Reserve your seat for The 2019 Beer INSIGHTS Seminar, our 26^th annual fall meeting, to be held on the evening of Nov 17 and all day Nov 18 at New York City’s Convene, a state-of-the-art meeting and event venue.  A handful of high-level US beer execs are already on board to discuss current hot topics and challenges in the US beer biz:  Marcel Marcondes, US Chief Mktg Officer for AB; Constellation Brands’ Chief Mktg Officer Jim Sabia; and Boston Beer chairman/Dogfish Head founder Jim Koch and Sam Calagione.  More speakers will be added.

This year’s 26^th annual seminar promises to once again feature cutting-edge content and plenty of time to network with industry leaders and peers.  Convene is conveniently located on W 46^th St, near Rockefeller Center and Times Square.  We have a room block set aside at The Kimpton Muse Hotel across the street at a special conference rate.  Click here to register.

It’s already been a notably active year for beer franchise laws, as Maine recently passed a carve-out for brewers under 30K bbls, following quickly-approved new law in Maryland. But movement in Massachusetts would make for quite a trifecta indeed. A hearing on tap for this afternoon sets stage for either more compromise or another round of frustrating acrimony. Recall, brewers in Mass have pushed for changes to state’s franchise law for many years now. Distrib advocates held off most serious discussion of creating a small brewer carve out for about as long before drafting their own proposal in 2017, using 30K-bbl cap. But sticking point all along has been size of that cap, as Mass brewers reluctant to support anything that wouldn’t include Boston Beer, which could be over 5 mil bbls this yr.  Today, folks on both sides of debate will speak at hearing before joint legislative committee, Boston Biz Journal wrote this morn. 

Beer Distributors of Mass will support a bill with upped bbl-cap, now 100K bbls, according to paper. That takes care of “99 percent of all breweries in the U.S.,” prexy Bill Kelley said. And that bill already has support of over half of legislators in MA, paper notes. Mass Brewers Guild believes language in distrib proposal is “more ambiguous and difficult to navigate for craft brewers,” exec director Katie Stinchon said. It will present its own tiered proposal: faster time table (30 days) and lower price to be paid by brewers under 5K bbls; from 5K-350K, brewers get 45 days’ notice and pay fair market value; from 350K to 6 mil bbls, brewers would need to give 60 days’ notice and pay 110% of FMV. Note too that hearing will cover more than just franchise reform proposals, as contentious bill aimed at limiting seasonal beer gardens in Boston also scheduled for review.

SipSource, combining forces of Wine & Spirits Wholesalers Assn, Nielsen, NABCA, VIP and others, tracks and reports depletions data from 12 big wine & spirits distribs in US, including 6 of top 10 and each of top 4: Southern Glazer’s, Republic National, Breakthru and Young’s Market.  That’s a pretty powerful set of data.  Tracks 71K wine SKUs, 28K spirits SKUs depleted to 195K on-premise outlets, 132K off-premise outlets.  What’s the data show?  You know.  “The biggest surprise to me is the level to which spirits are really winning right now,” SipSource analyst Dale Stratton told Wine & Spirits Daily earlier this month.

“There’s evidence that [spirits] growth is coming from the wine and beer categories,” he added, especially on-premise.  On-premise spirits depletions +4% in calendar 2018, Dale pointed out, while total spirits depletions +2.3%, wine depletions slightly negative -0.4%.  In updated figures for 12 mos thru Mar 2019, SipSource reports total spirits +2.7% (+2.6% off-premise, +3.1% on-premise) while total wine -0.4%, (-0.5% off-premise, +0.1% on-premise).  For 12 mos thru Mar 24, 2019 IRI MULC showed beer off-premise volume +0.1%.  Total US beer shipments -0.6% for 12 mos thru Mar ’19, Beer Inst estimates.

AB InBev announced late Friday afternoon that it was “not proceeding” with its Asian IPO which sought to raise up to $9.8 bil to pay off debt and ease further M&A in Asia.  ABI called off deal “due to several factors,” but only specified one: “prevailing market conditions.”  Company will continue to “monitor” those conditions and evaluate options.  The offering could come back at a later time.

What happened?  How did a company that pulled off the AB deal in midst of the worst economic conditions in memory, and then acquired SABMiller, fail to raise $8-10 billion for a partial stake of its growing Asian business?  Reading the financial press and analyst comments over the weekend, consensus seems to be that:

1) the price was simply too high; 2) Hong Kong markets and US-China relations are both in negative mode;

3) intensifying competition among global giants in China (ABI vs Heineken vs Carlsberg) will make growth more difficult there.  These factors led to an “Asian IPO Flop,” as Wall St Journal headlined.  “The concoction was far too frothy for investors when Asian economies face an array of sobering realities,” Bloomberg opined.  Offering valued Bud APAC “well above” Carlsberg and Heineken multiples and a premium to ABI’s own shares.  And while ABI was selling its premium image in China, “investors just weren’t convinced that demand would hold up in a slowing economy.”  Then too, another “fatal flaw” was ABI “hubris” in not pursuing a “cornerstone investor tranche,” typical in Hong Kong IPO mkt, of having large long-term investors pledging to purchase, according to Washington Post.  Again, almost every analysis went back to Bud APAC being overpriced. “With such a bubbly valuation, AB InBev may have thought its investors were wearing beer goggles,” WashPo concluded.

“More Debt for Longer” What are the ramifications of this “meaningfully negative development,” as Macquarie’s Caroline Levy called it?  “More debt for longer,” she and others pointed out.  It will take an extra year for ABI to get to its desired 2X debt/EBITDA ratio, Caroline believes.  Then too, “we cannot rule out another dividend cut.”   Finally, “perhaps most significantly,” WSJ wrote, “the IPO’s failure will dent AB InBev’s acquisition prospects” in the region.

What’s Plan B?  In addition to suggestion that ABI could reduce its dividend again, Bloomberg suggests ABI could cut costs further, “sit tight” for a while then revisit IPO and/or sell off brands/assets.  None of these options ideal tho.  Stock took a big hit when ABI cut dividend last yr.  Also, ABI “has been trying to show a friendlier face since the financial meltdown of Kraft Heinz.”  And if ABI “takes a knife” to mktg/other spend “investors might wonder.”  If ABI revisits IPO, “potential investors now have the upper hand,” and pricing would be “tough.”  Finally, selling off brands “undermines” ABI’s model of scale and back-office efficiency. 

TAP Whacked Two Notches by Bank of America  While AB InBev had to pull its Asian IPO, Bank of America/ Merrill Lynch (BAML) moved from buy to underperform on global competitor Molson Coors.  TAP “has integrated” MC and intl brands “well from a cost and cash flow perspective,” BAML wrote, but “sales have lagged” and “we see heightened potential that TAP will need to increase spending to stabilize market share on core bands” and up spend on above premium segments.  TAP share price off 2.5% to $53 as Express went to press.  Meanwhile, Molson Coors bought struggling Hop Stuff craft brewer in London which has brewery and 3 bars.

Understand the long-term shifts that shaped today’s beer biz and will continue to impact the industry with Ten Years After, the latest special report from Beer Marketer’s INSIGHTS. Available August 9, this in-depth report looks back at a decade of change in US beer. 2008 was a watershed year, bringing the formation of both AB InBev and MillerCoors just a year after Crown Imports, now Constellation, became the sole importer of Modelo brands in the US. Follow along as these 3 huge deals rippled across the industry and led to the trends and market positions that drive the biz today. This data-packed report, with thoughtful analysis from Beer Marketer’s experienced editors, tracks the changes that set US beer on its current trajectory. Pre-order your copy for the $200 today and be among the first to receive this exclusive report on August 9. Discounted rates available for orders of 5+ copies. Head to beerinsights.com to see what’s inside and order today.

Ending cannabis prohibition “may be one of the very few issues upon which bipartisan agreement can still be reached in this session.”  So said Calif Repub Rep Tom McClintock at subcommittee hearing earlier this week titled “Marijuana Laws in America: Racial Justice and the Need for Reform.”  Reflecting bipartisanship, NY Dem Jerrold Nadler said he “had the pleasure of agreeing with every word,” McClintock said, except the “last paragraph.”  McClintock closed his remarks by criticizing Dems who “decided to play the race card at today’s hearing.”  Since the hearing focused on “Racial Justice,” historic (and ongoing) disparities in enforcement of cannabis laws were center stage, according to several reports.  “The foundations of our drug policy are inherently racist,” said one speaker.  The architect of cannabis prohibition “targeted blacks and Latinos,” said another.  So, issues of how to deal with criminal records of those arrested for cannabis crimes and whether and how to ensure minority businesses can partake in legalized cannabis remain key challenges for reformers. 

Again, despite bipartisan Congressional and broad public support for reform, the road remains unclear.   A handful of bills in Congress include: 1) knocking cannabis off of the Controlled Substances Act and ending fed prohibition; 2) reducing its status in the CSA; 3) limited banking reform; 4) supporting state action.  Atty Gen Barr prefers prohibition but said last option would be preferable to current situation, (the STATES Act).  But Sen McConnell sez: “I choose not to embrace” hemp’s “illicit cousin.”  Indeed, The Height Capital Markets group gives the STATES Act and banking reform bills just a 25% chance of passage in current Congress, reports MarketWatch.  “Ultimately, the political divide between the House and Senate will serve as the greatest roadblock,” sez Height. 

As Congress dithers, states continue to move on.  Hawaii just decriminalized cannabis.  Meanwhile, one issue pertinent to alc bev biz continues to percolate.  At this week’s hearing, Doctors for Cannabis Regulation prexy called concern that cannabis is gateway for other drug use as “one of the most thoroughly debunked issues in this debate,” adding that “there’s also a stronger correlation between alcohol and tobacco and the use of other drugs.”  As pro-cannabis Leafly put it: “In other words, if we’re truly concerned about a gateway effect, alcohol and tobacco use are bigger concerns than cannabis.”  

 AB legend Gussie Busch’s son Billy announced this week: “The William K Busch Brewing Company is ceasing operations as the company is shutting down and stopping the brewing of our award-winning Kräftig beers due to market demand.”  In late 2018, Billy got clearance to build brewery/distillery in St Charles County, MO.  Construction started with anticipated completion by end of 2020.  That’s now on hold, “although he’s still considering a distillery,” KMOX reported.  Recall, Kräftig brands launched with huge ambitions in 2011.  Billy talked about 2 mil bbls.   Partner Jim Hoffmeister (AB vet) talked “‘4 or 5 million barrels’ as if that were almost a given,” St Lou Post-Dispatch reported back then.  All along, Kräftig was mainstream play, aimed at Bud, Miller Coors.  “I wanted to price our beer so everybody could enjoy it, everybody could afford it,” Billy told KMOX this week.  “Maybe I should have come out with a higher price on it.”  In any case, Kräftig caught in same mainstream malaise as its competition.  William K Busch Brewing Co had just 6K bbls produced in Wisc last yr.   

Beer Inst economist Michael Uhrich wrapped up and reported his state-by-state packaging shares for 2018.  Final figures confirm cans’ growing share, adding another point to 57.3 of total biz.  Then too, cans have nearly 64 share of domestic production/shipments, Michael notes.  So, whatever impact aluminum tariffs had, didn’t blunt cans’ momentum.  Other key takeaway: Draft hangin’ in at 10.5 share, pretty much where it’s been since 2011 and a point higher than 2008.  So, looks like dropoff of corner bar/tavern biz offset by growing taproom sales.  Package shares vary widely by state, natch.  Some details:

·      Can shares vary from high 60s/over 70 in AL, AR, IA, OK, WV to below 50 in CT, DC, HI, MA, NV, NJ and RI.

·      Bottles still have highest shares (>40) in CT, HI, NV, NJ and RI, lowest in those high can share states.

·      Almost 1 in every 4 beers sold in DC is draft, by far highest in US.  But draft also over 15 share in CO, ME, MA, MN, OR, PA, RI, strong craft states all.    

A couple more points from Michael.  With all puts and takes and packaging possibilities, “sealed containers of 12 or fewer fluid ounces still composed 2/3 of all beer volume in the US during 2018.”  And: 12-oz aluminum cans were largest share gainers last yr, regaining share lost to larger cans in 2017.  Tho glass now less than 1/3 of total volume, still nearly 2/3 of above-premium volume.  Smaller kegs gaining share of draft from half-bbls, which “reflects the ongoing shift toward rotation and variety in draft offerings.” 

NBWA’s Beer Purchasers Index, a measure of distrib purchase intent, fell into contraction mode in Jun, reports NBWA economist Lester Jones.  And it fell sharply.  Overall BPI hit 47.5 in Jun, down from 61.6 in Jun 2018.  And what’s worse, down from 61.9 in May this yr.  Indeed, BPI had been in expansion territory Jan thru May before hitting Jun wall.  Import index fell from over 70 last Jun and in May ’19 to 54.2 in Jun ’19. Craft index slipped to 50, dividing line between expansion and contraction.  Premium lights struggling at 36.4, while premium regular and below premium below 30 each.  Ouch.  FMBs slipped from on-fire 78.8 in May to hot-hot 67.5 in Jun.  Cider in low 40s.  Silver lining: “The ‘at risk inventory’ [of going out of code] reading at 49 is the category’s first reading below 50 in 2019,” Lester observed.

Consumer price index for beer increased 1.7% in Jun vs Jun 2018, per latest Bureau of Labor Statistics data. That matched 1.7% increase for All Items in Jun.  CPI for beer has been ahead or even with All Items 4 of last 6 mos.  CPI for spirits shot up 2.5% in Jun vs yr ago while wine prices increased 1.5%.  Thru first half of 2019, CPI for beer was up 2%, ahead of 1.7% gain for All Items but behind spirits increase of 2.2%. CPI for wine was up 1.1% Jan-Jun.  A year ago, CPI for beer increased just 1.2% Jan-Jun, just under half of 2.5% gain for All Items.  

Govt’s 2% avg price bump in 1^st half slightly behind avg price trend in IRI MULC scans YTD thru Jun 16.  All in, avg beer price up 60 cents/case, 2.5% to $24.47 in IRI scans, thanks to trade up.  Avg premium case-equivalent sold for $21.43, +26 cents or 1.2%.  Avg import price up just 1.4%, FMB prices up only 0.5% and craft +1.2%.