Last year was a rollercoaster year for brewers in the US market. While issues have spilled over into 2004, there are still some reasons to be cheerful for the coming twelve months. Anne Brockhoff looks at the year that was, and what awaits the beer market in the US.

US brewers faced any number of challenges in 2003. Bad weather depressed shipments early in the year. A slow economy also hampered sales. And then Anheuser-Busch and other players raised prices.

But, as worrisome as those factors might be, none is likely to have had a lasting impact. The larger question for investors, analysts said, is where future growth will come from.

"The biggest thing people are trying to figure out is how come the beer industry isn't growing," one analyst said.

One problem is that spirits continue to make inroads into the beer market. Companies like Diageo have aggressively marketed premium and flavoured spirits to the beer crowd and have, to some extent, succeeded in wooing it away. Indeed, spirits shipments are estimated to have risen by 2.5% in 2003, while beer slipped 1%, according to Legg Mason.

"Beer is losing share of stomach to more sophisticated drinks containing spirits," one analyst said.

That doesn't mean brewers are going down without a fight, however. Anheuser-Busch, the world's biggest, launched Michelob Ultra in autumn 2002 to capitalise on the low-carbohydrate diet craze sweeping the US. The brand captured 2.1% of the US beer market and boosted A-B's sales volume in the high-end beer category by 7.2% by the end of 2003, the company said in December.

"Michelob Ultra has become the hottest new brand in the beer industry since being introduced," and more than tripled initial projections by the end of 2003, said Rick Leininger, director of Michelob brands.

Michelob Ultra, along with Bud Light, was credited for boosting A-B shipments to record levels last year. Domestic shipments to wholesalers rose 0.8% to 102.6 million barrels. Wholesale sales to retailers accelerated during the second half and posted a year-end gain of 0.9%, the company said earlier this month.

A-B, which will report its fourth-quarter results on Feb. 4, also re-affirmed expectations for earnings per share growth of between 12% and 13% in 2003 and set an initial target of 12% for 2004.

While cannibalisation, especially of Bud Light, is a concern, Michelob Ultra is expected to be "a meaningfully larger portion of the mix in 2004 than it was in 2003, favourable to company-wide net revenue per barrel growth," according to a report from Legg Mason, which rates A-B a "hold" and has a target price in the high $50s for the company's shares.

Media reports estimate that around 3% of the US population has tried the Atkins or other low-carb diet, and the trend shows no sign of abating. In a bid to capture those health-conscious consumers, Coors' Aspen Edge is rolling out in 10 states now, and will go nationwide by the end of the year. Rock Green Light, a low-carb extension of Labatt USA's Rolling Rock, shipped one million cases in less than three months after it was launched in 2003.

Low-carb appeal is also giving Miller Lite a boost and helping fuel an apparent turnaround at Miller, the US arm of SABMiller. New packaging and advertising has helped reposition Miller Lite with its 21- to 28-year-old target market; Miller is also reorganizing its sales and distribution systems as part of a three-year plan that analysts believe may be starting to yield positive results.

Third-quarter domestic sales to retailers were 1% below the prior year, SABMiller said on Jan. 13. That compares to a 4.4% drop on a pro forma basis for the first six months. SABMiller will report full-year results in May.

"A couple of quarters doesn't make a trend, but from everything we're seeing, (Miller's) doing a pretty good job to at least stop a decline and turn a corner," one analyst said.

But good news for Miller could mean bad news for Coors, because Coors Light is the brand most likely to lose out to a reinvigorated Miller Lite, analysts said. That's one reason Legg Mason earlier this month lowered its forecast for Coors' fourth-quarter earnings per share to $0.76 a share from $0.81.

Coors will report fourth-quarter earnings on Feb. 5; the company said in October that third-quarter sales volume in the Americas rose just 0.1% from a year earlier. Coors said then it planned to reduce US distributor levels to 2002 levels during the fourth quarter as it works to implement new supply chain information systems and processes.

Despite what Coors CEO Leo Kiely has called "continuing industry headwinds," analysts are generally looking for a better year in 2004. Why? Because those so-called temporary factors may prove to be just that.

One can hope for better weather, and the economy is perking up. While beer prices did rise 2% in 2003, according to the Bureau of Labor Statistics, analysts said that didn't seem to adversely affect consumer demand, and nominal price increases are expected to continue in 2004.

"The beer prices are sticking-people are paying more for it," one analyst said. "Anheuser-Busch has upped prices and the other guys are following suit."

As a result, US beer shipments are expected to have picked up slightly through to year-end. Legg Mason estimated shipments were flat to up by 0.5%, in 2003 compared with down more than 1% year-on-year for the nine months ended Sept. 30. That trend is likely to continue into this year.

While that doesn't answer the question of long-term growth, it does give reason for cautious - very cautious - optimism for 2004.