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The City: Beer group gets spirited idea

Published:  18 January, 2007

Despite the flurry of mergers and acquisitions over the past few years, the world's big brewers are under pressure
from the growing trend for consumers to switch to wines and spirits. Undoubtedly, new markets are opening to them, notably China and India, but in the more developed world, where profit margins are higher, consumers are spurning beer, especially in the biggest market of all, North America. And if you want evidence of that trend, look at the actions of Anheuser-Busch, which until recently was the world's number-one brewer, a title it still holds in the United States. It has announced a third successive quarter of lower profits and issued a warning that its full-year earnings will fall by about 10%.

So it is taking action. First the St Louis-based giant let it be known that it was working with its domestic brewing rivals to develop a campaign to promote beer as a generic product. The idea is that each producer should reduce its brand advertising and donate the space to the industry-wide initiative. For an industry to come together in such a way suggests it really does feel under pressure, especially since a price discounting war is in full flow.

But Anheuser's second move is much more intriguing: on the basis of if you can't beat them, join them', it is entering the spirits industry. Anheuser claims it is fighting the battle for share of alcohol' and has formed a subsidiary, Long Tail Libations, to produce and sell a liquorice-and-wild-berry'-flavoured drink named Jekyll & Hyde. This has been launched in four states as part of the 153-year-old group's testing of the spirits market.

Anheuser-Busch is a cautious company, and there is a very long way to go before it becomes a serious contender beyond the beer market, which itself is fragmenting rapidly. It is quite possible that Jekyll & Hyde will not be a winner and Anheuser will walk away. But if the new drink does succeed and convince Anheuser that it has a future in the spirits market, then the brewer could have a significant long-term part to play in the consolidation of the wines and spirits market, especially in North America, which accounts for about 40% of Diageo's operating profits. What Anheuser offers is a proven and powerful distribution network that would be attractive to many international groups that feel underrepresented in the US market. Early alliances are conceivable.

The other possibility is that Anheuser could decide to augment Long Tail's position through merger and acquisition. That would present a powerful new factor for everybody to take into account.