|Much of the story of the U.S. beer business can be found in this fact: From 1990 to 2004, 60% of Chicago's neighborhood tap rooms closed.
“If I’m going to drink, I want something substantial,” Mr. Ryan said while sipping a Manhattan at Simon’s, a hipster bar in Chicago’s trendy Andersonville neighborhood.
The bar calls of young men like Mr. Ryan are benefiting hard liquor distributors like Diageo and Brown-Forman while damaging brewers’ bottom lines. And the shift from beer to spirits is grounded in cultural factors that make it more than a passing fad.
Down from 1999
Beer sales, at $25.6 billion, were 53.2% of the alcohol beverage market in 2004, down from 56% in 1999, according to the Distilled Spirits Council of the U.S. The spirits segment improved to $15.1 billion in 2004, or 31.3% of market, up from 28.2% five years earlier.
The factors driving this seachange in alcoholic beverage consumption habits range from a blurred image for beer brands to shrewd moves by distillers, from consumer affection for luxury goods to the withering away of blue-collar institutions where beer was part of the social fabric.
Beer marketers are fighting back, spending more on bar promotions and rolling out sweeter products to compete with cocktails. Bob Lachky, vice president for brand management at Anheuser-Busch, said that hard liquor and wine “clearly . . . have affected our industry.” But, he added, “It’s important to remember that beer continues to be America’s favorite beverage.”
That may be true, but others say there’s little chance brewers can stem their slide. There’s “not much” they can do, said John Greening, former account director for Anheuser-Busch at DDB Worldwide, Chicago. “All you can do with a trend is adjust your sails.”
Generational dynamics have played a role. Baby boomers’ parents drank wine and spirits while their kids picked up beer. Now it’s going in the other direction.
|Wine and liquor -- not beer -- have become the most popular drink in the 21- to 27-year-old demographic that is critical to beer marketing.
“Drink what your parents don’t drink,” said Mr. Greening, now director of the Advertising-Sales Promotion sequence in the Medill Graduate School of Integrated Marketing Communications at Northwestern University.
The depth of the dilemma was highlighted in a recent survey by Morgan Stanley that found spirits were the most popular drink choice among 21- to 27-year-olds -- the sweet spot for brewers. Among that group, 40% said spirits were their favorite drink compared to less than 30% in 2003.
Spirits also enjoyed a stronger image among twentysomethings, beating beer on taste, quality and sophistication.
Other studies held similar grim portents, showing that men as well as women are taking a pass on suds. A survey by Simmons Research showed 44.4% of white males 21 to 29 said they drank regular domestic beer in fall 2004, down from 48.8% in fall 1999. Just over 39% said they drank light beers, down more than a point from fall 1999.
That age group “is [brewers’] bread and butter,” said Benj Steinman, publisher of industry newsletter Beer Marketer’s Insights. “Any shift in that would be alarming.”
Sales of the top 25 spirits brands, which represent about 45% of industry volume, increased by 5% last year, according to Impact Databank. Diageo’s Captain Morgan rum surged by 14%, and Crown Royal Canadian Whisky jumped 11%. Grey Goose, the super-premium vodka created by Sidney Frank Importing Co. and sold to Bacardi last year, soared 21%.
|Five years ago the big brewers didn't believe spirits would ever catch on among younger drinkers. They were wrong. Anheuser-Busch and Molson Coors now report declines in earnings due to decreasing beer consumption.
Feeling the pain
Publicly traded brewers, whose stock price is tied to their ability to increase share, have felt the pain. Last week, shares of Molson Coors Brewing Co. nosedived after the brewer shocked analysts by posting a loss. Industry leader Anheuser-Busch posted a decline in earnings as well. Both cited the decline in beer consumption as factors.
And there’s no sign of relief. Beer volume is expected to grow at a 0.5% annual clip from 2004 to 2009, less than the 0.9% pace forecast for all alcoholic beverages, according to the Morgan Stanley survey. Spirits are expected to grow by 2.0%, wine by 3.5%.
This grim outlook marks a sharp reversal for the beer industry. Beer sales grew at 3% to 4% clip during the 1970s. Beer continued to outperform the market after per capita alcohol consumption declined during the early 1980s. Spirits nose dived.
As recently as five years ago the big brewers didn’t worry about competition from spirits. “We felt that distilled spirits would never catch on,” said one former beer industry executive.
Lack of brand differentiation
So the brewers competed against each other. And as they did, their marketing became homogenous. Following the lead of Anheuser-Busch's powerhouse Bud Light, brewers served a steady stream of humorous ads where entertainment value frequently overshadowed any effort to build or differentiate brands.
“There’s nothing intriguing about” beer, said Darrell Jursa, managing partner of the consultancy Liquid Intelligence. “It’s like water and soft drinks, and it’s advertised like water or soft drinks.”
|For years, brewers like Anheuser-Busch employed entertaining ads rather than ads designed to offset competition from spirits marketers. Analysts suggest that Budweiser's frogs and lizards evoked a lot of smiles -- but not brand loyalty -- over the years.
Norman Adami, CEO of SABMiller’s Miller Brewing Co., offered a similar diagnosis in a speech last spring. “The net effect of all that emulation [of Anheuser-Busch marketing] across the industry was that it caused consumer excitement to fade and allowed for successful attack … from outside the industry, particularly from the wine and spirits industry,” he said.
The spirits industry mounted its attack in the late 1990s. Spirits marketers broke into cable and radio, media they had avoided before, and increased their on-premise marketing. Spirits marketers spent $440 million on advertising in 2004, up nearly 12% from 2003, according to TNS Media Intelligence. Beer marketers spent $1.2 billion, up 7%.
'Sex and the City'
The goal of the spirits marketer’s marketing efforts -- from TV advertising to new flavors and unusual bottle shapes -- was to make their products less intimidating and more fun. And they succeeded, with a little help from the brightly hued cosmopolitans on Sex and the City.
The push by spirits coincided with a broader trend of consumers trading up in purchases ranging from fast food to home appliances. Marketers who pushed $30 vodkas benefited; mass brewers suffered.
“The cosmopolitan and the Manhattan have become statements of sophistication, taste and experience,” said Michael J. Silverstein, author of Trading Up: The New American Luxury. “Women, in particular, have been drawn to the cocktail as an alternative to beer.”
|Spirits and wine have enjoyed leading roles in TV shows, movies and the music business in recent years. Everything from the cosmopolitans consumed on 'Sex and the City' to movies like 'Sideways' have brought glamour and high cultural status to wine and cocktails.
And while spirits had a number of societal factors going their way, beer was undermined by changes. Many college campuses cracked down on drinking during the late 1980s.
Blue-collar institutions fade
Another factor was the fading of blue-collar social institutions, from corner taverns to union halls, where young men were “taught” to drink beer.
The decline in bar and tavern-going was documented by Robert D. Putnam, a Harvard University professor of public policy, who wrote Bowling Alone: The Collapse and Revival of American Community.
“Americans are staying home in the evening, and Cheers has become a period piece,” he wrote.
Chicago taverns down 60%
In Chicago, one-time hog butcher of the world, the number of taverns dropped by about 60% to 1,320 between 1990 and 2004, according to the Chicago Tribune. The city hit a peak of nearly 7,000 in 1947.
“Ten years ago when a guy had a beer, the lady he was with might have a glass of wine,” said Arthur Shapiro, an industry consultant who as a senior marketing executive at Seagram led the spirits industry drive into TV advertising. “Now if she’s going to have a cosmopolitan, he’s going to have a martini.”