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    Strange Brew

    The rising popularity of specialty beers forces big brewers to create "upscale" brews of their own.

    NEW YORK -- Sales of craft and specialty beers are on the rise, which is good news for small brewers but a mixed bag for large beer companies, reported SmartMoney.com .

    Craft beers account for only 3.2 percent of the volume of all beer sold, but they grew more than 7 percent in 2004 and in the first half of 2005, while overall beer sales in the United States were flat. Any spike in beer sales is good for an industry that is struggling with increasing consumer preference for wine and mixed drinks, but higher sales of craft beers, such as Sierra Nevada, Yuengling and Boston Beer’s Samuel Adams, may come at the expense of more traditional beers, according to SmartMoney.com .

    Anheuser-Busch, Miller Brewing and Molson Coors, for example, are concerned about propping up sales in their original Budweiser, Miller and Coors brands, respectively, SmartMoney.com reported.

    With the health and safety concerns linked to drinking, "people may be less likely to sit down with a six-pack of beer and more likely to sit down with a pint of craft beer," said Ray Daniels, director of craft beer marketing at the Brewers Association said in the SmartMoney.com report.

    As with wine and spirits, the popularity of craft beers is being driven by changing consumer tastes.

    Increasingly, "people favor high-end, higher-image, higher-price products," said Legg Mason analyst Mark Swartzberg in the report. "The crafts are another manifestation of that."

    Harry Schuhmacher, editor of Beer Business Daily, agrees. "Consumers are trading up in all consumer-goods categories," he said. "This is just part and parcel of that general trend."

    Miller, which owns the smaller Leinenkugel and Henry Weinhard brands, believes the craft beer trends show "consumers don't have a problem with beer" and will respond "to marketing at a higher level," spokesman Peter Marino said in the SmartMoney.com report. In addition, Marino noted, "the craft beers have been immune to the deep discounting that plagued the beer industry this summer."

    Anheuser-Busch, in particular, is adding beers that will compete for craft drinkers. Last week, it announced a new seasonal brew, Jack's Pumpkin Spice Ale, and its Michelob Marzen, Michelob Pale Ale and O'Doul's Amber won gold medals at the Great American Beer Festival.

    "We're making a concerted effort to offer more varieties and styles," said Robert C. Lachkey, Anheuser-Busch executive vice president of global industry development, in the report.

    And, Lachkey said, Anheuser-Busch has decided that not every new beer has to be sold nationally or remain on the market forever. Some, like the pumpkin beer, "can be seasonal or regional."

    According to SmartMoney.com , the big brewers have an advantage with their wide distribution networks. Schuhmacher believes, for example, that Anheuser-Busch's pumpkin seasonal "is going to do great," in part because it will be "in every 7-Eleven in the country."

    But the Brewer Association's Daniels said in the report that massive distribution can "undermine the craft identity. If you're ubiquitous in the marketplace, there's less allure."

    Schuhmacher agreed that perception can be a problem for the big brewers. Anheuser-Busch "has some of the best brewmasters in the world, so there's no question about the quality," he said in the SmartMoney.com report. "It's just the perception among consumers that it's coming from this giant brewery."

    Schuhmacher and Legg Mason's Swartzberg both believe that consumer preference for upscale beers is here to stay.

    "I don't think it's a fad," Schuhmacher said in the report. "It's a long-term demographic shift." But "short of an acquisition," Swartzberg said, "it's going to take years" for the big brewers' smaller beers "to impact total performance."

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