Consultant Tim Coughlin (DMG Financial) doubled down on INSIGHTS’ recent Ten Years After review of transformative changes in US beer biz 2008-18.  In talk at NBWA seminar, Tim went back 20 yrs to review changes in distrib value and resulting “not so great value reset” he sees happenin’ now for many distribs.  Cherry-picking Tim’s wide-ranging seminar, bottom line is that current trends pressure value for many, tho not all, distribs these days.  Hence, for some “yes, that is the sound of a closing window.”

Turn back clock 20 yrs and megabrands/big brewers dominated the biz.  Beer distribs “fundamentally undervalued,” Tim sez, and deals often went for 1-2X GP for intangibles.  Capital costs were relatively high.  Then, consolidation kicked in, as industry and bankers alike realized “how stable these businesses are.”  Technology started takin’ on increasing importance.  Just how different was 1998 vs 2018?  Prime rate was about 8% vs 4.9%; 20-yr yield 6.2% vs 3%; GDP growth 4.75% vs 2.8%; biggest brands, except Bud, growing vs now each down or flat. Other key macro/beer trends over 2 decades: beer per caps fell; volume trend “sideways at best,” especially last 10 yrs; beer lost share to spirits; total population grew modestly, but now slowing and aging; beer price indexes for off premise far outpaced wine/spirits, which “went flat” during great recession.  Meanwhile, SKU counts exploded (4-5X for avg distrib); net sales/case up near 60% for typical distrib to just below $19; GP/case rose 66% to $5; but oper profits/case for high performers barely up, just a penny after adjusting for inflation to 92 cents/case (based on distrib data from NBWA Productivity report).  So: it was hard to build wealth via organic growth alone; distribs needed to acquire to truly build wealth. 

Who were distribs who “crushed it?”  Those who: 1) “paid for synergies to inspire sellers” (the unwilling lost deals); 2) made best decisions re Modelo portfolio; 3) cultivated craft “wisely” vs those “stung” by paying “market entry” fees for brands that “flopped” and/or did not see hyper local coming; 4) somehow played interest rates properly, whether “Crazy” or “Genius”; 4) implemented tech smartly; 5) did deals, “plowed down debt,” then invested/repeated the process.  Current value landscape marked by recalibrations of risk and return, Tim sez.  For example, family offices may be more interested in wealth preservation, don’t need same returns as other investors seeking to build wealth.  But they’re not buying smaller distribs.  Then too, there are simply fewer consolidation oppys these days, especially oppys to remove significant operating expenses (i.e. up to 70% of ’em).  New suppliers are driving consolidation.  If Constellation moves brands, as in SoCal, for example, seller gets good multiple for brands but may end up with “shell of a company” with depressed value, sez Tim.  Smaller distribs who can’t “mount a legal fight” in similar situations could end up even more squeezed.  Then too, craft values have fallen, so less likely to offset EBITDA losses and big multiples paid for them sometimes ain’t payin’ out.  Finally, some distribs face “succession dilemma”: when distrib cannot acquire to grow, operates in soft/declining mkt and wondering what they’re passing on to next gen.  Are they better off cashing out? 

Looking ahead, not many folks project industry growth, at least for near future, cost and margin pressures certainly not easing, transaction pool will shrink and banks getting more conservative as they see more biz failures (at least on brewery side, tho not distribs).  Tim posited several “owner scenarios” in this context.  Some folks in healthy mkts with right brands doin’ just fine and not pressured to sell. Committed, aggressive buyers like lower values.  Those with that succession dilemma tho, really need to take “hard look” to decide if future generations can ride out a negative cycle (as current owners may have in past), hope for improvement.  And for those with weak portfolios in declining mkts who can’t fund investments needed to even sustain current biz, “yes that’s the sound of a closing window.” 

Mike’s keeps hittin’ new highs.  Mike’s $$ sales up 101.1% for 4 wks in Nielsen all outlet scans thru Sep 14.  Gained $75 mil in that period alone, more than Constellation and Boston combined.  That doubling drove Mike’s yr-to-date $$ growth to 65%.  Thru Jun, $$ trend a measly +48.6%.  Meanwhile, Constellation, Boston and Diageo each picked up dollar pace in most recent period as well.  Constellation $$ sales +12.9% for 4 wks, vs +10.9% YTD.  Boston $$ sales jumped 24.3% for 4 wks; +19.9% YTD.  Diageo dollars +19.1% for 4 wks; +15.5% YTD.  AB eked out 0.3% $$ gain same period, MC $$ slipped 0.2%.  In latest 4 wks, total volume continued strong, +1.8%; YTD trend hung in at +0.3%, $$ +3.2%.

Mike’s $$ sales jumped 71.7% to $954.6 mil in IRI multioutlet + convenience yr-to-date thru 9/8, 100% in FMBs, including seltzers. So Mike’s got 35.7 share of FMB segment, according to additional IRI data shared by Bump Williams Consulting. Up 7 share. Boston Beer FMB $$ sales up 62.5% to $505.5 mil. It gained 3 share to 18.9 of segment.  FMBs 62.3% of Boston Beer’s total $$ sales YTD. Number 3 FMB player Diageo Beer Co also driving 20% growth in $$ sales in red-hot segment.  Diageo at 11 share, but actually lost 1.3 points of FMBs.   Diageo derived 73% of its sales from FMBs.  MillerCoors at #4 with 9 share, lost nearly 4 share of segment. Its FMB sales are down 4.7%.  And AB #5, also at 9 share, down 3 share, but its $$ sales slightly up.  Constellation is #9 player in FMBs, with a 1 share of segment, but way up with Refresca launch.  This goes beyond seltzer. Mike’s and Boston have top 6 brands in FMBs between ’em.  If Anthony is right that “the future is flavor,” then top 3 US beer suppliers have got some serious catching up to do. 

Paw Paw Wine Dist of Kalamazoo is selling distrib rights to Alliance Bev, Great Lakes Wine and Spirits and Vintage Wine Co, cos announced today. Deal expected to close by yrend. In biz since 1943, Paw Paw has big wine book including Gallo, Mondavi, Kendall Jackson. But it also sells Bell’s (in its home mkt), Heineken USA, Diageo Beer Co, among other beer brands.  In 80s, it “became the Kalamazoo area distributor of Kalamazoo Brewing Company, known today as Bell’s,” release said.  Today, Paw Paw sells about 300K cases of Bell’s.  This acquisition will reportedly make Alliance the largest Bell’s distrib in state. It is a top MC distrib too, entering mid-sized mkt where Miller and Coors brands remain unconsolidated.

Mike’s Hard Lemonade Co-founder Anthony von Mandl’s presentation at yesterday’s NBWA convention in Vegas really riled folks up, perhaps those who don’t have White Claw most of all. (Same presentation far less controversial at Mike’s celebratory meeting last week.)  Anthony called an industry “inflection point,” where biz can “go one of two ways.”  It can “continue down the path of accelerating decline.  Or we together can transform this industry.”  He hammered on this theme of a “transformational moment” where “brands once thought of as invincible are showing continued weakness and decline” as “the tropes of traditional beer advertising no longer resonate,” etc.   Then too, today only 9% of beer consumed by males 21-29, but 30% consumed by 21-29 yr old males only a generation ago.  So there’s a “dark cloud” of “millions of consumers bypassing beer altogether.”  To Anthony that “foreshadows further quickening decline.”  While many agreed with much of what Anthony said, his anti-traditional beer undercurrent a bitter pill to swallow, especially for those without White Claw and reliant on such brands.  They wished that he hadn’t stuck the knife in so far. 

White Claw is the antidote to what’s ailing beer, according to Anthony.  White Claw is “at the center” of “fundamental culture change,” he said, growing in a “transformative and category changing manner.”  White Claw phenom related to broader-based “health and wellness” trends.  And it’s “breaking all the laws in the beer industry,” added Anthony. Another reason it’s taking off: “the future is flavor.”  As a new generation emerged “mainstream beers tasted more and more the same to them.”  Industries are “disrupted by outsiders and new thinking” and this yr it’s White Claw.  “I absolutely know we have built an enduring brand,” said Anthony, that “has the potential to deliver billions of dollars of profit.”  The biz is “not going to magically return to the megabrands of yesterday.” Anthony also thanked his distribs, and praised “the greatest distribution system in the world” and its ability “to deliver to every account in the country,” which wine and spirits system can’t do.  And he encouraged distribs to get behind this “moment in time and history to really transform the entire beer industry,” calling seltzers “most profitable and sought-after category” in all of alc bevs. “Let’s rebuild this industry together,” he concluded.  Total Mike’s depletions, Anthony noted, up 150% in Sep.     

Count Constellation’s huge in-process brewery in Mexicali, Mexico, near US border, among big investment plans criticized by the country’s current leader. Mexican President Andrew Manuel Lopez Obrador didn’t mention Constellation by name, but noted “a big plant to produce beer in Mexicali” as the kind of water-intensive biz that shouldn’t be cleared in a particularly dry region of the country, Reuters reported. Recall, concerns about the impact of the Mexicali brewery on the area’s water supply have followed Constellation since the plan was announced, including some local protests. All along, the brewer has assured locals, Mexican officials, US industry members and investors that it’s a non-issue. 

President Obrador promised a study on the issue back in March, but this week’s critique not linked to any particular findings. Instead, Obrador’s comments more closely aligned with his tougher stance against major development deals cleared by the previous administration. He’s already canceled a plan for a new Mexico City airport and “forced a group of infrastructure companies to accept reworked terms,” Reuters wrote, “saving the public $4.5 billion.” Broadly, he would like to see more development in southern part of the country, where economic growth hasn’t kept pace with the north. The southeast region, too, is “where 70% of the country’s water is,” Obrador said in press briefing, during general comments about environmental protection activity. That’s where such water-intensive development projects should be directed, he suggested, “if someone wants to produce beer – in case it’s necessary.”

Cans continue to gain share of total beer biz volume as total bottle sales declining at steeper rates in US thru first half of 2019, according to Beer Inst data. Indeed, total bottle sales declined every year since 2008; anywhere from -1% to -5% including down 4.8% in 2018. They fell from 40 share of total beer volume to 32 share in calendar 2018, and fell to just 30 share in Q2 2019. Domestic bottles account for more than all of that decline, down from 30 to 21 share from 2008-2018, including volume down 7.6% in 2018, its worst decline rate in the last decade, BI estimates. Domestic bottle trend steepened further to down low-double digits in first half of 2019, driving total bottles down 8%.

Meanwhile, cans snagged 7 share to 57.3 share from 2008 to 2018 and growth picked up in first half of 2019. Cans collectively grew just low single digits at best thruout the last decade, but total cans improved to +4% thru first half of 2019. Hard seltzers likely giving domestic cans an extra boost along with most cos continuing to gravitate toward can formats for majority of new innovations. And import cans picking up steam as well, likely driven by Corona franchise additions such as Premier and Refresca among others. Separately, draft gradually rose from 9.5 to 10.5 share of total industry volume in 2018 (tho unclear how much taproom volume BI is capturing in this report). But this year, draft is declining at steeper rates, down 4% thru first half, BI estimates.

AB InBev figures second time’s the charm as it priced IPO of its Asia biz at HK$27 a share, low end of expected range, CNBC and others report.  That means ABI should raise in range of $5 bil, about half of what it sought in IPO it abandoned in Jul.  Then too, biggest anticipated IPO on Hong Kong exchange this yr now looks like #2, behind Uber.  Budweiser APAC on sked to start trading Sep 30. Pricing coming in at lower end of expectations "no surprise at all," CNBC quoted one analyst, but still a "fair deal" for investors, given ABI’s focus on premium mkt in China.

Tho NBWA Convention trade show floor chock full of CBD-product companies seeking distribution, veteran alc bev atty and distrib advocate Mike Madigan advised distribs to be extremely careful before entering CBD-bev biz.  In short, “it’s muddled,” said Mike, specifically their legality.  Why’s that?  First, if CBD (cannabidiol, non-psychoactive chemical found in both cannabis and hemp) is not derived from hemp (legalized in Farm Bill late last year), it’s not legal.  Second, FDA has not approved any CBD-infused beverages or foods for humans or pets.  Loophole: CBD supplements are outside FDA jurisdiction and appear to be legal.  But what we saw on convention floor sure looked like bevs and distribs have shown great interest in selling them, by all accounts.

TTB has said it will allow hemp ingredients in alc bevs, if producer gets formal approval.  Problem is that “research suggests little CBD comes from hemp,” Mike pointed out, but rather from other cannabis plants.  Since distribs must hold fed permit to sell beer, if distrib violates fed law, distrib permit at risk, can be suspended or revoked, he said.  Congress is pressuring FDA to develop and clarify rules on CBD-infused bevs, but it’s moving very slowly, according to NBWA genl counsel Paul Pisano.  NBWA met recently with FDA on this topic, and agency has a “working group” considering the issues.  Key problem: if FDA allows CBD, which has drug properties, to be infused in bevs, will it have to then clear other analogous bevs which also contain say Viagra, or other such recreational drugs?

Mike advises distribs not to carry these bevs until there’s “further clarity” on fed level.  (Later in day, Jim Koch basically took same position, to “let others sort it out.”)  If distribs “bound and determined to sell these products,” Mike advised, they should “require the producer to provide a letter that ensures” federal government has deemed the beverage complies with federal law, which doesn’t seem likely.  At very least, distrib should get assurance that a lab has certified the CBD derived from hemp, and that the producer indemnifies the distributor if they’re sued from a liability standpoint.   Mike expects lawsuits against CBD-bevs similar to when AGs went after bevs combining alcohol and caffeine.  Despite Congressional (and commercial) pressures, FDA indicates it will act deliberately, and give guidance “once we have the science,” agency told NBWA.  

What if distribs set up separate business unit to sell CBD bevs?  Distribs should definitely set up separate biz, said Mike, but still 2 risks.  Right now, still looks like violation of fed Controlled Substance Act, tho TTB/FDA more likely to go after suppliers first rather than distribs.  Second, if separate company commits felony but is owned by same entity that owns wholesaler beer permit, that beer permit also at risk.  So, a risk-reward muddle, to be sure.

MillerCoors announced another slew of new products yesterday, adding to already full plate, in brief meeting with distribs at NBWA convention.  They included Blue Moon Light Sky, Coors Light Peak, Leinenkugel Spritzen and Keylightful, each checking different boxes, but all low-cal, several with flavors, or playing off “better-for-you” cues. That’s on top of previously announced national launches of Saint Archer Gold, which will receive $30 mil in support, and Movo Wine Spritzer, plus previously announced Coors Edge (NA).  Most new entries are above premium.  This comes on top of 2019 national launch of FMB Cape Line,    a top-10 Nielsen growth brand, which already sold over a mil cases, MC said, plus already announced new campaigns on Coors Light, Blue Moon and much more still to come.  “We are just getting started,” promised cmo Michelle St Jacques.  This yr’s innovation pipeline is 2x bigger than last yr’s pipeline, with 30% fewer SKUs, she added.  MC total volume still down 3.3% yr-to-date in Nielsen all outlet thru 9/14, tho down 2.4% for 4 weeks.   

In his last presentation as MillerCoors ceo, and just before he ascends to Molson Coors ceo next week, Gavin Hattersley emphasized how much faster MC is innovating, taking risks, how much it has changed but also how much there is still to do. He laid out his goals as TAP ceo:  “My goals for Molson Coors are simple.  I want to restore our iconic brands to glory...I want to premiumize and modernize our portfolio... and I want to put more firepower behind our brands….We are about to put our foot on the gas pedal in 2020.”  Tho not all plans finalized with Molson Coors board, INSIGHTS understands lotsa change coming.  Stay tuned.  More in upcoming issues of our publications.