Brewers and distributors are caught between a slowing economy and rising costs. What does it take to navigate hard times?High gas prices. A weak housing market. Weak consumer confidence. Rumblings of recession.What does it mean for the American beer business? The latest issue of Brew Magazine takes a look.From the issue:The beer business is generally considered recession-resistant, if not recession-proof, because its products span the spectrum of consumer tastes and price points. But that doesn’t mean beer doesn’t get pinched during tough times.
With the economy slowing and gas prices rising, consumers cut back on going to bars and taverns. They go out to eat less. And while sometimes those consumers enjoy a beer at home, that’s not always the case.“Thankfully, beers are still quite affordable, but yes, I think when people have less disposable income every week, something like beer is affected,” says Miller Brewing Company CEO Tom Long.Making it worse for brewers and distributors: Every input cost — gas, corn, grain, hops, barley and aluminum — is rising.
Costs are climbing even as off-premise business tails off. And high prices at the pump affect everything that moves, including consumers.“I think it (gas prices and the economy) is probably going to slow the industry down,” says industry consultant Joe Thompson, who predicts growth this year to come in somewhere between flat and a 1 percent increase. “And on the cost side of the equation it’s getting whacked pretty good. Fuel costs are going up. Insurance costs are going up. Everything is going up.”So it’s a tough environment. And it could be for a while.
But beer industry veterans say the best way to proceed is by sticking to strategy instead of panicking at the first sign of trouble.That means investing in your business and staying focused. “It would seem to me that the most important thing would be to not just overreact,” says John Greening, a former advertising executive who worked on the Anheuser-Busch business and now is an advertising professor at Northwestern University’s Medill School of Journalism.So far the leading domestic brewers appear to be hewing to their longer-term strategies.
They’ve spent the past few years focusing on their mainstream brands even as they try to tap into the high end in competition with the growing competitive set of imports, crafts, wine and spirits. And — as seen by new product introductions, the brewers’ focus on highermargin beers and ongoing marketing investment behind their main brands — that’s continuing even in the midst of the slowing economy.Distributors also emphasize focus.“We’re sticking to our business plan to drive premium and above-premium volume,” says Jim Doney, president of Chicago Beverage Systems, which handles Miller, Coors and a host of other brands.
“You’ve got to stick with your plan.”Brewers and distributors are also keeping a close eye on consumers and what they they’re doing.The biggest concern in the trenches is how high gas prices will go. With the price of a gallon cracking $4 in some markets well before Memorial Day, many distributors are concerned about how gas prices will affect their margins and the business overall.Besides cutting into disposable incomes, high gas prices also force consumers to cancel vacations, day-trips and other outings that may be beer-drinking occasions.“If the price of gas keeps climbing … and stays above $4, I think that’s going to have an impact,” says Mike Gallagher, executive vice president of Miller Brands in Milwaukee.A-B and Miller said that volumes were disappointing during their latest quarters.
But both made it plain they will continue marketingnto drive sales in the summer.“Marketers have to resist the temptation to cut marketing spending,” says Tim Calkins, clinical professor of marketing at Northwestern University’s Kellogg Graduate School of Management. “The problem is your equity can erode very quickly. All of a sudden you lose what makes your brand unique. You stop reminding people about what makes the brand special.”A-B appears committed to its effort to energize its core brands.
It’s doing that partly by increasing marketing spending behind Budweiser and Bud Light (although the Bud family continued to decline during the first quarter).A-B is also investing in new-product launches — always an expensive endeavor. It launched Bud Light Lime just before Cinco de Mayo.This fall it’s launching Budweiser American Ale. Both brands are priced above premium.For Miller’s part, it’s sticking with its strategy of “stoke, exploit and protect,” which offers consumers a variety of options at different price points.