Low beer prices take toll on the major brewers

Modern Brewery Age,  Oct 31, 2005  

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AP--It started in early summer and built through the Fourth of July. By the time it reached its crescendo in Florida over Labor Day, people hoarded all they could. College newspapers printed enthralled articles. It had been a beer sale for the history books.

"Coors, Bud and Miller all entered the fray," says Art Friedman, president of Gold Coast Beverage Distributors Inc., a wholesaler in southeast Florida.

"Packs that cost as little as $11.99 were being sold with $5, $6, even $8 or $9 off."

Beer prices appear to have rebounded since then, but the summer price cuts could still spell trouble for major brewers.

On Wednesday, Anheuser-Busch Cos. said third-quarter net income fell 24 percent, hurt by volume declines and cost pressure as well as a litigation charge.

It is no secret that U.S. brewers have struggled to boost sales as American drinkers turn increasingly from beer to wine and spirits. The phenomenon is reflected in stock prices. Shares of Anheuser-Busch, the industry's dominant player, with a market share of about 50 percent, hit a 52-week low of $41.64 on Oct. 13 and have slid 14 percent in the last year.

Shares of Molson Coors Brewing Co. have dropped about 13 percent since the company was created in February by the merger of Molson Inc. and Adolph Coors Co. Shares of SABMiller PLC have done well over the past year, gaining about 34 percent, but the company makes only about a fifth of its profit in North America.

Many observers fear that while the decision to slash prices may boost beer makers' market share and overall sales volume in the near term, the strategy could make it hard to increase profits down the road.

That's because brewers' bottom lines are far more sensitive to price than volume. According to Christine Farkas, an analyst at Merrill Lynch, every incremental increase in price boosts brewers' earnings two to two-and-a-half times as much as a similar increase in volume.

Farkas recently cut her third-quarter and 2005 earnings-per-share forecasts on Anheuser-Busch, citing the Labor Day discounts. "They were focused on regaining market share, and they were willing to sacrifice profits to do so," she says.

In Florida, accounts vary as to who fired the first shot, but most agree the situation got out of hand.

"There is a lot of finger pointing," said Benj Steinman, editor of Beer Marketer's Insights. "Coors may have had the first $5 coupon, but they are not big players in the market. Miller was the first to do it widespread. Bud jumped in later. It got nuts. Prices were destructive of brand equity."

Peter Marino, a spokesman for Miller, agreed the price war was hurting all involved, but denied Miller played an aggressive role.

"We are going to defend our market share," he says. "But we think pricing is not the answer. We believe you've got to market your way out," he says, pointing to the company's recent ad campaign exhorting Miller's taste.

SABMiller recently reported that during the first half, Miller's U.S. sales to retailers fell 0.3 percent, despite growth by Lite.

Anheuser-Busch, the industry giant with far more U.S. pricing power than its competitors, Wednesday said it believes it gained market share, but didn't address Florida specifically.

Anheuser-Busch executives have previously said they are willing to use discounts as a tool to gain market share. However, Budweiser, its most famous brew, traditionally sells at a premium to its competitors, so it may not be fair to accuse the company of ruthless pricing tactics, defenders say.

Several observers believe that traditional premium is now being eroded, at least in some markets.

Recent problems or not, some long-term investors are still bullish on brewers, especially Anheuser-Busch. The company made a splash in April when it announced billionaire investor Warren Buffett's Berkshire Hathaway Inc. had become a "significant shareholder." Legg Mason recently upgraded the shares, citing the low valuation.

Kevin Grant, a portfolio manager of the Oakmark Fund, a $6.8 billion value-oriented mutual fund, has held an Anheuser-Busch stake for a number of years and currently owns about 3 million shares.

"The beer companies have done all they can to get those customers back--and price has been used," he says, admitting the strategy could crimp earnings in the near term. But he adds, "Trends come and go. Whether the trend is spirits or the trend is microbrews. We are not among the people who think (other drinks) are going to take all the market share. That is not what has happened in the past."

When tastes do shift back, he adds, beer companies will be well positioned, especially A-B. "They are in better financial shape to weather the storm than some of the smaller competitors," Grant said.

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