overcapacity and half of the country's 1,278 breweries in the red, "a major shakeout is inevitable," says Brendan Quinn, a director at London-based beverage analyst Canadean.

TANGY PILSNER. Only 600 to 700 breweries will survive to the end of the decade, predicts Michael Dietzsch, president of the German Brewers Assn. Despite their pride in tradition, brewers are being forced to adopt new strategies. As prices plunge, regional breweries have been trying products such as low-calorie and nonalcoholic beers.

Some, such as Bitburger, are putting all their chips on one brand name and going national. Its tangy pilsner, brewed in the Eifel area south of Bonn, has long been a local favorite. But now, to win a wider following, the brewery is adopting ploys such as sponsoring Formula One racing. "Marketing used to be an unknown word," says Dietzsch, who is also president of Bitburger. "Now, image is crucial."

Other brewers are hoping the German reputation for quality will carry them into international markets. Only 7% of German beer is exported, with Bremen's Beck & Co. and Hamburg's Holsten together accounting for two-fifths of the total. With competitors entrenched in key markets, Germany may never boast a global giant such as Heineken or Anheuser-Busch Cos. "It's too late," says Canadean's Quinn. Yet many midsize brewers are eyeing the growing markets in eastern Europe and Asia.

Hofbrauhaus, the smallest of Munich's six breweries, is capitalizing on its 400-year-old name with an overseas push that helped the state-owned brewery turn a profit in the past two years after years of losses. In Bangkok and Jakarta, it is launching restaurants modeled after its lively tourist stop in Munich, and it is opening a brewery with a local partner in Laizhou, China. Marketing manager Maximilian Erlmeier has just inked a deal in India and is studying others.

The shakeout won't draw in a flood of foreign investors because margins are thin and the market fragmented: No label has more than a 5% market share. Although centuries-old purity laws regulating brewing were struck down in 1989 to make room for imports, foreign ale has won just 2.7% of the market.

LOYALTIES. That's partly because beer flows deep into the German soul as well as the belly. Throughout the country, localities boast ales with distinct tastes, names, and even vocabularies. Cologne has 24 brewers with the unique taste of light, mild Kulsch. The drinker's brush-off of substitutes, das ist nicht mein Bier, is also the common phrase indicating rejection: "That's not my beer."

With such traditional loyalty, no German brewer has stooped to altering ancient ingredients, but all are now obsessively cost-cutting. A few, such as Dortmund-based Brau & Brunnen, are buying up private regional breweries. Some have followed the advice of Peter Wagner, a partner at Munich-based consultancy Roland Berger & Partner, who urges them to band together for better deals on raw materials, transport, and advertising.

But the idea touches a sensitive nerve. "We rely on our reputation as a private, independent brand," says Michael von Rieff, fifth-generation owner of Cologne brewer Reissdorf. "I can't risk losing that."

With family brewers dominating the industry--two-thirds of them selling within a 30 mile radius--creativity is needed to battle national brands. Hans Peters, owner of Monheimer Brewery near Cologne, found 800 people named Peters in phone books of nearby villages and sent each a bottle of beer to invite them to a party. Hundreds came.

Yet as the industry consolidates and the big get bigger, there should still be room for microbreweries. "Beer needs a hometown," avows a German proverb. That's a sentiment that customers and brewers can share.

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