A-B price move to trigger beer war

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The country's largest brewer plans to ratchet up discount activity to reverse weak sales-and the likely result is an all-out beer brawl.

Anheuser-Busch controls a 50% share of the U.S. market, and when it holds or reduces the normal price increase-as observers expect it to do-rivals almost always follow. "They've got to move boxes," said Harry Schumacher, editor-publisher of industry newsletter Beer Business Daily.

Quashing or even tempering a price increase would mark a huge reversal in the beer industry; since 1998, brewers successfully passed through price hikes typically ranging from 2% to 3%.

But A-B is getting squeezed by competition from wine and spirits, and it's contending with the resurgent Miller Lite, marketed by SABMiller's Miller Brewing Co.

A-B, which brews best-selling Bud Light and No. 2 Budweiser, saw sales to wholesalers climb 0.4% during 2004. But during the fourth quarter, sales fell 1.5%.

A-B wouldn't discuss pricing plans. But in a release, A-B Chief Financial Officer Randolph Baker said, "We believe the pricing environment in the domestic-beer industry remains favorable and, importantly, is largely consumer driven."

A-B put through the first stage of its two-part annual price increase in October; the second phase is expected to happen during the first quarter. The two moves will cover about two-thirds of company volume.

Still, there are concerns that the price increases won't stick-or that they'll be discounted back.

will it stick?

"A-B distributors expect pricing to take a back seat to volume growth," UBS analyst Caroline S. Levy said in a recent report. Based on distributor expectations, the "average [expected price] increase for 2005 was around 1% to 2% (vs. 3%-4% historically) with even some [distributors] questioning whether they will see any increase at all next year."

William Pecoriello, an analyst for Morgan Stanley, lowered his 2005 forecast for revenue per barrel growth to 2% from a range of 2.2% to 2.7%.

"The real risk of continued weak volume growth is that the brewers will look to scale back price increases or become more price promotional," he said in the report.

Indeed, A-B already has started discounting. For example, it cut prices in some markets where its products sold at a premium to archrival Miller.

Looking to pricing activity this year, a Miller spokesman said. "We anticipate the pricing environment to remain healthy and rational, although we anticipate the industry leader may intensify the narrow tactical discounting that has been going on for more than a year now."

Ms. Levy noted in her report that 85% of surveyed Coors and Miller distributors have noticed more discounting in their market, with A-B usually taking the lead.

That said, observers believe the market is unlikely to see a repeat of the fierce discounting wars of 1997 and 1998. That was sparked by ultimately unsuccessful efforts by Miller, then owned by Philip Morris Cos., to take share from A-B.

Any price cutting this time around would be more tactical, Mr. Schumacher said. The 1990s price wars were a "disaster," he said.

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