Are Mega-Brands in Permanent Decline?

FILED JULY 19, 2010

Dear Client:

Last week I spent the week in western Europe, not to tour breweries unfortunately, but to meet with major fund managers who have hundreds of millions invested in the global beer industry. They flatter me by pretending to listen to my take on the US beer industry. Wherever I went, it seemed the main question was whether our big beer brands -- Bud Light, Miller Lite, Coors Light, Heineken, and Corona -- were in a permanent decline due to their maturity, or whether their volume softness was mainly a result of the recession or lackluster marketing or higher pricing or some combination of such. The first reason is scary, the latter ones less so because they are controllable. The conclusion I came to, for reasons outlined below, was that these brands are not necessarily in some sort of permanent lifecycle decline.

Certainly history does not support this conclusion, as consultant Mike Mazzoni has recently posited and Dr. Bob Weinberg has been demonstrating for years using his infamous "pocket charts." Those charts show that every major beer brand since Repeal has gone through a steady rise and then, as next generation comes of age and they resist drinking "their father's beer", those brands go into an inexorable decline that no amount of marketing investment can reverse. (In fact, sometimes that investment can accelerate a brand's decline. A former board member of Interbrew once told me that marketing dollars are like motor oil to an engine -- if the brands are already growing, marketing accelerates the growth, but if the engine is going in reverse, marketing also accelerates the decline).

But I would submit that today's beer industry is very different from our father's beer industry, and therefore some of the rules don't apply. For one thing, most of those brands that rose and then declined -- many regional, some national -- did so due to the August Busch III's take-no-prisoners market share expansion from 1960 through 2008. Before 1960, there weren't really any mega-brands in beer, just a fractured market of high share regional brands and a few moderately successful national brands. Any brands that declined during that era was actually just Three Sticks and his army of Wharton MBAs outsmarting the competition, and of course Philip Morris coming out with a better widget called light beer.

The other difference is that the beer industry, until fairly recently, has always been highly fragmented with perpetual excess brewing capacity in the hands of several under-capitalized players. The beer industry was a wild west, particularly on the low end. Pricing integrity was non-existent, as anybody with a few idle dusty fermentors and a third-hand truck could start shipping beer at a cut-rate price. Yes, today we have more actual breweries, but the multitude of breweries we have today are craft brewers who sell at the high end, and most don't have capacity issues. If anything, they are lacking for capacity. Don't underestimate the value of having an industry that is operating at near 100% capacity in the summer months. Market shares tend to be rather sticky when that's the case. Oh, A-B or MillerCoors may lose or gain a share point. But it's not like Schlitz or Stroh losing 25 share points in two years.

The other difference is that we operate in a virtual duopoly dominated by sophisticated multinational companies, who tend to make decisions based on rational fiscal analysis rather than on passions fueled by family rivalries. In the past, if a big brand were suffering, the natural reaction - EVERY SINGLE TIME -- was to drop trou on pricing and hit the deep discount button. Competition naturally matched. Once you do that for a few years, the consumer starts to believe that the beer is subpar because it's always sold cheap, and an inexorable race to the bottom occurs. Today that is much less likely to happen. In fact, despite this recession, brewers have raised pricing much faster than the consumer price index, and it looks as if we'll see yet another price increase in September.

Today, we have reason to remain cautiously optimistic about the future our mega-brands -- by that I mean our big pale lagers, both domestic and imported. Clearly unemployment has taken its toll, particularly when you consider that unemployment over-indexes on the young adult male, and even more so on the young ethnic consumer who typically drinks light beer. Once unemployment abates, there's no reason to believe these brands won't be the primary beneficiary, just as they are the primary victim today.

Secondly, demographics favor the mega-brands. The US population is expected to grow about 1% a year for the next decade, and much of that population growth -- due to immigration -- will skew young and Hispanic. Again, the big light beers and imports benefit.

And thirdly, the big brewers and importers have shown a willingness to maintain and even increase their commitments to brand marketing while simultaneously increasing pricing. If they can get that marketing piece right, the needle can indeed be moved. "But Harry," you're saying, "I read in the Atlanta Journal-Constitution last week that you thought the big brewers' marketing efforts were 'terrible'." I did say that, and I do believe that we are decidedly not in a mega-brand marketing Renaissance. But perhaps I chose my words too harshly. The thing about marketing is that its quality can change without a moment's notice. Besides, if you're going to get your marketing sea legs, it's best to get them during a recession when nobody's selling any beer anyway.

But lets be honest: the big light beer brands are down because pricing is up in the teeth of a recession. The big brewers, which today sell beer all around the world, can afford to sacrifice some volume in the US in order to ratchet up pricing, so that when the economy improves their beers will be geared with higher margins. "A crisis is a terrible thing to waste," says Rahm Emmanuel. Brito agrees. They have emerging markets to get volume growth. The US is all about profits. Brito and Mackay didn't fall off turnip trucks yesterday.

People are naturally induced to trade down in these trying times as pricing is increased. It's even happening within the brands. The largest off-premise beer package in the US is Bud Light 18 pack cans, which are down moderately (-3.4%) in SIRI 52 week all-channel through June 13. The second largest package is Bud Light 12 pack cans (-4%). But the third largest package is Bud Light 12 pack bottles, down 14%. The third largest package in the US beer industry is down 14%. And yet Bud Light suitcase cans are up 6.3% and Bud Light 30 packs are up 7%. So consumers are trading down big time to larger, cheaper can packages within the brand. The difference in package trends are almost identical for Coors Light and Miller Lite. It's pricing and it's the economy, in tandem, that is driving down demand.

"But if it's the economy, while are high priced craft beers growing?" Craft beers are consumed by people with discerning tastes who want more flavorful beers often brewed by local brewers with a story. Regardless of the macro-economic winds, they are still willing to pay more for the privilege. Craft volume sales are about 5% of the business. Inversely, the big brewers and importers are 95% of the business, and are therefore unable to avoid the pervasive effects of a hard-pressed lower income consumer who drinks not for the bold flavor but for refreshment and ethanol.

Now, just because I believe times are different today doesn't mean that our mega-brands won't be in a perpetual decline. I'm just saying that it's not inevitable. While the examples aren't abundant in our industry (although look at Corona in the early 1990s, and look at PBR and Yuengling today), examples abound in most other CPG categories of old brands growing again. "There is no such thing as old brands, just old marketers who fail to breath new life into the brands they are supposed to market." That quote is from Roger Enrico, former chief of PepsiCo, who halted the 20 year decline of Pepsi by instituting the Pepsi Challenge, which induced Coke into the biggest marketing blunder of the century that gave us New Coke. MillerCoors' Tom Long echoed that sentiment in Beer Business Daily two weeks ago, when he said, "There are brands that are relevant, and there are brands that aren't. That's all."

Until tomorrow, Harry

"Good people drink good beer. Just look around any public bar: Bad people drink bad beer. Think about it."
-Hunter S. Thompson

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