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Christian Eisenbeiss has beer in his blood. So does Bernhard Sailer. Both are third-generation members of German brewing families, both love their work, and for now, both are brewing up heady profits. But if you had to choose which man represents the future of the troubled German beer industry, it would have to be the New York-born Eisenbeiss (his parents emigrated to the U.S.). He and his sister share a 48% stake in the company that sells more beer to Germans than anyone else — Holsten, on Germany's north coast. Eisenbeiss believes a modern brewer needs to be big — Holsten already serves up 1 billion liters a year — and international. Sailer and his brother, Dietrich, by contrast, own and operate the small but thriving Hofbräuhaus Traunstein in southern Germany, which brews 10 million liters of beer annually. For centuries, such local breweries have been the backbone of this most German of industries. But Sailer is not optimistic about the future of family-owned breweries. "Some don't have the money to continue, and others don't have a new generation willing to take over," he says.

Here comes the great German beer shakeout. At last count, the country had 1,279 breweries, or nearly 75% of all those in the E.U. But Sailer estimates, based on conversations with peers, that one-third of those in his home state, Bavaria, only manage to crank out beer because they subsidize production costs with income from their real-estate holdings. He's managed to survive by repositioning Traunstein as a trendy regional "premium" brew, and by partnering with several tiny brew-pubs.

For most German brewers, however, the rule seems to be get big or die. The problem begins with the fact that Germans, like most northern Europeans, are getting older and drinking less beer. "The average has dropped from 140 liters per person in the early 1990s to 120 now," says Sailer. "I figure it will hit 100 in the next 10 years." This takes its toll on the brewers. The German Federation of Brewers says the number of mid-sized breweries — those generating between 500,000 and 100 million liters per year — has shrunk from 610 in 1995 to 466 today, mostly through closure. Analysts see the next decade being dominated by even more mergers, closures and acquisitions. Credit Suisse First Boston analyst Ian Shackleton sees 70% of Germany's beer flow ending up in the hands of just a few global players by 2010. He points out that thirsty outsiders like Heineken in the Netherlands and Interbrew in Belgium have already taken over 18% of Germany's production since 2000; big brewers like them have the resources to suck up the rest as well.

But if the global players are poised to take over the German beer market, why haven't any German brewers become global players? Bavarian monks formalized and perfected the art of brewing in the Middle Ages. Yet even a German giant like Holsten is dwarfed by Heineken — which produced 11 billion liters in 2002 and is awaiting regulatory approval for its purchase of Austria's 2.6 billion-liter-per-year BBAG brewery for €1.9 billion.

Shackleton explains that when Dutch and Belgian brewers began seeing their local markets shrink in the late 1980s, they responded by beefing up their exports, hammering the "premium" theme and buying up other breweries. German brewers, by contrast, were protected by the beer purity laws — which lost their teeth when the European Court declared them protectionist in 1987, but still act as a seal of approval — and ensconced in family and village tradition. They responded by lowering prices to stimulate demand, cutting back production and staying resolutely local. Thus, while a country like the Netherlands exports more than half its production, Germany exports just over 11%.

That leaves German brewers not only too small to dominate the global game, but too short on cash to even get in the game. Beer is so cheap in Germany that a mid-'90s law designed to cut down on drunkenness forced pubs to price at least one nonalcoholic drink cheaper than beer. And German consumers watch their wallets: when Beck's (550 million liters) raised prices in 2000, its sales fell 20%. Last year, brands like Warsteiner (570 million liters) and Radeberger (880 million liters) did manage to lead prices in the premium segment higher by advertising their quality, but beer inflation still trails other products.

For many years, German price sensitivity and fierce loyalty to domestic beer — just 3.3% of beer consumed in Germany last year was imported — functioned as a keep out sign for foreign brewers. As Coen Thönissen, from Dutch brewer Grolsch puts it: "The common wisdom was that beer in Germany isn't business. It's culture."

That perceived impenetrability is evaporating. In 2001, Heineken entered into a joint venture with Munich-based Schörghuber Group to share control of BrauHolding (820 million liters), which brews, among other brands, Germany's No. 2 wheat beer, Paulaner Weissbier. Heineken said it was primarily interested in adding Paulaner to its global offering, but it also hatched a plan to use Schörghuber's connections to spread Heineken around Germany. A year later, Interbrew bought Beck's — the only German beer to have leveraged Germany's brewing reputation to its own global advantage. The price was a staggering j1.7 billion. Again, that deal was done primarily to harvest the Beck's brand for use outside Germany, but it also gave Interbrew a platform from which to sell its other premium labels, such as Stella Artois, within the country.

If Germans begin quaffing imported beers in any substantial numbers, it will increase the pressure on domestic brewers to grow or sell. In July, Eisenbeiss hinted that he'd be willing to sell his shares to anyone interested in having Holsten as a "strong partner" in the German market. Another one of the nation's top five brewers — Brau und Brunnen (750 million liters), which makes 19 different beers including Jever and Dortmunder Union — also went on the block this year.

And there are plenty of buyers. The U.K.'s Scottish & Newcastle will soon have up to €3.25 billion to spend after selling off nearly 1,500 of its pubs later this year, and a year ago, South African Breweries (SAB) bought America's Miller Brewing Company to create SABMiller — now the world's second-largest brewer, and a company hungry for European expansion. That may have awakened Anheuser-Busch — No. 1 in the world, which has fat profit margins in the U.S., where it gets more than 80% of its sales. At one time, the company had ruled out European acquisitions, but rivals think they'll get involved and the company is no longer adamantly denying it. A-B has been fighting with the Czech Republic's Budvar brewery over the name Budweiser for years; in recent weeks, courts in Japan, Lithuania, Spain and Taiwan have all found against A-B. Analysts say a German acquisition wouldn't come as a surprise. And Denmark's Carlsberg has been nibbling around the German market for more than a decade.

While the big get bigger, the small will get smaller. "Microbreweries, meaning small operations generating less than 500,000 liters per year, and especially the new generation of brew-pubs, are still a healthy business in Germany," says Ralf Knabe, an analyst with Dresdner Kleinwort Wasserstein. "They account for most of Germany's breweries in number terms and can probably maintain their independence, but they generate just 2% of the volume."

The real crunch is on mid-sized breweries like Sailer's. They got a temporary reprieve this year when the government implemented a hefty deposit on cans — which affects big brewers who sell in shops more than little ones who sell barrels to beer houses. Still others have used creative marketing to pull themselves back from the brink. The million-liter-per-year, 180-year-old Härle Brewery in Königseggwald went public this year and offered five cases of their flagship Walder Bräu as an annual recurring dividend. The strategy brought in €800,000 — which was enough to both keep the company afloat and lock locals into a uniquely German type of loyalty program. Another brewer, Iserlohner Pilsner, launched a "Save Iserlohner" campaign geared toward the villagers of its namesake town. Production rose enough to entice local businessmen to buy the brewery in the hope of making it a premium brand.

Still, there's little doubt that a massive shakeout is on the way. "For consumers, it will mean less choice, but it won't mean no choice," says Credit Suisse First Boston analyst Andy Bowley. "We had a consolidation like this in the U.K., when lager elbowed aside things like bitters and ale, but you can still find quality niche products." That's good news for Sailer and perhaps a few hundred like him. But for those who can't change with the times, the future looks as inviting as a mug of stale brew.

• STEVE ZWICK | Cologne
• As Germans drink less beer, the country's once-mighty industry must adapt or go under