Recovery May Give Low-End Beers a Hangover

Keystone, Others Target Most-Loyal Fans in Attempt to Shore up Share Growth Seen During Recession

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As brand manager for Keystone Light, Elina Vives would seem to be in a tough spot these days. The below-premium beer made big gains in the past few years as the economy tanked. But with trends improving, MillerCoors, along with Anheuser Busch, is raising prices on budget beers in a move to get drinkers to trade up to more-expensive brews such as Miller Lite and Bud Light, which struggled in the recession.

"What they're really trying to do, both of them, is drive business to the premium brands where they make more money," said Benj Steinman, president of Beer Marketer's Insights. But for Keystone, which is owned by MillerCoors, that could mean losing momentum that made it one of the fastest share gainers in all of beer. So what's a brand manager to do?

Credit: *Shipments of beer barrels in thousands. Source: Beer Marketer's Insights

"There is a significant segment of the population that chooses to drink below premium, and those are the guys we really want," said Ms. Vives, who took over Keystone a year ago after working on the high-end Peroni import, a move she likened to moving from "biscotti to beef jerky." Keystone is "glad to get the volume and windfalls that we got in 2009," she said. But "I'd rather focus our effort [on] ... the people who are going to stay loyal," adding: "We have to hitch our wagons to those people."

To do that, Keystone is doubling down on a strategy that has made it one of the biggest ad spenders in the below-premium segment. The brand will become a sponsor of the WWE pro-wrestling franchise, while continuing its "Always Smooth" national TV campaign that debuted last year. The campaign's star is Keith Stone, a laid-back everyday-hero character meant to appeal to the brand's target audience of men aged 21 to 34, who prefer T-shirts and worn-out hats to fancy clothes and who drink cheaper beer and are damn proud of it. The brand's agency is Publicis Groupe's Saatchi & Saatchi, New York.

Still, Keystone will be hard-pressed to lock in gains made in the economic downturn. Shipments grew 16% in 2008 and 14.3% in 2009, making Keystone Light the 10th-biggest beer brand by volume, and the fifth-largest sub-premium beer, according to Beer Marketer's Insights. The top-selling below-premium brand is Anheuser Busch's Natural Light (the No. 5 overall beer brand), which grew 0.6% in 2008 and 2.7% in 2009. But as the economy improves consumers are returning to mainstream light beers -- and the narrowing price caps "may accelerate the consumer's decision to trade up," noted UBS in a recent report.

In 2010, Keystone's growth slowed to 2.2%, while Natural Light fell 3%. And the slide is continuing this year. Case sales of Keystone Light grew less than 1% in the year ending March 20 and Natural Light sales dropped 4.6%, according to SymphonyIRI, which measures grocery sales not including Walmart or liquor stores. The average price for a Natural Light case jumped 59 cents to $14.57, while Keystone Light was up 56 cents to $14.

Executives can cope with the volume losses -- as long as they move consumers into their own premium brands. Anheuser-Busch has been especially aggressive, making it a goal to reduce the price gap between its subpremium and premium brands to 15%, down from the historical average of 25%. (The gap between Bud Light and Natural Light grew as high as 40% in 2007, according to a recent UBS report.)

In September, A-B accelerated its price hikes on subpremium brands and "consumers traded up," and it "benefited brands like Bud Light, benefited Budweiser," Carlos Brito, CEO of global parent Anheuser-Busch InBev, said on a recent earnings call. Still, he noted that "we were not able to compensate in the premium and above segments what we lost in the value and price," he said. But "that's the pain you suffer the short-term when you're trying to do something that's great for the company."

One long-term risk for the big brewers is competition from increasingly aggressive and cheap-priced bottom feeders, which see potential gains as big subpremium brands hike prices. Beer 30, by Melanie Brewery Co., added more than 100 distributors last year to about 300 and is now sold at Walmart in seven states, said Jeff Ciesco, the brewer's sales manager. "We do not invest in marketing and media like the big boys do," he said, noting that the brand's biggest selling point is pricing. Beer 30 is selling for an average of $11 a case, according to SymphonyIRI.

Keystone nearly tripled its measured media spending in 2010 to $7.4 million. The investment is still a fraction of the $145 million spent on Miller Lite, but a lot more than the $1.5 million that A-B spent on Natural Light. Keystone's plans this year include advertising on repeat episodes of Fox's "Family Guy" -- a bit of a coup for a beer brand, for which age sensitivities can make it hard to appear on animated programs, even if they are targeted at adults.

Keystone is also aligning with beef jerky brand Jack Links on a partnership that promotes "Canhole," in which consumers are urged to toss bags of jerky into holes that can be cut out at the top of Keystone Light cases.

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