Recent Trends Bode Ill for Old-Time Brewer

The Stroh family has sold beer in Detroit since 1850. But industry experts are wondering if a company full of 19th century tradition will toast the new millennium.

The Stroh Brewery Co. has been struggling with declining sales, a loss of contract business, increased competition and heavy debt. And that has fueled industry speculation that the company would be sold to Pabst Brewing Co. and its assets split between Pabst and Miller Brewing Co.

“They’re not going to be able to turn it around without exploring strategic alternatives--merging or divesting,” said Skip Carpenter, an analyst with Donaldson Lufkin & Jenrette Securities Corp. Stroh “clearly will not be a long-term survivor if they remain in their current situation.”

Company officials strongly disagree with such forecasts, noting that past predictions of doom haven’t come true.

“The Stroh Brewery Co. has for some time predicted that there would be further consolidation in the industry,” spokeswoman Lacey Logan said. “However, there has never been a timetable for this to occur.

“Stroh has the wherewithal to go it alone and will take necessary steps to remain competitive.”

What can’t be denied, however, is that 1998 was a bitter year.

Stroh’s shipments declined 15% through the third quarter, a drop of 1.9 million barrels, according to Benj Steinman, president of Beer Marketer’s Insights, a trade newsletter.

“It’s the worsening of a trend,” he said. “They’ve been down any number of years, but that’s the steepest drop so far.”

Steinman says part of the problem was lower sales due to increased competition beginning in 1997. Brewers of higher-priced brands lowered their prices, hurting companies like Stroh, which sells lower-end brands like Colt 45 and Old Milwaukee.

The company also was hurt by Pabst’s decision to switch its contract brewing from Stroh to Miller.

In December, Stroh announced it was closing its brewery in Tampa, Fla., laying off more than 150 people there, to cut capacity. It also said it was cutting jobs in its Detroit headquarters.

Stroh is still a family-owned company and doesn’t have to release financial disclosure forms. But according to the Milwaukee Journal Sentinel, the company squeezed out a profit on operations in the third quarter of 1998 due to cost-cutting, but lost money for the year due to heavy debt payments. Stroh increased its debt load after the 1996 purchase of La Crosse, Wis.-based G. Heileman Brewing Co.

The company employs about 3,000 nationwide. It has breweries in Texas, North Carolina, Pennsylvania, Wisconsin, Washington and Oregon.

It’s among the last of a host of brewing concerns founded by German immigrant families.

When Bernard Stroh stepped off the docks in Detroit in 1850, his family already had been brewing beer for two generations in Germany. In Detroit, he cooked up some beer in a small barrel and started delivering it in a wheelbarrow. The brew found a market in an area where darker, English-style beers had predominated.

By the turn of the century, there were 23 breweries in Detroit, and Stroh Brewery Co. was the largest. It was pouring out 50,000 barrels a year.

By 1950, the company was brewing 300,000 barrels a year. For a couple of decades, Stroh was satisfied with being a regional player.

By 1980, then-president Peter Stroh decided to grow. In 1978, his company rolled out Stroh’s Light--the first new brand in the company’s history. It bought the F&M; Schafer Brewing Co. in 1979 and the Jos. Schlitz Brewing Co. in 1982.

Those purchases made Stroh the nation’s third-largest brewer behind Miller and Anheuser-Busch Inc., moving 25 million barrels of beer a year.

The Stroh family put much of its profits back into Detroit, spending $150 million over the last 20 years in redevelopment projects. The family also sponsored major events such as Fourth of July fireworks, the Detroit Grand Prix and the Montreaux-Detroit Jazz Festival.

But soon after it bought Schlitz, the company started losing ground and found itself with too much capacity. It shed workers, closing its Detroit brewery in 1985. Four years later, Peter Stroh announced the company was looking for a partner or a buyer to help pay the company’s debts and to add cash.

The reasons for his move then are the same ones that bedevil the company now. Stroh’s brands have competed on price. But since the 1970s, Anheuser-Busch and Miller’s parent, the Philip Morris Cos., have spent billions on advertising for their brands and kept costs low.

Those tactics won millions of customers for them. Today, the two provide about 77% of the beer sold in the country, according to Beer Marketer’s Insights.

In 1989, the Stroh family agreed to sell to Coors Brewing Co., but the deal fell apart. Stroh itself later fed a consolidation trend in the industry in the purchase of G. Heileman.

But the company continued to lose market share and had about 7% of the market in 1998--fourth behind Anheuser, Miller and Coors.

Logan says the company chose to reduce sales, mainly by eliminating slow-selling brands, to strengthen profits during the price war. She also said the company was running ahead of schedule on repaying its debt.

“This type of pricing strategy driven by these two large brewers does damage to all [brewers],” Logan said. “It not only drives margins down, but in the long term it diminishes brand equity and value.”

Under a scenario described by the Journal Sentinel, based on industry speculation, Stroh would be sold to Pabst. Pabst would close Stroh’s Detroit headquarters and sell its malt liquor brands to Miller.

“It makes sense that they would be looking at something like that,” said Jennifer Solomon, an analyst with Saloman Smith Barney. “I would think given the level of discussion and given the fact that it’s consistent with what’s going on in the industry, there’s something behind the talk.”

Some industry watchers say Stroh could recover--if overall prices go up, and if the company keeps cutting costs. But with Anheuser setting a goal of owning 60% of the market, such moves will be hard.

“What’s happening is that for major brewers, the only way to be successful is to steal share from competitors,” said Gary Hemphill, vice president of Beverage Marketing Corp. in New York. “Busch and Miller and Coors are being pretty successful.”