Federal Excise Tax Fight Looming?

Could be on the table in 2009.

WASHINGTON – Miller Brewing Company’s top lobbyist warned distributors gathered here that Washington may look at boosting the federal excise tax in 2009.

The scheduled expiration of the Bush tax cuts and ongoing budget issues “will create a tax fight that we have not seen in this town for over 15 years and will probably produce the largest tax bill and rewriting of the tax code since the days of Ronald Reagan and Dan Rostenkowski,” Timothy Scully told Miller distributors attending the National Beer Wholesalers Association’s legislative conference on Tuesday.

Scully noted that Miller paid more than $700 million in federal excise taxes and the overall industry pays about $4 billion.

Increasing the excise tax would hurt brewers and distributors alike, Scully said:

Any increase in the federal excise tax will make it harder for us as a brewer and you as a wholesaler to continue the necessary investments in our brands. An excise tax increase would pull funds from the advertising or marketing of those brands. Any increase would limit our ability to innovate and grow highly profitable and exciting brands like Chill.

2007 A Good Year for Beer

Industry up estimated 1.4 percent, says Beer Marketer’s Insights.

Beer Marketer’s Insights’ Jan. 14 issue has a roundup of 2007 beer statistics. And it was, in BMI’s words, “another pretty good year for beer.”

Beer shipments increased by 1.4 percent, a solid encore to the 2-plus percent increase in 2006, BMI reported.

Given that spirits growth slipped to the 2 percent to 2.5 percent range, the growth gap between beer and spirits narrowed considerably.

Growth Gap Narrowing Between Beer, Spirits

Craft beer a factor?

The Associated Press recently picked up on a story that’s been the talk of the beer press: Spirits is no longer growing dramatically faster than beer.

From the story:

"After years of losing people to mixed drinks, industry experts say the beer industry regained some of its lost luster in 2007, helped by surging interest in craft beers, a slowing economy and the desire of more drinkers to imbibe at home.

"Final year-end data has not yet been released, but Eric Shepard, executive editor of trade magazine Beverage Marketers Insight, said growth in the number of spirits sent to sellers slowed in 2007 while beer shipments remained about the same."

Change Is Brewing

Feminization and Millenialization in the beer business.

The latest issue of Miller Brewing Company’s Brew Magazine takes a close look at six trends that are shaping the future of the American beer business.

Over the past couple days we’ve looked at the trends of premiumization (especially of light), Latinization, fragmentation and occasionization. Today we look at the remaining two trends highlighted in the issue: Feminization and millennialization.

FEMINIZATION

What group of people embraced virtually every significant beer trend of the 1990s before white males?

The answer: women.

When women skewed more than men toward a brand -- Corona Extra, Bud Light, Coors Light and Heineken -- male share started increasing, according to Miller internal research. When women started walking away from brands -- including Budweiser and Miller Genuine Draft -- men followed.

And, of course, women have been a key driver in the growth of wine and spirits at the expense of beer.

And women’s influence is likely to grow. Among the new generation of male legal-drinking-age consumers, a higher percentage says they are closer to their female friends than in the past, according to Miller research.

So, what does this mean for beer?

For one, marketing should be inclusive of women, which doesn’t necessarily mean appealing overtly to them. It’s about the right attitudes and values. For instance, the unpretentious message of the Miller High Life campaign appeals equally to men and women.

(And there is an obvious corollary, which at times has been forgotten in the beer business: Advertising shouldn’t be offensive to women.)

It’s also more important than ever that brewers be cognizant of womens’ tastes and preferences. Part of Blue Moon’s success lies in its appeal to women. A-B’s Michelob Ultra was a hit with women, and A-B was aiming for the female market when it launched the Peels line of fruit-flavored malt beverages.

Change Is Brewing

Fragmentation and occasionization in the beer business.

The latest issue of Miller Brewing Company’s Brew Magazine takes a close-up look at the trends that are shaping the future of the American beer business.

Yesterday we looked at the trends of premiumization – especially the growing premiumization of the light segment – and Latinization. Today we look at two more trends: fragmentation and occasionization.

FRAGMENTATION

In 1997, supermarkets sold a total of 672 different beer or flavored malt beverage brands.

In 2007 they sold 1,225 -- an increase of 82 percent -- according to figures from Nielsen.

The story on store shelves shows how the beer business has been rocked by the consumer trend of fragmentation.

But over the past 15 years, people have become more interested in brands that allow them to express their individuality more precisely. Customization and personalization are the orders of the day.

Fragmentation has challenged once-dominant icons, which are finding their positions tough to defend. For example, Levi Strauss & Co. is challenged both by high-end boutique brands as well as private label brands.

In this environment, the challenge for brewers is to sharply differentiate their brands and communicate what sets them apart.

They’ve been doing this with marketing: For instance, Coors Brewing Company has been hammering the “cold” messaging for Coors Light in advertising and packaging. Miller Brewing Company has taken a “hard right turn” back to the product-centric -- and sometimes comparative -- advertising that rejuvenated the brand a few years back. The high-profile “Dalmatian” ad is an example of that.

The brewers also are doing it with product development and innovation. Each of the leading national brewers has been increasing its focus on imported or craft brands with distinctive positions. With Coors it’s been by pushing -- subtly -- Blue Moon; with A-B it’s been by striking distribution and marketing deals for imports; and with Miller it’s been by promoting brands from the Jacob Leinenkugel Brewing Company as well as imports from parent SABMiller plc, particularly Peroni Nastro Azzurro.

Change Is Brewing

Powerful trends are shaping consumer behavior. What does it mean for beer?

It’s a cliché to say the only constant is change.

Then why do marketers sometimes seem to forget that -- often at their own peril?

The beer business, like any other, is constantly evolving. Not as fast as say, the iPod. Instead, incremental --sometimes almost imperceptible -- shifts transform the landscape over time. The growth of light beer from virtually nonexistent thirty-five years ago to the biggest piece of the business is a perfect example.

The latest issue of Brew Magazine looks at six big consumer trends that are shaping the beer business and other industries. They include: premiumization, latinization, fragmentation, occasionization, feminization and millenialization.

Over the next few days, Brew Blog will highlight these trends.

Today’s installment takes a quick look at the trends of premiumization and latinization.

Adami Reflects Part 2

"I believe that a solid foundation was put in place."

Norman Adami faced daunting challenges when he took the reins of Miller Brewing Company in March 2003.

The brewer was in the midst of a 15-year decline. Miller Lite had slipped to the No. 3 light brand. Anheuser-Busch was firing on all cylinders. Consumer appeared to have grown bored with beer.

The conventional wisdom held those facts were unchangeable. How’s that conventional wisdom held up?
A-B has been losing market share since 2004. Miller Lite is once again the No. 2 light beer. And brewers are innovating and, once again, “standing up" for their beers.

The latest issue of Brew Magazine takes a look at how the beer business has changed during the Adami era.

Brew Magazine sat down to discuss those changes with Adami, who was promoted last year to the position of CEO and President of SABMiller Americas. He is retiring at the end of November. (Note: This interview was conducted before SABMiller plc and Molson Coors Brewing Company announced their intention to create the MillerCoors joint venture.)

The first part of the interview ran in last Friday's installment of Brew Blog. This is the second and final part.

Q. What’s the biggest challenge facing brewers now?

A. The single biggest challenge in the 21st century for the big domestic brewers is how to leverage scale on one hand but also how to manage complexity in the marketplace…. that is product complexity, the market complexity … and do so in a successful way.

Every brewer’s challenge is to build a complete and differentiated brand portfolio.

The U.S. beer market is not one single market, It’s made up of several different markets each with their own unique characteristics, their own competitive sets, their own consumer profile, their own dynamics. All this adds a level of complexity to the competition in the marketplace that I think is a challenge for any brewer.

At the end of the day it boils down to the challenge of building a portfolio that can capitalize on the consumer trends and deliver sustainable growth.

Q. Where do you see opportunities for growth in beer?

A: The Light category will continue to grow. You can see that happening. The light segment will be a battleground and it’s a critical battleground.

But light’s not the only source of growth in the industry.

In recent years we’ve seen the drammatic shift to premiumization. So value growth is definitely going to continue to come from that opportunity. That represents both volume and value growth.

The Latinization of America provides a huge source of growth and is an important success factor.

The consumer is relatively promiscuous. Twenty years ago a beer drinker was a beer drinker. A scotch drinker. Today you’re talking about repertoire drinking. Consumers will go from one occasion to the other and drink different brands and now it’s a question of capturing the imagination and capturing the occasion with the appropriate brand and that’s why a complete and differentiated portfolio is important.

I do believe that the category will grow share in the total alcohol market over the next 5 years.

Q. How?

A. We’ve got to continue to differentiate, we’ve got to continue to stand up for our beers we’ve got to innovate across multiple dimensions, we’ve got to make it exciting for the consumer.

We’ve got to capture the imagination of the consumer and avoid the sameness that the category has suffered from, particularly five years ago.

Consumers are looking for variety. They are looking to use beer or whatever alcohol beverage they’re drinking to badge themselves, and to meet their specific needs depending on the occasion.

We need to understand the need state and compete effectively across the broad alcohol category. From Miller’s experience in recent years, as well as other brewers and suppliers, we have seen the consumer respond and the category perform when this level of focus is directed at the brands.

Q. How would you characterize Miller’s progress in reshaping its portfolio and capitalizing on opportunities for growth?

In 2003, we set out a 5-year plan to shape and build a portfolio of brands. The starting point was to rejuvenate our flagship Miller Lite, followed by strengthening a number of our core legacy and heritage brands (given their size and importance) and then developing literally from scratch what we call our worthmore portfolio.

Given our situation and limited resources, it was not possible to boil the ocean all at once. So we had to prioritize and put in place and invest in the building blocks, the marketing skills, capabilities and infrastructure and systems that would sequentially enable us to get there over time. E.g., in 2003 we established a new product development team from scratch knowing that there would be a gestation period before delivering.

The aim each year was to build on what was established the year before, and by and large we have been able to achieve this… and we will continue to shape and build off the base that we havee stablished.

At Miller there is an appreciation for a full and differentiated portfolio.

Our focus and imperatives are:

1. Stoking our flagship Miller Lite
2. Protecting our legacy and heritage brands
3. Very importantly, exploiting and developing the potential of our worthmore brands

At Miller there’s an appreciation for a full and complete portfolio.

We have access to great international brands – none of the other brewers have as much access. We’ve got great brands in our portfolio already -- We’ve got Pilsner Urquell, we’ve got Peroni -- which have great potential into the future.

We’ve got Sparks, which is a great unique differentiated brand.

We have Leinenkugel’s, which is a genuine, authentic craft that plays into the need state for craft brands.

We’ve got a product like Chill, which is the outcome of a new product development capability and process in which we are very selective about how we go to market with new products. We’re not going shotgun.

Then we’ve got access to other SABMiller brands. There’s over 150 brands outside the U.S. that we haven’t brought in.

We believe we are well positioned.

Q. What are the challenges in managing the complexity of a complete and differentiated portfolio?

A. One needs to balance the portfolio in its totality. It’s not a question of looking at each brand or subcategory in isolation.

The consumer landscape, competitor portfolios and distributor realities need to be considered .

And the way one takes those brands to market is not a one-size fits all. And certainly that’s where I think we’ve learnt a lot and continue to learn by getting our feet wet. We’ve made good progress.

The way one nurtures and grows an import brand is not necessarily the same as the way one would do it with a craft beer or a mainstream brand. They all have unique success factors that one needs to take into account. That’s what I mean when I talk about a business model within a business model…..

The portfolio is a critical dimension for any brewer. That’s just not true in the US, it’s true the world over. SABMiller and Miller have been putting a lot of effort into dealing with this level of complexity, this level of consumer shift, this broader landscape.

Q. What would you point to as your proudest accomplishments during your time at Miller?

What’s most satisfying?

First, I think really the whole able challenger approach, which helped created a sense of possibility within the industry at large. It added vitality to the competitiveness in the industry. Today the beer business is a place where a good idea can be successful.

As far as Miller specifically is concerned, our fortunes were inextricably linked to the performance of our flagship brand, Miller Lite. Prior to 2003 it had been in decline for about eight years, and we were able to rejuvenate it and, within a period of just over three years, grow the brand by almost 3 million barrels. That fundamentally changed Miller’s situation and prospects.

Second, there’s the new relationship with the distributor network. Distributors were very leery of Miller. We committed to fulfill our end of the bargain. And we asked them to step up and support us in terms of bringing brands to the marketplace and executing local market plans and, very importantly, working as a unified system. We committed in turn to provide the leadership. The Miller distributor network is enthusiastically engaged and committed to Miller’s success.

In addition, the mindset and capability within the Miller organization is substantially advanced. We’ve pursued an executable strategy that will allow us to grow in the changing environment and have built strong teams at critical levels within the business. We made sustained progress in building real commercial capability, enhancing our competitiveness as a company. Over the years I have also focused on building a strong executive team.

Very importantly, Miller people have an expectation, a self belief and a determination to win. Having experienced success they know they can and will win.

In summary I believe that a solid foundation was put in place that allows Miller to grow on a sustained basis.

After Adami

Adami era was a time of change.

The beer business has undergone a great deal of change over the past five years.

In 2002, Anheuser-Busch appeared to be an unstoppable juggernaut. Consumers thought one light beer was the same as the next. And consumers appeared to have grown tired of beer.

Fast forward five years and A-B is losing share, brewers are differentiating, and consumers are returning to beer.

Obviously, many factors drive a $70 billion industry. But a lot of people in the business will tell you that Norman Adami -- who joined Miller Brewing Company as president and CEO in March 2003 -- was a catalyst for change. And he did it by energizing Miller with an “able challenger” mentality.

The latest issue of Brew Magazine takes a look at the industry status quo before Adami joined Miller and the current reality.

From the issue:

Then: Slide toward one-brewer dominance
Now: The smaller guys take share

Back in 2002, Anheuser-Busch was on a roll and appeared on track to hit its goal of 60 percent share.

“A-B was growing faster than the industry,” Adami says. “They were powering ahead, achieving market share of 50 percent and commanding over 70 percent of the profit pool and growing ever stronger. Everything was going their way and this industry was moving into a state where one brewer would be dominant.”

Then two things happened. Miller was acquired by South African Breweries, a global beer company, which put a “beer guy” in charge of Miller. Adami transformed Miller from a company that followed A-B to one that challenged A-B. That bold move revitalized Miller Lite – and disrupted Bud Light’s growth algorithm.

The other factor was the explosive growth of crafts and imports – a part of the business where A-B and its restricted distributor network weren’t well represented.

A-B fought back against Miller by slashing prices. And it made a series of acquisitions or licensing deals to bring more crafts and imports into its fold, notably InBev’s stable of European bands, including Stella Artois.

But the picture has changed. A-B saw its share dip by 0.1 points in the second quarter. During a call with analysts, A-B’s chief financial officer Randy Baker said: “The industry has grown much faster than we anticipated … If the extra volume growth comes from imports and craft brands, it will be difficult for us to increase market share, just because of the math.”

Then: Bigness rules
Now: Differentiation rules

For nearly three decades, the leading American brewers focused all their attention on making big brands, which they advertised through big campaigns and sold in big retail displays.

This model worked well in the 1970s, the 1980s and the 1990s. Then, at the turn of a new century, it stopped working so well. Consumers started picking up wine and spirits instead of beer. And beer calls increasingly were for imports and crafts.

The big American brewers – whose dabbling in the high-end had been inconsistent – now are in the midst of transforming their portfolios to reflect this new reality.

A-B – which, as the industry leader, has the most to lose by these marketplace changes – has responded with a wide range of actions. It’s launched a flurry of new products in a wide range of niches; inked distribution and marketing deals with established craft and import brands; and has diversified into beverages ranging from spirits to energy drinks to water.

Adami got Miller started on portfolio transformation by increasing focus on two high-end imports from parent SABMiller plc, Peroni Nastro Azzurro and Pilsner Urquell, deepening Miller’s presence in craft by launching Leinenkugel’s Sunset Wheat, and acquiring the fast-growing Sparks brand from McKenzie River Brewing Corporation.

Miller refined this approach with the Stoke, Protect, Exploit strategy. The prongs are driving growth of Miller Lite (“stoke”), prudently managing core brands such as Miller High Life and Miller Genuine Draft (“protect”) and tapping emerging high-growth and high-margin opportunities, including imports and crafts (“exploit”).

Coors Brewing Company has indicated its desire to tap into higher-end beers by creating a new brand-incubation unit, the AC Golden Brewery Co.

The entire issue can be seen here.

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