Big Brewers Find Price War Seems to Have No End
--Summer Discounting Turns Into a Year-Round Habit, Cutting Into Profits
By Rekha Balu
07/02/1998
The Wall Street Journal
Page B6
(Copyright (c) 1998, Dow Jones & Company, Inc.)
A costly second front has opened in the Beer Wars: price.
A summer ritual in the beer business, discounting has in the past two years become a marketing tool for all seasons.
That's great news for cost-conscious beer drinkers, of course, who are seeing 30packs of popular brands in some
markets priced as low as $7.99. For the brewers, however, kicking the year-round discounting habit could be
difficult. And it is already cutting into industry profits.
Anheuser-Busch Cos. and Miller Brewing Co. have always slugged it out with advertising and promotions, spending
hundreds of millions of dollars a year to boost their brands.
Talking frogs and skimpily clad young women, however, haven't been able to revive Americans' interest in beer
drinking. Per capita annual beer consumption has fallen since its 1981 peak of 24.6 gallons -- or about 262 12-ounce
cans for every man, woman and child -- to 22.1 gallons in 1996. During those years, health awareness has cut into
all kinds of booze consumption, rendering alcoholic beverages a mature business in which the best chance for
growth is to take market share from a competitor.
Miller, a unit of Philip Morris Cos. and a distant No. 2 in beer to Anheuser, started a price war in early 1997 and was
initially successful. Instead of raising prices before the summer, Miller "responded with an increase in discounting,"
says W. Randolph Baker, chief financial officer of Anheuser. "It wasn't just that they stepped up the summer
discounting, but that they got progressively deeper as we went through each quarter of the year."
Anheuser didn't immediately follow, and Miller was able to seize almost two full points of market share, jumping
from 20.6% of industry sales in the fourth quarter of 1996 to 22.4% in the second quarter of 1997. Anheuser's share
fell during that same period to 43.8% from 46.6%, according to Beer Marketer's Insights Inc., a Nanuet, N.Y.,
consultant.
The move appears to have caught Anheuser off guard. It normally increases its prices during the first or second
quarter and that made even worse its price comparison with Miller during early 1997.
But the Big Bud doesn't sleep for long. Anheuser responded with its own price cuts and quickly grabbed back lost
sales; its market share soared to 47.5% for the fourth quarter of 1997, and Miller's was back to 20.9%.
"It's tough with pricing to maintain an offensive advantage because the competition will follow," says Scott Bussen,
a Miller spokesman.
The bad news for brewers: While fighting over a few points of market share -- those relatively few beer drinkers
who would rather switch brands than pay $1 a case more -- the industry had cut the price of nearly everyone's beer,
even the drinkers who couldn't care less about price.
"We don't pay attention to price," says Victoria Oberman of Chicago, loading several cases of Budweiser and Bud
Light into her sports utility vehicle at a Chicago supermarket. On this day, Ms. Oberman paid $10 a case -- typically
24 12-ounce cans or bottles -- with a free bag of ice thrown in with each case. But since she and her husband and
their friends prefer Bud, Ms. Oberman says she would have paid more and wouldn't have switched to Miller for a
lower price.
The discounting has taken its toll on brewer profits. Anheuser's revenue per 31-gallon barrel fell to $90.58 in 1997
from $91.12 the prior year. Miller's revenue per barrel fell to $78.19 from $80.79 in 1996, according to Beer
Marketer's Insights. Anheuser's revenue per barrel for the first quarter of 1998 was 2% lower than a year earlier,
according to the company.
So far in 1998, Anheuser has been able to cut back on discounting in some cities and on some package sizes, hoping
that Miller will pull back, too, and that customers will remain mostly loyal. In Boston, for instance, Miller's discount
is 50 cents more per 30-pack than Anheuser's. But on 12-packs, they are priced the same. And in New York,
Anheuser 30-packs cost $2.20 more than Miller. And 24-packs cost $1.70 more.
But in the most competitive markets, including Houston and Southern California, Anheuser is discounting to keep
its price equal to Miller's.
At the same time, both major brewers are spending more on advertising and promotion this year, which raises costs
and further pinches profit margins. "They're spending more and charging less, which leads to shrinking margins,"
says Tom Pirko, a consultant at Bevmark LLC.
With Nos. 1 and 2 slugging it out, smaller brewers are getting hurt, too. Stroh Brewery Co. has seen its lowerpriced
Old Style and Old Milwaukee brands suffer as Busch and Miller High Life are sold at comparable prices. Stroh
decided to opt out of the price war.
"We've rationally decided to give up some market share to maintain profitability," says Mark Duchovic, vice
president of corporate planning at Stroh. The company won't disclose its revenue-per-barrel figure, but Mr.
Duchovic says the number has gone up by 1% because Stroh stayed out of the discounting.
Coors Brewing Co. also is staying out of the fray. Its revenue per barrel rose to $88.54 last year from $86.91 in
1996.
All the discounting threatens to cheapen, in the consumer's mind, the value of these heavily advertised brands. It
makes beer more of a commodity, says Robert Weinberg, an independent beer consultant in St. Louis. And that
prompts some drinkers to "trade up" to a higher-priced beer.
That's helping to increase sales of Corona-brewed by Mexico's Grupo Modelo SA, which is partly owned by
Anheuser-Busch -- and Heineken, brewed by Heineken NV of Amsterdam. Milton Byrd, who works for the Chicago
Transit Authority, strolls past the discounted stuff at a liquor superstore and picks up two cases of Heineken for
$20.99 each. He buys Heineken, and only Heineken, and only two cases at a time, even when he sees it discounted
to as low as $17.98. "If Heineken isn't there, I do without," he says.