Time To Hit The Hard Stuff

Faced with lackluster beer sales, Anheuser-Busch may buy a spirits maker

Could the King of Beers become the King of Booze? The recent promotion of 42-year-old August A. Busch IV to CEO of Anheuser-Busch Cos. (BUD ), effective Dec. 1, has the industry buzzing that big changes are brewing at the beer giant.

Confronted with lackluster domestic beer sales, Busch IV -- the great-great grandson of company co-founder Adolphus Busch and son of August A. Busch III, Anheuser's chairman until Dec. 1 -- has suggested at industry events over the past year that Anheuser may have to expand aggressively into the broader alcohol market. Now that he has ascended to the throne, industry watchers think an acquisition of a spirits company could be imminent. "Its 12 [U.S.] breweries can make anything, and it doesn't have to be beer," says Harry Schuhmacher, editor and publisher of Beer Business Daily.

Busch IV, who has run U.S. beer operations since 2002 and served in various roles at the company for 21 years, takes over during a rocky period for the beer industry. Wine and spirits have been steadily gaining share from beer over the past decade: Beer now accounts for 56% of the overall alcohol market, down from 60% in 1996, according to trade publication Beer Marketer's Insights. Sales volume for spirits is rising 3% to 4% a year, while beer has been flat. In 2005, Anheuser, the nation's No. 1 brewer and maker of Budweiser, reported that net income fell 17.9%, to $1.8 billion, the first such drop in a decade.


The king of beers isn't a complete stranger to the world of spirits. It has been quietly testing its own liquor product, Jekyll & Hyde, since November through a subsidiary, Long Tail Libations Inc. The group's name is a nod to the Long Tail theory, which asserts that in today's era of viral marketing and Internet sales, a collection of small products can exceed the market share of a blockbuster.

Jekyll & Hyde -- a 60-proof berry-flavored liqueur and an 80-proof herb-flavored black liqueur, packaged in nesting bottles -- makes a nifty-looking shot, with the black liquid resting on top of the red Jekyll layer. The niche product, aimed at twentysomething barflies, allows Anheuser to test the logistics of shipping liquor through its massive distribution network and get a taste of how to market effectively in the category. A major move into liquor could pack a serious financial punch. Profit margins on spirits, which are generally cheaper to produce, can be almost five times larger than on beer.

The company declined to say what, if anything, may be on its shopping list, but speculation includes some of the most well-known names in spirits. There's plenty of talk about Absolut, the world's third-largest liquor brand. The Swedish government has said recently it wants to privatize many of its largest businesses, which means V&S Group, maker of Absolut, may be on the block. Another possibility is Bermuda-based Bacardi & Co., which owns Bacardi rum and Grey Goose vodka. Anheuser currently makes and distributes the Bacardi Silver malt beverage products in the U.S. Other names being bandied about are Brown-Forman Corp. (BFB ), the Louisville-based distiller that makes Jack Daniel's and Southern Comfort, and Deerfield (Ill.)-based Fortune Brands Inc. (FO ), which owns Jim Beam and Maker's Mark.

Adding hard liquor to Bud's cooler seems likelier than buying another brewer. Imports and craft beers have been industry bright spots. But antitrust issues could make it tough for Anheuser, which controls nearly 50% of the U.S. market, to move aggressively into those segments.

Some analysts suspect Anheuser itself could be a target. A merger with Belgian brewer InBev, which is larger in terms of volume but lacks a major U.S. position, would create a massive global player. There are also rumors that hedge fund giant Eddie Lampert may be eyeing Bud. Either seems like a long shot. For now, there's no sign Busch IV is ready to give up the crown, having only just inherited it.

By Adrienne Carter

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