Alc bev biz sure ain’t standin’ still.  Lotsa legal, legislative, leadership and other issues churnin’ in recent weeks.  Columbia Dist pickin’ up Constellation’s wine and liquor biz in northwest has many folks wondering where that leaves Young’s Market (which lost brands) and whether more beer distribs will add wine and spirits as alc bev lines continue to blur.  Even AB dippin’ its toe with Jim Beam and other recent liquor forays.  Meanwhile, merger of 2d and 3d largest wine/spirits distribs Republic and Breakthru scheduled to close late in 2d qtr, reports Shanken News Daily.  Top 2 (Southern Glazer’s is #1) will control well over 1/2 of all wine/liquor distribution.  That kinda concentrated power has to make it interesting for leader of Wine & Spirits Wholesalers Assn.  And Craig Wolf, longtime prexy there, movin’ on to run for Maryland Atty Genl.  No successor named yet, but, as Wine and Spirits Daily noted Friday, Craig’s departure, along with recently announced change at Distilled Spirits Council where prexy Kraig Naasz will return to his old lobbying firm, leaves NBWA’s Craig Purser as “last Craig standing” in DC alc bev assns.

 Meanwhile, as states wind down their legislative sessions, lotsa last-minute maneuvering to pass bills in final days.  Big changes coming in Colorado and Oklahoma soon: 3.2 beer basically being phased out in both states as grocery and c-stores get rights to sell strong beers.  But lotsa machinations in both states too as retailers jockey for position and issues of age of clerks, public consumption, location of future licenses and more poppin’ in final days, with amendments still possible.  Elsewhere, Louisiana legislature failed to pass bills aimed at opening state to direct alcohol delivery to consumers.  Concerns there included enforcement issues and liability for 3d party services, so state set up task force to study issue instead. 

 “Taprooms Should Not Be the Biggest Bars in Town”; “We Are Not A Bar”  In Alaska, increasingly common tensions between craft producers and traditional retailers surfaced at public hearing where bar/restaurant owners sought “tougher restrictions on small distilleries and breweries,” reports Juneau Empire.  “Manufacturers’ tasting rooms should not be the biggest bars in town,” said one saloon owner.  “We are not a bar.  We don’t want to be a bar.  We have nothing to do with bars,” countered craft distiller.  Retailers want to reduce producers’ taproom sizes, sample sizes, hours of operation and more.  Producers say they already operate under stricter limits, i.e. no live music and no products other than their own. We’ll air out these taproom issues with a brewer, a top atty and a wholesaler advocate at our Spring Conference in Chi next week.  See below

Amidst “fast and ferocious change,” bev cos must “adapt or die,” began Macquarie’s Caroline Levy, on panel of Wall St analysts she moderated at Beverage Forum in Chi Apr 24. Disruptions at retail (Amazon), and cost pressures leading to “tough year for stocks” in bevs and larger CPG (consumer packaged goods) universe, Caroline said.  ABI stock down 8%, TAP down 14%, Coke down 5%, Diageo down 14%, Constellation flat yr-to-date (through last week), Caroline showed. Only Boston Beer up 15% in beer universe.  Next day, Wall Street Journal featured same theme: consumer staple stocks down 13%, worst performing sector in mkt.  Article titled: “The ‘Amazon Effect’ Stings Consumer Staples Stocks as Pricing Woes Mount.” P&G stock down 21%, Kraft Heinz down near 30%, WSJ reported.  “Disappointing earnings reports” leave many investors “skeptical” said WSJ, of cos “ability to cope with rising costs as well as to fend off online competitors like” Amazon.

Caroline’s first question about “one of the biggest disruptors,” Amazon and its effect on c-stores as well as bev cos.  C-stores are “suffering,” said Wells Fargo’s Bonnie Herzog, and her outlook “much more cautious, much more concerned” as “traffic soft” and “number of trips lower.”  Between changing purchasing patterns of consumers (i.e. e-commerce) and “struggling low income consumers,” tuff to grow even in strong economy.  Yet analysts lavish in their praise of Coke, highly critical of Pepsi.  (“Pepsi looks in trouble to us,” said HSBC’s Carlos Laboy).  In beer, panelists liked ABI or Constellation.  Molson Coors never even mentioned during hour long discussion.

Dialogue on potential M&A somewhat subdued, compared to previous panels.  An ABI-Coke tieup “unlikely,” said Stifel’s Mark Swartzberg, because beer still fragmented, especially in Asia and Africa and ABI still has “a lot of opportunity in front of them.”  Any significant ABI deal still at least a couple of yrs away because they have “a lot of debt,” Caroline noted ($100 bil).  “There is a decent chance” of an ABI/Pepsi “tieup” in Bonnie’s view, saying she goes “back and forth” on such a deal’s prospects. Carlos praised “discourse” from ABI on “expanding category” and looking at “adjacent” categories.  ABI “needs to figure out organic growth,” added Carlos, and that is “clearly” ABI ceo Brito’s “top priority.”  With lower valuation, dividend yield of 4%, prospect of raising dividend, ABI has “a little more breathing room,” added Mark, especially with organic rev.  He sees “a lot of ways to win” for ABI.  Meanwhile, Constellation has done  “phenomenal” job of mktg, noted Evercore ISI’s Robert Ottenstein, really “differentiating the brands.”  Still “upside” for STZ, because of its “consistent, sustainable growth” in high single digit range, added Bonnie.  And feedback on its innovations “quite positive.”

Boston Beer sales-to-retailers up 8% thru mid-Apr, it reported, in what amounts to a striking turnaround after 2 yrs of significant declines.  Some questioned if Boston could ever get back on track, but strong first qtr results in a very soft industry show at very least that Boston got out of its funk.  Sure, it went against easy comp (down 14% in Q1 last yr). And no one knows if its innovations, like Angry Orchard Rose and Sam ’76, will last. But Boston once again has a lot going right, even if core Sam Adams not growing. 

Total Boston Beer volume up 12% in Nielsen all-outlet yr-to-date thru Apr 14. Suggests on-premise still a challenge.  But biggest brand Twisted Tea leads way for Boston, franchise up 24.5%.  Angry Orchard franchise up 9%, including 16% last 4 weeks. Angry Orchard Rosé #1 new brand in biz, chairman Jim Koch said, and a top 10 Nielsen growth brand overall.  Then too, Truly Spiked and Sparkling mostly incremental. Truly variety pack up 254% in supers. Total Sam Adams franchise still soft, even with boost from Sam ’76 and its New England IPA. But beer performance improving too.  With Boston shipments up 15% and avg rev per bbl up 2.3%, Boston oper income up $5 mil, 130%, even with $14 mil, 26% jump in ad promo and selling expenses.

Category health are the words on everyone’s lips in the beer biz these days, so no surprise it was major focus at NBWA’s Spring Legislative Conference (just as it had been at NBWA’s fall convention).  The industry is the “worst I’ve ever seen,” one major distrib told INSIGHTS in DC.  “Sales suck,” NBWA prexy Craig Purser said on stage, quoting a distrib, during panel on category health.  Many other anecdotal reports of soft, soft start.  Problem of category health brought into sharp relief by terrible trio of familiar stats BI prexy Jim McGreevy opened with on that same panel.  Beer declined from peak of 61 share of alcohol market in mid-90s to under 50%, per cap beer consumption down more than 2 gallons over last 20 years, beer declined 1.3% last yr and “volume declines are accelerating.”  Indeed, US shipments down 3% in Q1 data from Beer Inst. And beer volume down 1.6% yr-to-date thru Apr 14 in Nielsen all-outlet, 0.7% steeper than in 2017.  Yikes!

Big challenge remains what to do about it.  Especially at an industry level. Craig and Jim working together to face this challenge (with support of their members) and category health panel at NBWA had a sense of urgency. They intro’d 3 strategic planks for combined category health effort: 1) ”Consumer experience, perceptions and image”; 2) “Sales and execution at retail”; 3) “Beer policy advanced at all levels.”  They added BA prexy Bob Pease and IWSR’s Brandy Rand to bring new voices into the dialogue.  Yet this framework and proposed solutions sounded somewhat familiar and specifics still skant.  Suggestions included better on-premise presentation, hiring more women, focusing on beer and food pairings, appealing more to populations where beer under indexes.  Two basic questions persist, said one supplier exec: “What are they going to do about it?  Who will pay?”

Different Performance, Competitive Positions Lead to Differing Views From Top Execs Other takes on getting back to category health voiced by top supplier execs at Bev Mktg Forum in Chi a couple days later.  Beer “can and will return to growth when the high end has a bigger footprint of dollars,” said Constellation Brands Beer Division prexy Paul Hetterich. When high end over 50% of volume, in Paul’s view, beer will grow (slightly) again, maybe 1-1.5% per yr.  Following that logic, premiumization happening already and Constellation pushing it along faster. So industry might not even need overarching category health initiative to get back to growth.  Easy to say when you are growing. Also, craft brewers could give a whit if light lagers get healthier or not.  But AB ceo Michel Doukeris took issue of category health to heart.  In fact, Michel said his “biggest ambition” is to “bring industry back to growth...for the benefit of all,” he added, “a growing industry” is his “number one aspiration.” Secondarily, Michel said, he aspires for AB to “lead this growth as a company,” adding AB “has everything it needs to do that.”       

Is US Beer in Decline?  Seems like ancient history, but US beer biz actually grew slightly in each of 2014, 2015 and 2016.  That was then this is now.  With Q1 so soft, following 1% drop last yr, many wonder whether US beer biz has entered a decline phase.  Whether it’s share loss to wine/spirits, growth of legal pot, young people drinking less, critics getting more traction, US beer biz under more pressure. In other large global mkts, like UK, Russia, Germany and Japan, beer declined by a quarter or more from peak. When spirits reversed its decades-long decline in US, it required concerted and prolonged effort.  Spirits spoke with one voice thru DISCUS and had very specific action plan and objectives that it knocked off sometimes one-by-one, state-by-state (Sunday sales, increased availability, advertising on tube for example). Beer biz ain’t anywhere close to that yet, either in speaking with one voice or having specific actionable objectives.  Still, one gets sense that beer biz finally facing problem. Solutions will take longer.

Constellation still by far leading growth in US beer, up 3.68 mil cases, 12% in a down market in IRI multi-outlet + convenience yr-to-date thru Apr 22. But composition of that growth is changing.  Modelo Especial up 1.97 mil cases, 16.7%. Got 53.5% of Constellation’s growth.  Corona Familiar up 882K cases, 128% and Corona Premier (almost all incremental) up 456K cases.  Those two Corona line extensions another 36.3 share of Constellation’s growth.  So that means several other brands slowing down, or even down.

Corona Extra up 200K cases, 1.5% yr-to-date in IRI MULC.  And it’s down in big mkts like SoCal. Corona Light down 160K cases, 7.3% nationally (down 10% for 4 weeks).  Pacifico slowed to single digit growth as well; up 71K cases, 8% yr-to-date.  Modelo Negra still up double digits, 61K cases, 11%, but Modelo Especial Chelada up 33K cases, 4.5%.  So while Constellation still picture of health overall, it’s no longer firing on all cylinders.  But does that matter as long as it achieves its growth objectives?  

Many Elements to Boston’s Double-Digit Growth; Mike’s Led By White Claw For a co that was down last 2 yrs, Boston Beer suddenly has a lot of things going right. Up 791,000 cases, 13.7% in IRI MULC yr-to-date thru Apr 22.  Twisted Tea Original up 238K cases, 18.5% and Twisted Tea Half & Half up another 97K cases, 22%.  Those 2 brands alone over 40% of Boston’s total growth.  Then too, Angry Orchard Rosé added 126K cases and Truly Variety Pack up 123K cases, just in supers (they are each top 100 brands in supers, but not in MULC).  So those 2 brands another 1/3 of total Boston growth in MULC, based on their supermkt trends alone.

Meanwhile, Boston’s beer brands include many puts and takes, with a lot of brands still down big.  But importantly Sam ’76 is a top 30 craft brand, up 160K cases and Sam Seasonals up 154K cases, 47%.  As for Mike’s, it’s again scoring solid double-digit gain.  Up 713K cases, 17%.  More than half of that gain comes from White Claw.  White Claw variety pack alone is up 319K cases, a top 50 brand in supers.  

Bud Light Orange Picks Up  Bud Light Orange sold 121K cases last 4 weeks thru Apr 22 in IRI multi-outlet + convenience and 127K cases YTD.  Good enuf for 0.14 share of $$ in latest period. It’s selling, said one large AB distrib last week, echoing comments of AB CEO Michel Doukeris at Bev Forum a couple of weeks back.  Still not moving needle tho as it got 0.2 share of AB biz even in latest 4 weeks when Bud Light down a whoppin’ 8.3%.   Michelob Ultra Pure Gold sold 141K cases and Natty Rush also sold 108K cases, all incremental YTD. 

Other than solid 6.4% gain in Jan, import shipments sluggish since Nov.  March import shipments up 80K bbls, 2.6%, reports Beer Inst Economist Michael Uhrich, based on data from Commerce Dept.  And Q1 trend the same: +207K bbls, +2.6%.  Mexican shipments strong but not spectacular: +355K bbls, 6.5% in Q1.  Shipments from Belgium and Ireland up +30% and +23% respectively.  Jamaican biz still flyin’, +82%.  But Dutch shipments down 14%, and German, UK and Dominican Republic shipments each cut in half or more.  Biz from Canada and Italy each up low-singles, tiny volume changes.  With modest import gain in Q1, looks like total US biz down about 1.4 mil bbls, nearly 3%, with 12-mo running total a weak -1.4%.   Details in this week’s beer marketer’s INSIGHTS.  Meanwhile, exports up 100K bbls, 7.5% in Q1.  And tho overall cider biz back in the black, import cider flat Jan-Mar.     

This is groundbreaking new arrangement between 2 aggressive, ambitious and acquisitive companies. Columbia Dist will become Constellation’s wine and spirits distrib throughout OR and WA starting Jun 1.  That amounts to about 2 mil cases of wine and spirits, INSIGHTS hears, likely well over $100 mil in revs.  Columbia already sells about 6 mil cases of Constellation beer brands (out of 60 mil cases of total beer annualized that it sells in all).  Now it’s adding Constellation’s wine and spirits too.  And recall, it already bought 2 beer distribs earlier this yr, Marine View and General, totaling about 9 mil cases (Marine View deal closed last week).  And it sells 18 mil cases of non-alc bevs as well.

But now this is yet another major move, as Columbia, one of largest beer distribs, enters wine and spirits biz in a big way.  It also significantly expands relationship between Constellation and one of its largest Gold Network distribs.  And brings Constellation’s Total Bev Alcohol approach together at distribution level in a dynamic new way.  In fact, suggests possible shift in meaning of Gold Network.  Will Constellation decide to move its wine and spirits portfolio to beer distribs in other markets too?  Too soon to know answer.  Absent franchise protection, this deal certainly raises that possibility.  Finally, this deal also shows that with beer category weak, some of stronger beer distribs are increasingly looking beyond beer for growth opportunities.  

For yrs, Columbia has had shared services agreement with wine and spirits distrib Young’s Mkt, where it warheouses, delivers and merchandises Young’s products.  That deal reportedly up for renewal, and we hear Young’s and Columbia working towards revised agreement .  Meanwhile, Young’s Mkt also just lost large wine supplier Chateau St Michelle.  And now Constellation’s wine and spirits portfolio will move to Columbia.  Tho Young’s still has other strong brands like Brown Forman, Tito’s, Sazerac, its mkt position weakened.   

“Constant Consumer Shifts Force Us  To…Evolve” Columbia will “be directly entering the Wine & Spirits category through an expanded partnership with Constellation Brands,” wrote Columbia ceo Chris Steffanci in memo to employees announcing move.  “We will now be selling and distributing its entire wine and spirits portfolio in Washington and Oregon…helping to bring to market a Total Beverage Alcohol approach.”  In a “retail environment” that “becomes more complex by the minute,” these “constant consumer shifts force us to evaluate and evolve our portfolio to meet more drinking occasions and the needs of broader consumer trends,” added Chris, echoing comments of Constellation ceo Rob Sands.  Chris also noted Columbia’s previous “big aggressive moves” like “adjusting organizational structure and strategic priorities to stay ahead.” Now this is another “game changing initiative.”  These are “monumental times at Columbia Distributing through our recent acquisitions and now the portfolio expansion that will define us as a Total Beverage Alcohol distributor.”   

If demographics are destiny in the great, ongoing beer vs spirits battle for “occasions,” then beer’s headwinds seem to be pickin’ up force.  They certainly did over last 5 yrs.  Look at demographic data from annual Mediamark surveys of US adults.  Data in table compares percentage of each demographic group that drank beer and spirits in 2012 and 2017, plus “indexes” that compare those percentages to the average.  They sound some alarming notes.  We also included some volume and per capita (per drinker) figures.

Lotsa stories in these numbers, most of ‘em not so hot for beer. But we’ll tease out some bullet points that suggest wounds suffered by beer vis a vis spirits during this period.

• Beer gained 2.3 mil drinkers 2012-2017, but percentage of adults who consumed beer dropped almost 2 points.  Had same % of 21+ adults consumed in 2017 as 2012, beer would have picked up over 6 mil drinkers.  In contrast, % of adults who drink sprits rose 2 points.  So spirits gained 11 mil drinkers in 5 yrs, 9 mil more than beer picked up.  And while beer had 3 mil more drinkers in 2012 than spirits, in 2017, spirits had 5.6 mil more drinkers than beer.

• Beer did nothing to improve penetration among women, as % of women who drank beer actually shrunk by 1 point.  Critically, there remains exact same 52-point difference in the index separating male and female drinkers.  Male-female split in spirits now: a mere 4 points.  (Not shown here, but women index higher for wine than men do.) As result, nearly 15 mil more women drink spirits than beer.
  

• Among 21-24 yr-olds, beer picked up just 170K drinkers while spirits gained 750K.  That’s another sign that dropoff in teen drinking may already be affecting legal-age drinker pool as well, especially for beer.  
  

• With mini-population explosion, lots more millennials drinking both bevs in 2017 vs 2012.  But % of that group that drinks beer dipped 3 pts, vs a 2.5-pt gain for spirits.  As result, while beer gained 9.6 mil millennial drinkers, spirits picked up over 14 mil drinkers in same age group. Meanwhile, slightly older Gen Xers actually soured on beer.  Beer lost 3 mil drinkers in that group while spirits gained 1 mil. 
  

No surprise then on bottom lines.  Less beer sold in 2017 than 2012, while spirits volume rose 13%.  Per capita beer consumption per drinker, fell by 2 gallons, 3%, while per capita spirits consumption per drinker held even.  As result, beer lost 3 full share of total absolute alcohol consumption, giving up 2.6 of that to spirits.

After the much-discussed and broadly applauded clarification from TTB about category management practices back in early 2016, no (public) follow-up yet.  But TTB may have taken “a bit of a detour,” atty Marc Sorini suggested to craft brewers at CBC, “going after what I may characterize as more low-hanging fruit.” Marc spoke before TTB announced Warsteiner offer in compromise (see above), but his comments echoed those made a week earlier (and before that too) by ex-TTB chief counsel Rob Tobiassen about TTB going after “low-hanging fruit” in recent investigations and that the $750K TTB got from MA distrib Craft Brewers Guild (CBG) over pay-to-play allegations was TTB’s “starting point” going forward.  Indeed, Warsteiner just paid $150K more.

Did MA ABCC “Surrender”?  Meanwhile, Marc also noted TTB workin’ thru $5 mil allocated for trade practice enforcement and has 50 cases in process.  But “hope they don’t think they’re going to litigate all of those,” he advised.  Litigation costs pile up fast.  (Keep in mind that CBG still litigating fine it paid to MA ABCC.)  Marc also mentioned comments by TTB’s Bob Angelo that he intends to seek permit suspensions in future cases. It’s “going to be very interesting to watch” how those chits fall, including in already announced investigations in Chi, Miami and Napa/Sonoma.  Back in MA, recent decision to drop case against AB branch looks to Marc like a “white flag” from ABCC. “Damn expensive” and “damn contentious” investigation may not have been best “resource allocation decision,” and he assumes agency holding its hands up, saying “we’re done enforcing this s***, we surrender.” Will other states draw similar lesson or take cues from stepped-up TTB actions?

Taproom Talk Takes Precedence Over Franchise Reform  Manufacturer retail privileges have become “the point of the spear at the state level for public policy fights,” Marc noted.  “Opposition has definitely hardened,” he said, citing contentious battle in MD, recent ruling in TX upholding state law that bars brewers from selling beer from their taprooms for off-site consumption.  Ruling highlights that bringing cases based on equal protection claims likely not best way forward for suppliers, since it’s so tuff to push courts beyond “rational scrutiny.”  Meaning: “the court says ‘if I can come up with some way that has even minimal rationality’” for challenged statute, it’ll “uphold the law.”  Court did seem to find TX legislature’s decisions to bar brewers from off-premise sales is “kind of a stupid distinction. But this is the legislature’s stupid distinction and it’s up to them,” Marc paraphrased.  While retail rights rose to foreground, franchise reform took a back seat. After calling for more small brewer exemptions to state franchise laws 2 decades ago, “Marc Sorini’s success in this is pretty dismal,” he admitted.  Meanwhile, VT looks poised to pass bill that provides carve out to brewers under 50K bbls to franchise law, a compromise apparently neither small brewers nor distribs excited about.

TTB touted “largest single offer in compromise for trade practice violations accepted by TTB to date” in announcement yesterday.  Got $900K offer in compromise from Warsteiner Importers Agency over allegations it engaged in trifecta of violations: Tied House, Commercial Bribery and Exclusive Outlet. Not a lotta detail, but Warsteiner’s alleged violations actions “placed, or had the potential to place, the retailer’s independence at risk.”  Alleged violations occurred between Jan 2015 and Apr 2018 at Warsteiner offices in West Chester, OH “and at other locations throughout the United States.”  Recall, TTB has 50 open investigations.  Gotta figure if it can score $900K from small importer, lots more “low-hanging fruit” (see below) ripe to be plucked out there.