Big Brewers Have a Hangover
By David Kiley
The outlook for big U.S. beer companies is as flat as the third-quarter earnings reported in late October by Anheuser-Busch (BUD ) and Adolph Coors (RKY ). Anheuser reported a 3% percent third-quarter gain, and Coors' earnings per share stayed the same as a year ago's $1.68. While several Wall Street analysts downgraded Anheuser, the majority of Coors analysts kept their hold ratings following a round of downgrades in 2003.
The analysts' moves appear to be for good reason. These days, just about every market force -- from demographics to carb-restricting dietary trends -- is working against drinking a cold brew.
Baby boomers typically cut back on beer-drinking as they age, and young consumers are increasingly finding more beverage satisfaction in spirits. Says Credit Suisse First Boston beverage analyst Andrew Conway: "Wine and spirits could continue to take share from beer, as these categories can better capitalize on shifting consumer trends. Spirits offer greater variety, a more premium image, and are benefiting from increasing brand investment." Conway downgraded Anheuser from outperform to neutral.
Coors, the third-largest U.S. brewer, on Oct. 28 reported that third-quarter sales volume slipped but that earnings rose 4.4% on a net-dollar basis on higher prices. Earnings per share stayed the same as a year ago. Income in the quarter rose to $64.1 million from $61.4 million last year. Sales increased 5%, to $1.1 billion, from $1.05 billion last year, as U.S. volume fell 2%, to 8.6 million barrels. Analysts were looking for Coors to report earnings of $1.75 a share on sales of $1.08 billion. It's in the midst of trying to complete a merger with Canadian brewer Molson (T.MOL.A ).
Anheuser, whose brands include Budweiser, Michelob, and Busch, on Oct. 27 reported earnings of $684 million, or 85 cents per share, during the three-month period ending Sept. 30, vs. $664 million, or 80 cents per share, a year ago. That performance met expectations of analysts surveyed by Thomson First Call. Anheuser CEO Patrick Stokes said during the announcement earnings should rise 7% to 10% next year, including a gain from hedges of commodity prices. "We remain confident in our ability to achieve our double-digit earnings per share growth objective over the longer term," he said.
While beer companies have launched "lite" and low-carb formulations, consumption numbers clearly show that spirits marketers are gaining an edge. They've awakened from a five-year-long slumber, led by the proliferating success of flavored vodkas and gins, small-batch and premium whiskeys, rums, tequilas, and the renaissance of the cocktail. Not only is consumption up but prices are too. Drinkers seem more than willing to pay 25% to 100% higher for drinks made with premium brands like Belvedere and Grey Goose and otherwise "special" line extensions like Stoli Gold.
The spirits products have added flavor, dimension, and nifty packaging to previously static products, while the beer makers' efforts have focused largely on taking away -- either calories or carbs. These modified versions of mass brands like Miller and Budweiser have prompted many beer drinkers to ask, "what's the point?" Sure, brews like Michelob Ultra are rising in sales, but that's from the inevitable shift by carb crunchers and calorie counters who are drinking beer more for the buzz than the taste.
Taste seekers with more to spend and contempt for the carb police are driving sales of smaller brands and microbrews such as Corona and Samuel Adams. Continued sales volumes of the big brands like Bud are arguably driven more by distribution deals that keep them ubiquitous and inexpensive than by product quality, taste, or product innovation. Those distribution deals will become pricier and more difficult to hold onto as Generation X and Y increasingly give up on mass-produced suds.
Beer is a $78.1 billion industry in the U.S. and represents 54% of retail dollar sales of alcohol consumption, according to Adams Beverage Group. Beer accounts for 87% of alcohol consumption by volume. Beer consumption on a gallonage basis declined 0.6% in 2003, a small number, but significant given the enormous base.
Meantime, wine consumption was up 3.6%, and spirits rose 4.8%. From 2000 to 2003, beer consumption gained by 1.8%, but wine was up 11.2%, and spirits increased 6.7%. Beer sales at bars and restaurants last year were down 1%, while spirit sales climbed 7%.
Looking to the nonalcoholic beverage industry for ideas, Anheuser next month is rolling out a caffeinated Budweiser product, B-to-the-E, a malt drink with caffeine, guarana, and ginseng. The idea is to piggyback the popularity of caffeinated soft drinks like Red Bull, Coca-Cola's (KO ) KMX, and Sobee Adrenaline, which have been increasingly used by bartenders and college students as mixers for vodka, tequila, and, yes -- beer. The irony, of course, is the main ingredient of these swills, besides caffeine, is sugar. Sugar is carbs.
Anheuser says the target market for B-to-the-E is contemporary adults in their 20s who are looking for the latest beverage to keep up with their lifestyle. Anheuser executives have said the drink probably marks the beginning of new products aimed especially at driving sales with young customers.
Neither Miller Brewing nor Coors has announced a caffeinated beer, though Miller has tested one before. But New Century Brewing recently launched one called Moonshot in Boston and Atlanta. A pilsner brew, Moonshot holds 45 milligrams of natural caffeine, or the equivalent of half of a cup of coffee.
Meantime, Miller and Anheuser's Budweiser have been in an ongoing ad battle over which brand has more taste and which is fresher. If drinkers compare tastes and freshness of those brands vs. smaller U.S. beers and many foreign brands, the brewers' debate quickly becomes a bit like trying to discern which Presidential candidate's TV ad is more truthful. Now there's a challenge. Investors may find owning beer stocks to be a bit challenging for the time being, too.
Kiley is Marketing editor for BusinessWeek in New York
Edited by Beth Belton