Despite a soft beer biz last yr, above premium segments tacked on another 3.2 mil bbls and added 2 share of volume, we estimate.  Passed the 40 share mark for the 1^st time, and passed premium segment along the way.  Reported import shipments behind sales, as we suggested last issue.  Still, imports picked up additional 0.7 share in 2017 to 16.6.  Craft also up 0.7 share, with approx 5% shipments gain, to just below 12 share.  Michelob Ultra-driven superpremiums added a half-share too.  With all the churn in FMBs, not a lot of net category growth, we estimate.  Up 100K bbls, 0.1 share.  FMBs still just over 4 share of US volume.  And cider down slightly.  It’s been a strong run for above premium last 5

years.  Above premium volume up nearly 23 mil bbls, 36.6% and gained over 11 share since 2012. Import/craft got lion’s share of gain, but plenty of growth across the board. 

Premium volume really took a hit in 2017: -4.6 mil bbls, 5.5% with light and full-calorie brands down.  Premium share down 1.7 to estimated 37.7.  Since 2012, biz lost 16.5 mil premium bbls, 17%, and segment shed 7.6 share. Subpremium volume dipped 2% for 2d-straight yr, with subpremium lights near even.  Lookin’ at these light beer numbers, sure seems like premium lights gave up some ground to lower-priced competition last yr, especially since 5 yr-trends virtually same for premium/subpremium light segments.  First coupla mos of 2018 showing more of the same.  Above premium segments up 2 share yr-to-date thru Feb 17 in Nielsen all-outlet scans.  Premium segment dipped 1.7 share. Subpremiums off 0.3.

 No surprise but still significant that SAM, Boston Beer stock, surged again after strong results reported late yesterday.  Stock up another 5% so far today.  SAM stock stellar in last 12 mos; up 77%, tho still way down from peak.  Asked on conference call about “current pricing landscape,” chairman Jim Koch said Boston “maintaining our 0% to 2% guidance.”  While Boston seeing “some downward pressure primarily from the introduction of 15-packs,” there’s “much less downward pricing pressure and some upward ability for 6-packs and 12-packs,” Jim said, according to Seeking Alpha transcript.  There are “a somewhat limited number of craft brewers with significant volume in that 15-pack. So it’s kind of turbulent,” but “there’s not widespread downward price pressure that we’re feeling in craft.” It’s “much more coming in the form of tactical pricing on unusual pack sizes.”  

Surprisingly, Bud Light Orange is “number one thing” that AB prexy Michel Doukeris “heard about” from retailers as he moved around to 15 states in his first 100 days or so on job, he told Beverage Forum in Chi yesterday. “Please give me more Bud Light Orange,” they asked; people are “falling in love” with Bud Light Orange across US, according to Michel.  Perhaps big sales still to come, but in first 4 weeks on mkt thru Mar 25, Bud Light Orange sold 3300 cases nationwide in IRI multi-outlet + convenience.  Total AB at 142.7 mil cases.  Michel sees “a lot of opportunity” in US beer with brands to the “right” and “left” of its core lagers. More detail on Bev Mktg Forum in future issues. 

Joint winter convention of distribs from 3 big states (IL, MI, and WI), representing almost 10% of US volume had strong program that was kind of a throwback to some of best distrib meetings in days gone by.  Editor’s note: more state distrib assns should try multistate meetings with topical programs in nice settings (didn’t hurt that convention took place in Aruba). It featured several contrasting presentations from key industry leaders like Constellation’s chief commercial officer Bruce Jacobson, MillerCoors prexy of sales and distrib operations Kevin Doyle (Kevin was Bruce’s boss when he was at MillerCoors) and craft founders like Bell’s Larry Bell and Revolution’s Josh Deth.

“The largest beer industry change in the last 30 years is at hand,” said Bruce, as he kicked off program. That is shift to high end, of course. He presented Constellation’s vision for next 3 yrs: Constellation expects industry to be up 31 mil cases (that would be big improvement from 2017 and 2018 trends so far). But high end will gain 155 mil cases, while low end will lose 124 mil cases 2018-2020 (high end anything above $25 per case at retail).  Constellation expects to get majority of that growth.  In fact, Constellation’s 2018 goal is “just short of 300 million cases.”  (Editor’s note: that would be up double digits from 265 mil cases INSIGHTS estimated in calendar 2017).  And Bruce also forecast a landmark change: high end will become the majority of $$ sales in off-premise scans in 2019, up from about 45 share currently. It’s already about 60 share of on-premise $$.   

Unsurprisingly, Kevin focused on different data, including over-proliferation of SKUs in beer sets, climbing 14% to 17,000 in last few yrs, before finally pulling back a bit.  “Retailers are starting to figure out that they’ve gone a bridge too far,” said Kevin.  What’s more, out-of-stocks are up 6-8% and productivity per SKU down 5%.  That’s while 5-7% of SKUs do 90% of volume, according to Kevin. So retailers taking long hard look at this. Especially since, until last yr, beer had been a growth category for retailers, gaining $4 bil in all outlets over 4 yrs in Nielsen data.  But “last year you saw the turn,” revs down $90 mil. And beer “started kind of soft this year.”  Nation’s largest retailer Walmart cut lotsa SKUs “to make sure they can fulfill orders online.” Meanwhile, on-premise foot traffic down 4%, according to Kevin. Taprooms have as high as 30% of on-premise biz in San Diego (29% in Portland).  Yet MC’s taprooms less than 2% of its craft biz and “we use it as a marketing vehicle.”  Regarding on premise overall, Kevin said: “everything is changing about this channel.” 

Craft conversation also circled around changed landscape. Revolution Brewing continues to grow double digits, but “I do see a more cloudy future” for craft, said founder Josh Deth.  And as result he’s become “more risk averse and conservative.”  Bell’s also still growing, but founder Larry Bell reminded of some pie-in-the-sky proclamations of recent past, such as 20 share by 2020.  That came out “just before the train hit the mountain.”  In the wake of such ambitions, “some people overcapitalized” and there are “empty tanks.  You’re probably going to see “a few more deals” and “someday there will be a shakeout.” Not exactly the go-go growth of a couple of yrs ago.  Once again, everything’s changed.     

Seems like everyone’s addressing category health these days.  Nielsen reviewed “Reduced Growth of the US Adult Beverage Market,” in a report yesterday.  Kicked off with notion that “fragmentation” of on- and off-premise outlets, plus shifting demographics, health/wellness, ailing big brands, stagnant wages and more combine to create challenging mkt and account for decelerating trends across alc bevs.  Nielsen’s all-outlet data scans show slowdown for each.  On rolling 12-mo basis, dollar sales of beer slipped from +3.2% thru Oct ’16 to just +0.5% thru Dec 17, wine slipping from +5.4% to +1.9% and even spirits trend slowed from +5.8% to +1.8%.  That’s while overall CPG spending flat, flat, flat since early 2017.  Nielsen also pointed to same stat that we highlighted Monday showing increase of about 100K alcohol-selling outlets over last decade.  So, retail access outpacing population growth (and alcohol consumption).  Lotsa closures over last yr alone in fine dining, conventional liquor stores, casual night clubs and neighborhood bars, Nielsen data shows.  Meanwhile, new openings in casual dining, c-stores, quick service restaurants and dollar stores.  That’s retail fragmentation, both an oppy and a challenge, as NBWA economist Lester Jones suggested on Monday.  So where are people drinking these days, especially younger people?  You guessed, the T word.  Indeed, “67% of US millennials say they’ve visited a brewery tasting room more than they did in the past year.”  And 61% of all adults say they’re hitting taprooms more often.  Premium bars, movie theater bars and Tiki bars (!!) also drawing more traffic these days.  What’s driving taproom biz?  “30% say they want something new; 56% want a different selection of beer; and 38% want more specialty or limited run beer options.” 

Nielsen noted too: “millennials are not all the same.”  Separating older (age 30-39) from younger (21-29) millennials shows different preferences.  Older millennials over index for beer at 125 (they’re 25% more likely to drink beer than all 21+ adults.  But beer index for younger millennials dips to 116.  Spirits index is reverse: 124 for younger millennials (higher than beer), 109 for older millennials (lower than beer).  A promising note for cider’s future: younger millennials index at 208 for cider, older millennials at 145.  Places of purchase differ too:  older millennials much more likely to buy beer at warehouse club stores, younger millennials at night clubs/bars, which makes sense.  Meanwhile, “millennials with kids also buy at tasting rooms and music/sporting events, often order wine by the bottle when they’re at a restaurant, and they drink more wine than they did a few years ago.”  Nielsen’s prescriptions to battle alc bev deceleration echo some of those made by IWSR’s Brandy Rand at NBWA Monday afternoon (and others): food pairings, health and wellness cues (running clubs, yoga, etc), combining low-cal/low carb bevs with healthy food, and “creating an experience or activity where customers will also come and drink.”  

ABI’s US volume stayed weak, but total co reported sterling financial results, especially in Q4, when organic revs jumped 8% and EBITDA up 21%.  Indeed, ABI strong globally for full yr 2017 too. Here in US, AB finished 2017 with US sales-to-retailers down 3%, shipments down 3.5%. Meant it lost about 3.2 mil bbls and fell to 89.55 mil bbls in shipments.  That’s steepest slip and largest bbls shipments loss since formation of ABI back in 2008. (And almost a half mil bbls bigger loss than INSIGHTS estimated, after tuff Dec). Like MC, AB volume trends not improving, but profits still going up.

AB able to grow US EBITDA 1.9% for yr, including 6% growth for Q4. It expanded US EBITDA margin 159 basis points to 41.2% for full yr. How could that be, with revs down 2%?  ABI cut $152 mil (organic), 3.4% from North American sales, gen and admin costs (90% of North America is US), just like MillerCoors cut $90 mil from mktg, gen and admin.  It also reduced cost of sales. AB rev per bbl up 1.5% in 2017, including 2.1% in Q4.  

Since 2008, ABI almost doubled EBITDA in US, ceo Brito said on conference call, and tripled cash flow. Both measures “way ahead of what we planned,” Brito added.  But volume behind expectations.  Now in next 10 yrs, more emphasis on improving volume trends, while maintaining profitability.  ABI has already done this in Western Europe (where it’s gaining volume and share in recent yrs), Australia and other mkts similar to US. With its category expansion framework (“adopted” from SAB) and new leadership here, US at “very important point,” emphasized Brito, but this “won’t happen overnight.” 

Indeed, AB sales haven’t improved so far in early 2018 scans.  AB down 3.2% yr-to-date thru Feb 17 in Nielsen all outlet. Each of Bud Light and Bud still down about 6%.  Michelob Ultra up 17% and Stella up 8.6%.  In all, AB still down 1 share of volume, 1.2 share of $$. Avg AB prices up 10 cents, about 0.5% last 4 weeks. 

Global ABI a Behemoth at $22 Bil EBITDA Yet ABI got its best global growth in 3 yrs. Revs up 5.1% to $56 bil and EBITDA up 13%, $2.45 bil to $22 bil (including big $960 mil gain in Q4).  It grew EBITDA virtually same amount as Molson Coors made in toto ($2.5 bil).   ABI has already delivered $2.1 bil out of expected $3.2 bil in synergies from SABMiller transaction. And it’s paying down debt, tho it still has $104 billion in debt.  ABI’s net debt to EBITDA ratio went from 5.5x to 4.8x. Despite US softness, ABI remains an impressive engine of global financial growth.

Category health comments at NBWA Legislative Conference earlier this week very timely in context of weak Q1 scan data and even weaker shipments data.  While Q1 US beer shipments down about 3%, depending on Mar import # still to come, just-released spirits volume in control states ticked up in Mar (+4.4%) and up 2.8% in Q1.  Yup, a near 6-point gap.  More important, beer shipments trending down 1.3% or so for 12 mos, while control state liquor volume +2.7%.  That’s a 4-pt gap for 12 mos, as we signaled in late Mar.  Then too, rolling 12-mo spirits’ $$ trend in control states rollin’ along at healthy +5.1%, reports NABCA.

 Meanwhile, NY Times this morn featured story on how craft distillers already investing big tax cut they got in Dec, as craft brewers have.  Recall, per-proof fed excise tax slashed 80%, from $13.50/gal to just $2.70/gal on first 100K gals.  That’s a million bucks if you ship 100K gals, “a windfall for every single distiller,” as one told NYT.  Craft distillers also told Times they’re investing in new equipment and people to build their bizzes.  Article quoted Distilled Spirits Council Sr VP noting “unprecedented collaboration by spirits, wine and beer producers” to get tax cut.  But one Brooklyn distiller “has done something just as unusual: lowering prices.”  Recall, reducing price not a promise from brewers with their tax cut, but a near-$11/proof gal break may allow small distillers to invest and reduce price.  NY Distilling Co’s founder told Times he reduced wholesale price of his gin from $29 to $18/bottle, down to $14 with volume discount, resulting in significantly lower retail price.  “Very few distillers have gone so far as to lower price,” NYT reports, and one called such a move “reckless” since “if the tax break goes away, then the price break goes away.”  But price-cutter sez “driving force will be increased sales and from that revenue, we will further invest in equipment and other aspects in our business.” 

 Efforts to extend tax breaks for brewers, vintners and distillers already underway.  Distillers hit Capitol Hill in May.  Among NBWA’s “key talking points” for legislators this week was “tax permanency and parity” for S Corps to treat ’em the same as large corporations, making estate tax relief permanent, and handful of other biz tax issues.  Support for extending fed excise tax cut on beer an “additional industry issue” for NBWA, not a primary one, tho opposition to aluminum/steel tariffs was first talking point in NBWA brochure for members. 

In spite of all the volume struggles for top 2 and slight drop for beer overall, US profit pool kept climbing and hit new heights last yr. Operating profits in US beer almost certainly over $9 bil. Recall, US profit pool estimated at $8.9 bil in 2016 by Bernstein analyst Trevor Stirling. Using that as base, looks like operating profits on US beer biz up several hundred mil.  Why do we say that?  Well, ABI by far most profitable of course. It got oper profits of $4.92 bil in 2017, up about $35 mil, less than 1%, estimates Trevor.  But that’s well over 50% of oper income on US beer.  MillerCoors operating profit jumped $110 mil, 8.6% to $1.382 bil, even tho volume down 3%; EBITDA up 2% to $1.883 bil. 

Constellation led the way, growing US profits more than AB and MC combined. Its oper income up $264 mil, 26% to $1.5 bil for 9 mos to Nov.  In its fiscal 4^th qtr (ending Feb 17), its beer oper income was up another $58 mil, 21% to $338 mil.  So Constellation oper income up $325 mil to over $1.8 bil from Dec 16-Nov 17.  Top 3 gained near $500 mil in profits in 2017.  That’s extraordinary.  Heineken USA also increased profitability, but lost volume. Of top players with visibility on profits, only Boston Beer oper income declined.  Boston Beer oper income fell $22 mil to $116 mil. It dropped $40.5 mil, 26% last 2 yrs as it invested heavily in programs and volume fell a half mil bbls.     

Combo of continuing strong FMB trend (Twisted Tea), hot new cider (Rosé) a coupla new beer brands (Sam 76/NEIPA) and an easy comp (-15% same qtr last yr) did wonders for Boston’s Q1 2018.  Shipments jumped 15%; depletions +8%, co just announced.  That brought shipments back to just 2.5% below Q1 16. Thru Apr 14, depletions still running up 8%.  New CEO/prexy Dave Burwick attributed better depletions trend (recall, Boston depletions -7% in calendar 2017) “primarily to increases in our Twisted Tea, Truly Spiked & Sparkling and Angry Orchard brands that were only partially offset by decreases in our Samuel Adams brand.”  Sam trends improved due to launch of Sam 76 and NEIPA, he added, tho other Sam styles down.  Transition to seasonal Sam Summer was “smooth” and “a few weeks earlier” than last yr, which helps explain gap between shipments and depletions.  Boston maintained volume guidance of 0 to +6% for the yr. 

 Better volume boosted financial result too, natch.  Revs +17.8% as shipments popped.  Gross profit up $20 mil, 26% and gross profit margin expanded 3.3 points to 50.5%.  Even while Boston tacked on additional $14 mil, 26% in ad, promo and selling expenses, operating profit up $5 mil+, 130%.  That’s still $2 mil below Q1 2016.  Lookin’ at new Sam brands and Angry Orchard Rosé, Chairman Jim Koch commented that “response from our wholesalers, retailers and drinkers has been quite positive, but it’s too early to fully understand repeat rates on these new products and therefore draw conclusions on the long-term impact.”  Even so, a very strong start for Boston.  

 Paying attention to potential impacts of legalized marijuana should be a “required course,” not “an elective,” Prof Jonathan Caulkins (Carnegie Melon Univ) advised student/distribs at NBWA Legislative Conference.  Jonathan made many familiar points, but taken together show attention to this issue surely warranted.  Importantly, he rejected notion that we know whether pot is substitute for alc bevs. Data just not there, he said, and it may be 20 yrs before we truly know answer. Anyone who claims that question resolved simply a pot advocate, he suggested, or an advocate against pot.  That said, impacts “could be large,” he acknowledged.  And other highlights from Caulkins raise interesting, provocative and even alarming issues that beer folks need to know.

·         The 80-20 rule that governs lots of products holds for pot: 80% of consumption comes from 20% of users.  That means vast, vast majority of pot consumed by heavy, daily users, not weekend warriors.   

·         Not that long ago, ratio of daily alcohol users to daily pot users was 10:1.  Now it’s 2:1.

·         Policy does matter.  When fed cracked down on drug use in Reagan era, usage rates fell (or at least admitted usage rates fell), Jonathan showed.  As policy eased, usage rose. (Tho note these are admitted usage rates, plus people could have stopped using, or started, for other reasons.)

·         Canada, where recreational pot on sked for this summer, is “first large national commercial model,” will allow mail order direct delivery.  And given long border with US, smuggling likely.  Then too, Canada may “force the policy hand in the US,” Jonathan believes.

·         Potency has risen dramatically, Jonathan showed, while costs dropped dramatically.  Years ago, an occasional user, 1 joint/night on a weekend, might have ingested 4.6 milligrams of THC/day.  Now, daily use could be up 260 milligrams, 60X the THC level. No one really knows what affects will be of much stronger pot.   

·         But 1 hour of pot intoxication in Washington state, where pot prices have already “collapsed,” now costs less than buck (“far cheaper than going to the movies”), data shows.  And he believes prices could drop so low (“astonishingly low,” i.e. a nickel a /joint, “ this crowd should worry about that”) as to make pot a “loss leader,” for grocery stores for example, to sell more food. 

·         Pot possesses a “wellness perception,” (hell it’s “medical”) that alcohol does not have. 

Net-net, Jonathan sees a proliferation of products, collapse of costs, new types of mktg (i.e. jointly, with tobacco, food, bevs etc), all-in a “formidably dynamic sector.  There’s nothing more likely to shake up you world.”