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BEER: AFTER BIG JULY FOURTH, ARE FLAT RESULTS AHEAD?

NEW YORK -- The Fourth of July holiday weekend provided a needed bang for domestic beer brewers. But holiday sales aside, these aren't such heady times for beer, analysts said.The difficulty of sustaining strong price increases, rising cost of doing business, loss of share to wine and spirits, and threat of rising excise taxes will make it hard for the industry to maintain recent levels of profitability,

NEW YORK -- The Fourth of July holiday weekend provided a needed bang for domestic beer brewers. But holiday sales aside, these aren't such heady times for beer, analysts said.

The difficulty of sustaining strong price increases, rising cost of doing business, loss of share to wine and spirits, and threat of rising excise taxes will make it hard for the industry to maintain recent levels of profitability, according to beverage analyst Caroline S. Levy, a managing director at the UBS investment bank.

"We believe the cost of business is rising and expect more hurdles to grow earnings at levels seen over the past three years," Levy stated in a July 7 report.

In a survey of more than 50 distributors taken the day after the holiday, nearly 75% reported July Fourth weekend sales fared better than last year, thanks to sunny weather, the long weekend, the improving economy, more promotions and easy year-over-year comparisons.

Independence Day is beer's biggest holiday, contributing 4.9% of annual volume, followed by Labor Day, 4.5%, according to UBS. Altogether, seven major holidays contribute 28.5% of beer's annual business.

But, in a sign that the wine industry is nipping at beer's share, 30% of distributors surveyed by UBS and the Beer Business Daily newsletter in San Antonio, Texas, reported beer discounting was heavier than last year. Another 55% said discounting activity was unchanged and 15% said it was lighter.

Distributors are bullish on the outlook for pricing. In a May survey by UBS of more than 100 wholesalers, about 84% of Anheuser-Busch Cos. distributors (vs. 73% in an October 2003 survey) and 80% of Miller Brewing Co. distributor respondents (vs. 60% in October) expected an increase in net-revenue-per-case in 2004. Coors Brewing wholesalers were the exception, with 46% expecting an increase in 2004 vs. 61% in October. Anheuser-Busch, Miller and Coors accounted for 82% of U.S. beer volume in 2003, according to Beverage Marketing.

Still, Levy, who has a neutral rating on Anheuser-Busch and reduced rating on Coors, predicted that the rate of price increases would slow by the fourth quarter as would the growth of Michelob Ultra, Anheuser-Busch's popular low-carb light beer.

Lack of innovation also remains a concern. Beer enjoys deep market penetration, and its drinkers are trading up, as evidenced by the success of more pricey light/low-carb choices like Ultra, said Brian Sudano, senior vice president, Beverage Marketing Corp., New York. However, the industry has lagged in expanding its varieties and beer-drinking occasions, he said.

Beer makers rolled out 54 new varieties in 2003, according to Adams Beverage Group, while UBS reported the spirits and wine industries introduced 186 and 370 new products, respectively. About one-third of the new beer products were flavored alcoholic beverages, or malternatives, which, while profitable for the beer industry, also provide extra advertising for spirits brands, Levy wrote.

The lack of new products comes as per-capita consumption of beer declined 2.7% to 21.6 gallons from 1998 to 2003, while distilled spirits rose 8.3% to 1.3 gallons and wine 15.7% to 2.2 gallons, according to data compiled by Beverage Marketing.

Yet while almost half the distributors surveyed by UBS said the beer industry needs to enhance its image with consumers and tweak its marketing messages, only 6% said innovation was a must.

"It's about how beer reconnects with the consumer," Sudano said. "If [brewers] don't reconnect, they'll continue to have share loss over time."

NEW BEER INTRODUCTIONS

2001; 2002; 2003

Ale: 3; 9; 17

FMBs: 1; 21; 14

Lager: 4; 13; 10

Stout: 2; 0; 3

Light: 3; 5; 6

Wheat: 0; 3; 2

Pilsner: 0; 1; 2

Malt liquor: 3; 1; 0

Non-alcoholic: 0; 0; 0

Source: Adams Beverage Corp.