North American brewers are faced with continuing weak demand in their home markets over the next few years because of the dimming economic outlook and shifting consumer tastes.
Although beer remains the alcoholic beverage of choice, its appeal is going stale due to an aging population and the growing popularity of wine. In fact, beer consumption has been in steady decline since the last recession.
That new normal is forcing brewers to make strategic choices to ensure the industry's long-term growth, says a new economics report to be released Tuesday from Bank of Montreal.
"People who sort of traded down during the recession or stopped consuming or reduced their consumption – they are still very cautious as to how they spend," said Kenrick Jordan, senior economist with BMO Nesbitt Burns Inc.
According to his report, overall beer production fell 10 per cent in Canada and 2.7 per cent in the United States between 2008 and 2010. Declining production is coming at a time when consumer preferences are changing even among dedicated beer drinkers.
He noted that mainstream brands from big brewers continue to lose momentum, which is leading to more splintering of the market. While imports are poaching more sales, consumers are also gravitating more toward both discount brands and premium craft products.
"The demand outlook itself is likely to be sluggish, but there are some interesting things that are happening that would allow different strategies to be pursued," Mr. Jordan added.
In particular, craft brewers are poised to benefit from growing demand for higher-end specialty products. That, in turn, will force their larger rivals to invest more in product innovation and acquisitions to regain share in North America, while also tapping emerging markets for future growth.
In Canada, Labatt Breweries of Canada (a division of Anheuser-Busch InBev ) and Molson Coors Brewing Co. each control about 40 per cent of the market.
Increasingly, though, beer drinkers, especially 18- to 35-year-old men, are opting for premium and specialty products with unique flavours, and that's left big brewers scrambling to regain market share, said John Sleeman, founder and chairman of Sleeman Breweries Ltd. in Guelph, Ont.
"If somebody had offered me a beer made with orange and pumpkin when I was 22, I would have thought they were crazy," Mr. Sleeman said. "And now the people that are crazy are the guys who seem willing to drink mainstream beer."
Although Labatt and Molson Coors declined comment for this story, both companies have sharpened their focus on novel products. Molson Coors, for example, has created its own specialty beer company and acquired B.C.-based Granville Island Brewing.
Ravinder Minhas, president of Calgary-based Mountain Crest Brewing Co. and co-founder of Minhas Craft Brewery, expects larger brewers to make more acquisitions of craft brewers. "I don't think their strategy is going to work," he said. "That consumer who wants to buy a craft beer doesn't want it to come from the mega brewers."
Craft brewers will face growing pressure to create innovative new products and tap new demographics in the coming years, the BMO report noted.
Waterloo, Ont.-based Brick Brewing Co. Ltd., for instance, has introduced a new low-calorie light beer to attract more female customers but is also mulling ways to tap Canada's burgeoning new immigrant communities.
"I think immigration is, in fact, going to pick up and you'd better figure out how to have a proposition that appeals to new Canadians or they'll just go someplace else in terms of their choice of beverage alcohol," said Brick chief executive officer George Croft.
For now, many craft brewers across the country are in expansion mode. For instance, Victoria-based Lighthouse Brewing Co. is investing in product innovation and new fermenting tanks to help sales expansion into Alberta and Ontario. "We feel nothing but upside right now," said sales and marketing manager John Fitterer.
Despite growing consumer demand, however, BMO's report suggests that craft brewers will find it more challenging than larger brewers to cope with higher input costs, such as for barley, and rising prices for packaging materials like aluminum.
Doug Dawkins, president of Guelph-based Wellington Brewery, says he is loath to pass on any price increases to consumers in the current economic climate, even though his company has been running at full tilt since January and is boosting production capacity. "The market is so sensitive to a price increase that we kind of have to eat that," he said.