Lotsa low prices in Chi retailer Binny’s ad for Cinco de Mayo (dubbed “Cinco de Binny’s”) but Tecate takes cake, offering a case of beer for $11.99, plus a bottle o’ Binny’s Peanuts for a penny. Also can get a penny deal on Dos Equis: a 12-pack of Dos for a low $10.99, plus peanuts for a penny. Heineken one of many leading hi-end brands offered for $11.99 per 12-pack (tho no penny deal).  Others include Modelo Especial, Blue Moon, Guinness and Goose IPA.  That same $11.99 will get you a 30-pack of Busch Light, Pabst Blue Ribbon or Miller High Life.  Looking at these prices and following yesterday’s MC results plus weak April scans, you get feeling it could be a “hot” summer for beer prices. 

San Diego long touted as one of meccas of craft beer movement, with about 200 craft brewers in metro area. Segment got well over 30 share of $$. San Diego’s top 3 local players, Stone, Ballast Point and Green Flash, all became nationally renowned.  And all 3 quickly expanded nationally too.  Oddly, all 3 decided to build breweries in Virginia, back when it seemed craft beer growth could go on forever (2-3 yrs ago).  That was then, this is now.  Difficult to find better symbol of segment’s transformation than what’s happened to 2 of top 3 San Diego craft brewers in last 2 yrs.  Constellation paid $1 bil for Ballast Point when its growth thru the roof.  But Ballast Point volume dropped 15% last yr nationwide, more in San Diego.  And down double digits in scan so far this yr.  Constellation already took $87 mil write-down on its purchase.  Meanwhile, Green Flash made a series of business blunders. Built brewery in VA with lotsa debt, betting on come, when it wasn’t even 100K bbls. Went national, reformulated lead brand and focused even more on higher ABV hoppy beers. Even made head-scratching deal to open brewery in Nebraska, not a craft mecca or a population center.  Then, saddled with all that debt, sales went into reverse.  Sad tale reached unhappy denouement Mar 30 when its lead bank Comerica foreclosed on Green Flash.  Sold to WC IPA LLC, led by Richard Lobo, a Green Flash board member. Lobo founded local private equity firm. Green Flash’s VA brewery will be sold separately by Comerica.  Green Flash also pulled back from 50 states to just 8, walking away from chunk of volume. Sales still down in core CA. Can Green Flash re-establish itself as local/regional force?

Even largest San Diego craft Stone took some lumps, like layoffs, tho at least it’s growin’ nationally.  Below top 3, a crazy quilt of great growth, big declines and everything in between. Taproom phenom still expanding, many growing very rapidly. MC estimated taprooms at 30 share of on-premise in San Diego, highest in US. Taprooms fueled further craft growth, but also made for incredibly challenging competitive landscape. Biggest players under attack but also benefit from their own taprooms. Local distribs can’t participate in sizable chunk of biz.  Some of same characteristics that make a mkt like San Diego a craft mecca (principally, craft abundance) also make it a competitive minefield.

Molson Coors stock lost 15% of its value yesterday, hitting a 4-yr low.  Initially bounced off bottom today, but now down again at presstime. Molson Coors stock mkt capitalization at just $13.1 bil, down almost $11 bil from peak over $24 bil.  Think about it.  Stock down 45% from $109.80 on Sep 1, 2016. That’s a month before Molson Coors closed on purchase of 58% of MillerCoors it didn’t own for $12 bil.  Since peak, mkt cap declined by almost entire purchase price.  Yikes! 

Tuff Analyst Reports Molson Coors stock price declined so much in that period, even while many Wall St analysts had “buy” recommendations with price targets more than 2x as high as where stock currently at.  But reading analyst reports this morn, most aren’t optimistic about its prospects now.  “Sobering” Q1 and “deteriorating fundamental outlook,” said Morgan Stanley; “We simply don’t see the fundamentals of the business turning…. The structural declines we see are likely to persist into the future,” Consumer Edge; “Top line challenges likely to limit outperformance…. We see little improvement on the horizon,” Goldman Sachs; “TAP Misses Across the Board,” Citi; “Very disappointing Q1… Guidance appears lofty for now,” JP Morgan.  Only Stifel retains “buy” rating in this group, but even Stifel begins “we reduce our forecasts.”

MillerCoors facing familiar and new challenges in Spring 2018: volume continues down 3% in Nielsen all-outlet data thru 3/24, and now it’s got pressing production/logistics issues at its Golden brewery. Those issues prevented many Western distribs from getting beer they needed, especially Blue Moon and Coors Banquet.  Couldn’t have come at much less opportune moment; sales already soft just before MC late-Mar natl sales convention. MC ceo Gavin Hattersley got kudos for bluntly acknowledging situation at convention. Called out “significant headwinds” including “challenges that we’ve brought on ourselves, like inventory levels.... We haven’t had a strong start to 2018.”  But “hang in there with us,” Gavin implored distribs. “We are working around the clock to get inventory back to the levels you need.”  Against challenging backdrop, Gavin expressed continued “confidence” in MC plan and that it could get back to growth by 2019.  While many distribs exasperated by glitches in Golden, remains to be seen how much these shortages affect overall results.

Meanwhile, MC remains under shared in high end where growth is at in beer these days, tho it is stepping up efforts there.  MillerCoors has just 8 share of $$ in high end in IRI, Constellation showed at its recent Gold Network Summit. And of top 25 growth brands in high end, MillerCoors has none of ‘em so far in 2018, consultant Bump Williams showed in his Apr newsletter. MC’s biggest competitive challenger, Constellation, sells 70% of its beer thru MillerCoors distribution network. Several of its largest distribs already generate more gross profit $$ from Constellation portfolio. While some would see this as a challenge/headwind for MC, MC paints this as oppy to partner with its distribs that already dominate growth segments. And also to drive growth/better compete vs AB with MC brands it claims are complementary.  MC will make big push on Sol, “one of the most heavily supported brand launches in many years for MillerCoors,” sez MC.  So far it has nada in segment that’s 11 share of industry volume. AB spent millions on Montejo and Estrella Jalisco but hasn’t made headway; it’s less than 0.5 share of Mexican imports.

MillerCoors biggest high-end brand, Blue Moon, especially affected by Golden brewery issues.  Many sizable distribs told INSIGHTS they were simply out of draft.  Impossible to protect all Blue Moon tap handles. What caused Golden glitches? MC finally made transition to one combined ordering system (DRIVE), but new system couldn’t communicate with Golden warehouses.  Beer sat there. “During the first few weeks of implementation, our ability to package, load and ship beer was significantly constrained,” chief supply chain officer Fernando Palacios wrote distribs Mar 23. That “resulted in inventory and out-of-stock issues for many of you.” MC expects “to resume full operations by the end of April, so that we will be positioned for a successful summer selling season.”  MC acquired craft, under Tenth and Blake umbrella, remains a bright spot. Total Tenth and Blake up 31% YTD thru Mar 24 in Nielsen all outlet. All 4 acquired craft brewers far outpacing craft segment, still have significant expansion opportunities, but they remain small.

At convention, MC pointed to 4 economy brands growing double digits: Keystone Light, Keystone Ice, Hamm’s and Steel Alloy. Overall, MC gaining share of subpremium and premium segments that are 2/3 of biz. Yet those segments are very soft, so MC declines stubbornly persist. What’s more, in economy segment, MC increasingly resorts to price, including 15-packs of Keystone Light, and now Mil’s Best, low-priced Hamm’s and Two Hats intro (off to very modest start; sold just 11,000 cases YTD thru Mar 25 in IRI multioutlet + convenience). In all-important Chi mkt, MC down 8% for 12 weeks Mar 25 in IRI foodstores. So MC got more aggressive on price, including $9.99 30-packs of Miller High Life at leading chain Jewel Osco. Adds up to picture of increased pressure on MC volume. If current trends continue, MC will have lost over 20% of its volume in its first decade, tho it has built profit tremendously. Distribs view MC as weakened competitively, but it’s stronger financially. How MC can strengthen mkt position remains perplexing challenge for MC.

Yet more evidence in recent days that beer biz not off to great start in 2018.  Domestic brewers’ taxpaid shipments dipped another 400K bbls, 3.4% in Feb, estimates Beer Inst economist Michael Uhrich, following 5.6% decline in Jan.  Then too, Feb imports came in down slightly, -41,000 bbls, -1.5%, after 6% Jan gain.  So, for 2 mos, US shipments down approx 1 mil bbls, 3.3%.  That’s especially soft given fairly easy comp of -3% same period last yr.  Michael cited weather, inventory issues; MC’s shipping challenges from Golden likely a factor too.  Meanwhile, retail scans show beer volume down slightly in Q1.  

Yet, spirits trend pretty steady: volume +2.4% for 12 wks thru Mar 24 in Nielsen. Control states report 1.9% volume gain Jan-Feb, +2.7% for 12 mos.  What about wine?  Scan data shows +1.6% volume trend thru Mar 24, $$ +4%.  “Slowing” wine trend cited by several observers lately, possibly to +1% or less in 2017.  Constellation execs acknowledged 2017 slowdown.  But trading up in wine may be moving faster than in beer.  At admittedly “arbitrary” line of over $11/bottle, biz growing 13%, said cfo David Klein recently, while biz below $11/bottle up just 1%.  Despite “pullback” in 2017, “we still believe that the wine market is a 4% to 5% grower over time.”

To everything, churn, churn, churn.  While craft got 5% growth overall, turns out 916K of craft’s 1.2 mil bbls of growth last yr came from brewers that only opened in last few yrs (2014-2017), Brewers Assn economist Bart Watson revealed in new look at data during annual review at Craft Brewers Conference.  All craft brewers that opened in 2013 or before collectively were only up 285,000 bbls, 1.3%.  Of a couple hundred regional brewers (over 15,000 bbls), about 40% declined.  Meanwhile, almost 1000 new brewers (997) opened last yr alone.  And 165 brewers closed, “highest number of closings in the modern craft era,” said Bart.  Expect at least that many going forward, Bart added. Meanwhile, BA Director Paul Gatza cautioned newbies currently getting that great growth that “you may not be that shiny new object in a few years.”  At same time, taprooms are “awesome,” added Paul. “That is where the excitement in the beer industry is right now.”  And taprooms are about half the total of breweries, Paul said.  But at 2.7 mil bbls, they were a little more than 10% of craft volume.  Many, many more new breweries coming on.  Craft “settled into a longer-term growth pattern” of 5% last yr, according to Bart.  At same time, capacity utilization kept going down.  It dropped again last year, to 56% or 57%.  That’s a lot of excess capacity and would take 12 yrs of 5% growth to fill, noted Bart.  But what if growth slows further?  

 Despite tuff Q1 numbers for MillerCoors (shipments -6.7%, underlying EBITDA -12.2%) and fact that US beer in a funk, Molson Coors CEO Mark Hunter advised against over-reaction on conference call this morn.  Q1 just 14% of annual profits and Q1 2018 a “small, volatile quarter” marked by a few “big events,” as noted in this morning’s Express.  Then too, US remains a very large and very profitable market, with margin pool expanding. It’s still a “great place to compete,” Mark pointed out, so gotta “be careful not to get overly anxious,” even about overall category softness, or “unduly concerned by short-term trends in industry demand.”  Turning that around takes time, he reminded, as he’s seen in other countries.

In Q1, total US STRs down about 2.3%, Mark said, while MC STRs -3.8%.  So, MC mkt share performance in line with recent history, Mark and MC prexy/CEO Gavin Hattersley said several times on call.  Weather a big factor in lousy Q1 for beer, with especially “awful” Feb.  Gavin added some color to outsized shipments hit from issues at Golden brewery.  Impact greatest in Central states, Pac NW and to “limited degree” in Great Lakes, not so much elsewhere.  While MC’s “made progress” in fixing issues, “not fully caught up yet.”  Recall, Molson Coors report said it expects to reverse Q1 under-shipment of 383K bbls in back half of yr, not Q2.  Golden one of world’s “largest, most complex breweries,” reminded Gavin, and he expects rollout of new ordering system at other plants to be “smoother.”      

Pressed on share losses in above premium (MC continues to gain share in premium and below premium, that’s part of “consistency”), Mark and Gavin returned several times to high-end brand plans that mostly launched in Q2 and MC very excited about: Sol (“early results very promising”), Arnold Palmer Spiked Tea, Henry’s Hard Seltzer in slimline cans, new Blue Moon brands/pkgs, Crispin Rosé and Leinie Shandy.  Redd’s performance remains “unsatisfactory,” Mark acknowledged, but still a big, profitable brand for MC.  Then too, MC’s acquired craft brewers “far outpacing” craft segment, new Coors Light creative hitting in Q2, Zima’s returning for longer period, etc. 

MC Got 2%+ Pricing in Q1; Maintaining Guidance  Tho rev per bbl up 1.4% in Q1, there was negative 90 basis pts of mix (most of that packaging mix, not brand mix), so 2.3% in net pricing, said Gavin. Fed excise tax had modest impact on net sales/bbl, about 50 basis pts.  So, MC’s pricing “pretty consistent” going on 4 qtrs, mix “should improve” with efforts in above premium and Gavin’s seeing “nothing terribly different” in pricing environment vs prior years. 

Net-net: even tho not much to celebrate in Q1, especially in US, and TAP stock price down 13% at presstime, Molson Coors guidance for the year unchanged, Mark stressed several times.  That includes: underlying free cash flow of $1.5 bil, plus or minus 10%, continued cost savings (approx $210 mil this yr) and low single-digit cost of goods/bbl increase across it key mkts.  

Five yrs ago, US Justice Dept cleared final settlement allowing AB InBev to buy Modelo, setting up Constellation to be sole producer and importer of Modelo portfolio in US.  Crown’s then-ceo Bill Hackett said Constellation looked at beer biz as an “engine of opportunity, engine of growth.”  Well, turns out that little engine, which started with just a 1% gain in Q1 of 2013, surely could.  Constellation announced fiscal 2018 results (thru Feb), with beer shipments volume up 10.2% to 19.45 mil bbls, depletions +11%, beer net sales +10.1% to $4.66 bil and beer operating income +19.8%, yes 19.8%, to $1.84 bil. 

What do 5-year numbers look like?  Pretty damned good.  Constellation Brands Beer Div boosted shipments by 7.4-7.5 mil bbls, over 60%, while total US beer volume declined about 1.7 mil bbls, 1% same period.  So, Constellation’s mkt share rose from 5.6 to 8.9.  Net sales expanded by over $2 bil, 80% since fiscal ’13.  Operating income more than quadrupled: jumped $1.35 bil from $448 mil to $1.8 bil. (It was sharing profits with Modelo in fiscal ’13).  Constellation fattened beer operating margin from 17.3% to 39.5%.  Back in Apr 2013, Bill cited key question from distribs: could Constellation run a brewery?  It’s now expanding 2 and plans a 3d.  Capacity is 26.8 mil bbls.  When current projects completed by 2023, it will have 37.5 mil bbls of capacity.  Recall Constellation’s wildly ambitious “2-2-1-1” volume goal of 600 mil cases, 43.5 mil bbls, via organic growth, innovation and deals. 

Constellation’s remarkable growth record, tops by far in beer and among “top tier” in all of CPG, as ceo Rob Sands reminds, isn’t its only unique aspect.  Constellation did not invent Total Beverage Alcohol approach, but it’s doin’ it better than anyone else, as between-bev lines continue to blur.  (Latest: AB’s joint “beer-and-a-shot” promo with Jim Beam.)  Constellation’s wine and spirits biz hasn’t shown same growth as beer, but revs grew 3% organically last yr to $2.9 bil, and operating income held even at $801 mil. It continues to bolt on new high-end spirits and wine brands.  Then too, Constellation ran ahead of its competitors by making big bet on Canada’s largest cannabis company.  Adult “relaxation and social occasions” not limited to alc bevs any more, Constellation knows.

How else is Constellation unique?  It does not see much “interaction” between beer category health and its own, sez Rob.  If beer slows further, likely result would be “larger market share gains,” he told analysts recently.  (That’s exactly what happened in final fiscal qtr.)  And tho Bill Hackett always careful to “mind the gaps” between Corona prices and other segments, Rob insisted “anecdotal” reports of lower craft pricing “has zero interaction with us.  It does not affect us whatsoever.  We don’t see anything that’s going on in the industry or the category that will cause us to do anything differently” than typical 1-2% price increases.  AB InBev and Molson Coors execs criticized looming aluminum and steel tariffs.  But, due to hedging and “source of supply,” tariffs will “have a de minimis effect on Constellation,” cfo David Klein said on same call.  Finally, while AB InBev and MC struggle mightily to return to growth after a decade of losing volume, Constellation investing heavily to continue growth, with a target of net sales and operating income being up in the 9-11% range in fiscal ’19, and 2-4% gains from wine and spirits. 

Will Next 5 Yrs Be As Rosy for Constellation?  Past ain’t necessarily prologue.  But Nik Modi of RBC Capital Markets reminded that “STZ has ended up beating the high end of its initial guidance for the last 4 consecutive years.”  Meanwhile, Stifel’s Mark Swartzberg downgraded stock to hold based on valuation, tho he still thinks growth will come. (Stock value 11x as high as before deal). Others suggest numerous potential pitfalls ahead for Constellation, including taking on too much. Whatever happens, gotta tip cap to 5-yr run.  

 Regarding AB InBev charges that Heineken infringed several patents involving draft dispensing systems (see yesterday’s Express) Heineken responds:  “HEINEKEN is aware of a lawsuit that ABI filed against us in the court of New York claiming that certain elements of PET kegs for Heineken’s countertop Blade and Brewlock tap system for the on-trade are infringing on their patents for Bag-in-Bottle (BiB) products. HEINEKEN does not agree with ABI’s claims and we are confident in the merits of our case. As this is now a matter of the court, we will not divulge any further detail at this time.”

As expected, soft US biz and logistical woes from new ordering system in Golden hit MillerCoors’ top and bottom lines in Q1.  Shipments down 815K bbls, 6.7% “primarily due to weak US industry conditions and quarterly timing and wholesale inventories, including STW delays in parts of the country related to the launch of our new ordering system at the Golden brewery which took longer to ramp up than anticipated.”  MC under- shipped by about 383K bbls, suggesting underlying trend closer to -3.5%.  Indeed, MC reported “US brand volume,” which seems to be new lingo for STRs, -3.8%, “driven by lower volume in the Premium Light segment.”  That tracks pretty close to MC scan trends thru 4/21, but a point steeper than Q1 scans indicated. 

Shipments shortfall translates to approx $30 mil in gross profit, Molson Coors pointed out in release, which it expects to reverse “primarily in the second half of the year.”  Then too, underlying EBITDA in US took a 12.2% hit, with cost of goods sold rising with higher aluminum costs already.  Mktg, gen and admin costs cut tho.  Net sales per bbl rose 1.4% with higher net pricing, but negative sales mix.  All in, Molson Coors volume and net sales down 3-5%, underlying EBITDA -18.5% in Q1 thanks to triple whammy of US logistics woes, cycling of tax provision in Europe (“now behind us”) and “overall industry softness” in US.  More after conference call.