Will microbrews kill the King of Beers?


msn.com | Money

By Joseph Tirella, MSN Money

If Robin Ottaway, sales manager and co-owner of the Brooklyn Brewery, wants to know how popular his company’s beer is, he need only check his e-mail. In his inbox last month were requests from interested parties in Costa Rica, Panama and India asking how to get Brooklyn’s brews (already sold in China, Turkey and Finland, among other countries).

“Just people inquiring about our beer,” he says. “We have a pretty well-established international market.”

Co-founder on success of Brooklyn Brewery

Indie “craft” beer makers such as Brooklyn Brewery are where the action is these days. American craft brewers are small (producing fewer than 2 million barrels annually), independent (not controlled by an industrial brewery such as Anheuser-Busch) and traditional (using at least 50% all-malt ingredients in their beers). And their success is striking fear into the mass-market brewers who dominate the $97 billion U.S. beer industry.

How beer is made at the Brooklyn Brewery

Although craft beers account for only $5.7 billion of the industry, they have seen a 58% increase in dollar sales since 2004, according to the Brewers Association in Boulder, Colo. Last year, while imported and noncraft beer both experienced a growth rate of 1.4% in volume, craft beer enjoyed a 12% growth rate in volume, according to the Brewers Association.

The shift in consumer tastes — along with a commodities boom that has put pressure on profits throughout the beer industry — has put the jumbo players on the defensive. The industry’s No. 2 and 3 players, SABMiller (SBMRY, news, msgs) and Molson Coors (TAP, news, msgs), respectively, are merging their operations in the U.S. and Puerto Rico. Their new company – MillerCoors – is expected to go into effect in July and will have a combined market share of nearly 30%.

And the nation’s self-titled King of Beers, Anheuser-Busch (BUD, news, msgs), has been dogged by the possible takeover by Belgian global powerhouse InBev.

Click here for more on the possible takeover.

Craft beers are nothing new to Anheuser-Busch: For the past decade, the company has been buying its way into the sector with minority stakes in producers such Redhook Ale Brewery (HOOK, news, msgs) in Seattle and Widmer Bros. in Portland, Ore.

Who really owns your favorite beer?

Anheuser-Busch has also been revamping its Michelob line, which includes flavors such as Honey Lager, Amberbock and Marzen, an Oktoberfest-style beer. Several of Michelob’s brews have been winning awards at both the Great American Beer Festival and the World Beer Cup.

But the craft sector has proved particularly thorny for Anheuser-Busch since April 2007, when its second-

largest American distributor, Ben E. Keith Beverages of Texas, broke an exclusivity deal with the brewer after taking over the Texas operations of C.R. Goodman Distribution, a Colorado-based network that specializes in craft and import beers.

“We saw a great need to expand our portfolio into the craft and import segments,” Kevin Bartholomew, the president of Ben E. Keith, which has been carrying Anheuser-Busch beverages since 1933, said in an e-mail. “This segment has been growing in mid-single to double digits, although at a lower base, for at least 10 years.”

Ben E. Keith now carries more than 60 brands of craft and import brands, including Belgium’s Duvel and Chimay as well as Brooklyn and Delaware’s Dogfish Head. The distributor has seen greater than 12% growth in the category since January, Bartholomew said.

The Ben E. Keith move was “a jailbreak,” with serious implications for Anheuser-Busch, said Bump Williams, the general manager of Chicago market research firm Information Resources. “If (Ben E. Keith) is breaking their exclusivity,” he said, “then everyone else is going to be breaking it.”

If one major brewer has an edge with craft-beer consumers it might be Molson Coors, which has created its own successful craft-style beer.

The company sent brewer Keith Villa to Belgium, which has a far more varied beer tradition, to earn a doctorate in brewing chemistry at the University of Brussels. When Villa returned to the U.S., he created Blue Moon Belgian White Ale, which looks, tastes and is marketed like a craft beer but is mass-produced — a detail the Colorado company isn’t going out of its way to promote.

Initially, drinkers were skeptical. “People said, ‘There’s something wrong with my beer — it’s cloudy,'” said Villa. But once they tasted it, he said, “we couldn’t brew enough of it.”

Even without national advertising, Blue Moon has seen double-digit growth since 2002, according to a spokesperson. In April, it was named the No. 1 beer in U.S. supermarkets for 2007, according to IRI’s Top 30 Beer Brand Performers (which featured 20 craft and imported brands among its ranks). “This beer is on fire,” said Williams, of Information Resources.

Williams says the major brewers seem to be taking the right steps to adapt to the changing beer market. “When you’re as big as these three companies, you’re not going to see the double-digit growth like in the craft beer market,” Williams says. “But all three (Anheuser-Busch, SABMiller and Molson Coors) are doing the right things to capitalize on that part of the beer industry.”

As the tectonic plates of the U.S. industry shift, some smaller brewers — Boston Beer (SAM, news, msgs),

Heineken U.S.A. (HINKF, news, msgs) or D.G. Yuengling & Son, a regional brewer in Pottsville, Pa., that bills itself as America’s oldest brewery — might find themselves in a position to grow their market shares. “They’re under the radar of the big brewers,” Williams says. “But people are watching them.” Still, he adds, until the St. Louis brewery is dethroned, Anheuser-Busch remains king. “They’re still the one to beat.”

A ‘lunatic fringe’ beer

That might sound like bad news for most smaller brewers, but not to Tom Peters, co-owner of Philadelphia’s Monk’s Café. Peters pours only Belgian, German or American craft beers.

See the variety of beers at Monk’s Cafe

“The big boys are opening the market,” says Peters, one of the first people to sell Belgian beer in the U.S. “What Coors and Anheuser-Busch are doing is growing the market share, and that’s going to trickle down to smaller brewers.”

Monk’s owner on the beer industry

From Peters’ vantage point, Blue Moon is “a gateway beer or an introductory beer to Belgian beer and other craft beers.”

And craft brewers, certainly, will drink to that.



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