Recall, as TTB stepped up investigation of trade practices in last 2 yrs, it “discovered a number of instances where alcohol beverage wholesalers or importers were operating without a valid FAA Act permit due to unreported changes in control or proprietorship” changes in owners of the biz. And changes in control/ ownership need to be reported to TTB within 30 days, it reminds, along with new permit applications.  Operating without a permit is big no-no.  Several attys have pointed out that TTB investigators were using distribs’ failure to report control/ownership changes as leverage to induce offers in compromise over separate trade practice allegations.  On Friday, TTB announced a “temporary voluntary disclosure program” that runs thru Dec 31, 2019.  Distributors or importers can “address unreported changes” in order to take care of “significant number of” distribs and importers that made changes “but failed to file new permit applications within 30 days.” 

Virginia Alc Bev Control Board just reversed an early May decision that had compelled arbitration in battle between Bell’s Brewery and distribs Loveland/Premium (Reyes).  As we wrote in May 8 Express, that decision by ABC hearing panel subject to review by ABC board.  And, after Jun 12 hearing, ABC board decided “it does not have authority to compel the parties to proceed with arbitration.”   Thus, Board vacated order to compel arbitration (Bell’s wanted arbitration) and “remands this matter back to the Hearing Panel to determine whether there has been a violation” of the ABC Act, which is what Loveland/Premium wanted all along.  Recall, Bell’s refused to transfer its brands to Premium after Premium signed deal to buy Loveland, claiming they did not provide all the documents it requested.  Bell’s then filed intent to terminate Loveland.  Distribs filed complaint with VA ABC.   Bell’s sought a hearing.  Loveland threatened further charges when Bell’s refused to fill orders and Bell’s finally pulled brands from the entire state.  Bell’s also filed motion to dismiss Loveland/Premium charges and compel arbitration.   

New program will allow distribs/importers (and only distribs/importers, not other permit holders) to file changes and new permit application at same time, to “reduce the burden on eligible industry members.”  At same time, TTB “will also exercise enforcement discretion regarding these unreported changes.”  That means TTB won’t seek “civil or criminal penalties for continuing to operate” while TTB reviews applications under the program.  Nor will TTB “deny these applications on the sole basis” that the distrib/importer operated without a permit, as long as the industry member was otherwise in compliance with TTB statutes and regs.  Meanwhile, TTB retains authority to “investigate and take appropriate action” regarding other possible violations, natch.

Dogfish Head is first major acquisition in Boston Beer’s history, but it was “surprisingly easy,” said Boston chairman Jim Koch, with “no disagreements” and it “went right through” closing on schedule to start the 3d qtr. Both cos are growing, doing well and will continue to “execute” their respective 2019 plans (formulated separately), tho Boston will “integrate the finances” and back office and report results including Dogfish Head starting next qtr.  While those steps may have been easy, what comes next could be the hard part: consolidation.

Boston Wants One Distrib Per Territory; Seeks to Move 2 Mil Cases Boston needs “to move and move quickly” said Jim “in aligning distributor networks.”  Recall, a little more than half of Dogfish Head’s volume is already in Boston network.  Boston has around 400 distribs, Dogfish Head a little less than 200.  Dogfish Head last yr totaled a little more than 4 mil cases.  In rough numbers, Boston looking to move about 2 mil cases.  So there is a lot to be done. 

Jim wants to give “clear guidelines” about Boston’s objectives: one portfolio, one distrib network per territory, a “full coverage” wholesaler.  Its preference: “basically the wholesaler with the largest volume,” which will be Boston distrib in almost all instances as Boston volume about 15x Dogfish nationally. The 2 mil cases Boston seeks to move amount to about 3% of combined entity’s volume.  Both Jim and Sam are big believers in 3-tier, but want to “utilize 3-tier strengths,” not pit one distributor against another. 

“Where we can move, that’s what we want to do,” said Jim.  “I am optimistic our wholesalers will treat each other fairly and respectfully in a business-like way.”  Distributor disputes “just come down to money,” taking money out of distributor system and giving it to lawyers, sez Jim.  Rather than “burn up millions and millions” in resolving such disputes, he’s hopeful that selling distribs will be “paid fairly” and transitions will resolve professionally, without costly litigation.

Some Recent Dogfish Head Distribution Changes Create Confusing, Contentious Situations  Boston Beer will be able to move in a number of states, depending on state law, while others likely to be more contentious.  And there are many recent Dogfish Head transactions that look like head-scratchers in context of Boston/Dogfish deal. Especially if Boston’s aim is to consolidate with “full service” and larger distrib with its brands in any given territory.   

For example, last yr, IL distribs got pushed by Constellation to buy Ballast Point from wine/spirits distrib Breakthru and in return traded… wait for it… Dogfish Head.  Those distribs were unhappy with deal at time, as Ballast Point got huge valuation even with trends in decline.  Think about it now, as many of those same distribs have Boston.  Presumably they’ll be expected to go and buy the same Dogfish Head brands back.  Just a year later.  Breakthru has gotta be none too happy either and it’s also Dogfish Head distrib in multiple states, including home market Delaware, MN, Colo.

Or what about NY where Dogfish Head recently moved from Oak to Union, a Sheehan Family Co?  But Oak is Boston distrib in some of that territory and Manhattan sells Boston in rest.  So Sheehan Family Cos could be pressed to sell just after it bought.  What’s more, Sheehan Family Cos also sells Dogfish Head in multiple other states and it sells Boston Beer in some too (MA and upstate NY).  For both Breakthru and Sheehan Family Cos there could be puts and takes across multiple geographies.  Those are just 2 recent examples, but there are others.

Import shipments picked up 100K bbls, 2.9% in May, reports Beer Inst economist Michael Uhrich based on Commerce Dept data.  Mexican shipments carried the load, up nearly 200K bbls, 8.2%.  That’s while Dutch, Belgian, Canadian and Irish shipments all down for the month.  German and Italian shipments posted gains.  For 5 mos, imports +346K bbls, 2.3%.  Mexican shipments up 443K bbls, 4.2% for 5 mos.  So, a net loss of 100K bbls from elsewhere.  Dutch shipments -64K bbls, 3.5% yr-to-date, despite 31K-bbl boost in NAs (Heineken 0.0) Jan-May.  Canadian shipments -5%; Irish shipments +5%.  Belgian-German combo gained 31K bbls, 2.6%.  Italian shipments jumped 28K bbls, 31%.  Import gain thru May offset about 3/4 of domestic brewers’ drop same period, according to Michael’s estimate.  So, total US shipments off 93K bbls, 0.1% yr-to-date going into summer selling season.  At same time, Michael estimates total state shipments, which usually align fairly closely with domestic + import total, down a little more sharply, -0.5% thru May.

Every state has its own winding, even messy version of the deep-dive into the current state of alcohol regulation and enforcement (or is it deregulation and ‘unenforcement’?) in Wisconsin taken by the Cap Times this week. In Wisc, the “Tavern League has been a political powerhouse for decades,” the piece begins, but more recent shifts pose new challenges. At the heart of the League’s recent gripes: unlicensed event venues, or so-called “wedding barns,” where renters bring their own booze (and bartenders). The expansion of such unregulated venues creates a slippery slope, the Leagues leaders suggest. “We’re operating without a net,” exec director Pete Madland explained. From here, the state’s on a path toward “empty buildings in college towns” used for unlicensed venues that won’t house weddings but will function as unlicensed BYOB bars with live music, a “$20 cover charge, smoking. No ID requirements. No sanitation requirements. No water requirements. Nothing,” the League’s lobbyist Scott Stenger paints as troubling boogeyman that closes the article. 

A key problem, for the League and others in the article, is the lack of enforcement by the Dept of Revenue. For its part, the DOR says it closed over 800 investigations in its 2018 fiscal yr and is on course to complete more in FY19. Yet it has just 9 agents to cover thousands of licensees. Tho the particular deregulatory fears explored in this piece don’t focus on small alc bev manufacturers and the exemptions to strict 3-tier laws they’ve carved out over the last decade or so, the explosion of these licensees certainly adds to strain for the regulators. Total number of manufacturer licenses in Wisc jumped 150% to 431 between 2010 and 2018, the Cap Times details. Some of those license holders and wedding barn owners have gotten support from free market-oriented orgs aligned with (and funded by) the conservative-activist Koch brothers. Legislators need “courage” to look at the whole system, Wisc director of Koch-connected Americans for Prosperity, Eric Bott, told the paper. Note AFP has more full-time employees in the state than the DOR has investigators. 

Sprinkle in shifting consumer interests, away from dive bars and toward tasting rooms and barns. As the Cap Times identifies, in the end, “regulating competition...is a key aspect of the law.” The questions raised resonate broadly. Multiply it all by 50. Beer gardens in Boston or small brewery taprooms in New Jersey. How about glassware in California? Or residency requirements in Tennessee? Or “consignment sales” and “slotting fees”? What is an appropriate level of regulation of the alc bev industry? How should states (and the fedl gov’t, by the way) determine that without picking winners and losers? And how are the forces pushing legislators and regulators one way or another shifting?

Competition can be fun, as well as fierce.  Responding no doubt to news early yesterday that AB InBev prepared to give away 100K Buds in England if England won women’s semifinal FIFA World Cup game vs US team (see yesterday’s Express), Miller Lite tweeted the inevitable, right-on response in middle of the game in the afternoon.  “Okay, Bud, you’re on.  We’ll take the U.S.  If we win, we’re giving away 100,000 free beers right here in the good ol’ USA.”   The US women won, of course.  So, it’s a 100K Miller Lites, on the house. 

Have a great 4th of July.   Hoist a bunch of frosty ones!

When it comes to product innovation, Diageo is taking the quality, not quantity approach, co explained at its innovation event yesterday with media, noted Marketing Week.  “We are actually doing less innovation now than three or four years ago and that is quite simply because of the strength of our ideas in the pipeline,” said Michael Ward, Diageo’s global head of innovation. Why’s that? Those current ideas “are delivering most of what [we want] and that allows us to be more choiceful,” he added.  While Diageo works at slow and steady innovation pace, co is “ramping up marketing spend” to support its “three-pronged consumer centric strategy that aims to hone innovation around ‘recruit, re-recruit and disruption.’” As part of that recruit and re-recruit goal, Michael said, to gain new customers, “we need to be doing things on a scale that really matters.”

Non-Alc Guinness? During event, Michael acknowledged that yes, Diageo “has been working on a non-alcoholic version” of its flagship, reported Campaign. He stressed co’s taking its time to get quality just right. “It needs to be a no-compromise proposition.” Giving example of Diageo’s cautious approach, Michael pointed to its 0.5% ABV lager, Pure Brew, which is in 250 pubs in Ireland but has not expanded beyond that since early 2018 test launch. While Pure Brew won’t be going mainstream, it’s helping Diageo “learn our way in to the non-alcoholic beer market…from a consumer, technical and production standpoint,” said Michael.  Guinness 0% was tried once before, back in 2014 in Indonesia, reminded Campaign, but didn’t do much of anything. So no timetable as to when Guinness might challenge rivals Heineken and Bud in non-alc mkt, but recent data from Marston’s showed volume for non and low-alc beers has grown 60% since 2017 off-premise and 30% on-premise since 2016 in the UK. 

Co-founder/co-CEO and very public face of Constellation’s Canadian cannabis partner Canopy Growth, Bruce Linton, is leaving “effective immediately,” Canopy announced this morn, following emergency board mtg last week.  “The Board decided today, and I agreed, my turn is over,” Linton said.  (In at least one interview this morning, Linton said he was terminated.)  Linton’s co-founder Mark Zekulin will become sole CEO.  Also, Board will launch search “to identify a new leader to guide the company in its next phase of growth,” Canopy announced.  Recall, just 2 wks ago, Canopy reported disappointing Q4/full yr results.  Overall revs rockin’, but recreational sales actually dipped from previous qtr and Canopy reported big operating losses in qtr thru Mar ($174.5 mil) and 12 mos ($577 mil) as it spent heavily to capture growth. 

Constellation CEO Bill Newlands commented last week during conference call that STZ “not pleased” with Canopy’s performance, tho “we continue to aggressively support Canopy on a more focused long-term strategy to win markets…while paving a clear path to profitability.”  In Canopy’s announcement, board member and Constellation CFO David Klein said: “We thank Bruce for establishing the foundation for a company that is very well positioned to lead in the emerging global cannabis market.  We are also excited to embark upon our next phase of growth as global leader in the cannabis industry.”  (Bill Newlands is also a Canopy board member.)  Constellation spokesperson told Express this morn: “We fully support the decision made by Canopy Growth’s Board of Directors to appoint Mark Zekulin as the company’s sole CEO. Mark has played an integral role in the company’s success since its inception, including managing all aspects of the company’s day-to-day operations. He is committed to helping ensure a successful transition, as Canopy begins a process to identify a leader to drive the company’s vision going forward. The future of Canopy Growth remains very bright and we look forward to the company’s continued success for many years to come.”  History doesn’t repeat itself, but it does rhyme from time to time.  And you can’t help but recall that handful of key leadership positions at Consteallation’s billion-dollar craft partner Ballast Point replaced suddenly back in Jul 2016. 

Media picked up Bill’s “not pleased” quote, natch.  One analyst told Bloomberg: “This looks like to me it’s got Constellation’s fingerprints all over it.  Nowhere did it seem like this guy was ready to depart the company.”  Meanwhile, Constellation and Canopy working on drinkable cannabis to be launched in Canada in mid-Dec this yr.  Different analyst told MarketWatch that he expects Canopy will seek out exec with consumer packaged goods background, just as big CBD co in US recently hired Kellogg vet.  “The success of Canopy and all cannabis companies will come down to brands,” same analyst said.

In an interview with MarketWatch back in April, Mark Zekulin was asked about how he and Bruce divided responsibilities at Canopy.  He joked: “Somebody has to get all the attention and somebody has to do all the work.”  Seriously, Bruce and Mark viewed the “vision and strategy” as a “joint exercise,” Mark said then.  While Bruce took on “outward facing items” of talking to the media, drumming up investor support and more, “if you look at the organizational chart of Canopy Growth, most of the functions at the company run through me.”  So, Mark’s the day-to-day, inside guy and he remains.  But Canopy’s “next phase” won’t include the guy who co-founded company “with an abandoned chocolate factory and a vision,” as Bruce put it, expressing confidence in Mark and Canopy’s team.

Didn’t Budweiser used to be an iconic American beer brand?  Tho its fortunes continue to fade in the US, Bud’s growing globally.  And today, AB InBev’s UK arm announced it will “give away 100,000 complimentary bottles” of Bud if England’s women’s soccer team defeats the US this afternoon.  “We want everyone in the country to come together to lend their support – and we want as many people as possible to celebrate as one if the team reaches England’s first FIFA World Cup final in more than 50 years,” said Bud’s UK mktg mgr.  Say it isn’t so!

ABI’s offer comes on heels of report last week from London-based brand valuation company called Brand Finance that determined Bud’s big World Cup promo last yr helped vault it past Bud Light as most valuable beer brand in the world, worth $7.5 billion vs Bud Light’s $7 bil.  Bud value grew 6.2% last yr, sez Brand Finance, vs Bud Light’s 5% drop.  ABI scored 11 brands among top 25.  Top 10 after Bud, Bud Light: Heineken, Harbin, Kirin, Corona, Snow, Brahma, Skol and Guinness.

Back in May, when AB InBev filed application in Hong Kong to list minority stake in its Asian biz, analysts speculated ABI could raise between $5 bil and “close to $10 bil” for portion of biz they valued between $40 and $70 bil.  Turns out those at high end were right.  When ABI starts selling 1.63 bil shares of Budweiser Brewing Co APAC on Jul 19, they expect price between $5.13 to $6.02/share, seeking to raise up to $9.8 bil.  And at top end, Bud APAC market cap would be near $64 bil.  Goal of IPO remains two-fold: 1) “address investor concerns about [ABI’s] debt load of more than $100 bil,” as Financial Times put it; 2) find more local partners to build ABI’s Asian biz.

Latter motive very much on ceo Brito’s mind when he spoke to FT recently.  “The number one reason to do the listing is to have a platform in the region that is seen as closer to those markets and connected to what the region will do, since that’s something that can be attractive to local groups.”  Potential sellers are “more comfortable” joining buyer with local presence, Brito noted.  “That’s what we saw in Latin America, so we’re betting that the same model could work in Asia.”  Not a lotta big targets in region, as FT and others point out.  But they include Thai Bev (key player in Thailand and Vietnam) and Philippines’ San Miguel.  As Barclays analyst told FT: “It will be interesting to see if ABI can really line up deals in Asia since there are not that many viable, quality targets in the region that are big enough to move the needle.” 

Other fun facts about this listing.  It’s biggest IPO of the year, surpassing Uber’s $8.3 bil, even at low end of share price.  Also, it’s largest IPO ever in food/bevs, ahead of Kraft Foods’ $8.7 bil back in 2001, Wall St Journal notes, and more than double next-largest, Suntory in 2013.  “The IPO pricing values Budweiser Asia at 16-18 times its enterprise value (EV) to EBITDA ratio, one term sheet shows,” reports Reuters.  “That compares with an EV-EBITDA value of 11 [times] for AB InBev itself, according to Refinitiv data, 15 for China- focused Tsingtao and 10 for Japan’s Kirin.”  So, day after largest US beer distrib Reyes Holdings announced $2-bil sale of its food biz Reinhart, largest global brewer prepares listing to raise nearly $10 bil.  There’s always another beer deal down the road.

Did someone say US beer biz needs a strong July 4?  Not a lotta momentum built in Jun, but numbers quite a bit better than May.  For 4 wks thru Jun 22, volume -1.3% in Nielsen all outlet scans.  That’s almost a point improvement vs -2.2% volume trend for 4 wks thru Jun 1.  Yr-to-date, volume -0.4%.  Meanwhile, $$ sales +1.7% for 4 wks, +2% yr-to-date.  AB and MC trends very similar -4.3% and -4.5% for 4 wks respectively, with AB $$ down 2.3%, MC $$ down 3%.  Constellation continues +8-9%, Boston revved to +24.5% (8 pts ahead of YTD trend) and Mike’s still rockin’ near 50% gains.  Diageo stayed on double-digit $$ track.

No relief for mainstream segments; premium volume -7.1% for 4 wks, economy -3.9%.  Every top-10 brand in those segments took a hit for 4 wks.  So, above premium, still tracking +6-7%, grabbed 3 share of volume and $$ in most recent period.  FMBs still runnin’ ahead of YTD pace: +25% for 4 wks vs +22% for approx 6 mos.  Imports up modestly, +3.6% in Jun.  Super premiums up 6.4% with Ultras afire.  Cider saggin’ again, -8.7% for 4 wks.  Seven of top-10 growth brands in most recent period have some kinda flavor: 3 White Claws, a Truly, Naturdays, Lime Cactus Ultra and MC’s Cape Line.  Craft still soft; volume -2.4% for 4 wks.  But Blue Moon Belgian White and Sierra Nevada back in black for 4 wks, New Belgium +11%.