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July 4 Holiday Sales Data Confirm Ineffectiveness of Discounting in American Beer Industry

Posted on: Wednesday, 20 July 2005, 15:01 CDT

MILWAUKEE, July 20 /PRNewswire/ -- Sales data for the American beer industry's important 4th of July sales period confirmed widespread suspicions that heavy discounting would fail to drive volume or share gains, while Miller Lite, Corona and other strong brands demonstrated solid growth in sales and price.

Key Trends Continue

The two-week sales period ending July 9 is expected to be the single- biggest beer sales period of the year, and combined data from supermarkets and convenience stores during that period revealed several key trends.

-- The industry is slow-growing, but fast-changing. While overall volume for the industry itself grew a respectable 1.8%(1), dramatic share shifts within the industry continued. Most notably, higher-priced imports and craft beers continued to surge, while mainstream, full- calorie American lagers continued to suffer. -- Volume and share movement did not correlate with discounting. Miller Brewing Co.'s share of total beer sales remained flat versus the prior year, while increasing prices by 1.2%(1). In contrast, Anheuser-Busch lost 0.5 share points despite lowering prices versus the prior year by 0.5%(1). -- Brands with established momentum continued to show strength. Miller Lite's share grew 0.6 share points, while the import category grew by 0.9 share points(1). -- The new Budweiser Select continued to drive collective gains for the Budweiser franchise. Introduced nationally in February, Bud Select captured a 1.8 share(1). But with A-B now touting Bud Select as having "light beer stats," sales of Bud Light declined 0.1 share points while sales of A-B's low-carb beer Michelob Ultra declined 0.6 share points. Original Budweiser dropped 0.9 points of share(1). -- Anheuser-Busch executed particularly strong discounting for its economy brands in supermarkets. Over the July 4 sales period, A-B cut the average price per case for Busch 4.4% and Natural Light by 5.6%(2). As a result, A-B's two economy brands each picked up 0.2 share points, while A-B's premium-priced Michelob franchise declined 0.9 points(2).

"Price discounting is not an effective growth lever for the industry, unless you want to rent volume in the economy segment," said Tom Long, Miller's chief marketing officer. "Driving brand value is the growth lever, and we will play aggressive offense there, while playing smart defense on the pricing front."

Closing the "Execution Gap"

The sales data also reflected that Miller had moderate success in executing its stated strategy of not ceding share based on A-B-led pricing initiatives. After the Memorial Day sales period, Miller said that A-B had out-executed it in securing discount programs with retailers, under-estimating both the depth and breadth of A-B's cuts. Miller vowed that it would protect Miller Lite's share by closing that pricing-execution gap as the summer progressed. For the 4th of July period, Miller competed more effectively in discounting activity, but was unable to close the gap with promotional activities such as features and displays.

"We made progress, but we're chasing a moving target," said Doug Brodman, Miller's senior vice president for sales. "Fortunately, the growing brand strength of Miller Lite is more than making up for the relative price swings."

For A-B, their current discounting activity resulted in its deepest average price decline since 1998(3).

The Disappearing Umbrella

The July 4 results reflect the latest milestone in an ongoing shift in the relative brand strength between Miller Lite and the Budweiser brands. For many years, Budweiser brands sold at a premium relative to the competitive brands under the Miller and Coors trademarks. In April, Anheuser-Busch told financial analysts that its brands could no longer command such premiums.

"For a variety of reasons, we just have not been able to sustain those higher price points in competition that we built over the years," A-B CFO Randy Baker said in reporting the company's first quarter results(4). "And it was clear in the sales results we were reporting last year."

In late May, A-B further reported that the average price gap between Bud brands and Miller Lite had been cut by two-thirds versus the prior year. At that time, the gap had closed from an average of 45 cents per case to an average of 15 cents per case, according to IRI statistics noted by Anheuser- Busch.

In mid-June, A-B vice president of sales and marketing Mike Owens summarized the new A-B strategy by saying(5), "We have collapsed the pricing umbrella that SABMiller enjoyed, which puts SABMiller in the difficult position of having to decide whether to further undercut our pricing or give up share."

The July 4 results indicate that even though that pricing umbrella continues to collapse to its lowest level in years, Miller Lite continues to gain share.

"We were encouraged by the fact that we were able grow Miller Lite's share and price, particularly while A-B's share and price were declining," said Long. "We see brand reconsideration occurring at a rapid pace, and we are determined to capitalize on that throughout our portfolio, leading with Miller Lite."

Increased Parity

When averaged nationally, A-B still commands a slight pricing premium to Miller Lite. But relative pricing conditions vary widely by geography, retail channel and package. For instance, in 49% of beer transactions across the U.S., Miller Lite and Bud Light are priced at parity with each other. Miller Lite sells at a lower price in 26% of transactions, while Bud Light sells cheaper in 25%(6).

The July 4 period marks the midway point of one of the most competitive summers in the modern history of the American beer industry, as the nation's three major brewers have engaged in discounting. In early February, Anheuser- Busch lowered its earnings projections, saying it would use discounting throughout the summer to reinvigorate its business. Subsequently, Miller rejected the notion that discounting could restore momentum to either specific beer brands or the industry as a whole, but also vowed not to cede share from Miller Lite based on price.

Increased A-B Focus on Economy Brands

While many consider Anheuser-Busch's discounting strategy to be highly unorthodox for a market leader, the company's aggressive price cuts with economy brands over the 4th of July are particularly perplexing. Far more than other beer brands, economy beer brands tend to be highly price-sensitive, and thus price-based share gains within the segment require ongoing discounting to be sustained.

"If this is a one-time push, they've simply rented some very expensive share for a couple months," said Brodman. "And if they stick with it, they will have permanently gutted much of the profitability out of their economy brands for their system."

The A-B discounts intensified the recent deterioration of the pricing umbrella A-B enjoyed in the economy segment, as the Busch brand once sold at a premium price over Miller High Life and the Natural Light brand commanded a significant premium over Milwaukee's Best. Miller said it would not automatically move in lockstep with A-B's cuts to maintain relative price positions, saying it would bolster its economy brands with marketing.

"We believe the right kind of highly targeted marketing support will allow us to sufficiently protect our economy brands without over-reacting on price," said Long.

Miller confirmed new advertising campaigns are breaking for its two top economy brands. Under the theme "Brewed for a Man's Taste," television spots supporting Milwaukee's Best Light began airing last night on ESPN's World Series of Poker. In September, a much-anticipated new campaign will debut for Miller High Life.

Marketing vs. Discounting

In late April, Miller president and CEO Norman Adami told a beverage industry gathering that the future of the American beer business depended heavily on brewers' ability to create great marketing behind their beer brands.

"The history of the American beer industry -- including the history of Miller -- is laced with lots of tragic stories of brewers trying to fix struggling brands by dropping price," said Adami, reflecting the on July 4 results. "But the evidence consistently suggests that discounting not only doesn't provide any real stability to struggling brands, but that it actually accelerates the decline of the brand's image with consumers. That's a road any conscientious brand steward should avoid."

Milwaukee-based Miller Brewing Company is the oldest major brewer in America, celebrating its 150th anniversary in 2005. Miller is a wholly owned subsidiary of SABMiller plc, one of the world's largest brewers. Miller's principal beer brands are Miller Lite, Miller Genuine Draft, and Miller High Life. The company imports Pilsner Urquell, Peroni Nastro Azzurro and Foster's and has craft brews Leinenkugel's and Henry Weinhard's. Its portfolio of brands also includes Milwaukee's Best and Sharp's, a non-alcohol brew. Miller produces Icehouse from the Plank Road Brewery, a small division of Miller; Olde English 800; and Mickey's Malt Liquor. More information about Miller Brewing Company is available at the company's corporate web site, http://www.millerbrewing.com/ .

Footnotes: (1) ACNielsen Combined Data - Supermarkets and Convenience Stores, 2-weeks ending 07/09/05 (2) ACNielsen Supermarket Data, 2-weeks ending 07/09/05 (3) ACNielsen Historical Supermarket Data (4) Statement attributed to Randy Baker during A-B Q1 results call April 27, 2005 (5) Statement Attributed to Mike Owens in Beer Business Daily article "Miller to Ramp up Marketing (and Discounting)" 06/15/05 (6) ACNielsen Supermarket Store-Level Data, 2-weeks ending 07/09/05

Miller Brewing Company

CONTACT: News Media, Peter Marino, +1-414-931-4973, or Analysts andInvestors, Gary Leibowitz, +44-7717-428-540, both for Miller Brewing Company

Web site: http://www.millerbrewing.com/

Source: PRNewswire

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