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Brewers' Dry Patch: Americans Turn From Beer to Harder Drinks

The Wall Street Journal. logo The Wall Street Journal. 5/9/2018 Saabira Chaudhuri, Nick Kostov
© john gress / reuters/Reuters

American drinkers are abandoning beer for harder stuff, squeezing the world’s biggest brewers.

Anheuser-Busch InBev SA, Molson Coors Brewing Co. and Heineken NV all reported sharply lower U.S. beer volume in the first quarter compared with a year earlier as drinkers turn to other alcoholic beverages, such as wine or whiskey.

AB InBev said its volumes fell 4.1% in North America, partly because of weakness in the company’s core Bud and Bud Light brands. Last month, Heineken said its volumes fell by a high-single-digit percentage in a declining U.S. beer market, without being specific. And last week, Molson Coors said its U.S. sales fell 5.8%, driven by a 3.8% drop in domestic brand volumes. That sent its shares tumbling 15% in a single day, to a four-year low.

Executives blamed a much colder start to the year compared with 2017, when warmer weather drove brisk sales. Despite the volume drop, AB InBev said it raised prices and boosted revenue per hectoliter. Strong volumes in markets such as Mexico, Colombia and Argentina helped, too. Shares rose early Wednesday in Belgium, before ending the day flat.

Still, the industrywide volume declines were sharper than expected, punctuating years of slowing growth amid broader headwinds.

Alcohol consumption overall is stalling. That has intensified a fight between brewers, distillers and winemakers for a more limited pool of drinkers. In that booze battle, beer has been losing out, especially among younger drinkers.

“Growth in wine and spirits has continued,” Gavin Hattersley, chief executive of MillerCoors, the U.S. unit of Molson Coors, told analysts after reporting its own falling sales last week. Millennial drinkers are “shifting from beer to wine and spirits,” he said.

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At the same time, consumers more broadly have been turning away from bigger brands—in categories ranging from frozen food to deodorant—toward smaller ones they see as healthier, more natural or made locally. Craft breweries have capitalized on that trend in recent years, and many bigger breweries have snapped them up or marketed their own small brews. But even craft-beer sales have started to slow recently, and the sector’s smaller volumes haven’t been able to make up for declines in the mass-market brands.

AB InBev sold 4.3 million liters, or about 1.1 million gallons, of Bud Light, America’s best-selling beer, in 2017, according to Euromonitor. That is off 16% from 2012. Euromonitor estimates overall beer volumes will slip 0.3% this year after a 0.6% decline in 2017.

Demographics are a significant headache for beer makers. For decades, beer has been the entry-level alcohol for younger drinkers. Typically, they would switch to more exotic drinks much later in life, if at all.

That is no longer the case. In 2006, nearly 65% of alcohol consumed by Americans aged 21 to 27 was beer, according to data from AB InBev. By 2016, that had fallen to 43%.

The proportion of young white males—long beer’s core drinking demographic group—is dropping. The share of Hispanics and African-Americans, who generally drink less and favor spirits when they do, is growing. Women were never big beer drinkers, having long ago gravitated to wine. Recently, they are drinking more spirits, including whiskey, after heavy marketing by distillers.

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Brewers for decades have relied on beer’s relatively low alcohol-by-volume content to give it an edge over spirits on taxation, distribution and advertising. But even some of those advantages are being eroded. Last year, the National Football League lifted a ban on liquor ads.

While beer has long labeled itself as the drink of moderation, liquor makers are fighting back and highlighting the low calorie and carb counts in hard spirits.

All this is costing the brewing industry drinkers. Beer’s share of the U.S. alcohol market by value dropped to 45.6% in 2017, from 48.2%, in 2010, according to Euromonitor. Over this period, spirits’ share jumped to 31.7%, from 29.6%. Wine held its ground at roughly 19.7%.

AB InBev said Wednesday that its Bud Light and Budweiser brands continued to lose U.S. market share in the first quarter—shedding more than a percentage point between the two brands. The company is in the midst of a yearslong effort to turn around both brands.

The company has poured advertising dollars into a series of marketing campaigns, with mixed results. The latest, Bud Light’s “Dilly Dilly” campaign—which follows a medieval king with a taste for Bud Light—has become a cultural meme, but it hasn’t lifted sales. AB InBev said Wednesday it is “seeing consistent improvements in brand health and market share trends” at Bud Light, although it added that it continues “to face challenges.”

AB InBev has said it isn’t giving up on those mass-market brands, but is more focused on offering drinkers more choice and persuading them to buy more expensive beer. The company recently rolled out its higher-priced Michelob Ultra Pure Gold, made with organic grains. It is also now selling Bud Light Orange and a new version of its Bud Light Lime. Both are brewed with real citrus peels.

The Belgium-based brewer, which completed its $100-billion-plus purchase of rival SABMiller in 2016, has been squeezing costs and boosting margins. Its shift toward higher-end beers has also bolstered its bottom line. Despite the big drop in volumes, U.S. revenue per hectoliter rose 1.9% in the first quarter, thanks in part to sales of higher-priced beers.

Net profit fell 28% to $1.02 billion in the latest quarter, compared with a year earlier. The result largely stemmed from higher finance costs and an unflattering comparison with last year’s first quarter, when the company benefited from government incentives in China and lower costs in Africa.

AB InBev said earnings before interest, taxes, depreciation and amortization—a crucial measure watched by analysts—rose 6.6% to $4.99 billion in the first quarter, topping analyst expectations for a 4.7% gain. The brewer said revenue increased 1.2% to $13.07 billion from $12.92 billion.

Not all big beer makers are struggling. Mexican imports from Constellation Brands Inc., which acquired the U.S. distribution rights to Corona and Modelo in 2013, have been a bright spot. In March, Chief Executive Robert Sands said the company is targeting net sales and operating income growth of between 9% and 11% for its beer business for fiscal 2019, significantly higher than the 2% to 4% target it set for its wine-and-spirits business.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Nick Kostov at Nick.Kostov@wsj.com

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