In 2007, AB InBev was “first to apply for patents for innovative keg-dispensing technology that better preserves a beer’s freshness.  Heineken has been violating these patents.”  So sez AB InBev as it sued Heineken yesterday in US and Netherlands over what it calls “bag in container” technology that provides “superior quality beer,” “extended shelf-life,” “fully recyclable” packages that are “lighter than traditional stainless kegs and therefore easier to handle in the retail trade.”  Then too, beer gets “fully dispensed” from these containers, so no waste.  And there’s “no deposit, making it more economical for the retailers.”  Key to technology is that with “bag in container” there are two “bottles” and the gas used to force beer out of container never touches the beer.  So it can’t affect taste. 

 ABI has 4 patents on the technology, first one issued in Oct 2015, most recent issued this month.  These containers not yet sold to consumers, but they’re used on-premise and on cruise ships, we understand. Turns out Heineken intro’d similar devices in US with what it calls its “Brewlock System.”  According to lawsuit, “Heineken’s importation of these products is in line with Heineken’s innovation plan, as described in Heineken’s own presentation: ‘Copy, and call it innovation.’  Accordingly, Heineken has copied ABI’s innovative design for the bottle-in-bottle device and attempts to call it their ‘innovation.’  It is not.  This technology is covered by ABI’s Asserted Patents.” ABI seeks judgments that its patents are “valid and enforceable,” that Heineken infringed them, an injunction to make ’em stop, plus treble damages, atty fees and costs.

 “We are very happy with our footprint today, so the company is really focusing always on growth, and the most important level for growth is and always is going to be organic growth.”  So said AB CEO Michel Doukeris at Bev Mktg Forum last week, echoing very similar comments made by ABI CEO Carlos Brito to Bloomberg in March that 99% of ABI’s execs’ time is spent on building top line organic biz.  Both Brito and Michel acknowledged tho that ABI also has folks always looking around for oppys, but again, as Michel said, “given the size of the last acquisition, and given everything we need to do on the footprint we have today, our focus is 100% on organic.”

Latest move in US comes with today’s official announcement of Budweiser Freedom Reserve Red Lager (see Dec 19, 2017 Express), its second Reserve brand and ongoing linkage of Bud brand with US patriotism, targeted to be available May thru Sep 30.  In interesting tweak, Bud “also partnering with alcohol delivery service Drizly” with special Budweiser $5 promo for new Drizly customers, where legal, combining iconic brand, patriotism and latest in alc bev delivery.     

You can’t keep a good man in one place.  Dolf van den Brink, who headed Heineken USA from Oct ’09 thru thru Aug ’15 before moving south of the border to be managing director of Heineken’s largest operating company in Mexico, movin’ up again.  In 2017, Heineken up mid-single digits in Mexico, following high-single digit growth in 2016.  Brand Heineken up double-digits there both years.  Now, Dolf gets prexy gig for Heineken in Asia Pacific, Heineken’s smallest but fastest-growing (volume) region. “Dolf has an outstanding track-record building high performing teams in both developed and developing markets,” said CEO Jean-Francois van Boxmeer.  “His strong leadership and people skills, coupled with his strategic, commercial and marketing insights, will be very valuable assets in driving growth in the Asia Pacific region.  I welcome Dolf to the Executive Team and look forward to working directly with him.” 

This will be Dolf’s 4^th continent for Heineken since joining in 1998.  He started in Netherlands, then moved to Democratic Republic of Congo before heading to US.  Coincidentally, The Economist just reported that Heineken recently declared a $353 mil-impairment loss in Congo, an increasingly challenging and often dangerous place to do biz.  Still, Heineken claims to be largest private employer there and “on the Congo River, barges operated by [Heineken’s] Bralima [brewery] are among the only vessels left operating a regular schedule.”

Another very busy mo in legal world, with mixed results for members in different tiers. Then too, buzz building about next alc bev case that will go to US Sup Ct.  Distrib advocates got some negative news and language from US Appeals Ct in 6th Circuit and Dept of Justice.  US Appeals Ct upheld lower court decision to toss Tenn’s residency requirement for retail licenses.  That may seem tangential, but Court explicitly rejected notion that 21^st Amendment “automatically protects laws regarding” distribs and retailers.  Decision opens door for Total Wine to open doors there.  Similarly, US Dist Ct in Tex tossed state law that bars public co’s from obtaining retail liquor licenses.  Opens door for Wal-Mart to open liquor stores in Tex; already sells beer and wine there.  So, score two for mega-retailers seeking change.  Then too, Dept of Justice rejected NBWA, BA and Yuengling attempts to add restrictions vis a vis AB-distrib relationships to proposed final judgment over ABI-SAB deal.  Still up to US Dist Ct judge to decide whether to hold further hearings or accept final settlement agreed to by DOJ and AB InBev back in Jul 2016.

3-Tier System Sometimes “Invalid” Sez Circuit Ct  Distrib advocates very fond of quoting Sup Ct language that 3-tier system “unquestionably legitimate.”  They often use quote to defend state laws that buttress 3-tier system.  They also embrace interpretation that Sup Ct’s Granholm decision, which bars state discrimination between in-state and out-of-state entities, limited to products/producers, but allows discrimination in other tiers.  But 6^th Circuit in TN case not only insisted “Supreme Court did not give any indication that the 21^st Amendment automatically protects laws regarding wholesalers and retailers,” but added that it “also stated that there are times when the three-tier system is invalid.” 

That’s just the kind of language distrib advocates don’t want to see as next alc bev case before the US Sup Ct begins to emerge.  What’s that case?  Consensus among attys at NABCA Legal Symposium seems to be that “winning ticket” back to Sup Ct, as atty Richard Blau put it, likely to involve state restrictions on retailers via residency requirements or prohibitions against retailers shipping alc bevs across state lines.  Coupla key court rulings pending in latter cases.  And attys for retailers who seek to ship across state lines have made it very clear their final desired destination is Sup Ct.  As Richard noted, the “2d generation” of alc bev cases in wake of Granholm tended to rule that state restrictions on retailers “protected by [the states’] police power and the 21^st Amendment.”  But a third generation showing some “divergence” and Appeals Ct splits have opened where Commerce Clause ”has strong pull” in some and others “reaffirming” the 21^st Amendment.    

A Coupla Recent Distrib Wins Too  Elsewhere, Rex Dist won a round in Mississippi.  It   persuaded state appeals court to revisit whether AB violated state franchise law when it matched and redirected Rex’s 2017 deal to sell to Adams to Mitchell Bev instead.  Lower court said no violation and dropped Rex’s charges vs AB and Mitchell for tortious interference and more.  But appeals ct will take another look.  Meanwhile, US Dist Ct upheld Texas law barring small brewers from selling beer for off-premise consumption from their taprooms, an outcome clearly favored by distribs there.

 Biz ain’t gettin’ any better.  Quite the contrary. Nielsen all-outlet scans thru Apr 21 show volume down 3.4% for 4 wks, with premium light, premium regular and near premium categories each takin’ 7% hits.  Craft trended down 1.7% for 4 wks, crappy news as 14K folks attending Craft Brewers Conference in Nashville this week.  Even import growth slowed to less than 2% for this period.  And FMBs went negative.  Cider and superpremium segments each up 6-7%.

Yr-to-date volume trend getting dangerously close to -2%; off 1.8% thru Apr 21.  Above premium segments each up YTD, but premium volume -5.6%, below premium -2.3%.  AB and MC each down 3.5-3.6% YTD; Pabst, NAB and HUSA each down 5%-6%.  Constellation, Boston and Mike’s each slowed in most recent 4 wks, but up 9.3%, 12.5% and 17.1% respectively YTD.  Each of Bud Light, Coors Light and Bud down 6-6.5% YTD, Lite -2.6%.  Michelob Ultra and Modelo Especial cooled a bit but still up mid-teens thru Apr 21.  Every top below premium in the red except Key Light.  Corona Extra down near 5% for 4 wks, -0.8% YTD; Corona Light down double-digits in most recent period, -7% YTD.  But Corona Familiar and Premier grabbed 0.7 share between ’em for 4 wks.   They picked up 535K cases for 4 wks while Corona Extra and Corona Light shed 273K cases.

Panel of attys with deep institutional knowledge and past practice plumbed current trends in alcohol trade practice law and litigation at NABCA (control state assn) Legal Symposium.  Two key current developments. First, stepped-up fed and state investigations/ enforcement.  Second, ongoing lawsuits between companies where plaintiffs “weaponizing” antitrust and trade practice laws, as vet alc bev atty John Hinman described it, to collect (treble) damages and atty fees vs competitors for alleged competitive harms.

Fed Tax & Trade Bureau (TTB) often talked up its stepped-up trade practice investigations in last yr.  It has at least 11 investigations now underway, including joint efforts with state regulators in CA, IL and FL.  What’s more, as of several mos ago, TTB still had not used approx $4 mil of $5 mil it received for investigations in fiscal ’17 and ’18.  Means it’s gotta step up spending or at least earmark spend by end of this coming Sep, as ex-TTB counsel Rob Tobiassen pointed out.  TTB mostly targeting “low-hanging fruit,” Rob offered: i.e. consignment sales, as it recently disclosed charges in Napa/Sonoma wine cases.  Such sales fairly easily discovered via emails/invoices, Rob pointed out.  “You only need an audit,” said John.  Expect to hear about more investigations − TTB engaged in NY, we hear − as well as more joint efforts, since states provide local knowledge and more of a hammer to go after retailers, while TTB can provide resources and add focus on natl players. 

At same time, one relatively new tweak: industry members suing each other over alleged trade practice violations.  Two current cases, if they proceed to trial and resolution, may portend many more, John predicted.  That’s because plaintiffs can win treble damages and atty fees, “a heckuva hammer.”  In WV, big wine distrib Johnson Bros and its partner Mountain Bev (big beer distrib there too), sued by smaller competitors alleging attempts to monopolize wine biz, pressure suppliers to move brands, selling below cost and more.  Defendants deny wrongdoing, natch.  Case in discovery and slated for trial this fall. In CA, a handful of retailers trying to build class action lawsuit vs Southern Glazer’s.  They allege slew of anticompetitive practices, including violations of credit terms, favoring some customers, loading up others and more.  If they can prove these allegations and “these two cases go forward to conclusion you’ll see a lot more,” John said.  (Separately, Total Wine is alleging various state laws, i.e. post-and-hold, license restrictions, put it at competitive disadvantage and continues its litigation.  It’s in 2d Circuit Ct of Appeals challenging CT’s pricing laws. State won at lower court.)  Speaking of hammers, Rob reminded that “making misleading statements to the government” (TTB), whether under oath or not, is a felony.  Sometimes, such statements get players into more trouble than underlying conduct; think of Robert Mueller’s investigation.  “True test” of TTB actions, Rob suggested, will be when industry in 2-3 yrs looks back to determine whether its “actions worked and leveled the playing field.”

Weapons Come Out As Competition Sharpens What’s driving “convergence” of stepped-up TTB activity and private suits?  Lack of enforcement in past played role, these attys agreed.  But tuff and evolving competitive environment also a factor, suggests Rob: too many SKUs “encourage” slotting fees or their equivalent; deceleration of sales (at least in beer) adds pressure; shortages of high-demand products “encourage” illegal tie-in sales; disruption by Amazon, Total and others seeking new sales routes; changing drinking patterns among drinkers lead to less brand/supplier loyalty.  This “creates winners and losers” and leads to some responses that perhaps go over legal line.  Players have options: 1) work within the law and maintain level playing field; 2) work to revise laws via legislation/administrative activity (as in other deregulation encouraged by Trump Admin); 3) attempt to “gut the existing system through litigation” via 1^st Amendment, Commerce Clause, Equal Protection other legal challenges.  Then there’s “self-help through private litigation” where players “take matters into own hands,” and seek incremental change, said Rob.

Finally, all this activity shows “why we need a regulated market,” summed up atty Jim Webster.  If mkt were clean, ”we would not get lawsuits.  Regulators should be taking care of these activities.”  Ideally, clear regulations prevent illegal activity, and would have broader impact than any given lawsuit (tho those potential costs could be “deterrent”). Rule- and law-making can be time-consuming.  Still, it’s “cheaper to have the government level field than to pay private attorneys to do it for you,” said Rob.  Jim concurred: ”it’s better to have government enforcement than private enforcement.”

 Opening session of Craft Brewers Conference in Nashville this morning, with 14,000 attendees, lauded craft brewer’s achievements passing federal excise tax reduction, and building craft movement, which champions small, entrepreneurial and independent.  Last yr’s passage of CBMTRA (Craft Beverage Modernization and Tax Reform Act) was the “largest legislative victory in our history,” said Brewers Assn prexy Bob Pease.  It was “hard fought and hard won” after 9 yrs of “continuous work,” a “quintessential grassroots effort” that defied “skeptics” and resoundingly answered questions from BA members about whether it could even be done. Answer: “Hell yes.” But “our work is not done” as relief only good for 2 yrs.

Over 3300 craft brewers have adopted BA’s independent seal, noted Bob. That’s over 50% of US craft brewers and over 70% of craft volume. This is “critical step” and “important,” because “research demonstrates tremendous beer drinker confusion” about which brands are independent.  Big brewers “blur the lines of independence and confuse the craft beer drinker.”  But said Bob: “Your brand aligns with their [craft drinkers’] values.”

Bob “hammered” theme of seal “pretty hard. I’m going to hammer it again,” said BA chair Eric Wallace. Then he did just that in fiery remarks.  He noted need to “clear the smogginess in the air, created by the lack of transparency and obfuscations” by large multinational brewers about origins of their beers.  He referred to “faux,” “crafty” “capitulated” beers that are “weapons in the arsenals of big breweries.” And he gave a laundry list of their sins, including “rampant violation” of trade practices, “denigrating and expensive” marketing campaigns, “exclusionary” practices at stadiums, and more.  Those big brewers “are out to eat our collective lunch and take your kids’ collective lunch money” too.  In contrast, craft brewers are “exemplars of the American Dream, of entrepreneurial spirit.”  Collectively, craft brewers “completely changed the course of American brewing.”  Big brewers “want to acquire our credibility and market share” and “use our former brethren” to do so. But “we will not go gently into the night.”

While CBMTRA created “wave of hiring,” including 4 sales reps at Eric’s brewery Left Hand, based on savings from tax reduction, Eric issued ominous warning, if tax relief not permanent.  Noting “incredible competition” and that “growth is getting harder to come by,” Eric warned that if tax break goes away that could “possibly” lead to “wave of brewery failures, amongst those already on the brink.”   That last was only direct acknowledgment of much more challenging reality faced by many craft brewers as they gather at their annual meeting, including slowdown in scans (see below).  Talk to just about anyone at CBC and they’ll tell you it’s getting harder out there, with further challenges still to come.  So this yr’s mtg represents a new moment for the movement, and we’ll continue to update you in Express and Craft Brew News as the meeting unfolds.

AB ad spending dropped $116 mil, 16% to $598 mil in 2017, according to Kantar Media data published by Citi analyst Wendy Nicholson, tracking 12 media, including some internet.  Meanwhile, MillerCoors also cut spending by $44 mil, 9% to $435 mil.  At same time, Constellation jumped spending $44 mil, 18% to $288 mil.  Other beer players also increased spending tho volume down.  Boston Beer spending up $2 mil to $52 mil.  Heineken USA spending up $10 mil to $171 mil.  Heineken punches above its weight. Its share of voice far higher than share of mkt.  Total alc bev spending down 5% last yr, because half of $2 bil in toto spent by top 2 brewers.  Top distillers spend much less.  But they turned up the heat.  Each top distiller’s ad spend up double digits. Diageo spending up $13 mil, 19% to $78 mil; Beam Suntory spending jumped $19 mil, 23%; Brown Forman up $5 mil, 12% to $43 mil and Pernod Ricard poured it on (small base) with spending up $5 mil, 26% to $23 mil. Hot segments got biggest jump: bourbon spend up 44%, tequila up 42% etc.  Interestingly, these cos still spent 85% of all their tracked $$ on tv, sez Kantar. Wendy notes that Kantar data is imperfect, “however we believe the data is still relevant and helpful in determining spending patterns.”

Legal recreational pot remains a hot, hot topic.  Everyone’s talkin’ about it, even as no one’s sure exactly where it’s going – tho more states adopting recreational pot seems to be consensus – or what fallout will be.  At NBWA legislative conference, recall Prof Jonathan Caulkins told distribs “there’s nothing more likely to shake up your world,” than legal pot.  For its part, NBWA included set of talking points for distribs hitting the Hill, headlined “effective state-based regulation of alcohol should provide guidance in the marijuana policy debate.”  NBWA ain’t takin’ sides in that debate but suggests same “regulatory principles that create orderly markets” for alc bevs also apply to pot: i.e. separation of producers and retailers, label approval, limitations on access, and, perhaps oddly, “price regulation,” without being specific.  NBWA also advises that more research needed on health impacts, levels of impairment, appropriate tax policy and more.

CBA’s Andy Sees “Disruption”; Deschutes’ Michael Sees Impact on Sales Elsewhere, “pot is “potentially one of the most disruptive factors” to beer biz, Craft Brew Alliance CEO Andy Thomas told Investor’s Business Daily, echoing Caulkins.  “You have to look at it as an opportunity,” Andy added, “otherwise I think we’re kind of putting our head in the sand.” CBA “has held focus groups and conversations with people in the marijuana industry,” IBD reported and would “consider making or selling cannabis-infused beverages and other products if federal prohibition were lifted.”  (Constellation sez the same.)  Just as competition fierce and challenging in beer, competing with pot as edible, an ingredient in something else and/or as inhaled product are “very different animals” and “until we really know a lot of that it will be challenging for us to figure out what to do,” said Andy.  Andy’s Northwest neighbor/competitor, Deschutes CEO Michael LaLonde told Bend Bulletin: “I believe cannabis has affected sales.  It’s so potent today.  Someone might go and have a beer and do some edibles, and the combination of those two things means they don’t consume as much alcohol.”  Craft barely up in IRI scans in Oreg last yr, just 0.3%.  But Oreg Liquor Comm reports in-state craft brewers up healthy 19K bbls, 3% last yr, collectively shipping 644K bbls, over 20 share.  And Oreg one of only half-dozen states where total volume up last yr (+1.4%), according to Beer Inst.  Deschutes took a 15K-bbl, 17% hit in home state tho, where it still does about 21% of its total biz. 

Nick Sees Oppy; Growing Number of Ex-Beer Execs in Cannabis  Meanwhile, Midwest AB distrib exec Nick Rinella flipped to pot, joining ex-MC brewer Keith Villa, ex-ABI CMO Chris Burggraeve, ex-Molson Coors exec Torsten Kuenzlen and others who see big oppy in pot biz .  Nick named COO of Verdant Dist, CA pot distrib.  “After analyzing the size and scope of the national market for cannabis products and long discussions with my family…I knew it was a chance of lifetime.” He intends to “apply the procedures developed by my family over several generations,” to Verdant’s ops “to capture market share for our brand clients.” 

Fed Position Remains Fluid  As NY Senator Schumer intro’d bill to decriminalize marijuana, Trump Admin still gives mixed signals, warning of fed crackdown one day, signaling hands-off status quo on another.  Speaking recently at American Society of Addiction Medicine, official from fed agency SAMHSA played bad cop, criticizing burgeoning pot biz: “For too many years, a multibillion-dollar unopposed industry has presented this drug as a healthy pastime.  It is not.”  Pot has plenty of negatives, she stressed, reports Alcoholism & Drug Abuse Weekly, focusing on risks to adolescent IQ, pregnant women and more.  She also questioned research that suggests marijuana use reduces opioid overdoses: “I don’t think it was increased use of marijuana. I think there have been flaws in the research.”  Indeed, she pointed to contrary research that links pot use to “higher risk of developing opioid use disorders.”  So, a lively policy debate involving an intoxicating substance with lotsa biz oppy, very different perspectives, uneven govt regulation and contradictory research.  Imagine that. 

Constellation the growth story in US beer biz for several yrs. At its Gold Network Summit in Orlando, it laid groundwork to keep that going in multiple directions for yrs to come.  Constellation portfolio has plenty of runway just to maximize oppys for fast growing brands like Modelo Especial, Pacifico, etc. But it also has significant innovation push with major launch in Premier and several tests.  At same time, Constellation aims to increasingly leverage its total alc bev (TAB) approach with chain retailers. It is #3 in beer, #3 in wine, but by far #1 alc bev growth co at retail.  And as consumer trades up, Constellation also wants to lead big change in how chains set shelves with its Shopper First shelf set initiative, including eliminating as many as 20% of SKUs. Constellation often has talked about “doing simple better.”  But it also has 3 big initiatives that add complexity (innovation, TAB, Shopper First). Constellation already #1 in high end at 26 share and captured 56% of high end growth last yr.  As Constellation continues double- digit growth in scan data, one emerging question after GNS: Is it doing too much?  

Constellation clearly has grand ambitions. Perhaps all these moves are necessary evolutionary steps to get where Constellation wants to go. Constellation Brands Beer Division expects to grow 94 mil cases in next 3 yrs alone. That’s 6.8 mil bbls and implies avg of double-digit growth in that timeframe (Constellation will give guidance for fiscal yr Mar 29). But it ultimately wants way more. CBBD prexy Paul Hetterich laid out Constellation’s new long-term vision: To get to 600 mil cases total, with “2-2-1-1.”  That’s more than double its 2017 total of 265 mil cases (recall, Constellation first said it would double to 350 mil cases by 2023). Paul sees a day where Corona brand (including line extensions) would be 200 mil cases, Modelo brand would be 200 mil cases, Pacifico would climb to 100 mil cases and its craft and specialty brands would be 100 mil cases (obviously including M&A). Constellation aims to get to this vision through mix of organic growth, innovation, deals. Several of these objectives unusually audacious. As Constellation points out, only 6 beer brands ever got to 200 mil cases. What’s more, world of consumer packaged goods is generally fragmenting, yet STZ seeks to build multiple big brands. 

And Constellation relying on traditional tools to get there. For, example, it will pour on marketing spend in 2018. It already more than doubled spend in last 5 yrs.  In 2018, it will spend $50 mil incremental on innovations ($35 mil on Corona Premier alone).  Will also up total tv spend 33% and spend 20% more on hottest brand Modelo Especial.  Plus take Pacifico national with natl campaign and more. All while continuing to build media spend on its core brands. Ain’t just marketing where Constellation investing heavily to capture growth. It will invest another $900 mil over next 3-4 yrs to build out its Obregon brewery (acquired from AB), Constellation announced on Mar 20.  With addition of 5 mil hectoliters to Obregon, currently at 4 mil hectos. In toto, Constellation will have spent $5 bil to build out to total of 385 mil cases capacity. 

Constellation will also test mkt 2 FMBs, including Corona Refresca and Svedka Seltzers. Constellation’s lone blemish remains Ballast Point, still down double digits in scan. But it will use excess capacity to launch test of superpremium priced Western Standard, aged in High West bourbon barrels. Prexy Paul called craft segment an “outright __ show” but Constellation also still sees lotsa growth ahead in craft.  Undeterred, Constellation expanding Funky Buddha, and still shopping for additional craft partners. Ballast Point now over 80% aligned with Gold Network, up from 60%. Expects to get to 90% this yr.

Its Gold Network growing in power and becoming very real.  All Constellation distribs grew in 2017; half grew double digits, said chief sales officer Bill Renspie.  Seventy Gold Network distribs sell 1 mil cases or more of its products.  It has 8 distribs with over 30 share on its brands. Entire Western Business Unit grew 2.4 share last yr, double the 1.2 points that Constellation grew nationally.  Even with so much going right for Constellation on so many fronts, Constellation’s ambitious aims and aggressive actions do raise questions of how far it can go and how fast.