On the House

Three Cheers for Beer

One of the highlights of the 70th Annual National Beer Wholesalers Association’s Convention, held last month in Las Vegas, was “Mr. Beer Guy,” a short video celebrating the men who deliver the beer to retail stores, bars and restaurants across America. And, I’ve got to say, it’s a great promotional tool for the beer industry. With the foot-tapping music of ELO (Electric Light Orchestra) running through the short, we’re treated to scores of scenes of pallets being moved, trucks being loaded and unloaded, and “beer guys” delivering the product, by hand-truck and other means, to their ultimate destination. The final mock heroic scene of a “beer guy” saving the day with an emergency delivery to a pub sums it up: an uplifting, lighthearted, yet noteworthy treatment of a segment of the beer industry that by itself employs more than 90,000 workers across America.

As Betty Buck, the outgoing NBWA chairman of the board, commented, “It makes me want to put on some shorts and climb up on a truck!”

[Thos interested in viewing the video can see it on the home page of the NBWA’s website, www.nbwa.org.]

The enthusiasm of the video carried throughout the convention, marked by a record-setting 3,700 attendees. One of the themes of the convention, “America’s Beer Distributors: Delivering Choice and Value One Beer at a Time,” underlined the focus of the NBWA’s message, which is to emphasize the viability of the middle tier in the beverage alcohol system.

Indeed, the recent gains throughout the beer industry were also a reason for enthusiasm. After uninspiring results for several years, brewers showed a U.S. sales volume increase of 1.7% in 2006, according to Adams Beer Handbook 2007. With the rate of growth of higher-margin craft brews and more flavorful imported beers outpacing that of mainstream domestics, the major producers have increased their product portfolios dramatically to embrace this market dynamic while at the same time not foregoing basic elements of their core business.

Among beer wholesalers, the good news was tempered by a couple of their stated concerns: ongoing consolidation at the retail tier in the direction of major national chains and big box retailers; and the many legal challenges that are attempting to chip away at the foundation of the three-tier system itself (i.e., the Costco case in Washington State, et al).

Still, the organization can take some solace — as can wine and spirits distributors — in the latest legal decision coming out of Maine, in which the First Circuit Court of Appeals upheld Maine’s alcohol regulation system. In its ruling, the court stated, “This three-tiered system has been justified on multiple grounds: as an efficient means of controlling the distribution of alcoholic beverages, as an effective means of promoting temperance, and as a facilitating means of collecting excise taxes. Its legitimacy has been vouchsafed by no less an authority than the Supreme Court.”

Nine and Fourteen

No, the above are not prime numbers, but they do signify important milestones for the wine and spirits industries. Nine refers to the number of consecutive years of volume growth for distilled spirits in the U.S. According to the just-released Adams Handbook Advance 2007, distilled spirits consumption rose by more than 6.6 million 9-liter cases in 2006 to just under 176.6 million cases, an increase of 3.7% over 2005. Wine consumption, for its part, improved by 3.4% in 2006, to 283.1 million 9-liter cases, a more than 7 million case gain over 2005, and the fourteenth straight year that wine consumption has grown in the U.S.

These are heady numbers, but when we drill down even further, the good news gets better, as we detail in our annual Growth Brands report. According to a recently published study by the Economic & Strategic Analysis Department of DISCUS, spirits products priced at the superpremium and above level increased their volume by a healthy 17.5% in 2006, almost five times the growth rate of spirits overall.

This increase in high-end sales resulted in overall dollar growth that substantially exceeded volume growth percentages: retail sales revenue (combined on- and off-premise) of distilled spirits jumped 9.5% in 2006, to $58.6 billion, while retail dollar sales of wine increased 7.2%, to $26.0 billion.
We are all familiar with the positive trends affecting wine and spirits sales, but they are worth noting here: the increasing cultural acceptance of moderate beverage alcohol consumption as a potential health benefit; the continuation of a thriving cocktail culture; more product access, with the liberalizing of archaic blue laws nationwide, especially the growth of Sunday sales; a more spirits- and wine-savvy public, responding to increasing efforts on product education from retailers, restaurateurs, distributors, suppliers and the media; and a general modernization of retail outlets, as they focus on making beverage alcohol shopping a more enjoyable and less intimidating experience, especially for women.

The golden thread weaving its way through all of these positive trends is the American consumer’s ongoing migration toward luxury products. More than most retail product categories, wine and spirits are so-called “affordable luxuries.” Essentially, this means that even at the ever-expanding high end, they are inexpensive enough to appeal to a wide segment of consumers while still delivering the prestige that accompanies a luxury product. This is an admirable sweet spot to be in.

Even so, the value side of the retail equation still represents a powerful dynamic in the marketplace. As you know as well as I, the most successful operations are those that manage to embrace the many disparate elements of the business and refine their message to satisfy the most, and hopefully best, customers.

Pumped Up

If you want to experience the ongoing wave of new product introductions, especially when it comes to malt-based, energy-enhancing and non-alcoholic beverages, then the National Association of Convenience Stores (NACS) annual convention is one event certain to zing your taste buds. I spent a couple of days in Las Vegas attending the show in October and I’m still buzzed from the dozens of new energy drinks, both alcohol and non-alcohol, that I tasted. Reputedly, the show included 140 beverages you could put in the energy drink category, which is a massive number even for that testosterone-pumped segment.

Besides the Big Daddy, Red Bull, which finally bowed to the trend toward larger-size packaging with its new 12-oz. can, there were many of the already established carotid-pulsing regulars like Monster and Rockstar and Coca-Colas’s Full Throttle, which debuted a line extension to the clan, Full Throttle Blue Demon in 16-oz. cans. Coke also added to its hybrid energy/soda Vault line, announcing the launch of Vault Red Blitz, due out in March 2007.
Anheuser-Busch introduced the non-alcohol energy drink 180 Blue, made with the acai berry, guarana and juices and vitamins. Miller Brewing showcased its newly acquired, fast-growing, energy-enhancing Sparks line, with 6.0% to 7.0% ABV, depending on the version.

Then there were Hydrive Energy Drink, made from spring water, available in four flavors and boasting “50% more caffeine than the leading energy drink;” and Kronk Grind, trying to appeal to the skateboarding subculture with the tagline, “Momma Ain’t Gonna Like This;” and Rip It Chic, a lo-cal energy beverage targeted at female consumers in two fruit flavors (Sin-a-Man and Berry In-o-Scent); and just plain Freek Energy, billed as “the most Evil Energy known to man,” available in four mind-shattering flavors: Maniac, SF Maniac, Rage and Psycho, to name a few of the newcomers.
And from Socko Energy: Socko, Raw Attitude and Hogan Energy (named for Hulk Hogan), all of them in regular and sugar-free versions.

The wrestling icon’s vein-popping image adorns the cans and the brand’s debut was supposed to be highlighted by an appearance of renowned muscleman. But I couldn’t wait around to get a live glimpse of the Hulkster, since my eyeballs were already spinning from the wall-to-wall heavy metal imagery.

At the Diageo booth, they weren’t serving any Johnnie Walker, but they were displaying the new Source, a 3.5% ABV spring water, which comes in Citrus, Orange and Berry flavors. It is testing in Dallas. Diageo was also showcasing its line of malt-based teas, tabbed Raw Tea, which launched in New England over the summer. The FMB line consists of brewed tea with caffeine and natural flavors. It includes Lemon, Raspberry and Peach versions, is 5.0% alcohol by volume (ABV) and comes in 12-oz bottles. A fourth flavor, Raw Tea Green Tea, just debuted in tests in Las Vegas and North Carolina. Indeed, tea drinks seemed to be everywhere, including the already established Twisted Tea family (Original, Half & Half, Raspberry, Peach; 5.0% ABV), from Boston Beer.

This is just a small sampling of the beverages on display at the NACS show. It was entertaining and informative, but I was glad to get home and open up a bottle of wine.

Beer here!

I was thinking about the old adage, “The more things change, the more they remain the same,” and how I used to think that sentiment was true. In fact, it probably still is when it comes to human behavior and personality, which for me is applicable primarily for my night job as an unpaid amateur psychologist for my family and crackpot friends and doesn’t concern us here. In thinking about events that do concern us here — the beverage alcohol industry — I believe that changing conditions call for new responses. Obviously, I’m not the first person to come up with that bright idea; in fact, it is particularly relevant to top brewing executives, who have been grappling with ways to counter some discouraging trends over the past few years.

It’s no secret that the beer industry overall has been basically flat for several years now, and indeed was down 0.4% overall last year. Objectively speaking, that decline is not something to be quaking in our boots about, especially when we’re talking about an $82 billion industry. On the other hand, the wine and spirits segments of the business have been growing for years and chipping away at beer’s share of the U.S. market. Even more troubling for brewers is that wine and spirits — make that cocktails — are rapidly becoming the first choice of the upscale, professional consumer in his or her twenties. Simply put, wine and spirits are now cool, while beer, while it’ll never be square, is trying to regain, or create, a cooler image.

Still, that is a far from simple diagnosis, for the beer industry is anything but monolithic. Imported beers, for example, continue to flourish, with the segment gaining 6.5% in 2005; imports now comprise almost 13% of the total U.S. beer market. And though their collective volume is relatively small, craft and microbrews have surged recently, reminding some of the emerging energy they showed in the early and mid-1990s. Indeed, as our writer Julie Johnson Bradford rightly points out in our cover story, “Beer Fights Back,” the problem lies more with so-called Big Beer, the major domestic brewers who dominate the industry. Not that they haven’t been trying to make changes, and that’s a big part of what the story addresses.

Even as brewers contemplate new tactics and strategies, we shouldn’t forget that mainstream light beer continues to grow (up 1.7% last year), and amazingly now comprises about half of all the domestic beer consumed in the U.S. The concern there, however, is that its growth rate has slowed. The majors have responded with several moves: They have introduced energy-enhancing brews and flavored beers and branched out into an impressive series of smaller craft-brew initiatives, all of which might eventually have an impact. In addition, an ongoing effort to create an appealing image for beer is gaining momentum.

If nothing else, it’s going to be interesting to see how the industry develops in the next few years. From this perspective, it’s just a matter of time before things begin turning positive again for the majors.

The Vodka Phenomenon

Just for fun, I looked back at the vodka feature story we ran five years ago and discovered that — surprise! — the vodka segment was dominating the spirits landscape, super- and ultra-premium offerings were increasing and flavored vodkas were making serious inroads onto retailers’ shelves. Sound familiar? Even back then, there was some hand-wringing concerning the limited amount of shelf space retailers could devote to the explosion of vodka expressions and brands and warnings to expect a coming shakeout.

Well, since then, a number of vodkas have disappeared or lost their early cachet, but far more have been launched into the U.S. market, at ever-higher prices and featuring a wider panoply of flavors. Indeed, the trends of five years ago have only intensified: It appears that the vodka flavor-of-the-month is no longer a joke, and that high-end imported vodkas are sprouting up from every corner of the globe.

Web editor Jack Robertiello recently filed a report from the annual Wine & Spirits Wholesalers Association meeting in Las Vegas, where, once again, there were several new vodkas on display. “Take Parliament Vodka, a Russian spirit with a point of differentiation unique to me; it's purified by the addition of milk to the distillate, which then curdles, thereby, I'm told, removing remaining impurities in the vodka. Okay.

“Or there's Matrioshka Vodka, another Russian entrant in three assortments (Lux, Honey and Cranberry), filtered through birch charcoal and packaged to resemble the traditional nesting dolls of Russia. Then there's Chinggis Khan from Mongolia, others from France, Poland, Finland, all hoping to catch fire.”

Indeed, just as I’m writing this, an email popped up announcing the launch of yet another premium imported vodka from Russia, this one named White Gold

This, most emphatically, is no fad, no ice beer craze reminiscent of the mid-1990s, when in the course of a year a couple of dozen ice beers followed in the wake of one or two really successful launches. Within a few years, the market had shrugged them all off, save for a handful. The growth of vodka is clearly the driving force behind the growth of distilled spirits and maybe even the chief contributor to the flowering of the cocktail culture. Vodka now accounts for 27% of all spirits sold in the U.S., and it gained another 4.4% in 2005.

Of course, it isn’t only the liquid in the bottle that’s performing the sales magic. It’s a myriad of unique drinks using different vodkas created by innovative bartenders and product owners; it’s eye-catching packaging and incisive promotional activity; and it’s marketing support that truly helps define and position a brand and a category.

There’s no question that there is a finite amount of retail space to handle this avalanche of vodkas. Still, it’s pretty hard not to take a shot at the latest gee-whiz flavor, selling above $30, with a luminescent bottle that seems to shout, “Buy me!”

To paraphrase the line from the movie, Field of Dreams, “If you build it, they will come;” when it comes to vodka, it seems that the current truism is, “If you sell it, they will buy.”

At least for now.