Customers craving crafts ignore economic slump; imports looking for equal win
Jim Koch is realistic about craftbeer sales in convenience stores. “The whole category’s only 5% of the beer business. In c-stores it’s probably about 2% of the beer business,” says Koch, founder and chairman of the Boston Beer Co., maker of Samuel Adams.
Still, he’s vitally aware of the opportunity that exists in that small market. “C-stores are the last frontier for craft beer,” he tells CSP in an exclusive interview. “C-stores have really been the last channel to open up space for craft beer. … The opportunity has ripened for c-stores, and craft beers are popular today among c-store shoppers. That wasn’t as true 10 years ago.”
Koch’s perspective is both realistic and flush with opportunity.
Preliminary numbers from the NACS® State of the Industry Report of 2010 Data show microbrews up slightly in the channel, making up roughly 2% of beer category sales.
The optimism is in the growth upside. SymphonyIRI Group data shows the craft-beer category grew 12.8% in dollar sales and 12.4% in volume in c-stores over the 52-week cycle ending April 17, 2011. This comes as the beer category overall decreased 1.7% in volume. The only subcategories beating the growth of craft beers were ciders (up 22.6%) and flavored malt beverages (up 15.9%).
These statistics are echoed on the streets. “When you walk into any highend store, you’re starting to see more movement toward craft brews all around the nation,” says Sulu Jaffer, manager of nine Intown Market convenience stores in Atlanta, and a craft-beer enthusiast.
Dana Sump, category manager for the more traditional Casey’s General Stores, is seeing it, too. “Blue Moon and Sam Adams seem to be making the biggest gains [in high-end beers],” he says. “This has a lot to do with the continued focus on advertising and marketing of these brands. They have a ways to go to catch Corona and Heineken in volume yet, though.” The high-end-beer set in Casey’s more than 1,600 stores can range from 3 feet to up to 12 linear feet, depending on the market.
Chairman of the Bored
Why the current success for craft beers? Continued news of a struggling U.S. economy and high unemployment would suggest consumers are cutting back, not dipping in a little deeper for a higher-end brew.
“They’re simply an affordable luxury,” says Larry Munshower, convenience channel manager for Rochester, N.Y.- based North American Breweries, which represents the Labatt Blue, Honey Brown, Genesee and Magic Hat beer brands, among others. “People have scaled back on expensive houses, cars, jewelry, etc., but just about everyone can afford a $10 six-pack.”
Consumer data backs up Munshower’s theory. Craft beers have long excelled in on-premise accounts; but as the recession forced fewer restaurant visits, those drinking occasions moved closer to home, presenting an opportunity for beer retailers, according to research from Chicago-based Mintel.
“As consumers decreased on-premise alcohol beverage consumption, they likely moved to craft beer as an affordable luxury for home consumption,” says a November 2010 report from Mintel. Affordability aside, the trend is more a reflection of consumer personality, according to Tom Pirko, president of Bevmark LLC, a food and beverage advisory firm.
“Consumers are bored, and they’re looking for something to better define themselves,” says Pirko, who is based in Buellton, Calif. “In the recession, consumers have left the ‘middle’ out. … They’ve gone in two directions: Either they’re going to buy the cheapest possible beer … or they will spend more if they get the satisfaction of this image boost or if they can choose something that is interesting and makes them look interesting.”
Retailer John Zikias has seen it, too.
“Consumers are starting to get fatigued with trading down,” said Zikias, vice president of marketing for Thorntons Inc., Louisville, Ky., during the NACS State of the Industry Summit in April. “We’re seeing people saying, ‘Maybe I’m not going to buy that 18-pack. Instead I’ll buy a sixpack, but I’m going to drink a better beer.’ ”
The insight team for Tenth and Blake, the high-end-brand managers for MillerCoors, Chicago, tells CSP there is a generational element to the swing as well: “Millennials attempt to actualize their values of seeking variety, local sourcing [and] a belief in authentic expression through craft beer.” As a result, volume sales of the top 10 premium light beer brands were down 0.4% in c-stores for the 52 weeks ending April 17, according to SymphonyIRI. Bud Light was flat, Coors Light up 2.8%, and Miller Lite down 2.4%. So with the new Tenth and Blake team driving high-end sales, is there a risk of cannibalizing domestic beer sales? “No, there’s definitely room for growth for both our craft and imports, as well as premium lights,” the team says. “Ultimately, it comes down to occasion. We have a broad portfolio of options for beer drinkers, whether they’re seeking refreshment or seeking to savor a beer.”
The Role of Imports
Meanwhile, the imports side of the highend- beer coin is facing mixed sales results. Certainly in a market where consumers are looking to demonstrate “authentic expres sion,” imported beers can fi t the bill.
But sales data from SymphonyIRI, echoed by preliminary fi gures from the NACS® State of the Industry Report of 2010 Data, show the import category basically fl at, down 0.1% in 2010.
The Mintel report says imports’ loss is craft beer’s gain, showing more than one-third of beer drinkers “have decreased import consumption in favor of craft beer.”
More recent data, however, suggests that tide may have turned in more recent months.
“The slowdown in the economy has negatively impacted the disposable income of many beer drinkers and led to some trade-down,” says Steve Ward, vice president of national accounts for White Plains, N.Y.-based Heineken USA, acknowledging the struggle imports have faced. “But we are seeing that the import segment overall is returning to growth.” More recent SymphonyIRI numbers show imports grew 2.5% in convenience stores for the 52 weeks ending April 17, 2011. As cited above, during the same period, craft beers were up 12.8%, showing that both high-end subcategories can grow at the same time.
Scott Waters, vice president of convenience channel for Chicago-based Crown Imports LLC, importer of Corona, Modelo and recent U.S. entry Victoria, agreed growth has returned in recent months. “High end is what’s growing because people are looking for something authentic,” he says. “People are looking for authentic products that satisfy their needs and branded items are doing very well.”
Ward adds, “Good beer is an affordable luxury for many consumers, and all our research tells us that the desire to upgrade their beer experience on occasions they consider special is alive and well for beer drinkers. This bodes well for the imported segment in the near term as disposable income improves.”
Still, what’s driving the increase? If it’s affordable, why was it fl at in 2010?
Taste and Value
Koch of craft specialists Boston Beer obviously has a view. He subscribes to Pirko’s boredom theory and says any retailers who focused on budget beers during the recession did themselves a disservice by trading the consumer down.
“The subpremiums don’t taste that much different from the premiums, so on that end, people can get pretty much the same fl avor for less money,” he says. On the other hand, “a craft beer … will sell for the same price as [an import], but it’s got a lot more fl avor, and the consumer can tell that. … People are looking for value, and value doesn’t necessarily mean the cheapest thing on the shelf. Value means something that is worth what you pay for it.”
The major brewers are keenly aware of these issues, of course. On the craft/ imports side, they’ve bulked up their portfolios with introductions and acquisitions of microbrews—most recently, AB-InBev’s purchase of the Goose Island brand—and import brands.
“These beers are an affordable choice for high-end drinkers, who tend to be higher income and less affected by the economic downturn,” says Manny Zayas, vice president, convenience-store channel for Anheuser-Busch Inc., St. Louis. “It has led to some softness across the industry and, in particular, the industry’s largest segment in premium lights.
“While we wait for the economy to recover, we remain focused on the things we can control: staying in front of our consumers through aggressive marketing and improving business processes.”
Adds the MillerCoors Tenth and Blake team, “Consumer taste palates are evolving and expanding. Consumers are demanding variety in purchases, and experimentation appears to be an increasing value.”
Consumer research from Heineken USA supports the idea that imports are getting a sustainable boost, according to Ward. “Our customer research reveals that import brands tend to have a larger multicultural consumer base than domestic brands. Together, African- American and Hispanic consumers make up 44% of import volume, as opposed to 22% of domestic volume,” he says.
Daniel Mandelbaum, brand director for Heineken, says this insight goes back to the beginnings of craft beers. “Traditionally, craft beers are served in draught,” he says. “The draught format is not readably available in many of the African American- or Hispanic-focused on-premise channels.”
These two groups, Ward says, have been hurt more by the struggling economy, driving the sensitivity of the import market. Alternately, the market for crafts is highly Caucasian, so crafts are less affected in an economic downturn. “That being said, there is a huge opportunity with multicultural consumers,” Ward says. “The demographic is growing rapidly; by 2020, ethnic consumers will drive more than 70% of all the growth in the beer market, much of this driven by multicultural millennials,” who embrace upscale products and “tend to favor imports above crafts.”
Down on the Upside
On the budget-beer side, both A-B and MillerCoors have decided that as they make price increases, they will lean more heavily on budget beers, essentially “minding the gap” between the low end and the middle, and aiming to trade consumers up.
“We continue with our strategy introduced with the September 2010 price increases of reducing the price gap between our own subpremium and premium brands, which has historically been around 25%, to a level of around 15%,” Anheuser-Busch InBev CEO Carlos Brito said during an earnings report in May. “We’re encouraged by the progress we’re making, and we’ll continue to work to narrow this gap in the coming years.”
The strategy makes sense to Waters of Crown Imports. Many retailers, he says, overreacted to the recession by overinvesting in budget beers and trading consumers down.
“Below premium, everybody jumped on that bandwagon for all the wrong reasons. And that was they felt like there’s less money in everybody’s pocket,” he says. “What we’ve seen in the last six or eight months is the below-premium beginning to decline, and that’s primarily because the domestics have closed the gap with the premiums from a pricing perspective because that wasn’t good for their business either.”
SymphonyIRI data shows domestic subpremium brands were down 4.3% for the 52-week period ending April 17. To Pirko, ultimately, minding the beer section comes down to recognizing trends and knowing what’s happening in your store and your market. “You have to be very adaptable in the convenience-store [industry],” he says. “These trends are picking up speed. You really can make more money if you understand the dynamic of change for consumers that’s going on right now.”
Crafting a Strategy
In setting a cooler, it is possible to have too much of a good thing. Beer brewers all acknowledge the small share crafts and imports represent in convenience stores (about 2%), but they also encourage growing the section as appropriate to take advantage of current trends.
“Retailers need to overinvest in the high end, whether it’s imports or you’re in a hotbed for crafts, like Seattle, Chicago or New York,” says Scott Waters, vice president of convenience channel for Crown Imports LLC. “[Crafts and imports] put more money in the till. They satisfy a customer that’s probably younger, more affluent, so they’re also buying the better grade of chips and other products. So the basket ring for imports is going to be higher. It’s a valuable customer.” One trick to getting it right is avoiding some common misconceptions, outlined here by Jim Koch, founder and chairman of the Boston Beer Co.: ▶Craft-beer drinkers experiment a lot. “Generally, that drinker has a favorite craft-beer brand. They may have tried a few; they typically settle on one,” says Koch. “So they’re not that experimental.” ▶Craft-beer retailers need to carry a wide variety of brands and styles. “The very consistent pattern is: Roughly five brands in crafts and domestic specialty make up 75% of the volume. Then the next 200 brands make up the last 25% of the volume.” ▶Craft-beer drinkers drink only craft beers. “The idea that the craft-beer drinker doesn’t buy Bud, Miller or Coors is wrong. There’s a lot of overlap.” For tips on how to develop a craft-beer set, visit www.cspnet.com/crafttips11.
Not Your Mother’s FMB
Once upon a time, the fl avored malt beverage (FMB) category was the beer for the lightweight drinker, often female. Today’s additions to the subcategory are not your mother’s FMBs. With alcohol volume in the newer drinks pushing 13%, brewers have captured the attention of 21- to 29-year-old male drinkers, among others, bringing attention to a subcategory that was an afterthought for some in recent years.
“Have you tried the stuff? It’s nasty to me,” says one convenience retailer in the Midwest who requested anonymity. Citing Four Loko and Joose as the primary traffi c drivers in the category, he says, “Nevertheless, we are selling a bunch of it.”
And he’s not the only one. Preliminary numbers from the NACS® State of the Industry Report of 2010 Data, citing Nielsen statistics, show the FMB category grew 0.6% in c-stores, the largest growth of any beer category, to account for 4.3% of beer sales. SymphonyIRI Group data shows the category grew 15.9% in dollar sales in c-stores during the 52-week period ending April 17, 2011.
“There’s a lot of new choices, a lot of opportunity to introduce new products,” says Tom Pirko, president of Bevmark LLC, a food and beverage advisory fi rm.
Much of that opportunity comes via the tenet that there’s no such thing as bad publicity. Last year, the FMB category had a major run-in with the Food and Drug Administration and several state agencies following newspaper reports of teenagers and college students being sickened by the drinks and some dying in accidents or suicides.
Most of the hubbub centered on the drinks—most notably Four Loko—containing caffeine, which many argued masks the effects of alcohol, allowing the drinkers to drink more than they could handle. When the industry overwhelmingly agreed in November to remove the caffeine, the category saw a brief dip in sales as manufacturers scrambled to reformulate their drinks.
Today, “We believe … this is a category that’s coming back,” says Tom Mahlke, CEO of Roswell, Ga.-based Gila Brew Co., makers of Crunk Juce, a 12% alcohol beverage that debuted in July 2010 in a caffeinated version and was relaunched in May after being reformulated. “Various news I’m hearing suggests sales volumes are up to at least 60% or where it was [in fall 2010] to having already surpassed where it was. I think that proves the viability and the staying power of this category.”
For Chicago-based Phusion Projects, the makers of Four Loko, business appears to be booming.
“Quarterly national sales of Four Loko are up 27% year-to-date over last year, showing that the public has again embraced Four Loko as an alcoholic beverage of choice,” Chris Short, vice president of communications, tells CSP. “This is particularly impressive given that the product was effectively off the market for a period of time. … We are gaining our shelf space back and seeing sales increase every month.” And unlike craft or import beers, c-stores are the primary outlet for these beverages, which most often come in 24-ounce cans. Still, not every retailer is ready to play in the subcategory.
“I don’t even play around with that. I don’t want to attract that kind of customer,” says retailer Sulu Jaffer, who aims for a high-end beer and wine atmosphere in the nine Intown Market convenience stores he manages in Atlanta. “It’s done well at some other stores. But anything that gets any kind of negative publicity, I don’t want anything to do with.”
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