Beer Money

Just as wines and spirits have begun to chip away at beer’s dominance of the US drinks market, one of America’s shrewdest and wiliest investors has bought a significant stake in Anheuser-Busch. Does Warren Buffet know something we don’t, asks Jon Rees

Warren Buffet, the legendary American investor, caused consternation recently by revealing that he had taken a punt on beer. What would have seemed eminently sensible a short time ago now looks like a risky venture.

Buffett runs Berkshire Hathaway, one of the most successful investment vehicles on the New York Stock Exchange. The company is the key shareholder in some of the best known names in world business, including Coca-Cola and Gillette. It is a considerable generalisation, but Buffett likes brand names, consumer products and businesses that are already reporting big profits or those he decides are likely to do so pretty soon.

Buffett recently revealed that he had taken a “significant stake” in Anheuser-Busch, the world’s biggest brewer and producer of America’s biggest selling brand, Budweiser.

Nothing too surprising about that, perhaps, since it owns some of the best known brands in the world and, through them, controls about half of the entire US beer market. It made $513 million in the first quarter of the year, too, which is a lot of money. Indeed, it was actually rather more than the company was expected to make by Wall Street analysts. However, it was also A-B’s first drop in earnings for seven years, and the company was unable to raise prices significantly, while the amount of beer it was selling was actually falling. Some US commentators were, therefore, surprised by Buffett’s move, with analysts at stockbroker Bear Stearns commenting, “What is Berkshire Hathaway thinking?” Anheuser-Busch fits Buffett’s profile of a branded market leader that throws off lots of cash. But it has a short- and a long-term growth problem. US domestic beer industry volume growth is at zero, demographic trends are soon to be negative and US price increases may be hard to come by. Beer is America’s alcoholic drink of choice, of course, but not to the extent it used to be as wine and spirits are catching up. Beer sales were worth $25.6 billion and accounted for just over 53% of the alcoholic drinks market last year, down from 56% in 1999.

Competing categories

Meanwhile, the spirits sector improved to $15 billion in 2004, or about 31% of the market, up from just over 28% five years ago. Wine sales are worth around $20 billion, while a recent survey by investment bank Morgan Stanley actually found that spirits were the most popular drink among 21 to 27 year olds – four in 10 said spirits were their favourite drink, up from three in 10 two years ago. It does not look good for the years ahead either; beer sales are likely to grow by just 0.5% a year over the next four years, while spirits are set to grow by 2% and wine by 3.5%.

These figures are poor in comparison with what must now seem like a golden age for the brewers only a few years ago. Back in the 1970s beer consumption was growing by over 4% a year, and when alcohol consumption began to decline in the 1980s, beer still outperformed the market while spirit sales plummeted. Even at the start of the 21st century, there seemed little for the brewers to worry about because spirits had made relatively small inroads into the US market and there seemed little reason to suppose that would change. As a consequence, brewers saw the enemy as each other rather than outsiders, and they concentrated competition against one another.

First of all they competed against Bud Light, Anheuser- Busch’s phenomenal low-carb success story of the previous decade – about a third of all beers drunk in the US are now low-carb.

It was Bud Light that developed the trend in American beer advertising for using humour and it worked superbly. Almost too well, in fact, as most of the other brewers decided that if it worked for Bud Light it could work for them, too. The result was a stream of beer ads which did wonders for spreading a little light relief among the great American public but not much for differentiating one beer brand from another.

Copycat commercials

Norman Adami, chief executive of SABMiller, Anheuser-Busch’s great rival, said the result was bad for beer: “The net effect of all that emulation across the industry was that it caused consumer excitement to fade and allowed successful attacks from outside the industry, particularly from the wine and spirits sectors.”

It was in the late 1990s that the spirits industry saw its chance and started advertising on cable and radio, media which they had previously, by convention, avoided. Spirits firms spent $440m on advertising in 2004, up about 12% on the year before. In contrast, beer advertisers spent much more – about $1.2 billion. But the growth in marketing spend was nearly half that of the spirits suppliers, who aimed to make their products more accessible and more fun, too, with different flavours and bottle shapes. Celebrity endorsement of spirits and wine on shows like Sex and the City and Frasier helped, too.

The result is clear to see: sales of the top 25 spirits brands, which account for about 45% of the industry volume, increased by 5% last year: Diageo’s Captain Morgan rum rose by 14% and the ultra-expensive Grey Goose vodka, owned by Bacardi, increased by 21%.

There are also social changes at work, too, with women drinking more now, but preferring wine and especially spirits to beer. Meanwhile, the number of bars and union halls, where men learned their beer drinking, has declined dramatically in America’s major cities. For instance, there was a 60% fall in the number of bars in Chicago between 1990 and 2004, to just over 1,300, well down on the nearly 7,000 back in the 1940s.

Sage stuffing?

Warren Buffett, the Sage of Omaha, never knowingly throws money away though, and it is clear that the US beer market recognises it has a problem on its hands. Anheuser-Busch promises new products, increased investment in domestic marketing, new packaging and tactical price promotions. Well, it worked for the spirits industry.