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TORONTO, ONTARIO--(Marketwire - Sept. 27, 2011) - As North American brewers face sluggish demand over the next few years and rising input costs, they must take advantage of brisk consumption gains in emerging markets, and position themselves to offer craft, specialty and premium products in mature markets.

The strategy will be increasingly important to the industry's long-term vitality, according to a new report from BMO Capital Markets Economics.

"Some dynamic trends, including brisk consumption gains in emerging markets and for craft, specialty and premium products in mature markets are yielding opportunities for the North American beer industry to add value through product innovation, exploitation of niche markets and extension of global reach into emerging markets," said Kenrick Jordan, Senior Economist, BMO Capital Markets.

Production in the breweries industry, in both Canada and the United States, has been on a long-term downtrend due to declining consumption and growing competition from foreign producers in key markets. Production fell in both Canada and the United States during the recent recession and modest recovery. From 2008 to 2010, production declined 10 per cent in Canada and 2.7 per cent in the United States. Activity in the industry remains soft this year amid continued spending caution on the part of consumers.

The report notes that with the inability to pass cost increases on to consumers, brewers face pressure on margins as investment and input costs rise. For example, cost pressures have come from higher grain prices, including barley, and packaging materials such as aluminum.

Meanwhile, craft beers produced primarily by smaller, domestically-owned and domestically-oriented companies are facing strong demand relative to the industry's more mainstream products. As a result the number of specialty breweries has risen sharply in recent years. In the United States, small breweries have risen in number from about 10 in the early 1980s to more than 1600 in 2010.

"Despite some market challenges, our breweries have found success at home and internationally by sourcing quality ingredients, including barley, grains and hops produced here by Canadian farmers," said David Rinneard, National Manager, Agriculture, BMO Bank of Montreal.

The report also noted that while the large brewers participate in international markets, most of the industry's production is sold on the domestic market, accounting for more than 90 per cent of sales. At the same time, while import penetration in North America is low, the share of imported brewery products is increasing and approaching 15 per cent. The pace at which Mexico is making inroads is particularly noteworthy, with Mexico's share of U.S. beer imports rising from 17 per cent in 1990 to 46 per cent in 2010. Other major import sources for both countries include the Netherlands, Belgium, the United Kingdom and Germany.

Mr. Jordan concluded that to enhance their growth prospects, North American producers can be expected to make strategic adjustments to boost their performance, including investments in innovation, a continued emphasis on new product development, and expansion into emerging markets.

The report can be viewed here: http://bmonesbittburns.com/economics/reports/20110927/sr20110927.pdf.