Anheuser-Busch dominates the US brewing sector and is the largest drinks manufacturer in the world, but growth is hard to come by in its mature home market. The company is looking to new product innovation for growth and is also under pressure to step up its international expansion. David Robertson reports.

Anheuser-Busch's dominant position in the US beer market has made it a money-making machine for years but some of the fizz appears to be leaking out of its Budweiser and Michelob brands. And confidence in the stock has taken a battering in 2005, in spite of strong revenue, profit and earnings per share growth for each of the last six years, as A-B struggles to cope with changes in the national and international beer market.

Its domestic market in the US is particularly troublesome as, like many mature beer markets, overall sales are flat or declining. With 94.5% of its business in the US, A-B has little opportunity to offset these declines with growth from other regions.

Also, A-B is having to contend with the well-documented drift of consumers from beer to wine and spirits. As Bear Stearns analyst, Carlos Laboy, noted last month: "BUD (as A-B is called on the stock market) has a short and long-term growth problem. US domestic beer industry volume growth is at zero, demographic trends are soon to be negative, (and) US price increases may be hard to come by." These difficulties saw Budweiser lose 5% of its volume last year while Bud Light grew by just 3. 7%, in contrast to Miller Lite which saw volumes rise by 10.5%.

Worse still, A-B announced that its domestic volumes were down by 2.7% to 24.4 million barrels for the first quarter, with the company forced to lower its 2005 earnings per share growth forecast to 1%-4%, from earlier forecasts of 6%-9%, and far below previous years' double-digit performances. Worried investors and analysts are predicting that the situation could get worse if the newly merged MolsonCoors proves as energetic as SABMiller.

However, the world's largest brewer is not planning to be pushed aside by its rivals just yet and a number of innovative moves are being taken to revive the company's fortunes.

At an analysts' meeting on May 25, A-B president and CEO Patrick Stokes was in a bullish mood: "Facing challenges is nothing new to Anheuser-Busch and, time after time, we have emerged more profitable with a stronger foundation for future growth."

The highest profile of A-B's new innovations was the launch in February of Bud Select, a low-carb, light beer. Bud Select is being positioned as a rival to Miller Lite, which has also promoted itself as low-carb, but many analysts remain unconvinced that the launch is a sensible addition to the portfolio.

They fear that up to 70% of Bud Select's sales will come at the expense of other A-B brands, with Morgan Stanley recently noting: "The cannibalisation of Bud Select may prove higher than our original estimates." However, in spite of these concerns, A-B said recently that Bud Select had a 1.9% share of supermarket beer sales and described this as "performing very well".

Bud Select is not the only new product A-B has introduced recently. Earlier this year, it launched Be, a caffeinated and flavoured beer, Bistro 8, a lightly carbonated malt with 7% alcohol, and 9th Street Market, a pilsner beer in three flavours. Other new developments at A-B include new packaging, which the company hopes will appeal to younger consumers.

Bob Lachky, vice president of brand management, told just-drinks: "Our new aluminium bottles have met with rave reviews - "sleek", "modern", and "cool" are words being used to describe the new 16 oz. aluminium packaging. They give adult consumers unique packaging to complement their lifestyles - it fits the need for image-conscious beer drinkers in certain settings like upscale bars, clubs and restaurants."

Another tactic A-B  has adopted to protect its market share is heavy discounting in key markets like California and Florida, but there are fears that while helping maintain market share in the short-term, they could dent the bottom line and erode investor confidence still further.

The scale of these unprecedented discounts prompted analysts at Legg Mason to warn: "A-B's evident intention is to regain lost share on the view that short-term pain is outweighed by potential long-term gain. A-B's tactic may indeed help reverse it and the category's worsening volume growth, but we believe the net effect may lead to an even greater-than-expected worsening in category profits."

However, Stokes remains confident that this array of measures will produce an upswing in sales: "With our new product, packaging and marketing programmes, we are confident we will be successful in restoring our volume momentum."

However, observers have suggested that these moves, if successful, will create no more than a small improvement. As one analyst put it: "Anheuser-Busch is just tinkering" and if the company was serious about generating long-term growth it would have to "look beyond NASCAR and baseball", i.e. expand internationally.

The company has started to address this issue in recent years purchasing half of Grupo Modelo, Mexico's largest brewer, and, last year, acquiring Harbin Brewery Group, China's fourth largest brewer. And in April, A-B raised its stake in China's largest brewer, Tsingtao, from 10% to 27%.

The company stresses that its international reach is growing but even with the recent purchases, A-B is still far more US-centric than either MolsonCoors or SABMiller, hampered in launching Budweiser into some overseas markets because of its trademark dispute with the Czech company, Budvar. With the global beer industry consolidating fast, the fear is that if A-B chooses to remain a US-dominated company, it risks losing its place as the world's largest drinks manufacturer.