Demand Is Flat but Beer Prices Are Up

Demand for beer is weak and supplies are steady, so U.S. brewers are raising prices. It’s enough to make Adam Smith roll over in his grave.

Although that counterintuitive formula may not make sense to classical economists, it’s proving to be a winner for Anheuser-Busch Cos., Adolph Coors Co. and other brewers struggling to sell the ultimate carbohydrate drink to a generation of young people obsessed with all things low-carb.

With the summer beer-drinking season drawing to a close, the price hikes are helping the industry leaders weather a rough patch caused by more competition from the spirits industry as well as the popularity of low-carbohydrate diets.

Because of a relatively strong economy, consumers have largely swallowed the price hikes, and brewers have seen little effect on volume, beverage industry consultant Manny Goldman said.

“All they know is that, for now, the industry may not be exactly setting the world on fire, but it’s not going totally into the tank either,” Goldman said.

When it comes to prices, U.S. brewers follow the lead of Anheuser-Busch, which controls nearly half of the domestic market, Goldman said.

In a mature market, it is hard for brewers to find new drinkers. The popularity of cocktails, which have benefited from relaxed advertising standards, also hurts the industry.

Boosting volume by introducing new products is difficult because beer drinkers’ tastes are notoriously fickle, and each brewer is wary of diluting its brands’ image.

Beer companies have found some success from piggybacking on the low-carb craze. Anheuser-Busch introduced a low-carb beer called Michelob Ultra, a move that No. 3 U.S. brewer Coors copied when it started brewing Aspen Edge.

For the most part, though, price is the best option brewers have to increase revenue.

Anheuser-Busch recently reported a second-quarter profit that was bolstered by a 2.5% rise in revenue from each barrel of beer it sold in the United States. The company said it planned another round of price hikes for the fourth quarter that would cover more than 40% of its volume, with more increases to come at the start of 2005.

The price increases, which offset lackluster U.S. volume growth of 1.9% in the quarter, would not be possible if Anheuser-Busch had a significantly smaller share of the market, Goldman said.

Coors is even more dependent on price increases. Its U.S. volume fell 5.2% during the second quarter.