It took some months but Beer Inst back to having craft brewer on its board of directors.  It just elected Brett Joyce, prexy of Oreg’s Rogue, to the board, replacing Brooklyn’s Steve Hindy.  Brett following his dad Jack’s outsized footsteps (Jack passed away earlier this yr) to run Rogue, a leading craft pioneer now based in Newport, Oreg.  Rogue is top-30 craft brewer, and has national footprint.  But it’s one of few that lost volume in most recent yr, off 9% to 104K bbls in 2013.  Interestingly, Rogue also a distiller. So BI now has 2 board members whose cos also sell hard liquor (Constellation’s Bill Hackett is the other).  Rogue also has very spirited, boundary-testing approach to mktg and branding that may draw some attention and chatter.  Key to BI’s choice, we understand: it needed brewer who was willing to represent and advocate BI’s legislative and regulatory positions, essentially to support BEER Act.  That’s gotten trickier since BA has its own Small BREW Act out there at same time.

Statements from both Brett and BI chairman Luiz Edmond stress BI’s role in speaking for entire industry.  Luiz: “This is a critical time for brewers and importers of all sizes to come together for the benefit of the entire beer industry. It was important to the Board to maintain this small brewer seat so we can consider all perspectives” on key issues.  Brett said BI “has been the place where small, regional and large breweries have been able to come together with beer importers, suppliers and other major industry stakeholders to discuss policy” and other vital issues.    

Standard & Poor’s is reclassifying Boston Beer as part of its Mid-Cap 400 next Monday, moving SAM from its Small Cap 600, even as debate continues in industry circles over whether Boston Beer is still a small brewer.  Something which can’t be debated: it’s stock is on a tear again.  Up about 10% in last week, hitting $320 today, with mkt cap of $4.15 bil.  

As signaled earlier, Craft Brew Alliance volume softened in Q3 and it took earnings hit as it launched operations at City Brewing’s Memphis plant.   Shipments gain slowed to 2.4% in Q3, with Kona up 14% but Widmer brands

-0.4% and Redhook -8% with tuff comp.  Depletions steady at +6% tho.  For 9 mos, Kona up near 20%, Widmer +5.5% and Redhook +3.6% for overall 9.9% gain.  That’s still slightly ahead of 8% depletions gain. 

While revs up 5% in Q3, cost of goods increased 8.4% and selling, gen admin expenses jumped 17%.  So gross profits off slightly and CBA took $2.1 mil, 66% hit on operating line.  For 9 mos, revs and costs much more in line, so gross profits +16% and operating income up healthy 74%.  Margins remain modest tho, just 2.8% on operating line. 

Molson Coors reported its adjusted 3d qtr profit was down 2.7% to $271.5 mil or $1.46 per share as co cited “lower volume, increased brand investments, unfavorable foreign exchange,” and higher tax rates for decline.  That missed analysts’ expectations in range of $1.48-$1.50 per Thomson Reuters and Zacks.  TAP revs slipped 0.3% to $1.17 bil, and with weak sales in both Canada and Europe.  Worldwide volume declined 3.4% to 14 mil bbls.  In Canada, loss of Modelo brands contributed to a 2.2% volume drop in 3d qtr and a 5.9% decline in STRs.  Molson Coors lost half a share in Canada in qtr.  Pricing gain of 3.1% in Canada “was strong and came in above our +1% forecast,” wrote Dara Mohsenian of Morgan Stanley.  Volume decline of 4.6% in Europe was driven by severe weather in Serbia, Bosnia and Croatia, “as well as weakened consumer demand,” noted co.  Thru first 9 mos of yr, Molson Coors’ underlying free cash flow was up to $766.1 mil, up $19.3 mil vs yr ago and well within striking distance of full yr target of $775 mil.    

As AB launches Oculto, it is once again going to slightly higher alcohol brand with spirits branding cues  “hoping to attract younger consumers who increasingly choose liquor and Mexican beers,” wrote Wall Street Journal, breaking the story. Oculto, which means “hidden” in Spanish, “will be made with blue agave ‒ the same plant used to make tequila-blended with beer aged with wood from tequila barrels” with an ABV of 6%.  “The name Oculto is etched into a white skull that recalls the style of Mexican ‘Day of the Dead’ art,” wrote WSJ.  “The logo turns fluorescent and the skull’s empty eyes glow green when the bottle is cold.”  

Note, HUSA also has tequila-flavored Desperadoes expanding nationally next yr.  And after Montejo, “Oculto will be the second beer with a Mexican profile” in ABI portfolio, according to WSJ.  “The tequila beers are aimed at beer drinkers that have been defecting to cocktails,” concluded WSJ.  Other attempts so far have mostly either flopped or faded.  No, this is not Tequiza (as AB reportedly assured distribs).  But AB will be putting big push behind Oculto in 2015.  

Will be fascinating to see how AB purchase of popular 10 Barrel will be received in fiercely independent hometown Bend, home of over 20 indy craft brewers.  What does it mean when a $50 billion corporation drops in and suddenly owns a brewer and a retailer (the brewpub) as well as a distrib?  AB owns branch in Bend too. At a minimum, means that AB is all 3 tiers of 3-tier system in Bend, which may be perfectly legal, but wasn’t original idea of 3-tier.  

But there are many other angles to watch. 

Recall, AB down to 28.6 share in Oreg, having lost nearly 20% of its volume there in last 5 yrs.  And that’s from BI data, which likely doesn’t include all of smaller craft.  So AB share likely even lower. With 10-Barrel, AB is acquiring nearly 1 full share of volume in state, considerably higher share of $$.  In fact, last data we saw had 10-Barrel at almost 2 share of Portland $$ in foodstores.  We’d guess it’s even higher in hometown Bend and also that AB is lower.  So among many other purposes, 10 Barrel could shore up AB’s position in one of its most seriously challenged states.  But what about other craft brands that are sold by AB branches?  Will Craft Brew Alliance (which AB owns about 1/3 of) take a backseat to 10 Barrel (which AB owns outright)?  What about Ninkasi?  Stay tuned.

On night before Elysian sale went public, founders of 10 Barrel Brewing told “packed house” of around 300 local biz leaders and entrepreneurs in Bend about positive changes at brewery since they sold to AB last summer.  AB’s “sinking 10 million into expanding the brewery,” with 6 new 400-bbl tanks and adding new hires too, noted The Bend Bulletin.  “We feel 100 percent that we have nothing to apologize for, and never would we apologize for the sale,” Garret Wales told audience to “ringing applause.”  Next day, he told Bulletin “We’re stoked” about Elysian deal as well.  He assured that 10 Barrel will never hand over creative control to AB and noted AB is changing to their culture instead, claiming 10 Barrel “will continue to close on snow days so employees can ski,” even tho AB “doesn’t really like that.”  10 Barrel originally put out feelers for a partner with capital back in 2013 and 3 days later AB’s m&a exec was in Bend, noted report.  10 Barrel originally offered 25% stake but AB wanted whole brewery and they agreed once they had assurances AB would retain all employees and keep founding partners Garrett, and Jeremy and Chris Cox of course. Since deal, 10 Barrel has lost 1 sales rep out of around 215 employees, noted Chris.    

Predictably, both AB and Ky distribs beefed their lobbying corps in Frankfort, Ky as 2014 wound down and all anticipated big battle this yr when anti-branch bill dropped, as it was earlier this month.  AB increased its number of lobbyists from 2 to 10 in state capital over final 4 mos, and paid ’em $113,333, reports Courier-Journal in Louisville.  Then too, group of distribs, small brewers and retailers who support anti-branch bill set up group called KEG (Kentuckians for Entrepreneurship and Growth) which retained 14 lobbyists of its own.  KEG reported $16,058 in expenses for last trimester of year.  And all this was before any bill intro’d.  AB’s total expenses for 2014 topped $160K and made it 6th biggest spender in state, well behind leader Altria, which paid out over $323K.  Both AB and KEG hired well-known figures in Frankfort, natch, reports the paper.  Sales/mktg veep for AB branch told Courier Journal proposed bill is “an attempt to put us out of business after a 40-year track record of being an excellent corporate citizen in Kentucky.”        

AB on mini-buying spree of craft brewers with announcement of deal to buy one of top Washington craft brewers Elysian on Friday.   That’s its 3d craft acquisition in 12 mos, including 10 Barrel and Blue Point.  All 3 brewers around 40-60,000 bbls in size, with limited distribution.  Of course, AB also bought Goose Island in 2011.   AB “late to the game” and “don’t be surprised” if AB buys several more craft brewers, outgoing prexy Luiz Edmond told Wall St Jnl last mo.  Well, that didn’t take long.  More AB craft acquisitions are actively in the works, INSIGHTS hears.  Who knows how many before AB will be sated and its strategic ambitions achieved?

What Are AB’s Strategic Objectives?   For sure, AB is looking to participate more in the growth drivers of the beer biz, craft beer and Mexican imports (Montejo).  As it has for yrs, AB’s base domestic biz continues to decline, while craft up double digits 5 yrs in a row.  Meanwhile, AB’s craft-like Shock Top slowing and didn’t put a dent in craft brewers even in its best growth yrs.  Even Goose Island just flattish in scans during 4^th qtr.  At a certain point, if you can’t beat ’em, buy ’em up. 

Provide Locally Relevant Craft  AB will seek to grow these craft businesses through its distribution network, which is oft-disadvantaged in craft space.  That’s an obvious objective with each of these purchases.  AB will “continue to provide its distributors brands that are relevant in the local market,” AB’s craft ceo Andy Goeler told INSIGHTS.  (Not to mention keeping AB distribs focused on AB-owned brands instead of other suppliers.) Will there be cross fertilization or does AB view these purchases as separate local entities with distinct identities? “Separate local entities with distinct identities,” answered Andy without missing a beat.

Elysian One of Hottest Local Crafts  Like 10 Barrel, Elysian one of hottest local crafts in crowded and highly developed Pac NW, growing from 34,000 to 53,000 bbls last yr, with 55% of its biz in Wash.  And it’s up 50% there, according to Elysian’s Dave Buhler.  What about consumer backlash?  “We hope the loyalty our consumers have will transcend this transaction,” and that “they will give us a chance to prove that we are making the same beers qualitatively and creatively as we have since 1996.”  Co-founder (and head brewer) Dick Cantwell said he will “keep doing what I’m doing” and expressed hope that he will “have more time to do brewing.” All 3 founders/top execs are staying on.  But in some articles Dick expressed ambivalence about selling and apparently other options were available. 

Own Brewpubs; AB Will Own 7; Be All 3-Tiers in Seattle; Blurring the 3-Tier Lines  Elysian has 4 popular brewpubs and in Wash, “it’s legal for us to participate” in brewpub biz, said Andy, so brewpubs absolutely are part of plans.  Andy again praised brewpub biz as he did when AB bought 10 Barrel: “there’s a lot of learning there,” because of direct interaction with consumers.  Recall, 10 Barrel will have 3 brewpubs following opening of its Portland brewpub.  But Goose Island’s brewpubs still owned by Goose founder John Hall, because IL law wouldn’t allow AB to own. 

So AB rapidly becoming a significant operator of brewpubs.  This will undoubtedly not sit well with its wholesaler network, many of whom are already perpetually uneasy about ABI’s ultimate allegiance to 3-tier. “AB 100% supports the 3-tier system,” said Andy.  But in Seattle as in Bend, AB will actually be all 3-tiers of the 3-tier system as it has branch in Seattle.  Although these brewpub acquisitions are part-and-parcel of the larger craft brewer deals, could they also send a message to distribs about battling against AB in state legislatures over branches, etc? Or do they potentially suggest an even more overarching ABI ambition to participate more in other tiers as ABI is able to do in other countries?  Recall, old AB had retail presence at Busch Gardens and Sea World, so there’s a bit of back to the future here.  Also, could be aspect of “if you can’t beat ’em, join ’em,” as craft brewers continue to expand their bizzes across all 3 tiers.  We don’t know, but at very least, it’s fair to ask, where is AB going with all this?

Elysian Distribution Could Add Complications to Deal Another interesting aspect of Elysian deal is Elysian’s current distribution.  In neighboring states, Oregon and Idaho, Elysian is primarily in MillerCoors/All Others houses: Columbia Dist in Oreg and Hayden Beverage in Ida (also with smaller AB distrib, Centennial).  Then too, Elysian mostly with L Knife operations in NY and NJ, mostly MC houses in Pennsy (Wilsbach is only AB house, out of 8 distribs), and with indy house, DOPS, Inc in Maryland and Delaware.  Elysian is in 11 states – Wash, AK, Colo, Oreg, Ida, MT, Pennsy, NJ, MD, Del and NY – and is exported to Vancouver BC, Alberta Canada, Taiwan, Australia and Japan, according to company website. 

Can AB Dent Craft’s Image?  Possible Win-Win  Is there another possible objective in buying craft brewers besides competing more effectively in craft space?  Could AB have finally arrived at an ingenious method for countering craft’s overwhelming image advantage of recent years?  The more craft brewers sell to AB (or even others) the more the consumer could come to think of craft brewers as businesses like other businesses. Some of the craft movement's image and specialness could become compromised as many "beloved" players demonstrate same biz motivations as any normal biz, i.e. make money and/or cash out for that pile of ABI dough at the end of the rainbow.  Then, it could be AB wins either way.   If these AB purchases damage craft’s overall coolness factor, then AB won’t be competing at such a disadvantage. If AB ownership turns out not to be an issue, then ABI will have purchased entrée for comparative peanuts and will just play better in craft with these shiny new toys it has bought.  But it’s also possible that AB’s buying spree could serve to further harden stances among craft purists.  Time will tell.

Will the Justice Dept Object?  So far, not a public peep.  Tho conventional wisdom used to be that AB acquiring anyone would be a potential antitrust concern, these players are so small that they don’t seem individually or even collectively to warrant much government scrutiny so far, tho deals are reviewed.  Recall, provision in agreement when ABI bought Modelo necessitates that DoJ be notified in advance of any transaction greater than $7.5 mil.  No window into whether deals so far simply rubber stamped or given thorough going-over.  Then again, AB has an excellent counterargument.  It is losing about 2 mil bbls a yr.  What does it matter if it buys 50,000 bbls here or there to make up some small fraction of that?  

Investment firm Jefferies (not Jeffries) initiated its Boston coverage with analysis that suggested that Angry Orchard would account for almost 2/3 of growth over next 5 yrs, not (as we wrote) over half of volume.  Using Jefferies’ growth assumptions, Angry Orchard would be over 3 mil bbls and closer to 40% of Boston total volume than 50%.