Beer Marketer's Insights
Once again, no big step up in discounting during key holiday period, even following softer sales earlier in May. Avg price paid for a case of beer up 46 cents, 2.9% for 4 weeks, about same as it was yr-to-date. Interestingly, Miller prices up most. Avg prices up 3.8% for 4 weeks, tho Miller Lite's price only up 1.2%. It?s that malternative mix shift. Coors prices up least among top 3 brewers, less than 1%, as its hi-end brands declined and avg Coors Light prices up 1%. Avg prices paid for AB brands up 2.3% for 4 weeks, slightly less than YTD, but avg Bud and Bud Light prices up about 1.5%.
Tho all eyes on malternatives, #1 brand Bud Light was biggest share gainer in supers; volume up 11% and it gained 0.9 share for 4 weeks and YTD. But Bud biggest share loser in supers; down 0.5 yr-to-date and volume flat. Corona had very strong Memorial Day in supers; up 15% and 0.3 share for 4 weeks (that's triple Corona's gain pace last 13 weeks) with avg prices up 2%. Heineken rocked too during holiday period; up 17% for 4 weeks and gained 0.2 share, but avg price paid actually 7 cents lower than last yr. Coors Light held share over Memorial Day; Miller Lite down 0.1. Coors Light share passed Miller Lite in supers YTD, 7.4 to 7.3, as its share up 0.2 and Miller Lite down 0.1. Fastest-growing domestic light is Busch Light; up 15% and gained 0.3 share YTD. Each of leading import light beers (Corona, Amstel and Labatt Blue) continue up 18-24% YTD.
Other brands that gained 0.2 share or more during Memorial Day period were malternatives. But looks like segment beginning to mature. Here?s how it shakes out so far: Smirnoff Ice up 35% and 0.2 share to 1.1 for 4 weeks; avg prices paid down about 4% as it shifted biz to 12-packs. It?s up 89% YTD and got 1 share, about same as it had last summer. SKYY Blue and Bacardi Silver are pretty much in a dead heat at 0.4 each. They?re puttin? pressure on Mike?s Hard Lemonade, down 7% for 4 weeks. Mike?s line-extendin tho, so its total biz up. Meanwhile, other malternatives collapsing; Zima down 22%, Tequiza down 26%, Doc Otis down 35%, Rick?s Spiked down 58%, Hooper?s Lemon down 46%, etc. Seven of top 15 malternatives down 20% or more YTD. Branded-spirits names increasingly control segment: Smirnoff Ice, Bacardi Silver and SKYY Blue are 56 share; too soon to say much about other new spirits-branded entries.
Legal Flash
Largely on strength of Sam Light expansion, Boston Beer shipments surged 61,000 bbls, 21% in 2d qtr and 75,000 bbls, 13.6% in 1st half. Sam Light still in less than half of country, rollin? national by yrend. But shipments way ahead of depletions in 1st half, 63,000 bbls, according to prexy Martin Roper in conference call. And Boston Beer oper income flat in qtr, down by 1/3 in 1st half to $9 mil. Boston ad, promo and selling expenses up $13 mil to $46.3 mil and the co expects similar spending jumps in 2d half. Its stock dropped nearly 10% day after earnings announced. So far Boston Beer makin' big bet, but getting best volume growth since craft heyday. Orders-on-hand suggest Boston Beer up about 8% in 3d qtr too. In New Eng, where Boston does over 20% of its biz and is over 3 share, "we?re clearly getting repeat but we don?t know how stable it is," Jim Koch said. In Me and RI where it was intro?d last summer, "numbers appear to be holding up pretty well?. The 12 month number makes me feel pretty confident that we do have repeat drinkers that are going to become long-term Sam Light drinkers." Thru May, Boston Beer up 42% in RI, 39% in NH, and 3% in ME. In Mass, Boston Beer up 42% thru Apr including 10,000-bbl gain in Apr. Jim said distribs and retailers see Sam Light as brand with "long-term potential" while "they?re increasingly skeptical about all the malternatives that are coming in that beginning to look to them like the wine cooler phenomenon of the 80s."
Tex Light Beer Battleground: Bud Light 30 Share, Miller Lite Off 15%, Coors Light Down 8%
In Tex, by far the biggest beer light mkt and 2d biggest beer state overall, all light beers have over 60 share and still growing. Wow! Some shocking shipment and share shifts in Tex thru mid 03. Bud Light still flying. Up 192,000 bbls, 9% thru May; Gained 3 full share to 29.6. But Miller Lite fell 148,000 bbls, 15% and Coors Light fell 60,000 bbls, 8% for 5 mos. That?s on top of 9% hit to Miller Lite and 5% drop for Coors Light in 02. Those 3 brands at 49 share of biz in state. Total AB biz up 166,000 bbls, 4% (Bud brand down 5%) thru May while Tex mkt down 2%. Miller down 209,000 bbls, 13% YTD. For 12 mos, AB share climbed 2.3 to 55.2 while Miller declined 1.8 to 19. Coors only lost 0.2 share. It is down much more modestly overall than on Coors Light. Off 26,000 bbls, 2.5% for 5 mos. That?s because Keystone Light on a roll. Up 29,000 bbls, 13%. Keystone Light at 3.2 share in Tex, roughly 3x its national share. Meanwhile, Mich Ultra under 1 share in Tex: shipped 64,000 bbls thru May. Top malternatives declined 62,000 bbls, 34%, including 64% drop for SKYY, 49% drop for Bacardi and 20% drop for Smirnoff. At same time, Corona flat and Heineken up 7% thru May.
You might assume a contract that calls for master distrib's "full time commitment to sales and marketing of Pabst/S&P company brands" would mean master distrib could only sell Pabst/S&P brands. In fact, that was US Dist Ct?s interpretation when it ruled last yr that ex-master distrib Southland breached its contract with Pabst when it sold tiny volume of other brands, and found Pabst justified in terminating Southland. As result, Southland lost bid for $3 mil in liquidated damages. But US Ct of Appeals just reversed key part of Dist Ct?s decision. Ct of Appeals agreed with Southland's argument that selling of non-Pabst brands (none competed directly with Pabst) "was done for the purpose of creating good will that would advance" sales and mktg of Pabst brands. What?s more, judge wrote that how Southland "chose" to "devote its full time commitment" was at Southland's discretion, wasn't detailed in agreement and wasn't necessarily "exclusive 'sale'" of Pabst brands. Indeed, turned out that Pabst chief at time (Lutz Issleib) "instructed" Southland to sell one of the non-Pabst brands! "It is not the time?devoted to the non-Pabst brands that controls," the judge ruled, "but the purpose of that activity to increase the sales of Pabst products." Turns out that during trial Pabst execs had conceded that distribs "often combine different beers together or other products of different prices and qualities onto a single palette for a 'package deal,' which helps move certain products that may be unrelated." Judge pointed out too that real reason Southland was terminated was soft volume, not sale of other brands. Pabst "did not even know about Southland's non-Pabst sales nor the actual contract itself," according to judge, "until after Pabst terminated its contract with Southland." Yet another unique factor: Southland was dubbed a "master" distrib, but didn't have warehouse or trucks. Southland was more like a contract sales force for Pabst/S&P in the southeast. Judge sent case back to US Dist Ct to resolve whether $3 mil "liquidated damages provision was otherwise enforceable," tho Pabst could try for rehearing at US Ct of Appeals.
In 2d-biggest beer mkt in US, malternatives (including coolers and Zima) shipped 249,000 bbls for 5 mos, up 64,000 bbls, 35%. Captured 3.1 share of Tex shipments yr-to-date. But new entries Bacardi Silver (35,000 bbls), Skyy, Sauza and Citrona from Miller (40,000 bbls, mostly SKYY) and Captain Morgan (12,000 bbls Apr-May) drove segment growth. Smirnoff Ice slowed to 6,000-bbl, 8% growth for 5 mos, including a 22% drop in May (not coincidentally that was pipeline-fill mo for Captain Morgan, Sauza and Citrona). Ice down 9% in Apr too. Mike?s remains underdeveloped in Tex, but up more than Smirnoff so far this yr; gained 6400 bbls, 76%. Meanwhile, new malternatives cutting heavily into coolers and Zima. Other malternative brands, mostly Seagram?s, Bartles & Jaymes and Zima (but also Doc, Tequiza, Rick?s, Hooch, etc) dropped 37,000 bbls, 35% for 5 mos.
At same time, all this action on new products ain?t slowin? Bud Light a bit in its biggest mkt. Up another 267,000 bbls, 15% for 5 mos. Bud Light gained 2.4 share to 26.6 of Tex shipments. Bud up 1% YTD too. In fact, AB up 345,000 bbls, 9% for 5 mos in Tex, while state shipments up 310,000 bbls, 4%. Miller down 56,000 bbls, 3% (including incremental malternative volume) as Miller Lite continued down 6% in its biggest state. Thru May, AB share over 53 while Miller share dropped to 20 in Tex. And Coors volume down 0.5%. Pabst actually up slightly in Tex. Gambrinus up 33,000 bbls, 21%.
Pabst cut dropoff rate by more than half over last 12 mos (see above) as several key brands turned around. Pabst Blue Ribbon, Lone Star and Colt 45 (about ? of Pabst biz, we estimate) each up yr-to-date. Supermkt trends show PBR family up 6.3% YTD thru Jul 14, Colt 45 up 5%, Lone Star up 9%, according to IRI. Stroh and Old Style trends positive in supers too, tho on tiny base. But Old Mil/Old Mil Light (about 30% of Pabst biz) still runnin’ down mid-single digits; Schaefer, Schlitz, other brand families still down double-digits in supers. Meanwhile, Pabst just hired mktg veep Alan Willner who spent time with Guinness and Coors. Former mktg director Gene Clark and 2 mkt mgrs left recently.
As US Appeals Court upheld granting of summary judgment to Guinness Bass Import Co (GBIC) following its early-2000 termination of Beer Capitol in Wisc, it implied beer distrib compensated for brands by makin’ money off ‘em, not building equity. Appeals Ct wrote Beer Capitol was "compensated for its role" in selling GBIC brands "during the course of the distributorship" for 8 yrs. Distrib got zilch when it refused GBIC’s offer of 1X net profit and challenged termination instead. But, GBIC not "unjustly enriched" by this result, court ruled. Judges wrote: "Beer Capitol made a tactical decision to sue rather than accept the payment" offered by GBIC. "That choice did not unjustly benefit GBIC," court concluded. Recall Guinness had consolidated 5 southern Wisc distribs into one. Three distribs accepted offer of 1X net. But Beer Capitol sued in US Dist Ct for breach of contract. Dist Ct had ruled Beer Capitol not protected by state fair dealership law. At Appeals Court, Beer Capitol argued: 1) it relied on "promise" by Guinness execs in early 2000 that it would be consolidator in southern Wisc; 2) GBIC was "unjustly enriched" by Beer Capitol’s investment in brands and because Beer Capitol never compensated for brands. US Appeals Ct said there was no evidence "reasonable" person would agree GBIC promised Beer Capitol it would be consolidator, and GBIC not "unjustly enriched."
At this morning’s US Court of Appeals hearing on case between FEMSA and Interbrew over integration of Beck’s into Labatt USA, hard to figure where judges going. Recall that District Court granted FEMSA an injunction blocking Beck’s integration back in May. Interbrew atty began by stating that ruling based on “egregious errors of law.” He hammered: lower court judge found no “irreparable harm” other than loss of bargained for minority-right. But one of Appeals judges suggested harm could flow from breach of contract simply by losing “benefit of having right." If it can’t be enforced, "that right is lost." “How could you put a monetary value on loss of bargaining power?” another asked. Most senior judge summed up FEMSA position: “You had a right, you want that right.” Yet judges pressed FEMSA atty too: “Why can’t the whole transaction be undone later” if no injunction granted but FEMSA prevails in its claims? As for money damages, “heaven knows,” judge added, these are “deep pockets adversaries.” But FEMSA atty argued: “The right itself has value, separate and apart from any loss that might occur as a result.” One side told us to expect a decision in no more than 90 days.
AB Sez Disapproval of $57-Mil Tex Deal Was Legit; Sellers Should ?Take Nothing? from Suit
AB denies all allegations it acted improperly in its brief answer to charges in fed court by ex-distribs Williams/Durrill in Corpus Christi that AB illegally withheld approval of $57-mil purchase in early 2001 (See Jun 17 INSIGHTS). Argues Williams/Durrill not entitled to damages and requests that "upon trial or other final hearing of this matter Plaintiffs take nothing." Recall that Williams/Durrill charged AB violated Tex franchise law, breached AB equity agreement and tortiously interfered with a contract when AB nixed a proposed $57-mil asset purchase of their 3.3-mil-case distrib. AB subsequently approved a $51.5-mil purchase price (to same buyer) with additional $5.5 mil to be paid down road if buyer met certain targets. A year later, Williams/ Durrill sued for "fair market value as of the date AB violated the law" ($57 mil), plus damages.
AB quotes its letter rejecting original deal: "the proposed sale does not meet our qualifications and standards necessary for approval. Specifically, projections indicate a low projected return on investment. We believe the low return on investment would jeopardize [buyer] L&F Distributors, LTD?s ability and incentive to provide the financial support necessary for the successful operation of the business and to comply with the terms" of the equity agreement. AB?s answer also listed several "affirmative defenses." Key: AB argues Williams/Durrill "have no damages or greatly reduced damages as a result of the Deferred Payment Agreement" it signed with buyer, and that their claim for punitive damages is "barred" by US Constitution. AB argues too that Williams/Durrill have no standing to sue and they have already waived claims. Separately, AB filed motion to dismiss their 3d claim, that AB "tortiously interfered" with original agreement. In AB?s view "there was no valid, existing contract subject to interference." Besides, "AB was legally justified in disapproving the proposed sale"; since under the equity agreement AB "had the power to approve or disapprove a change in ownership, AB cannot now be sued for doing what the contract expressly permitted it to do." Dist Court denied AB?s motion.
This case raised lotsa eyebrows for lotsa reasons. Just one is price Williams/Durrill did get, let alone original deal. Recall that 4 of 5 Fla AB deals detailed in Maris trial were all between $4 and $6 per case. One went for $10/case. EBITDA ranges were between 4.7X and 8X. So this deal appears to be an outlier. Looking over copy of the $57-mil agreement, nothing stuck out to juice value. Buyer purchased "all business personal property" including land, 14 leased vehicles, inventory, etc, but Williams/Durrill kept 7 vehicles, a couple of buildings, a farm, an oil change business, plus boat and trailer. Note: AB very strong and growing in Tex, buyer was contiguous and this is area with growing population. Original $57 mil price "appears to be a fair market value transaction agreed upon by a willing buyer and a willing seller," sez atty Cris Hoel. Buyer "obviously was qualified in the supplier?s eyes," he added. Consultant and broker Andy Christon, who has done a bunch of AB distrib deals (tho not this one), agreed with Cris. Looking at $51.5-mil approved price, Andy said $15/case suggested an EBITDA valuation of a little over 8X. That?s not out of the woods "provided that this wholesaler?s adjusted EBITDA was in the range of $1.85 per case." In fact, one participant in Ippolito/Christon?s 2001 survey--a high-share, lo-cost, moderately growing AB distrib--recorded adjusted EBITDA at that level in 2000. But "these kinds of profit levels and high-end multiples are rare," he added. In Andy?s analysis, "adjusted EBITDA" means cash profits after adding back "discretionary expenses and family salaries." Consolidation savings can boost EBITDA, Andy adds. Finally, while 8X EBITDA is just 2/3 of AB?s current 12.2X EBITDA mkt valuation, Andy points out "such discounts (or greater) reflect a necessary valuation discount for lack of marketability of a privately owned" distrib.