Big Beer Goes Flat

Though it shows little sign of slowing down, the rise of craft breweries (defined as small, independent brewers of fewer than 6,000,000 barrels per year) is far from new. Over the past decade, the segment has grown volume at a compound annual rate in excess of 10%, compared to an annual decline of 0.3% for mass market beers over the same time period. This persistent growth has driven its share to more than 6.5% of all beer consumed in the United States and over 10% of its revenue. While no reliable estimates for microbrewery sales exist worldwide, weak overall sales growth of global brands (3.2% CAGR since 2000) suggests this is not a uniquely American issue.

The major beer companies have done their best to grow despite these dual headwinds. M&A has been a particularly popular strategy: the top four brands have grown their share of global volume from 22.5% to over 50% in the past 12 years. Though acquisitions may have improved margins (Big Four gross margins are 11% higher than the industry average of 40%, up from a 9% differential in 2001), by definition acquisitions haven’t solved the major producers’ ‘craft brewery’ problems since brewers more than 24% owned by a major brand are not classified as “crafts”. In fact, Big Beer would have been better served buying major wine and spirit suppliers, rather than one another. Though crafts have been stealing market share, total industry volumes remain stagnant due to declining rates of alcohol consumption and increasing substitution to the likes of champagnes, cognacs and chardonnays. Increasing regulation around alcohol advertising makes these trends hard to combat directly. With beer consolidation already raising the ire of regulators, cross-beverage M&A activity seems likely in the coming years as Big Beer strains for growth at current margins.

The beer industry’s historical savior, product innovation, has also achieved little success of late. In 2012, the world’s largest beer company, Anheuser-Busch InBev (owner of Beck’s, Budweiser, Labatt, Lakeport, Juliper, Stella Artois and more than 175 other brands) launched a new addition to the Budweiser brand, Bud Light Platinum. The 6%, “triple filtered” beer was supported by a “blanket” advertising campaign, touted Justin Timberlake as “creative director” and was prominently displayed alongside the world’s #2 and #3 bestselling beers, Bud Light and Budweiser. Yet, despite “exceptionally strong” sales in its first quarter, AB InBev says the Budweiser brands have lost more than 0.5% share in the US over the past year, with Platinum’s loss only “partially offset” by growth of two newer brands, Bud Light Lime Straw-ber-Rita and Bud Light Lime Lime-A-Rita (the fact that these two brands were growers in the period further illustrates the struggles traditional beer is facing).

Even advertising, the keystone of competition in the beer industry, seem to have been ineffective despite growth of more than $300M (30%) in the United States since 2000. A source within AB InBev told your author the internal business case for Bud Light Platinum was both simple and time tested: the bigger the ad budget, the bigger the sales.

With advertising, new products and M&A failing to stem craft’s growth, it appears the global brands are looking to a new form of product innovation: bottles and cans.

Earlier this year, Heineken (brewed by Heineken International) and Miller Lite (SAB Miller) introduced new, more slender beer bottles, while Sam Adams (Boston Beer Company) launched cans with a wider, flared rim intended to improve aeration. In April, Budweiser released a reshaped can intended to resemble its bowed logo, with the upper and lower rims of the can tilting inwards towards a tightened center. While this new can reduces the total beer volume by 6%, Budweiser claims it also doubles the aluminum needed, resulting in a lower overall gross margin for the company (the cans are not priced at a premium versus regular cans, which remain available).

However, the innovation-du-jour is without a doubt “vented cans”, which promise to make it easier for a drink to pour the ‘perfect’ glass of beer. In May, MillerCoors (a joint-venture between SABMIller and Molson Coors) launched their take on the concept: a wider mouth with two “slots” extending up towards the can’s rim. Less than a month later, AB InBev begin piloting Bud Light cans with a tab that made a simultaneous perforation above the mouth of the beer when it was opened. Just last week, Molson Coors unveiled a can with a tab that could be rotated and depressed to create a vent.

The thinking behind these “innovations” isn’t wrong. The megabrands have the infrastructure, capital and scale to support the R&D and manufacturing of differentiated cans and bottles, while the craft breweries do not. However, they don’t address the fact that consumers, especially in younger demographics, are looking for more variety and “authenticity” than beer drinkers traditionally have. Consumers are also unlikely to find much utility out of these new containers. They may stimulate a one-time – and not immaterial – sales bump, much like colored Heinz Ketchup once did, but it’s hard to see many consumers changing brands because Molson Canadian is easier to pour into a beer cup than Miller Lite.

The purchase of more craft brewers or creation of new, largely independent microbreweries may seem like an obvious answer. However, the craft market is tremendously fragmented – no one, or even dozen, acquisitions will drive significant volume growth. Instead, these moves would likely drive down consolidated performance metrics and require a largely dissimilar and more hands-on skillset. Furthermore, some consumers drink craft beers because they’re supporting smaller, typically local producers – not $150B corporations.

Instead, major brands should develop go-to-market partnership models for smaller brewers. Similar to the fab semiconductor business, market leaders can use (or even build) excess production capacity to brew, bottle and potentially transport beer for craft brewers. In doing so, they can use their scale to offer a better cost structure than microbreweries, while gaining exposure to the highest growth segment in the industry. Furthermore, this strategy would give Big Beer better insight into the ‘rising stars’ of the craft market and established relationships they can leverage in an acquisition. For better production agreements during the precarious start-up stage, major brewers could even negotiate share purchase agreements if specific sales levels are hit.

Big Beer executives are likely holding out in the hopes that their newest beer or bottle can take back the share they once owned. Unfortunately, the next Big Thing in beer is small – and it’s not going away anytime soon.