Sinking: Beer sales, beer stocks

By Robert Walberg

Warren Buffett’s Berkshire Hathaway last year acquired 5.7% of Anheuser-Busch. Busch, in turn, plunked down $82 million to buy Rolling Rock last week. Coors, the third-largest brewer in the U.S., was swallowed up by Canada’s Molson.

Lots of acquisition action, but rest assured, there’s no beer bubble. And until the beer makers can convince folks in the U.S. to buy their brews, there won’t be.

With the exception of light beers, which now make up 49% of the market, domestic beer sales have been falling steadily for years. According to Beer Marketer’s Insights, an industry newsletter, domestic beer sales have dropped 22% since 2000, with 7% of that decline occurring last year alone.

The decline of the Bud man

Why aren’t consumers drinking U.S. beers? That’s not altogether clear. For whatever reason – economic prosperity, low-carb diets, etc. -- beer is out and wine and spirits such as vodka and gin are in. Actually, that’s not entirely true. Imported beer sales continue to climb, further eroding the revenue growth of domestic brands such as Budweiser and Miller Genuine Draft.

Sales of Budweiser and MGD are about half what they were at their peak 15-20 years ago. Anheuser-Busch (BUD, news, msgs) and South Africa’s SABMiller have recouped much of the loss themselves, as Bud Light and Miller Lite are the two top selling light beers. But if the beer industry is to shake off its hangover, the brewers need to figure out how to sell their premium offerings.

Price cutting seems to be one approach to maintaining or building share. Unfortunately, the domestic price war is adversely impacting margins and profits -- especially now that fuel, utility and commodity costs are on the rise. SABMiller recently cited the combination of higher costs and aggressive pricing asreasons for its disappointing first quarter.

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SABMiller has launched a new ad campaign for Miller Genuine Draft in an attempt to appeal to a more sophisticated customer. Busch is also forging ahead with its own campaign designed to get consumers to switch from wine and spirits back to beer. Not to be left behind, executives at Molson Coors Brewing (TAP, news, msgs) recently noted that brand building was an essential part of revitalizing sales growth. The company is focusing on new packaging and labels.

Snapping up small brewers

That costs money. So in addition to rising fuel, utility and commodity costs, you can probably add increased marketing expenses. Given such a tough environment, it’s no wonder that the big brewing companies are trying to buy growth. Anheuser-Busch’s recent addition of Rolling Rock certainly won’t set the company on fire as Rolling Rock’s total sales last year make up less than one percent of total Anheuser-Busch sales. Nevertheless, it is a relatively popular premium brand that will benefit immensely from Busch’s distribution network.

There has been speculation that Busch is looking at gobbling up a sizeable share of Chicago’s Goose Island Beer. This would be a small deal with little or no impact to Busch’s bottom-line. However, it is indicative of Busch’s commitment to growing the premium side of its business during the current industry slumber.

Beer companies have also been busy snapping up international brands. Busch owns a 50% stake in Mexico’s largest brewer, Grupo Modelo, and a 27% stake in China’s biggest brewer, Tsingtao. SABMiller recently acquired Colombia’s Bavaria brewing company.

Whether it’s premium-domestic or international brands, the trend toward consolidation is clear. As such, small brewers such as Boston Beer Company (SAM, news, msgs) and Redhook Ale Brewery (HOOK, news, msgs) or international companies such as Kirin Brewery and Heineken NV might be future takeover candidates. Look for many of the small craft beer companies, such as New Belgium Brewing, to be gobbled up as the big boys search for the right mix to restart sales growth.

Will the sector bounce back? Almost certainly. Let’s face it: How often does Buffett's Berkshire (BRK.A, news, msgs) make a mistake. And if the economy begins to slow, and folks are no longer willing to drop $20 on a bottle of wine or $10 on a tricked-up martini, all the efforts currently being made by the big beer companies will start to pay dividends.

It’s probably a little early to be buying shares of Anheuser-Busch, as the environment will remain difficult for at least another six months. But at current prices, the stock offers good upside potential for long-term investors. With even a hint of a turnaround in its domestic premium brands, a return to the $55 area -- an 18% gain from current levels -- is well within reach.

At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.