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Recession Isn't Causing Brewers to Cry in Their Beer

Posted on: Sunday, 27 April 2008, 15:00 CDT

Hammering out a note to investors late last year, Wachovia analyst Jonathan Feeney decided to dispense some philosophical knowledge.

"Beer is the best place to go -- financially and personally -- in a recession," he wrote.

Brewers including St. Louis-based Anheuser-Busch Cos., the country's biggest beer maker, are hoping investors and drinkers agree with him.

The economy is mucking through falling house values, tightening credit and slumping consumer spending. But at One Busch Place, Anheuser-Busch executives are banking on beer being what they call "recession-resistant" -- largely immune to economic swings and turbulence in the markets.

"We're lucky to be in a business that is quite insensitive" to economic changes," W. Randolph Baker, A-B's chief financial officer, said in an

interview. "You're hard-pressed to think of categories that are less (affected) than good old beer."

Recession or not -- technically, it's too early to tell if the economy is in one -- Anheuser-Busch is trying to rise above serious challenges in its primary U.S. market. In the last few years, many consumers shifted away from mainstream beer and spent more money on craft beers, imported brews, spirits and wine. Not coincidentally, Anheuser-Busch's stock has lagged well behind the S&P 500 over the last five years. Its total return over that time has grown at about one-eighth the pace of the overall market.

Spurred by the faster growth of high-end imports, Anheuser-Busch has devoted much effort recently to distributing European alliance brands such as Stella Artois, Beck's and Hoegaarden.

But in an economic downturn, the company's lineup of moderately priced beers -- Budweiser, Bud Light, Busch and Natural -- may help the company ride out a choppy market, industry-watchers say.

"If we have a long economic downturn and people start trading down, A-B is going to be in great position to exploit that," said Eric Shepard, executive editor of trade publication Beer Marketer's Insights.

Since 1988, Anheuser-Busch has outperformed the S&P 500 in 15 of the 17 periods in which the economy grew less than two percent, according to Feeney.

Anheuser-Busch is "defensively-positioned in a time of consumer and equity market uncertainty," Deutsche Bank analyst Marc Greenberg told investors earlier this year.

In what may be a sign of the times, Anheuser-Busch's "sub-premium" beers -- those priced below Budweiser -- carried the flag for the company in the most recent quarter. Busch and Natural beers grew about one percent, compared to declines for the "Bud family" and Michelob beers.

"The key is to have a portfolio where people can dabble in the high-end and the low-end," Edward Jones analyst Jack Russo said in a recent interview. "In the long haul, you're well-positioned, whatever the economy does to you."

The overall beer industry has demonstrated resilience in tough economic times. Take the last recession, which lasted from March to November 2001, according to the National Bureau of Economic Research.

Domestic beer shipments dipped only one-sixth of a percentage point that year, according to data from industry consultant Robert S. Weinberg, a former A-B executive. The average American adult's beer consumption fell by just four ounces, to 31 gallons, in 2001.

In technical terms, "the income elasticity of beer is extremely low," said Baker -- meaning changes in personal income have little impact on the amount of beer consumed. Beer is still cheaper than it was 10 years ago after adjusting for inflation.

Food and beverages are usually some of the last spending categories to be severely affected by a downturn, said Lauren Torres, an equity analyst who covers Anheuser-Busch for HSBC.

But there are signs that some beer drinkers, feeling less flush because of high fuel prices, are going blue-collar and opting for less expensive brews. Anheuser-Busch executives say "trading down" -- drinkers switching from the company's pricier beers to go with cheaper ones -- is not widespread. But they concede it could become more prevalent later this year.

At Helen Fitzgerald's in Sunset Hills, bar and restaurant manager Suzie McCubbin said Bud Light is still the dominant brew. But she has noticed more customers asking about comparative prices, looking to save a little coin.

"People may choose draft instead of the bottle," she said, "because they're 50 cents cheaper during happy hour."

"Sub-premium" beers have been losing market share to more expensive ones for more than a decade. But sub-premiums have recently managed to narrow that gap, said Baker.

Anheuser-Busch spends little to advertise its sub-premium brews. The company aims to grab sales from competitors in the sub-premium category without actually expanding the sub-premium market. The reason: A-B makes less money on cheaper Busch and Natty beers than on Budweiser.

But even if a $60 barrel of Busch replaces a $75 barrel of Budweiser, Chief Executive August A. Busch IV said he would "take that glass half full."

The Natural and Busch beer families "provide excellent downside protection," he told analysts in February.

Although sales in the overall sub-premium beer category are down a fraction of a percentage point so far this year, that's an improvement from declines of 1-2 percent in recent years, noted Beer Marketer's Insights, parsing supermarket scanner data from Information Resources Inc.

"Some brands look downright robust in (the) weaker economy," according to the trade publication. Case sales of Busch and Busch Light each were up about 4 percent this year through March 23. Sales of Keystone Light from Coors Brewing Co. were up 12 percent, although Natural Light -- nearly one fifth of the category and the country's No. 5 beer -- was down 2.8 percent.

The data covered sales in supermarkets and drugstores but excluded Wal-Mart, liquor stores and convenience stores.

Anheuser-Busch and others are trying to adjust to the shifting market and appeal to consumers looking to save a few bucks. A-B is rolling out "Natty Light" television commercials for the first time in years.

Executives at Miller Brewing Co. of Milwaukee have noticed wine- and spirits-drinkers lowering their price points, defecting to higher-end beers such as Pilsner Urquell and Peroni from Miller's London-based parent company, SABMiller PLC. Some beer drinkers also are trading down.

Executives hope Miller High Life -- case sales of which are up about 2 percent this year -- will take advantage of more thrifty times. Said Miller spokesman Julian Green: "the message of a commonsense beer at a commonsense price has resonated with consumers."

Source: St. Louis Post-Dispatch

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