BUD Anheuser Busch Inbev SA NV

By Saabira Chaudhuri and Annie Gasparro 

An American walks into a bar. "What'll it be?" says the bartender.

For years, more likely than not, the answer would have been: "Make it a beer."

Not anymore. Last year, for the first time, Americans reaching for a drink more often chose a glass of wine or a cocktail.

U.S. drinkers, particularly young ones, are having relationship problems with the national beverage. It's no longer true they start out favoring mild pilsners and low-calorie beers, then graduate to harder stuff later in life, if at all. Now they are thinking about other things: taste, value, beer bellies.

Brenden Kennedy, a 32-year-old New York marketing executive, can't remember the last time he drank a beer. His parents drank Bud Light. When he hit drinking age, he tended to reach for a prosecco.

"When I drink beer, it always feels very heavy, like empty calories, and I don't find it's refreshing unless it's super, super cold," he says. "The flavor has never really appealed to me, and it doesn't feel sophisticated."

According to the Beer Institute, a trade group, drinkers chose beer just 49.7% of the time last year, down from 60.8% in the mid-90s. Among 21- to 27-year-olds, the decline has been sharper. Anheuser-Busch InBev SA, Budweiser's owner, found that in 2016, just 43% of alcohol consumed by young drinkers was beer. In 2006, it was 65%.

Per-capita beer consumption in the U.S. fell to 73.4 liters last year, from 80.2 in 2010 and 83.2 liters in 2000, according to IWSR, a drinks market research firm. Germany, by comparison, consumed 103 liters a person last year.

John Saputo owns beer distributorships in Florida and Ohio. He realized the industry had a problem a few years ago when he went out with a team of young radio-ad sales people who wanted him to advertise Budweiser and Bud Light on a local station.

When it came to their own drinks, some of them ordered wine -- and "even a liquor drink with a freaking umbrella in it," he recalls. "These kids, they don't even drink our product."

In some ways, big brewers are facing the same seismic shifts in taste as other large consumer-goods and packaged-food giants. Consumers, especially younger ones, are gravitating toward smaller brands marketed as healthier, more natural or made closer to home. Brands such as Kellogg's cereal, Campbell's soup and Aunt Jemima pancake mix are all feeling the pinch.

Mass-market beer makers are losing drinkers to an explosion of spirits brands, such as Tito's vodka, owned by Fifth Generation Inc. Craft beer brewers rode that wave, too, but their volumes haven't come close to making up for declines in mainstream beer. More recently, craft-beer sales also have slowed.

Miller Lite, Coors Light, Bud and Bud Light have all lost share to upstart labels. "The big things are declining. The smaller things are growing," AB InBev Chief Executive Carlos Brito told investors in March.

Demographics also are at work. Industry research has shown young white males still prefer beer, but their numbers are declining as a percentage of the population. African-Americans favor spirits, and the percentage of liquor consumers that are Hispanic is rising, the research shows.

Women's per-capita alcohol consumption has risen, but they prefer wine and cocktails. Millennials drink less than older generations, hitting alcohol volumes more broadly.

Nashville-based Mike Baker, 26, drinks only a couple of times a week. "A lot of friends of mine are very health conscious," he says. "They think drinking might add a few extra pounds and have long-term consequences." When Mr. Baker does drink, he reaches for a bourbon or a craft beer.

The beer industry has tried to make up for declining volume by increasing prices. That has helped make whiskey and wine relatively more affordable. Beer prices rose 42% between 2000 and 2017, compared with 11% for wine and 19% for spirits, according to a Brewers Association analysis of data from the Bureau of Labor Statistics.

As sales slide, a sense of crisis has taken hold of the industry. In May, Molson Coors Brewing Co. reported a 3.1% drop in U.S. second-quarter sales driven by lower volumes of its light beers. Last week, AB InBev -- which swallowed SABMiller PLC in 2016 to solidify its title as world's biggest brewer -- also reported U.S. revenue fell 3.1% in the second quarter on lower volumes. On Monday, Dutch brewer Heineken NV reported its U.S. beer volumes declined in the first half, blaming the consumer shift from lager to craft beer and spirits.

"Every consumer today drinks on average one bottle of beer less a week than they did 20 years ago," Heineken's U.S. CEO, Ronald den Elzen, told an industry conference last year. "If this is not a wake-up call that we have to do something, I don't know what is."

America has long been a nation of beer drinkers. Through the 1600s, the "ordinary," akin to the local pub, flourished across New England. The Dutch West India Co. built America's first large brewer in 1632.

Today's big beer brands trace their ancestry to German-style lagers that made their way to the U.S. in the mid-1800s, along with waves of German immigrants. Adolphus Busch was one of them. He married the daughter of Eberhard Anheuser, another local brewer, and eventually went to work for his father-in-law. In 1876, he rolled out America's first Budweiser.

Mr. Busch was the first U.S. brewer to pasteurize beer to prevent spoilage. He built a network of ice houses near railroad lines, allowing him to distribute his brew widely. Anheuser-Busch, having survived Prohibition by using its refrigerated trucks to sell ice cream, eventually surpassed Schlitz as America's biggest brewer.

In the 70s, Philip Morris Cos.-owned Miller mounted a serious challenge, eventually creating Miller Lite. Anheuser-Busch answered with "Budweiser Light." Bud Light, as it was later re-christened, was brewed and marketed as a lower-alcohol, low-calorie, mild-tasting "sessionable" beer. You could drink more in a single session without feeling too drunk or bloated.

"Through the 90s, the brand was ripping," says Andy Goeler who ran it in the 1990s. "It was a time when big was good. Levi's was good. McDonald's was good. Budweiser was good."

Bud Light eventually overtook Budweiser as America's best-selling beer -- a title it still holds.

Yet there were signs of trouble. European and Mexican imports and upstart craft brews, such as Samuel Adams, attracted drinkers looking for something new. A bourbon renaissance -- and the Cosmo-sipping cast of "Sex and the City" -- helped reinvigorate America's cocktail culture.

After liquor makers ended a decades-old voluntary ban on TV and radio ads, Diageo PLC, the spirits giant that owns Johnnie Walker and Smirnoff, ramped up U.S. advertising.

"We didn't see that as competition," says Tony Ponturo, a former marketing executive at Anheuser-Busch. "It wasn't beer."

Budweiser volumes peaked in 1988. Bud Light hit its own peak in 2008, according to estimates from Beer Marketer's Insights, a trade publication.

The same year, SABMiller and Molson Coors Brewing Co. merged their U.S. operations. A few months later, August Adolphus Busch IV, the great-great grandson of Anheuser-Busch's co-founder, orchestrated a sale to InBev, the beer giant controlled by Brazilian private-equity firm 3G Capital Partners.

Anyssa Armbrust, 24, says that when she started tending bar in the Chicago area a few years ago, craft beer was on the rise. Now, she says, a lot of young people are opting for vodka with either club soda or water. "They think if they get vodka and water, they're hydrating at the same time, so it's healthier."

Beer makers have begun trying to work together to do something about the threat -- a departure for an industry that has been a hotbed of infighting and litigation. "We need to be pro-beer first and try to differentiate our category from wine and spirits, and we need to do that together," said Molson Coors's U.S. CEO Gavin Hattersley at an industry conference last year.

Early this year, top executives from AB InBev, Heineken and Molson Coors gathered in Arlington, Va., to discuss ways to pool resources and market beer more generally. No concrete plans have sprung from the summit, and companies haven't committed any funding, executives say.

This spring, AB InBev bought a company that owns a string of small gin, vodka and whiskey brands and took a stake in a California winemaker. Executives are targeting Hispanics with Spanish-language ads. Last week, the company said it was creating a new position: a head of nonalcoholic drinks.

AB InBev's CEO, Mr. Brito, says the future is still bright for big beer brands in the U.S., and that AB InBev has become more focused on profitability. Higher-price beers such as Michelob Ultra, Stella Artois and Bud Ice, he says, are gaining market share. "If you look at our portfolio in the U.S., we've been trying to rejig it, trying to add new things that we think are growth engines for the future," he said in March.

Budweiser teamed up this summer with whiskey maker Jim Beam, offering shot-and-chaser specials at bars across the country. It also is rolling out a new Budweiser beer, aged with bourbon-barrel staves.

"It brings normal bourbon drinkers to beer," says Travis Moore, senior brewmaster at Budweiser's St. Louis brewery.

The new brew, which hits stores and restaurants in August, is called Budweiser Reserve Copper Lager. It is aimed at "entry-level drinkers," age 21 to 24, says Julia Mize, who promotes beer for AB InBev. "People who are in their 50s grew up with Bud because it was the No. 1 beer when they turned 21." Now, she says, young adults have so many other options.

Another recent limited-edition Budweiser is Freedom Reserve Red Lager, which began appearing on shelves this summer. And last fall, the company began selling 1933 Repeal Reserve Amber Lager, which has a slightly higher alcohol content.

The company is hoping the new products will reinvigorate drinkers' interest in Budweiser, which last year fell off the list of America's top three best-selling beers. It now ranks fourth.

AB InBev is working to persuade consumers to choose some of its other beers over wine or cocktails during meals. Among other things, it has launched an organic version of Michelob Ultra and fruit-flavored versions of Bud Light.

The company put Mr. Goeler, who managed the brand in the 1990s, back in charge of Bud Light, and the company launched a big-budget ad campaign about a medieval king with a penchant for Bud Light and a made-up toast, "Dilly Dilly."

AB InBev says Bud Light is luring drinkers from similarly priced rivals. But the brand is still losing volume and overall market share. Last year, Bud Light held 15.2% of the market, down from 19.5% at its peak, according to Beer Marketer's Insights' estimates. AB InBev sold 31.6 million barrels of Bud Light in 2017, down from 41.7 million barrels in 2008.

Kaitlin Meyer, 30, works in the financial industry in Chicago. She says she hasn't drunk beer since college. "You get full after beer," she says. "Wine is more drinkable. I'll drink vodka if I'm at a bar that has cheap wine."

--Nick Kostov contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

August 01, 2018 10:32 ET (14:32 GMT)

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