Leinenkugel

When big beer goes small

November 8, 2013: 12:42 PM ET

MillerCoors had success this summer with its craft beer division. Other big brewers have dipped their toes into the craft category, but some are staying far away.

By Daniel Roberts, writer-reporter

Leinenkugel's Summer Shandy

Leinenkugel's Summer Shandy

FORTUNE -- "The taste is flat out lemonade ... maybe an eyedropper of booze," writes the user Sammer on ratebeer.com's page for Leinenkugel Summer Shandy. On Beer Advocate, where the brand has a 72 rating ("okay"), the user Alphagnome writes, "Honestly, it's not good ... BUT it's refreshing."

Perhaps that's all that matters for a seasonal drink; Leinenkugel's lemonade-flavored beer had enormous success this summer. The second-best selling and fastest-growing craft beer, it outsold all of Leinenkugel's other beers combined in the time it was on shelves. Shipments were up 24% over last year. And it has helped the Jacob Leinenkugel Brewing Company go from producing 60,000 barrels a year when the Miller Brewing Company bought it in 1988 to now nearly 1 million.

More significantly, Leinenkugel's success led to almost double-digit volume growth in the third quarter for Tenth and Blake, the craft and imports division MillerCoors set up in 2010. Compare that to the 4% growth in net revenue per barrel for MillerCoors overall in the same quarter, and you start to think craft beer, long thought an impending threat to the big brewers, may be the solution to big beer's bigger foe: wine and spirits, which have been eating into beer sales for a decade.

MillerCoors was early into the craft beer craze with the creation of Blue Moon, the internally grown brand it launched in 1995. And Miller bought Leinenkugel back in 1988. But Tenth and Blake, which houses both Leinenkugel and Blue Moon -- in addition to imports like Peroni and Pilsner Urquell -- is something of an anomaly among mega-brewers; none of MillerCoors's peers have a separate craft division. Maybe they should, considering Leinenkugel has given its big daddy such a boost: Summer Shandy, the "highest velocity" of the top 15 craft brands this summer, was second in sales only to Blue Moon Belgian White, another MillerCoors property.

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Why did Summer Shandy do so well this year? Jake Leinenkugel, CEO, attributes it to beefed-up marketing. Leinenkugel did its first national television ads for Shandy in 2012 and this summer did an ad campaign tailored to baseball and other programs "that we thought millennials and beer drinkers were attuned to, like The Walking Dead," he says. Leinenkugel says there's no question that the efforts helped raised new awareness for the brand. "I guess I always thought, it's a Midwest beer, it's hard to pronounce, people don't know who we are," he says. "But that's changing."

The company won't say what it spent on the new marketing push; Leinenkugel says it was a significant figure for his company, though "a lot less than what a major brewer would throw behind a new brand."

In fact, Leinenkugel's full line of Shandy beers represented 9.7% of the 2013 growth in the entire craft market through September. Another big gainer was Blue Moon Belgian White, also owned by Tenth and Blake, with 7.2%, the fourth-biggest contributor to the category's growth. Shock Top Seasonal, owned by Anheuser-Busch InBev (BUD), was third with 7.5%.

Indeed, AB InBev isn't about to miss out on the craft beer boom, either. In contrast to Leinenkugel, Shock Top is a "homegrown" craft, hatched inside Anheuser-Busch in St. Louis (like MillerCoors's Blue Moon). The company takes pains to give Shock Top a craft sensibility, though sticklers would say that its corporate pedigree disqualifies it as a true craft beer. AB InBev's only other craft interest has been Goose Island, which it bought in 2011 and mostly left alone -- which AB's CMO Paul Chibe says has been key to the brand's success. "We want to have them maintain their identity, culture, and creativity. And the spirit of authenticity that comes from them being in Chicago where they were born." Asked if it might make sense for AB to have an in-house craft division to house Goose and other crafts it might acquire down the line -- along the lines of MillerCoors's Tenth and Blake -- AB's Chibe has some fighting words: "99.999 times out of a hundred, MillerCoors is copying what we're doing, not the other way around," he says. "I don't want a division sitting here in St. Louis like Tenth and Blake is sitting in Chicago. It makes no sense having a craft business that becomes just like us."

To be sure, Tenth and Blake leaves its craft brands alone, too: Leinenkugel still brews in Chippewa Falls, Wis., where it has for over 100 years. If anything, Tenth and Blake is more like a holding company. And Lauren Torres, analyst with HSBC, cautions: "I don't think people look at Tenth and Blake and say that because MillerCoors has an established category to focus on craft, they're doing more than others in the space."

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Even Heineken (HEINY), which sources say does not currently want to get anywhere near the craft scene, is not exactly completely uninterested in the category. "They're not playing in it, but they have brands like Newcastle that are not craft per se, but in certain countries do look nichey to consumers," says Torres.

That may be why the "craft" label itself is problematic. Take Heineken for example: It hasn't created any craft brand from within, it hasn't acquired any craft brands, and U.S. CEO Dolf van den Brink says, "Heineken USA is focused on building upscale, badge, import brands ... And we can do this more efficiently with fewer SKUs." But it is certainly innovating in response to the successes of rival brands. Heineken USA will soon come out with Dos-A-Rita, a line extension on Dos Equis lager that has agave nectar. The product comes in the wake of AB InBev's massive success with Bud Light Lime-A-Rita and Straw-Ber-Rita. Heineken also sells a shandy-like Radler -- part lemonade, part beer, and higher alcohol content than Leinenkugel Summer Shandy, which is lemon-flavored beer -- that currently only sells in Europe but will likely come to the States soon. While these are not necessarily "crafts," they are innovations that seek to offer consumers something new and different. Thus, the distinction between unique new beers from the big guys and small-brewed, independent beers -- perceived as true crafts -- may be meaningless.

Chibe, too, speaking from his perch as marketer in chief of the largest beer company in the world, says the craft craze may rest on meaningless distinctions about ownership: "It's not about the size, but the brewing tradition and the workers. Just because it's a small brand doesn't mean it will be any good. But just because it's a big brand doesn't mean it will be bad."

In Europe, which has also experienced the rise of craft beer, the definition may be even less relevant. In Latin America, the longtime wisdom was that Brazilians drink Brazilian beers (think Brahma and Skol, both owned by AB InBev) and Mexicans drink Mexican beers (like Corona, now also owned by AB InBev). But that has changed. "I was in Brazil two weeks ago and I was shocked," says analyst Torres. "I asked people what they drink, and a couple years ago they would say Skol and Brahma, but now some people said Heineken or brands I'd never seen before, meaning local craft beers. So craft has reached Brazil too." In other words, in the beer world, brand loyalty is mostly a thing of the past, save for the "Joe Six Pack," as the industry calls it, who indeed still exists, still matters, and still buys a big case of Miller Light or Bud Light for the game.

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Even so, the perception among more and more drinkers, either fairly or unfairly, is that small and independent means better quality. As Tenth and Blake beer merchant Gregory Weinberg puts it, "It's the same as with cheese, chocolate, and whiskey -- there's this notion that being small-batch, not owned by a big company, means automatic quality." And that association is having an impact. Whether they start a craft division or not, all the big brewers are taking note of craft beer; they can't afford to ignore it because, while crafts only make up single-digit percentage volume of the U.S. beer market, they have higher pricing and they are growing, while staple brands are mostly flat. Just last month, Duvel Moortgat Brewery of Belgium, which produces Duvel, announced it would buy Boulevard Brewing Company, the Kansas City-based, 12th-largest craft brewer in the U.S.

So what's next for MillerCoors's Tenth and Blake after the summer success of Leinenkugel? One option would be to innovate from within, creating a new craft beer internally. Tom Cardella, CEO of Tenth and Blake, acknowledges it's a possibility. "You know, we've thought about that a lot," he tells Fortune. But he says there's still so much potential with Blue Moon and Leinenkugel that they may not need to. Whether they do or don't, expect the rest of the industry to keep getting more crafty.

Click here to watch a video interview with Jake and Dick Leinenkugel

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