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Beer distributors sour on Anheuser's incentives

By David Kesmodel , The Wall Street Journal

Published February 7, 2008 at 12:05 a.m.

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A man carries a case of beer past Coors, Miller and Anheuser-Busch products in a grocery store in St. Louis. Some distributors are finding that, despite the incentives offered by Anheuser, selling only that firm's products might not be smart in the fast-changing alcoholic-beverage industry.

Photo by Associated Press / 2007

A man carries a case of beer past Coors, Miller and Anheuser-Busch products in a grocery store in St. Louis. Some distributors are finding that, despite the incentives offered by Anheuser, selling only that firm's products might not be smart in the fast-changing alcoholic-beverage industry.

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A decade ago, Anheuser- Busch Cos. began dangling financial incentives to get beer distributors to jettison rival brands.

The campaign, known as "100 percent Share of Mind," was a big hit, helping the King of Beers tighten its grip on the U.S. market. But now, some distributors are finding that selling only Anheuser products might not be smart in the fast-changing alcoholic-beverage industry.

In the past year, distributors in Texas, Tennessee and elsewhere have decided to eschew Anheuser's incentives and begin selling rival beers such as Yuengling Lager, as well as wine and spirits.

Recently, R.H. Barringer Co. became the first Anheuser distributor in North Carolina to start selling other brands, acquiring a rival that sells wine and imported beer. Today, about 60 percent of Anheuser's sales flow through distributors carrying only its brands, down from about 70 percent at its peak.

The shift might help competing alcohol brands gain market share, as distributors divert some of their attention from Anheuser, which accounts for about 48 percent of U.S. beer sales. For consumers, it means greater choice at their local bars and liquor stores.

Wall Street analysts say that the movement signals a weakening of the St. Louis brewer's clout in the marketplace as small- batch "craft" beers and imports, as well as wine and spirits, wrest market share from mass-market brews like Budweiser.

Anheuser's exclusive distribution system "was a great business model," but "the consumer environment has changed dramatically," said Bump Williams, general manager of the beer, wine and spirits practice of market-research firm Information Resources Inc.

In recent years, some of Anheuser's 560 independent distributors became frustrated as craft brands such as New Belgium Brewing Co.'s Fat Tire Amber Ale surged in popularity and competing distributors snatched them up. Often, the distributors adding such high-margin brews were the same ones that peddled the beers of Anheuser's top rivals, SABMiller PLC's Miller Brewing and Molson Coors Brewing Co.

Anheuser wholesalers "are realizing that we have made the competition stronger by basically forfeiting these brands to them," said Chris Monroe, vice president of D. Canale Beverages Inc., a Memphis, Tenn., distributor that carried only Anheuser products until last fall.

As profit growth eroded, Anheuser distributors began clamoring for the company to acquire brands with higher profit margins and growth rates. The beer titan has responded over the past two years.

It reached a deal to import European beers such as Stella Artois and Beck's from Belgium's InBev SA. And it has expanded agreements to distribute other companies' craft brews, spirits, water and other beverages.

Some distributors began hawking rival products several years ago. Others haven't been able to distribute the InBev products and other new brands from Anheuser because of franchise laws governing beer sales.

The laws, which exist in many states, block a distributor from taking over a brand unless the existing distributor agrees to sell it. Ironically, Anheuser distributors often backed the adoption of such laws.

When distributors forgo the incentives Anheuser offers exclusive partners, they are making a bet that they will make up the difference with revenue from the new brands. The incentives include cash payments of 2 cents a case, access to credit and truck-painting allowances.

Last fall, 11 distributors in Tennessee stopped being exclusive, in part because the state's franchise law kept them from obtaining the InBev lineup. They all began selling brews made by Pennsylvania's D.G. Yuengling & Son Inc., one of the nation's oldest beer makers, which was entering the Tennessee market.

"We saw a brand with some very strong potential, and we didn't want that brand to fall into competitive hands in the state," said Monroe of D. Canale in Memphis.