08/02/2011 06:17 EDT | Updated 10/02/2011 05:12 EDT

Molson Coors Canada Sales Cold As Canadians Seek Cheap Brands, Alcoholic Alternatives


MONTREAL - Molson Coors Brewing Co. said Tuesday its Canadian beer volumes fell in the second quarter as the weak economy pushed consumers to shop for cheaper brands and alcoholic alternatives.

Sales to retailers decreased by 4.2 per cent, more than the 2.4 percentage point drop felt by the industry.

Molson Coors (TSX:TPX.B) gave back half of its 1.5 per cent Canadian market share gains last year, driven partially by tougher comparisons from when it added new brands and supported marquee names in its portfolio such as Molson Canadian.

Brewers chasing volumes have reduced prices through normal discounting across the country.

"In Canada we are seeing downtrading. The third brewers mainly from a value perspective tend to be doing better and are increasing their market share and that's undoubtedly a trend," CEO Peter Swinburn said in an interview.

Wine and spirit sales have also outperformed beer.

Molson Coors has tried to compete by offering new citrus-flavoured beers such as Molson Canadian 67 sublime and Miller Chill Lemon.

"We're trying to satisfy those occasions that wines and spirits currently satisfy and there's no beer alternative and we're trying to step into that space," he added.

The brewer's profits decreased six per cent in the second quarter as the weak economy, unemployment and higher fuel costs drove Canadians to restrict their beer consumption.

"What we saw in the second quarter was a continuation of the economic pressures that we felt recently," Molson Coors Canada president David Perkins said during a conference call.

"Certainly gas prices and competition from other alcoholic beverages are putting pressure, and weather was a factor in the quarter as well."

Like many brewers, Molson Coors has been struggling as consumers contend with higher costs and difficult economic conditions. The company's core customers, men under 28, are seeing particularly high unemployment.

Those problems have been compounded by escalating fuel and ingredient costs, which are affecting nearly all consumer product makers.

Reporting in U.S. dollars, the maker of beers like Coors Light, Keystone Light and Blue Moon reported net income of $222.8 million, or $1.18 per share, for the period ended June 25. That's down from $237.2 million, or $1.27 per share, a year ago.

Analysts, on average, expected earnings of $1.29 per share, according to a survey by FactSet.

In Canada, underlying pretax income decreased 4.5 per cent to $139.9 million, while underlying profits fell one per cent.

Increased pricing, reductions in marketing, general and administrative expense and favourable foreign currency rates were more than offset by volume declines and the resulting fixed-overhead deleverage.

Molson Coors Canada's sales volume was 2.4 million hectolitres in the quarter, down 3.9 per cent. Net sales per hectolitre increased 2.2 per cent in Canadian dollars due to higher pricing and the addition of contract brewing sales to North American Breweries.

Cost of goods sold per hectolitre increased 7.7 per cent in Canadian dollars.

Swinburn said investments made in the company's international business also pressured company-wide results.

Many companies have looked to increase their business overseas as a way to bolster their business while U.S. consumers' spending remains conservative.

Molson is spending C$40 million to install a new high-speed canning facility early next year at its Montreal plant that will boost production and allow it to use different types of cans.

Revenue rose six per cent to $933.6 million after excise taxes from $883.3 million a year ago, but missed Wall Street's revenue estimate of $958.5 million.

Despite the short-term hit, Molson Coors instituted a $1.2 billion share buyback program as it looks to use its accumulated cash to reward shareholders in addition to dividends.

"This new stock buyback program reflects our continued confidence in the long-term growth and cash generating potential of our company," Swinburn told analysts on a conference call.

The three-year program won't interfere with Molson Coors spending on growth opportunities, he later added in the interview.

"It doesn't to us feel that we are limited on the mergers and acquisitions front."

Analyst Mark Swartzberg of Stifel Nicolaus said the weak second-quarter results are "dwarfed" by the unanticipated share buyback program.

"We downgraded to hold in June thinking share repurchase was unlikely. For years, investors have agitated for any share repurchase," he wrote in a report.

The program equals an 18 cents per share EPS increase to its 2012 estimate of $3.76 per share.

Results for MillerCoors, a joint venture with SABMiller PLC, improved thanks to higher prices, a solid mix of brands and cost containment efforts. MillerCoors sells both companies' brands in the U.S. and has tried to encourage the sales of some of its higher-priced niche beers.

Molson Coors' business in the United Kingdom improved due to a temporary marketing spending cut, a lower pension expense and favourable foreign currency exchange rates.

On the Toronto Stock Exchange, Molson Coors shares fell 20 cents at C$43.05 in Tuesday trading.