Big Beer: between a rock and a hard place

In this interview Brian Sudano from the Beverage Marketing Corporation talks to Ina Verstl and explains why big brewers were too slow to respond to the challenges of craft beer, all the while relinquishing their share of throat to spirits.

Q. Big beer has been losing out to craft. What were the reasons? Were the Big Brewers too slow to respond or are the entry barriers too low in the U.S. beer market?

A. I think you first need to put it into context. We keep hearing about how the “Millennials” demand variety. Variety has been sought by young consumers since the mid 1980’s. So this is not a new phenomenon. I think you are absolutely right to ask the question as to what happened to the big brewers and why they were slow to react. First, for the six years up to the formation of MillerCoors and InBev’s purchase of Anheuser-Busch, craft beer grew by a CAGR of 7.5 percent and added 3.5million hl of volume. Then, for the six years after the formation to 2014, craft has grown, we estimate, at a CAGR of 13.2 percent or 11 million hl. The absolute volume growth has accelerated every year since 2008 versus the prior year, which was not the case during the prior six years. This suggests that there is more to the current craft growth rate than a macro consumer movement.

Why is big beer losing share to craft? First, AB-InBev and MillerCoors both reduced advertising and promotional spending. In fact in 2012, they both were spending less than they did in 2007. This is going to have an impact. Second, several reorganizations and the loss of institutional knowledge resulted in less efficiency in addressing the changing competitive environment along with company capabilities. Third, both companies began to aggressively raise prices at a time when American consumers were going through the worst economic recession in 70 years. This was compounded by the fact that in 2008, the “big is bad” message was communicated across the social platforms. All this resulted in a perfect storm. Only recently have the big brewers begun to refocus on their big brands. However, momentum has since shifted to other brands and segments which results in the difficult task of changing the perceptions of these brands after consumers have moved on to other brands.

In effect, big brewers were too slow to respond. Also the barriers to entry are low for two reasons: brewers don’t need distribution assets due to the Three Tier System and craft brewers can access third party production capacity.

Q. "Craft" seems to be the in thing these days. There is craft cheese, craft coffee, even craft sodas. Isn’t the entry of PepsiCo into "craft sodas" going to make the whole debate over the definition of craft pointless?

A. The meaning of craft has always been somewhat contrived. For the most part in craft it means local. There are other meanings that have historically been associated with craft, including higher quality, unique flavour, a more hands-on approach to making beer, greater care in producing product, etc. Over time the meaning will change. You ask: “is a debate over the definition of craft pointless?” I’d say yes, as there is really no single definition and it means different things to different people.

Q. In the U.S. some observers argue that big beer brands also adhere to the "product life cycle theory," which holds that big brands will eventually mature and begin to falter. Can this case be made?

A. This is a very good question and hard to answer without going into great detail. In a nutshell, every brand goes through a product lifecycle. The successful companies reposition these brands each time they pass the lifecycle plateau, thereby bringing the brand back to the growth side of the curve from the declining side of the curve. Large brands would have never become large if these adjustments in positioning had not occurred. However, if you let a brand slide too far down the declining side of the curve, it becomes more difficult and expensive to bring consumers back to the brand or recruit new consumers, resulting in the brand losing greater relevance. I do believe that the big brands can grow again. However, it is very expensive and costly and I am not certain that either AB-InBev or SABMiller/MillerCoors have the patience and are willing to spend what it will take to do this. An example of a big brand in the U.S. beer market that has recently done this is Corona. The brand had lost 20 percent of its volume before stabilizing. Since then, the brand has grown for the past five years. This year the brand’s growth has accelerated and the brand will reach record volumes with tremendous momentum behind it. It is quickly approaching a 5 percent share of the U.S. beer market.

Q. Unbeknown to many outside the U.S., beer has had to relinquish share of throat to spirits. Where did this happen? In the on-trade? And how could this happen?

A. This is another complicated question. First you need to keep in mind that spirits had declined every year for over 15 years before starting to grow again in 1997. The biggest factors that helped spirits were consumer desire for variety and lack of major innovation from beer. Spirit companies were ahead of the curve on premiumization with products that were marketed as unique and contemporary and worth more. This resulted in a huge shift of volume to the high-end, while beer was primarily anchored in the mainstream. The desire for higher quality beverages complemented an era when consumers were in search of an affordable luxury in the 1990s, of “something special”. This has only continued during the past 20 years in beverages. If you eliminate the impact of the recession in 2008 and 2009, the trend has only gotten stronger. The second trend that spirits capitalized on was the desire for variety. The “cocktail craze” around the turn of the century is a perfect example. This drove both further consumer interest and the consumption of spirits. There were other events such as easing of regulatory differences between categories and greater new product innovation/activity from spirits that also drove consumers to the category. Spirits today remain much more developed in the on-trade than beer and have performed better. It was not until all the activity from craft beer and Flavoured Malt Beverages occurred that the category had innovated in a meaningful way. This has all contributed to beer losing share of throat.

Q. Bourbon seems to be on a roll. Will this last?

A. Historically, there has been a lot of shifting between hot segments within spirits in the United States. Vodka had a very long run due to its mixability and flavour expansion. However, it has pretty much run its course. Over the past decade, whiskey has seen a renaissance, beginning with the strength of Canadian whiskey led by Crown Royal, to single malt scotch, to blended scotch, to Irish whiskey and now bourbon. We are seeing Japanese whiskey showing signs of life in the market. Growth is being driven on two fronts – (1) quality perception and interest and (2) flavours – so I believe that the bourbon category will continue to grow for several years.

Q. Given the enormous SKU proliferation in recent years, aren’t brewers and distillers too optimistic about the number of brands the market can cope with? Or will distributors eventually become a veritable bottleneck?

A. We are already beginning to see a push back on the number of brands / SKUs which distributors and retailers can effectively handle. At some point, there will be consolidation so eventually we will see brand proliferation slow. The only way this can be avoided will be through changes in the regulatory environment around distribution and retail.

Brian Sudano is Managing Partner of the Beverage Marketing Corporation, New York. His experience covers the entire beverage industry, from soft drinks and juice to beer, wine and spirits, along with its various functions. He regularly provides strategic advice and council to some of the leading companies in the industry. Before joining BMC, Mr Sudano was a senior executive with Constellation Brands, the largest global wine company. He can be contacted via www.beveragemarketing.com .