Big Beer's Titanic Brawl

By Alexander L. Taylor III

Anheuser-Busch and Miller slug it out over a $30 billion market

For Americans by the millions, summer is that mellow and hazy season of beaches, baseball and, of course, beer. Yet for the folks who brew the U.S.'s favorite grownup beverage, the summer of 1982 has been anything but serene. American beermakers are engaged in the most ferocious free-for-all in their 357-year history. After years of steady expansion, two giant companies, Anheuser-Busch of St. Louis and Miller Brewing Co. of Milwaukee, are locked in a struggle for dominance of the entire market, while smaller regional and local brewers are getting trampled underfoot. In the past five decades, the ranks of American brewers have dwindled from 750 to a mere 45. Says Emanuel Goldman, a beer-industry analyst for the Sanford C. Bernstein & Co. investment firm of New York City: "The industry truly is in the final throes of consolidation."

In the fight to stay alive, smaller brewers have been racing to find merger partners, adding yet more turmoil to the churning industry. Pabst Brewing Co. of Milwaukee, once a leading brewer, has spent the past two months trying to merge with Olympia Brewing Co. of Washington State, while in the process having to fend off takeover attempts by the Wisconsin-based G. Heileman Brewing Co., as well as legal attacks by a dissident Pabst shareholder, Irwin Jacobs. Meanwhile, the Stroh Brewery Co. of Detroit, which acquired New York City's F. & M. Schaefer Co. in 1981, is still struggling to digest its latest takeover victim, the venerable Jos. Schlitz Brewing Co. of Milwaukee, which Stroh acquired for $497 million in June.

As the struggle intensifies, angry and anxious brewery bosses have discarded their easy, neighborhood-pub relations with competitors. Says Pabst President William F. Smith Jr.: "I think some of the camaraderie that existed ten years ago has changed. We've put on boxing gloves." Smith has hung a sign on his office wall that reads: SHOW ME A GOOD LOSER AND I'LL SHOW YOU A LOSER. Miller Chairman John A. Murphy has been known to take satisfaction out of wiping his feet on an office rug bearing the familiar eagle logo of Anheuser-Busch. Over at Anheuser-Busch, Chairman August Busch III has reportedly disparaged Miller's parent company, Philip Morris Inc. of New York City, by making derogatory remarks about "tobacco people" and lecturing his executives on the effects of smoking.

Big companies are winning their beer battles because making and marketing the amber drink has become an enormously expensive enterprise. The most efficient way to brew beer is in huge modern breweries that can cost $250 million or more to construct and many millions of dollars more to operate. The best way to market the resulting product is by setting up a national advertising drive and an efficient, but costly nationwide distribution network.

Once a brand is established and costs are met, each extra six-pack means more profits. Two weeks ago, Anheuser-Busch reported six-month profit gains of 24% over 1981 levels while selling only 10% more beer. That showed just how large profits can be once a firm is able to swallow the huge cost of launching a national product. As one beer executive points out, the drink's ingredients cost less than the bottle or can that it comes in and the advertising that is used to sell it.

The key to success in the industry is savvy marketing. Though beer drinkers like to boast of the distinctive flavor of their chosen brands, the truth is, as Donald Rice, an analyst with the investment firm of Blunt Ellis & Loewi points out, the products really do not differ from one another all that much in taste or ingredients. Most breweries focus mainly on the same group of customers, that 20% of American beer drinkers who consume eight out of every ten cans sold. These prime customers are both white-and blue-collar workingmen between the ages of 21 and 40, many of whom drink several cans a day, the prototypical Joe Six-Pack.

For nearly every brewer, the best way to reach these customers is through sporting events. In that contest, Anheuser-Busch appears to be the biggest spender. On radio, the company sponsors 20 of the 26 major league baseball teams, 14 of the 28 pro-football teams, 18 of the 23 basketball teams and twelve of 21 hockey teams. After all those outlays, there is still money for promoting racquetball, running, touch football, fishing, drag racing, softball, horse racing, soccer, rodeos and bowling. Busch also spends millions on the teams themselves. It owns the St. Louis Cardinals baseball team, paid $10 million to become the official beer of the 1984 Olympics and supports the U.S. Davis Cup team.

Busch's advertising clout has paid off. The company has been the No. 1 brewery for 25 years. Over the past decade, sales have soared 124%, from 24.3 million bbl. of beer in 1971 to 54.5 million bbl. last year. The firm's Budweiser brand is the largest-selling premium-priced beer in the U.S., with a typical retail price of $2.40 a sixpack, while Michelob, the company's "superpremium" offering, at about $2.90 a sixpack, leads that market segment as well.

If Anheuser-Busch has traditionally dominated the industry through its sheer size and muscle, Miller Brewing Co. has emerged as a hard-charging No. 2. Its tactics: canny marketing and nimble product development. Miller owner Philip Morris used rough-and-ready cowboy imagery during the 1950s and 1960s to propel its Marlboro brand to the lead in U.S. cigarette sales. Since it took over Miller in 1970, Philip Morris has used the same image-conscious advertising to promote beer. The master marketeers down-played the old Miller High Life slogan, "the champagne of bottled beers," and created a new image through "Miller time" television commercials. These typically feature young men who exercise mightily at such activities as felling trees or building highways and then cool off from their manly labors with golden lager. Says Jeffrey Weingarten, a vice president of Wall Street's Goldman, Sachs & Co. investment banking firm: "Miller actually started the process of selling beer on the basis of image rather than price. People now drink a particular beer not because of what it costs but because of what the brand says about them."

During the mid-1970s, Miller used the same successful technique to develop a whole new product category, reduced-calorie beer, and cash in on the nation's fitness craze. A typical commercial would feature a group of baseball or football players gathering in a neighborhood bar to argue over the merits of Miller Lite. The subtle message in the debates: that because the beer has one-third fewer calories, rugged men can actually drink more of it at a single sitting. Throughout the industry, light beer now accounts for 15% of the barrels sold, and Miller has about 60% of the market.

In reality, lower-calorie beer boils down to less brew for the money. Not only do most light brands carry premium-brand prices, they contain less grain and more water. In spite of the dilution, such beers are not all that much lower in calorie content than normal beers. Observes newspaper Beer Columnist Steve Byers of the Milwaukee Journal: "The calorie difference between a light beer and a premium beer is five potato chips. Why get a worse taste and flat beer for five potato chips?"

In the struggle for a slice of the low-cal market, Anheuser-Busch has not fared so well. The company's first two light beers, Natural Light and Michelob Light, have proved only moderately popular. Undeterred, the firm is spending some $50 million this year to launch yet a third reduced-calorie entry, Budweiser Light. Claims Anheuser-Busch President Dennis Long: "We are starting to see some chinks in Miller Lite's armor."

With Anheuser-Busch and Miller now controlling more than half the total U.S. beer market, life has become precarious for smaller competitors. Schlitz, a strong No. 2 ten years ago, slumped to a weak third after tampering with its brewing formula in the early 1970s. The company used cheaper ingredients and a faster brewing cycle to boost production. As drinkers tasted the difference, sales of the Schlitz brand plunged, from an estimated 17.4 million bbl. in 1975 to 6.2 million bbl. last year. Though the original beer recipe has now been largely restored, the damage has been done.

Schlitz's decline made it an easy target for takeover this summer by the much smaller Stroh, Detroit's family-owned regional brewery. In an audacious move to go national, Stroh borrowed $340 million, five times its net worth, to buy Schlitz.

Chairman Peter Stroh, the great-grandson of the firm's founder, saw the acquisition as a defense against the growing power of Busch and Miller. Says he: "Expanding was immensely important to our survival."

Like Schlitz, Pabst Brewing Co. has fallen on hard times. In 1959 the nearly bankrupt brewery decided to cut the price of Pabst Blue Ribbon to attract more customers. The strategy produced quick sales but eventually undermined Pabst's image. Between 1976 and 1981, sales of Pabst Blue Ribbon dropped from about 16 million bbl. to 9.6 million.

Pabst is gradually pushing the price of its Blue Ribbon brand back up again in an effort to restore its status as a premium beer. For now, though, the company's hopes for stronger sales rest chiefly with its own new entrant into the low-cal sweepstakes, Jacob Best Premium Light, and its popular West Coast superpremium brand, Henry Weinhard Private Reserve.

For the Adolph Coors Co. of Golden, Colo., everything seemed to be going right in the early 1970s. Though it was a regional beer produced in a single brewery, Coors won a kind of trendy following among everyone from college kids to Henry Kissinger and was carted in suitcases and backpacks across the U.S. Annual sales gains averaging 10% carried Coors to fourth place among brewers nationwide, but in 1977 disaster struck. The brewery was hit by a long and costly strike. The firm's poor labor-management relations brought on both bad publicity and a union boycott of Coors products. Today the company has slipped to a distant sixth place in beer sales.

Belatedly, Coors has geared up to establish national distribution by building a second brewery near Elkton, Va., but slow sales have forced the plans to be shelved for the time being. More immediately, the brewer has begun advertising heavily, and is in the process of adding a new superpremium brand, Herman Joseph's 1868. Insists Company President Joseph Coors: "We will fight tooth and nail to improve our market, and we're going to survive."

Among the handful of regional brewers actually to have prospered in recent years is G. Heileman Brewing Co. of La Crosse, Wis. The company jumped from 15th to fourth in the industry during the past decade by buying up old regional brands like Grain Belt, Rainier and Black Label, and running them more efficiently than had their previous owners. So far, the brewer's attempt to expand nationally by taking over Pabst has been stymied by the Milwaukee firm's defensive maneuvers to fend off acquisition. Moreover, the Justice Department has threatened antitrust action against the takeover because both Heileman and Pabst already have sizable shares of the Midwest beer market.

While regional beermakers struggle for national status, they have created an opening for tiny so-called boutique breweries. Last year seven of the nation's ten smallest boosted their sales. Too insignificant to get pushed around much by bigger brands, they concentrate on developing products with a unique taste and appeal. Among the best: Stevens Point Brewery of Stevens Point, Wis., which makes what a tasting panel assembled by Chicago Newspaper Columnist Mike Royko called the finest beer brewed in America; Leinenkugel of Chippewa Falls, Wis., which has been operated by the Leinenkugel family for 115 years; and Geyer Bros, of Frankenmuth, Mich., which last year turned a profit by brewing and selling a mere 4,500 bbl. of beer.

Perhaps the most glamorous small brewer is Anchor Brewing Co. of San Francisco, which was saved from bankruptcy in 1965 by Frederick Maytag, the great-grandson of the washing machine company founder. Maytag has developed a national following for his Anchor Steam Beer even though only 25,000 bbl. of the brew were produced last year. The beer, now available in 19 states, including Massachusetts and Georgia, is much praised by savants for its distinctively European taste, which imparts a somewhat heavier bouquet than is common among American brands.

Though some local and boutique brewers may continue to do well, the shakeout among larger beer companies will inevitably mean fewer and fewer choices for consumers. That is something that no beer lover can welcome. These days, when the bartender asks, "What'll you have?" the options seldom if ever seem to include such familiar names as Rheingold, Knickerbocker, Hamm's and Falstaff. Thus as the industry grows more and more concentrated, with fewer companies ruling more of the market, bits of Americana itself will continue to disappear. --By Alexander L. Taylor III. Reported by Stephen Koepp/New York and Paul A. Witteman/Milwaukee

With reporting by Stephen Koepp, Paul A. Witteman

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