Coors Deal Not Likely to Turn Out Bud’s Light

First the background. In the beer business today you have to spend big money to produce and market an everyday product that actually costs less than it did 20 years ago--allowing for inflation in the intervening years. It’s true. A six-pack of Budweiser cost $1.36 in 1969, and today it costs $3.95 or so, a shade under three times the old price. Meanwhile, the dollar today buys less than a third of what it did then.

There are very few things you can say that about. Why should it be so in beer? Because we’ve gone from a country in which 200 local brewers dotted the landscape to one of a few national beers and a dwindling number of local ones. The story of beer is a story of change--of many companies pushed around by change and of one company, maybe two, alert enough to take advantage of it.

Now to the foreground. In the latest news in beer, the Colorado-based brewer of Coors is buying the Detroit-based brewer of Stroh’s, Schlitz, Old Milwaukee and other brands and bidding to become No. 3 in the $23-billion (sales) U.S. market.

Smaller competitors are taking the bid seriously. The brewers of Pabst, Falstaff, Pearl and other beers threatened Tuesday to file an antitrust suit against Coors’ purchase of Stroh Brewing Co.

But the reaction in financial circles was pretty much of a shrug: The $425-million acquisition of Stroh “will help Coors, for awhile,” says analyst Joseph Frazzano of Oppenheimer & Co., who adds “however, they are buying fading brands.”

The verdict: The Coors-Stroh combination won’t affect the competitive situation in beer, a business dominated by Anheuser-Busch, with more than 41% of the U.S. market, followed by Miller, a distant No. 2 at under 20%.

Branch Breweries

And now the lessons of our story: Thirty years ago Anheuser-Busch, the St. Louis-based brewer of Budweiser and Michelob, held less of the market than Coors alone (8.6%) does today. Local brewers were still secure from the national brands, Budweiser and Schlitz, because even though those beers were known nationally, they couldn’t sell in volume far beyond St. Louis or Milwaukee because it isn’t economical to ship a product that is 95% water.

However, the local advantage shrank as Schlitz and Anheuser bought and built local breweries. But, here’s the lesson: Anheuser spent more to build new, efficient breweries in markets such as New York and Los Angeles than Schlitz spent to buy old ones.

Anheuser went into debt to do so, but the gamble paid off. Before long it could produce its premium beer in most areas of the country at less cost than local brewers could produce their beer--and Budweiser, which now accounts for one out of four beers sold, began to sweep the local brands away.

Yet Anheuser can be tackled by fresh competition--as Miller Brewing showed in the 1970s, after it was acquired by Philip Morris.

Made Crucial Error

The cigarette company’s smart marketing people saw opportunity in changing life styles, says Robert Weinberg, a St. Louis marketing consultant and professor at Washington University. With more people working in services, Miller saw that beer had to change from a drink that manual workers could sweat off to a beverage that wouldn’t bloat sedentary office workers.

So in 1973, Miller brought out Lite beer and enjoyed instant success, moving up in market share and gaining on Anheuser. But Miller became overconfident and failed to notice that, though it was making gains, the total beer market wasn’t expanding.

And that oversight led it into the crucial error of committing $400 million in the late 1970s to a new brewery in Trenton, Ohio. The brewery was to give Miller the capacity to pass Anheuser. Instead, the brewery never opened--to operate it would have incurred only greater loss.

After that, Anheuser put distance between itself and the field. The company now has 12 breweries around the country--and another going up in Cartersville, Ga., at a cost of roughly $500 million.

That is, Anheuser-Busch ($10 billion sales) is spending more to build one new brewery than Coors ($1.5 billion sales) is spending to buy Stroh. Clearly, it will be hard for the new company to compete with Anheuser’s capital muscle.

Or with its advertising muscle, where Anheuser spends more than $1 billion a year. In beer today, says consultant Weinberg, “You have to spend $100 million on advertising no matter how much you sell”--meaning that if you don’t spend, your product fades from sight.

Is such a business worth staying in? Coors thinks so--perhaps with good reason. Some 80 million adult Americans drink beer today, and consumption is rising, even if slowly.

More to the point, the business is changing. Where once beer competed with hard liquor, it’s more likely to compete today with adult soft drinks, such as Diet Coke. That could provide an opening for Coors, a company whose beer has been called “Colorado Kool-Aid.” But if not Coors, change in the beer industry will provide an opportunity for some company--change always has.