Flat Times for Beer Stocks

It might finally be time to kill the idea that a recession is a good time to buy shares of brewing companies. The argument is that, even in economic hard times, people still love to drink beer.

That might be true during the Super Bowl, but recent data suggest Americans overall are slowing their consumption of suds.

"Lots of folks have thought beer is recession-proof or recession-resistant," says Craig Purser, chief executive of the National Beer Wholesalers Assn. "The numbers don't bear that out."

Molson Coors (TAP), the largest U.S.-owned brewer, saw its shares hit their lowest level since May 2009 after a gloomy earnings report on Feb. 9. SABMiller (SBMRY), headquartered in London, is down 10.7% in 2010, and Belgian brewer Anheuser-Busch InBev (BUD) has fallen 6.7% since the start of the year.

"Toughest U.S. Market in Decades"

Molson Coors Chief Executive Peter Swinburn cited "the toughest U.S. beer market in decades," as his company reported fourth-quarter earnings of $1.02 per share, 8¢ below analyst estimates. Molson Coors sold 4% less beer by volume worldwide from a year earlier, but results in the U.S. were particularly disappointing for investors.

In the U.S., Molson Coors and SABMiller distribute beer through a joint venture called MillerCoors. "In the U.S., MillerCoors' fourth-quarter results reflect a significantly weaker beer industry than expected," Swinburn told analysts. According to the industry-funded Beer Institute, based on data from the first 11 months of 2009, beer shipment volumes fell 2.1% last year. And, according to market research firm IBISWorld, beer producers' revenues declined 2.7% in the past year.

Imported beer has borne the brunt of the downturn, with U.S. import volumes down 9.7% last year. Premium domestic brews have also suffered, as consumers "trade down" to cheaper brands and are more likely to drink at home than in bars or restaurants, Purser says.

Craft Beer Sales Rise 12.4%

One segment of the beer industry that has resisted the recession is craft breweries, increasingly popular for flavorful beers made in smaller batches. According to data from the Nielsen Co., craft or microbrew sales rose 12.4% in 2009.

Craft brewers are lucky that rising interest in their products has reduced the impact of the recession, says Julia Herz, craft beer program director at the Brewers Assn., a trade group for craft brewers.

Customers "want flavor, diversity, and choice," Herz says. "That's how craft has remained a high priority and an affordable luxury."

Craft beers account for 5.8% of the overall beer market, according to Nielsen. The vast majority of beer sold is produced by either the MillerCoors partnership or Anheuser-Busch InBev, the company that now owns brands like Budweiser and Bud Light. According to IBISWorld, by volume, InBev controlled 49.9% of the U.S. market in 2009, while MillerCoors controlled 28%.

(Some of these brewing giants also have a presence in the craft segment. Molson Coors said it plans to acquire Granville Island Brewing early this year. Based in Vancouver and founded in 1984, Granville Island claims to be Canada's first microbrewery.)

Fewer Discounts for Consumers

American consumers may be buying less beer because, despite the tough economy, they aren't getting very many discounts. According to Nielsen data, the average case of beer cost 2.5% more in 2009 than the year before.

The production costs for brewers have been rising for several years, says IBISWorld senior analyst George Van Horn. Another reason for fewer discounts, he says: Big brewers have tried to avoid price wars that would make it harder to pay back debt used to pay for recent acquisitions, he says. As of June 30, InBev had $55.6 billion in long-term debt after borrowing $45 billion to acquire Anheuser in November 2008.

If there are bright spots for brewers, they come from new products that are catching customers' attention, such as the proliferation of specialty beers or new low-calorie offerings. "I remain very, very bullish on the future of [beer industry] innovation," Purser says.

Despite economists' expectations that the U.S. economic recession is over, remarks from Molson Coors' Swinburn on Feb. 9 suggest beer-buying isn't set to rebound soon. "Overall consumer demand remains sluggish, and we see these conditions continuing to impact volume and mix in the near term," he told analysts.

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