Riding out hard times with brewers

The Baltimore Sun

ST. LOUIS - Hammering out a note to investors late last year, Wachovia analyst Jonathan Feeney decided to dispense some philosophical knowledge.

"Beer is the best place to go - financially and personally - in a recession," he wrote.

Brewers including St. Louis-based Anheuser-Busch Cos., the country's biggest beer maker, are hoping investors and drinkers agree with him.

The economy is mucking through falling house values, tightening credit and slumping consumer spending. But at One Busch Place, Anheuser-Busch executives are banking on beer being what they call "recession-resistant" - largely immune to economic swings and turbulence in the markets.

"We're lucky to be in a business that is quite insensitive" to economic changes, W. Randolph Baker, Anheuser-Busch's chief financial officer, said in an interview. "You're hard-pressed to think of categories that are less [affected] than good old beer."

Recession or not - technically, it's too early to tell if the economy is in one - Anheuser-Busch is trying to rise above serious challenges in its primary U.S. market. In the past few years, many consumers shifted away from mainstream beer and spent more money on craft beers, imported brews, spirits and wine. Not coincidentally, Anheuser-Busch's stock has lagged well behind the S&P; 500 over the past five years. Its total return over that time has grown at about one-eighth the pace of the overall market.

Spurred by the faster growth of high-end imports, Anheuser-Busch has devoted much effort recently to distributing European alliance brands such as Stella Artois, Beck's and Hoegaarden.

But in an economic downturn, the company's lineup of moderately priced beers - Budweiser, Bud Light, Busch and Natural - may help the company ride out a choppy market, industry watchers say.

"If we have a long economic downturn and people start trading down, A-B is going to be in great position to exploit that," said Eric Shepard, executive editor of trade publication Beer Marketer's Insights.

Since 1988, Anheuser-Busch has outperformed the S&P; 500 in 15 of the 17 periods in which the economy grew less than 2 percent, according to Wachovia's Feeney.

Anheuser-Busch is "defensively positioned in a time of consumer and equity market uncertainty," Deutsche Bank analyst Marc Greenberg told investors earlier this year.

In what may be a sign of the times, Anheuser-Busch's "subpremium" beers - those priced below Budweiser - carried the flag for the company in the most recent quarter. Busch and Natural beers grew about 1 percent, compared with declines for the "Bud family" and Michelob beers.

"The key is to have a portfolio where people can dabble in the high-end and the low-end," Edward Jones analyst Jack Russo said in an interview. "In the long haul, you're well-positioned, whatever the economy does to you."

The overall beer industry has demonstrated resilience in tough economic times. Take the last recession, which lasted from March to November 2001, according to the National Bureau of Economic Research.

Domestic beer shipments dipped one-sixth of a percentage point that year, according to data from industry consultant Robert S. Weinberg, a former Anheuser-Busch executive. The average American adult's beer consumption fell by just four ounces, to 31 gallons, in 2001.

In technical terms, "the income elasticity of beer is extremely low," said Baker - meaning changes in personal income have little impact on the amount of beer consumed. Beer is still cheaper than it was 10 years ago after adjusting for inflation.

Food and beverages are usually some of the last spending categories to be severely affected by a downturn, said Lauren Torres, an equity analyst who covers Anheuser-Busch for HSBC.

But there are signs that some beer drinkers, feeling less flush because of high fuel prices, are going blue-collar and opting for less expensive brews. Anheuser-Busch executives say "trading down" - drinkers switching from the company's pricier beers to cheaper ones - is not widespread. But they concede it could become more prevalent this year.

"Subpremium" beers have been losing market share to more expensive ones for more than a decade. But subpremiums have recently managed to narrow that gap, Baker said.

Although sales in the overall subpremium beer category are down a fraction of a percentage point so far this year, that's an improvement from declines of 1 percent to 2 percent in recent years, noted Beer Marketer's Insights, parsing supermarket scanner data from Information Resources Inc.

"Some brands look downright robust in [the] weaker economy," according to the trade publication.

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