When the economy is booming, we pound a six-pack of Bud with our buddies and watch the game. When the economy is lousy, we pound a six-pack of Coors with our buddies and watch the game. When the economy is flat, we pound a six-pack of Miller with our buddies and watch the game. This is why companies that make beer—like those that make diapers, electricity, and cereal—have countercyclical stocks. When the economy hits a soft patch, investors take refuge in them.
But now there's a fear in our beer. Last week, two leading beer companies reported disappointing results. Anheuser-Busch, which claims more than half the U.S. beer market, announced it was suffering from falling demand and rising costs. The volume of Bud and Michelob sold in the U.S. fell 2.7 percent from the year-ago quarter. Newly merged cross-border beer powerhouse Molson Coors reported a loss, with net sales in the U.S. down 2 percent, and U.S. operating income off by nearly one-third. The most recent trading statement of Miller, the No. 2 U.S. beer brand now owned by SABMiller, showed marginal growth. In the past two years, according to Gary Hemphill, managing director of Beverage Marketing Corp., beer volume has risen at a meager 0.5 percent annual rate.
Why are brewers crying in their beers? In part, they're facing the same difficulties as other manufacturers. Costs for raw materials and energy are rising, and they're having difficulty passing costs along to consumers. But beer companies are also butting up against some powerful demographic and cultural trends that may flatten sales for years to come.
Americans have always liked their alcohol, as historian W.J. Rorabaugh notes in his entertaining The Alcoholic Republic. And they still do. In fact, alcohol consumption has probably risen in the past 10 years. According to the Census Bureau (go to this link and then scroll down to table 201), between 1995 and 2002, per-capita consumption of alcoholic beverages rose from 24.7 gallons to 25.2. It's just that there are different drinks on the bar.
In all sorts of traditional retailing categories, Americans are becoming more yuppified and upscale. Williams-Sonoma is increasingly replacing Sears as a housewares supplier, and Home Depot opened the fancy Expo home design chain. The trend is particularly pronounced in food and drink. Millions of consumers have in recent years become connoisseurs (that is, insufferable snobs) when it comes to coffee, cheese, chocolate, you name it.
It's happening with alcohol, too. In the 1980s, beer-drinking yuppies, just as they did with automobiles, turned away from domestic brands and toward imports. That has continued. The Beer Institute reported that total beer imports in the first nine months of 2004 rose a solid 3.7 percent. But that's not enough to take the fizz out of Bud and Miller's growth.
The real problem is that Americans increasingly tipple with wine and hard liquor. Health-conscious baby-boomers, fretting about waistlines and heart murmurs, are eschewing high-carb beer for cardiac-friendly merlot (or, post-Sideways,pinot noir). According to the Wine Institute, U.S. wine sales have risen smartly in recent years, from 558 million gallons in 2000 to 627 million gallons in 2003. Meanwhile, the young and hip—traditionally the biggest consumers of beer—are looking for harder stuff. Club-goers want less Molson Ice and more Maker's Mark. The spirits crowd has become better at marketing, too, especially to younger consumers. That is one of the reasons a bidding war may be erupting over Allied-Domecq (Courvoisier, Kahlua, Stolichnaya), which recently agreed to be bought by Pernod Ricard.
Beer may be headed for long-term stagnation. The Wall Street Journal in March cited a Morgan Stanley survey that suggested that for the next five years sales of wine would rise 3.5 percent per year, sales of spirits would rise 2 percent per year, and beer sales would rise by a meager 0.5 percent.
The diverging fortunes of beer, on one hand, and wine and spirits, on the other, may be yet another illustration of the two Americas shopping meme. For the past few years, companies that sell baubles to affluent crowds have been thriving, while those who supply staples to the masses have been struggling. Alcohol may be the newest front. To caricature it, coastal professionals are filling their walk-in wine cellars with $30-a-bottle pinot grigio and Grey Goose. Meanwhile, working folks in the interior aren't buying quite as many six-packs.
Beer fans and investors can take some solace. Apparently, at least one denizen of the heartland has been seriously loading up on cheap domestic beer. Last month, Anheuser-Busch announced that Warren Buffett had acquired a significant stake in the company.