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« Craft Brewers and the Prettiest Girl at the Dance-Syndrome | Main | The Coming Artisanal/Craft Era »

Is the US beer market being milked?

The US beer industry continues to have a tough time.  The Beer Institute reports total shipments down 2.3% in the five months thru May.  Longer term, spirits continues their march, taking share.

The high-end continues to rock but the rest is pretty poor.  The usual suspects are blamed… weather and weather… taxes and the economy… and those dastardly spirits folks. 

Could the US beer industries woes be the logical result of the market realities of its larger players?  Could the woes be as simple as the result of over-aggressive pricing and to a lesser degree a change in the nature of the product consumed?  For the bang-for-the-buck crowd, a case of beer will never match a 1.5 liter of booze.  In my favorite local liquor store I can get a 1.5 liter of Sapphire gin or Kettle One vodka on deal for $32.  Note these are super-premium products; there is A LOT of much cheaper, quality stuff out there too.  As of 7/29, a significant liquor store in Littleton has a front line price on 24 12oz cans of Coors/Bud/Miller at $27 and change.  With taxes that will be over $30 for a case of cans.  Oh... and we are covered by two branches ;-)

For the bang-for-the-buck crowd, a mainstream light beer will never match the punch of a craft beer… to say nothing of a taste profile which younger (most?) drinkers are flocking to.  A few craft beers are already priced at parity with Coors/Miller/Bud bottles. 

And the very nature of craft beers will lower overall volumes.  If every drinker in the country switched to craft beers, overall volumes would plummet to a new much lower baseline.

And tough economic times drive many to think in more bang-for-the-buck ways than they might in better times.  If you want to feel better as you whistle past the graveyard you can read how the price of beer is actually quite low based on this or that metric but you know what?  Whether these are valid or not is completely irrelevant.  It is the consumer who determines these things, not some inflation-adjusted formula or some explanation based on the increased cost of inputs.  And the consumer is not tied to these analytics; they can change their mind and “re-set” what they consider a good price.  Is over a buck a beer for off-premise consumption a “good” price?  I think many folks are saying no.  And I think their wallets are in complete agreement.

But there is a reason for this aggressive price… back in the days when all of the major brewers were US companies (and US-focused) there was much more importance to things like a share point here or there and the never-ending battles with wine and spirits.  For the most part the US was the only stage on which they played.

But now 80% of all US beer volume is controlled by 2 large, international companies.  I don’t believe they look at US beer pricing (and its impact) in the same way these companies did in the past when they were solely US companies.  And why should they?

This is neither right nor wrong it simply is an observation.  I have written about the economic concept of Cash Cows which you can find here.  Basically Cash

Cows have high market shares in a marketplace with low growth rates – that pretty much defines the US beer market.  InBev saw A-B (rightly) as a very fat Cash Cow just waiting to be milked.

Cash Cows are typically high share leaders in a mature market or high share mature companies in major markets… they generate more cash than they consume AND typically have a lot of dough available… this pretty much defined pre-acquisition A-B.

Under classic strategy these business units should be “milked”… taking profits and investing as little cash as is possible. 

Cash cows provide the cash to drive a lot of the other actions of the company…

·         Providing cash for major business development initiatives, i.e., turning Question Marks into market leaders and helping fund Stars

·         Reorganizing regional and global financials by consolidating post-acquisition revenues, company-wide admin, R & D costs, debt service, dividends, etc.

I think the “woes” of the US beer industry are as simple as this… it is being milked, especially via pricing, to help fund these companies other activities in other countries… places where there is tremendous upside.  Again, this has no moral aspect, it is simply a business decision I believe has been made.

Unfortunately, this cash harvesting strategy and reapplying of financial resources for other programs could create a significant paradigm shift. Broad-based business expansion projects become top priority.  These can deplete resources for ongoing business development.

And by doing so it has opened the door to many of these “threats” and has been a boon for craft brewers by giving them tremendous pricing leeway.

Many beer wholesalers cry about their volumes these days but most are pretty happy with their gross profit.  I don’t see too many running for the exits.

Now of course if one takes the long view (ignoring the kumbaya sing-along on unity from the Beer Institute) will this be good for the beer industry for the long haul?  As I have noted in my attempts to share my wisdom on the craft brewing industry (which can be found here)… in reality there isn’t any such thing as the “beer industry”.

Folks who run large public companies and who think of the long-term are as rare as purple, 2-headed unicorns who speak French.  This is no negative reflection on them; it is simply the sad reality they live in.  And as a friend and fellow cynic noted when he worked at a large bank… this public company was run to enrich the top 200 employees (and I think he was very generous in this number) and to keep the stock price up.  That’s it. As a side note, I believe the Third was an exception to this but he was very old-school and he thought more as the owner of a private company since that’s basically how he ran A-B. 

So I would assume the big dogs will continue to do what they perceive is in their best self-serving interests… not necessarily in the US “beer industry’s” best interests but in the multi-national’s best interests… all while looking down the road about a quarter or two.  And unless ABI has a change of heart, or MillerCoors wants to get into a bruising fight that they cannot win, one would expect that the US domestic beer industry will continue to be treated as what it is to these companies, a Cash Cow that exists for the milking.

Of course they will fight things like equalization because that will hurt their Cow.  And of course they will come out with new products, etc… this isn’t an either/or type situation just the reflection of a larger strategic reality.  They have access to… or do they own? ;-)… incredible distribution systems.  You want that Cow to gush milk for as long as forever… or at least as long your stock options last ;-).

It remains to be seen what this paradigm shift means and how it will impact US beer distributors who do live in the long-term.  You’ll have to wait for my wisdom on that topic ;-)  Perhaps I’ll even make you pay to hear it and to devise strategies for dealing with it!  How’s that for a crazy thought?  ;-)

As a parting side note, just as I was about to post this came an article in the St. Louis Business Journal… you can find it here.  I’ll quote the first paragraph…

Anheuser-Busch InBev invests $1.4 billion in China

“In a push to create the world's first global beer brand, Anheuser-Busch InBev is making a big investment in China — a market that is expected to deliver more than 40 percent of the industry's growth over the next 10 years.”

 That Cow is goin’ be a rocking ;-)

And as another parting side note, the day after I posted the above, Harry led his 7/30 newsletter with this news...

A-B Taking Pricing

Dear Client:


A-B is taking a price increase again at the end of September in some markets.  BBD has seen price sheets going up between $0.45 - $1.20 on package beer.  Looks like it's going to be another year of 2 to 3% price increases even in soft times

Thanks to Harry... and I hear the milkman coming... again and again and again ;-)

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