Fifth anniversary of legal recreational cannabis in Colorado got front-page in NY Times today.  Very lengthy article a bit fact-light and largely anecdotal, but shows legal cannabis to be bit of a mixed bag.  Key takeaway: tons of cultural change as cannabis normalized, but in “surprising ways that often defy both the worst warnings of critics and blue-sky rhetoric of the marijuana industry.”  There’s been uptick in cannabis-related emergency room visits, and higher rates of mental-health issues linked to cannabis. But fears of widespread youth use haven’t come true; no increase in youth consumption since legalization and a decline in school expulsions due to drug issues.  Marijuana arrests plummeted, of course, but minorities still much more likely than whites to be arrested for cannabis crimes.  While medical and recreational bizzes humming along to tune of $1.5 bil in sales, black market hasn’t dried up and cops are busting lotsa illegal home-grow operations.  Violent crime rose in state, but “it’s almost impossible to attribute broad changes in crime rates to just one cause.”  In Denver, cannabis arrests down 25% over 5 years and make up less than 1% of overall crime.   Meanwhile, legislators continue to tweak laws.  This year, they approved home delivery, investment from outside Colo and by publicly traded companies and okayed “marijuana hospitality establishments” that may be exempt from indoor clean-air laws.        

In Illinois, where recreational use goes legal Jan 1, law passed by state legislature allows local communities to decide if/where adults can partake.  Loophole may allow smoking cannabis in bars, restaurants and other bizzes, Chi Sun Times reports, exempting cannabis from Smoke-Free Illinois Act that bars smoking tobacco in most public places.  Law’s architect said “it made the most sense for [local officials] to figure out as it suits their communities.  It’s really about licensing social consumption spaces, and that’s left very open for locals to determine what they want that to look like.”  New Chi Mayor Lightfoot mum about licensing plans, promising city officials will work “to ensure this legislation is not only rolled out safely and equitably throughout Chicago but also enhances our local economy and community businesses while prioritizing public safety.”

Pay to Play in California  Talk about cannabis-alc bev parallels.  “Some [cannabis] retailers in San Diego and Los Angeles…are asking anywhere from $1,000 to $50,000 a month from brands, depending on how much shelf space they want in how many stores.”  Yep, slotting fees are a thing for cannabis in Calif, reports Marijuana Business Daily.  Most common request:  $5-$10K per month for “prime real estate inside shops.”  Shop owners say they need the extra $$ to survive and compete with black market.  “This was always going to happen,” said one big grower, adding: “You don’t think Proctor & Gamble isn’t paying for shelf space?”  Not surprisingly, smaller “craft” brands that can’t pay are getting pushed off shelves. 

Just as interstate shipping a growing issue in alc bevs, could be coming to cannabis too.  No cross-state shipping allowed in US now, even between states where recreational use legal.  But Oregon, where licensed growers are sitting with 6.5 yrs of inventory, recently passed law to allow growers to export as soon as fed law permits, Wall St Journal reports.  At same time, consumer prices for cannabis down 50% in 2 yrs, to less than $5/gram.  Prices similar in neighboring Wash, tho higher in Calif ($9.60) and Nev ($14), according to data from Headset. Those states licensed fewer growers than Oreg, WSJ sez.   

Washington took “very strict” approach to licensing/investment, does not allow production/retail integration and limits # of licenses, head of State Liquor and Cannabis Control Board Rick Garza said at recent Natl Conference of State Liquor Admins.  Approach patterned after alc bevs (Wash was control state for decades) and to ensure “large tobacco, large alcohol” companies would not come in and gobble up the biz.  Rick sees path to “interstate commerce” via more “conservative” states barring cultivation, perhaps opening dispensaries to sell product grown elsewhere.  He also pointed out that no state has chosen a “control” model for cannabis yet, where govt plays prominent role in distribution and/or sale.  Public health advocates would probably be happier with that model.  If states were the cultivators, he suggested, oversupply would be less likely as state would more closely control production/price. 

Several other interesting points from Rick: 1) his state “had no idea how successful [recreational cannabis] would be,” as $1-bil mkt there now rivals spirits; 2) tho all states so far imposed flat tax on retail sales, Wash is considering a “potency” tax (“should we steer consumers to lower potency?”); 3) with all the concern over volatility, overproduction and other issues, over 4 years WA Liquor and Cannabis Control Bd has “never heard” a consumer complaint about how biz evolved, i.e. selection, availability, etc. 

In Canada sales of edibles/bevs pushed back to mid-Dec (from Oct).  CEO of Molson Coors-Hexo JV (Truss), told Toronto Star “our ambition is to be the beverage specialist.  We want to lead this category and we will lead this category.”  Not if Constellation’s partner Canopy meets its expectations.  On Constellation conference call last week, CEO Bill Newlands said he “was not pleased” with Canopy’s recent results, and key Ontario mkt behind other provinces, but Canopy “mostly on track.”  Constellation remains “very bullish” on long-term oppy and “happy we made the investment when we made it.”  

Reyes Holdings will sell its Reinhart Food Service biz for $2 bil to Performance Food Group, with deal expected to close by end of yr pending regulatory approval.  Performance will become a co with $30 bil in revs, adding Reinhart’s $6 bil in revs.  Reyes will get tons of additional capital to pay down debt and deploy against its other bizzes.  More beer deals reportedly in works.  Recall that after several yr lull in beer deals for Reyes (it bought more Coke bottlers during period), it ramped up in a big way last yr with several acquisitions of Constellation volume in CA, acquisition of Loveland in VA and more.  So Reyes now back in hunt for beer deals, with capital to do ’em.

Meanwhile, Performance, a public co, paid 10.6x Reinhart’s adjusted EBITDA of $164 million, after taking into account approx $265 mil in tax benefits, Performance reported.  Reinhart adjusted EBITDA margin only a little more than 2.5%.  Food service is a tuff, low-margin biz and Reyes not one of top 3 players.  Performance Food Group reported $387 mil in EBITDA in its last fiscal yr thru Jun 2018, a slightly lower EBITDA margin than Reyes.  It sez it will save $50 mil on this deal.

White Claw franchise alone had 5 of top 25 growth brands in $$ sales in IRI multi-outlet yr-to-date thru Jun 23, consultant Bump Williams’ Monthly Update showed.  Seltzers got 10 of top 25 growth brands overall. Those 5 White Claw brands grew over $150 mil.  That’s more than #1 growth brand Modelo Especial, which grew $145 mil, 19% (Modelo Chelada Limon y Sol got another $8 mil incremental, #21 growth brand).   Mich Ultra #2 growth brand up $131 mil, 15%.  Then again, Mich Ultra Pure Gold #5 growth brand and got $37 mil in growth.  And Mich Ultra Lime Cactus at #13, with $$ sales up $15 mil.  So 3 Mich Ultra brands grew $183 mil, 2 Modelo brands grew $153 mil (other variants like Negra not on list of top 25, but still up).  And 5 White Claw brands listed, including Variety Pack, Black Cherry, Mango, Grapefruit and Raspberry, collectively up $153 mil, with over half of that in variety pack. It’s #3 growth brand overall, $$ sales up $81 mil, 288%.  Ultra, Modelo, White Claw franchises grew by almost half a billion $$ in first half.  Not bad.  

Also notable among growth brands: 2 Truly mixed packs (Berry and Variety) grew over $50 mil, plus 3 versions of Natural Light grew almost $50 mil too.  Natty Light up $19.7 mil, 4%, Naturdays up $19 mil, all incremental and Natty Daddy up $9.35 mil, +28%.  Only 1 craft brand made top 25 growth brands: Sierra’s Hazy Little Thing up $10.7 mil, 125%.  That’s about as much as Bon & Viv’s variety pack, +$10.9 mil, 104%.  AB had 8 of top 25 growth brands.  MC had just 1 of top 25 growth brands (Miller Lite up $8 mil, 0.9%).  Constellation had 5 of top 25 growth brands as did Mike’s.

A coalition of 14 consumer and public health groups, ranging from Consumer Federation of America to American Institute for Cancer Research, asked TTB this week to add a specific “cancer warning on all alcoholic beverages.”  In a letter to TTB responding to TTB’s call for public comment on its proposed rulemaking to modernize its labeling and advertising regulations (see yesterday’s Express for some of Beer Inst’s comments on TTB’s proposal), the groups “urge” this message: Government Warning: According to the Surgeon General, consumption of alcoholic beverages can cause cancer, including breast and colon cancers.  This message, the groups suggest, should be in addition to the current warnings on all labels, “the three warning statements should rotate on alcohol labels,” not appear together, and TTB should require the warning statement “to be more prominent and conspicuous.”  Over its 8 pages, the letter to TTB makes these points/claims:

·      “The available scientific information shows that consuming ‘even one drink per day’ of alcohol increases cancer risk.”

·      “According to the National Cancer Institute, ‘there is strong scientific consensus that alcohol drinking can cause several types of cancer.’”

·      Consumers “remain unaware of this link.”  A 2017 survey showed 39% of American adults knew alcohol increases cancer risk, actually down from 41% in 2001.

·      “Cancers associated with alcohol consumption affect nearly 90,000 Americans each year.”  Alcohol is the third-largest contributor to cancer cases among women, the fourth-largest among men.

·      “Overall, researchers have estimated that daily consumption of less than a drink-and-a-half…accounts for 26-35% of alcohol attributable cancer deaths in the US each year.” 

·      “While even some public health researchers argue that the benefits of moderate drinking outweigh the risks, “recent research suggests that at least some of the benefits attributed to moderate drinking may be overblown.”

No doubt, this letter, and the groups’ position, will also figure prominently in discussions over revisions to the US Dietary Guidelines.       

AB today announced that it “will acquire the remaining stake in the disruptive wine company” Babe Wine, thru affiliate Zx Ventures.  Recall, Babe sells wine in a can, founded by Instagram star Josh Ostrovsky and David Oliver Cohen.  They got a good chunk of time onstage at AB’s SAMCOM conference in Jan.  Babe Wine is “consumer led” brand that aims to be the “Bud Light of Wine.”  And it has “huge aspiration” to be #1 canned wine in the world, said Josh.  Since partnering with AB, Babe sales “increased dramatically,” said AB. 

Will Babe get more resources now that it’s more fully part of AB system?  “We’re about investing,” said new brands veep Marina Hahn.  “We believe in it.”  With Babe, AB looks to “shake things up,” said Marina, by “democratizing” wine.   Like other brands that are part of Beyond Beer, including Drinkworks and Cutwater Spirits, “we’re all about disruption, innovation and convenience,” said Marina.  The convenience angle is consistent.  With Drinkworks, AB “reinventing home consumption.” Babe is “wine in a can.” Cutwater sold at stadiums.  In general, AB “reshaping…staid categories.” So far, Babe seeing “really, really good results,” said chief sales officer Brendan Whitworth.

AB Distribs “Overwhelmingly” Preferred and “Optimal,” Sez Brendan; Response Re Pestalozzi  Babe currently in 27 states, mostly with AB distribs, especially in new states, tho it had some existing arrangements with wine and spirits distribs. Going forward, “overwhelmingly strong preference” is for AB network as “optimal route to market,” said Brendan. But AB also is looking for distribs with the “right level of capabilities” and “right level of buy-in” to accomplish AB objectives with new brands and “ultimately” distribs that sign the contract.  Babe “reinforces the importance” of Pestalozzi agreement, said Brendan, who took exception to critical comments from anonymous distrib INSIGHTS published yesterday as “unbalanced…. We always welcome open and candid dialogue,” said Brendan. But “we feel this was really off target” and “misrepresents” agreement and situation.  Brendan encouraged that distrib to talk to him directly. 

After intensively studying wine and spirits distribution agreements and working with outside consultant, AB “very confident” in how it put Pestalozzi together as “nice blend” of AB equity agreement and what’s out there in wine and spirits world.  As for Babe, now AB can “fully embrace as part of our entire portfolio,” added Brendan. 

Numerous questions from analysts on Constellation conference call this morn around health of Corona family.  CEO Bill Newlands acknowledged that all in, Corona family “flattish,” but he’s “comfortable” with where family is and expects “solid year,” that family will grow.  Lotsa puts and takes, including going against intros/rollouts of Premier/Familiar last yr, other comps, lousy weather in key mkts and seltzers taking bigger chunk of high-end growth than expected.  But Bill noted Premier still up double-digits vs rollout, velocity increasing in most recent period (+25% for most recent 12 wks); Refresca off to “excellent” start (especially variety pack, tho very early days) and Jun depletions for Corona family, despite loss of day, running better than yr-to-date.  Corona Extra up yr-to-date thru Jun 16 in IRI, Bill added, and Corona family’s share of voice within beer “will be up this summer.”  Meanwhile, “focus for the summer” is to “maximize potential” of Premier and Refresca, Bill said.  Other comments from call:

·      Bill pointed numerous times to Modelo’s accelerated 17%+ depletions growth rate in fiscal qtr.  Modelo, Premier’s double-digit growth, Pacifico’s return to double-digit growth and modest contribution from Refresca were key drivers of Constellation’s 6.6% depletions growth in its Q1.

·      Modelo Especial draft business up 20%+.  Overall, Constellations on-premise volume up mid-singles vs industry trend of down low-singles.

·      Corona Refresca ACV at 30%+ in early days.

·      Constellation beer faces 10% depletions gain last yr in Q2 and lost day at end of Jun won’t be picked up until Q4, CFO David Klein noted. Then too, some of shipments timing benefit at end of fiscal ’19 will be given back in current qtr.  So, Constellation expects net sales/oper income to be up mid-singles in its Q2. 

·      Marketing spend as share of net sales ticked up to 11% in Q1 to drive summer sales; ratio expected to be closer to 9.5% for full yr.

·      What about seltzer? Constellation continues to “watch carefully,” said Bill, and will “explore all options” where it can participate profitably, but focus right now “entirely around Refresca.” 

·      Constellation continues to target beer operating margin of 39% for full yr, said David.

·      Net-net: “we’re quite pleased with how the year is setting up,” Bill concluded.

Constellation Brands Beer Division reported solid sales-to-retailers, up 6.6% in Mar-May qtr.  Shipments up 4.2 mil cases, 5.4%, which Constellation called “higher than expected.”   Recall Mar shipments was tuff drop, down double-digits, so strong bounce back in Apr-May.  Revs jumped $100 mil, 7.4% to nearly $1.5 bil.  And operating income up $60.6 mil, 11.7% to $580 mil.  Beer at 83% of Constellation’s total oper income in qtr.  Constellation Brands Beer Division’s operating margin jumped 150 basis points in qtr to 39.3 on favorable pricing and currency.   Co didn’t change its guidance on beer sales $$ growth and operating income, both of which it still expects to be up 7-9% in fiscal yr ending Feb 2020. 

Modelo Especial depletions up 17% in qtr.  Corona Premier up double digits.  Refresca launched nationally in early May and brand “positioned for success.”  Release offers no early read on Refresca results.  Constellation now expects its sale of about 40% of its wine biz to close in 2d half of calendar 2019 (originally expected to close in Jun).   Constellation stock spiked about 7% in pre-market trading as it beat consensus estimates on both earnings and revs. 

For 6 mos thru May, Constellation shipments +8.7 mil cases, 6.5%, again far outperforming US beer biz.  Net revs +8.2% to $2.6 bil and operating income expanded by nearly 14% to just over $1 bil.  So operating margin hanging in just under 40. 

Thoughtful, eloquent response from well-regarded distrib to question posed in yesterday’s Express “Is AB Getting Better?” What follows is excerpt of some length.   “I’m disappointed to report that although I recently felt that AB was indeed getting better,” this distrib began.  “Recent performance and actions have me now regretfully realizing they are not,” this distrib began.  First, he granted AB props for “field level relationships and communication” which “greatly improved over the past year,” adding that’s “critically important.” Then too, AB ceo Michel Doukeris “seems to have quickly assessed the U.S. market and identified what AB must do to grow again.”   But, distrib continued, “inventory levels and the Pestalozzi Agreement are specific and valid indicators that not enough has changed. Ignoring distributor forecasts and putting forward a bad agreement for wine and spirits is not a recipe for good relations and loyalty,” he said.  Getting better? Another distrib commented: “I feel like we’re on a seesaw.” 

First distrib’s response continued: “If Tito’s offered us the Pestalozzi Agreement we would quickly sign it because they would also be bringing us something of significant monetary value. Yet AB, the world’s largest brewer, who has not yet been able to produce organic growth for its beer brands in the US since they acquired the company ten years ago, puts forth an agreement for wine and spirits that offers us nothing. They bring absolutely no value to the table yet they put forward an agreement as if they are bringing us Tito’s. Given their lack of success with beer, what are the odds they are going to win in the highly competitive wine and spirits industry? Especially if their distributors are not willing to invest ahead of whatever products they bring us.”

This distrib pointed to seltzers as example.  AB “purchased the original Spiked Seltzer brand but then did not know what to do with it. Consistent with their DNA, they just thought that all they had to do was buy it. Now they are so far behind in the category that they may never catch up. It takes more than buying brands to be successful. It takes years of sound and consistent selling and marketing along with distributor partners who feel that investing effort and money in support of that brand will provide a worthwhile return.”

He concluded: “Every time I feel like AB is beginning to understand that winning formula, they force product upon us, submit something like the Pestalozzi Agreement, or otherwise shoot themselves in the foot. That along with their inability to stay focused has many distributors once again frustrated.”

Alc bev industry attys started weighing in on meaning/implications of US Sup Ct decision tossing Tennessee’s residency requirements for retail liquor licenses soon after Court posted it yesterday morn.  Everyone acknowledges decision narrows 21^st Amendment grant to states to regulate alc bevs, especially laws which have strong whiff of protecting in-state players at expense of out-of-state players.  Decision basically silent about middle tier, tho majority opinion clarified that anti-discrimination principle of dormant Commerce Clause indeed applies to laws regulating distrib and retail tiers, not solely to products/producers, as many regulators (and wholesaler advocates) interpreted previous Granholm decision.  No one sees sky falling or serious threat to 3-tier system at this stage, but lotsa acknowledgement that retailers seeking to ship across state lines, without having “brick and mortar” presence, are celebrating and will use decision to pursue that biz model.  Here are some comments:

“The portion of the opinion dealing with Section 2 of the 21^st Amendment is a blow to state authority and appears to be an effort to end any question created by Supreme Court decisions immediately after Prohibition.  This is the ‘definitive opinion’ that states’ rights advocates were seeking, but not the outcome they were hoping to achieve…. Smaller competitors in the manufacturing and retail tiers have many quarrels with state laws and are growing in political and legal sophistication.  Today’s decision gives advocates of interstate competition a lot of ammunition to challenge discriminatory state laws in the future.” Art DeCelle, McDermott, Will & Emery

“The Court was deliberate in clarifying that this case was not a ruling on the three-tier system. It reaffirms that the basic model and essential features of the three-tier system are legitimate. It recognizes that requiring industry participants to be physically present in the states where they operate – something NBWA believes to be essential to the three-tier system – is legitimate as well. More broadly, today's decision establishes a framework for state regulators and responsible industry participants to advance and support legitimate state laws that are essential to an orderly alcohol marketplace.  We are confident based on the Supreme Court’s comments reaffirming the public interest in state-led alcohol regulation that effective state alcohol laws will continue to withstand legal scrutiny.” NBWA

“The Court did not shoot down the underlying purpose of the requirement of local presence….  If anything [the majority decision] can be read to reinforce local presence as a valid state interest that does not discriminate so you do not reach the necessity of finding whether the means are justified. It even blesses limiting the number of licenses and the amounts of liquor sold.” Mike Moses, Siegel & Moses

“The majority decision reaffirms the proposition that any state law, including alcohol laws governing in-state distribution, can be challenged for allegedly violating the dormant Commerce Clause doctrine.  Any beliefs that the 21^st Amendment limits judicial review of alcohol laws to a rational-basis or minimal scrutiny level appear to be now and forever gone.  If a challenger alleges…that an alcohol law materially discriminates against out-of-state competitors…the government will have to provide competent and persuasive ‘concrete evidence’… that the challenged law:

·      Serves a bona fide public health and safety purpose or ‘some other legitimate non-protectionist interest’

·      Actually functions as an ‘essential element’ of the state’s means to achieving its legitimate end purpose and;

·      Is necessary because nondiscriminatory alternatives would be insufficient to further those legitimate purposes.

Although the Court did not address the full scope of its decisions, the rationale of the decision logically and presumably encompasses state laws that draw distinctions between in-state and out-of-state retailers.”  Richard Blau, Gray Robinson

“Under Tennessee Retailers, state laws that cannot be supported by evidence that they protect health and safety will likely fall, but state laws legitimately furthering health and safety interests, including physical presence requirements, will likely stand.”  RJ O’Hara, Flaherty & O’Hara

Did the court explain what it meant by “public health and safety?”  Not specifically, but the majority did point to “obvious alternatives” to the residency requirement that “promote responsible sales and consumption practices.”  For example: “State law empowers the relevant authorities to limit both the number of retail licenses and the amount of alcohol that may be sold to an individual,” (as Mike Moses points out above).  States could also “mandate more extensive training for managers and employees,” the majority also noted, and “even demand that they demonstrate an adequate connection with and knowledge of the local community.”  Finally, “the State of course remains free to monitor the practices of retailers and to take action against those who violate the law.”  Mike also points to a timely and extremely powerful link when asked how alcohol laws (and the 3-tier system) protect public safety: “Especially given the deaths in the Dominican Republic purportedly caused by counterfeit liquor…. Much of the counterfeit liquor emanates from Asia where sophisticated crooks can match a bottle, label and case packaging to perfection.”  Also: “I just had a wholesaler in Michigan conduct a recall pulling from retail accounts (2 days) on its own without waiting for instructions from California supplier.  It was a fizzing wine-based product that smelled like ammonia.”

Beer Institute filed comments yesterday with the TTB on its proposed rule changes to labeling and advertising regs (TTB-2018-0007; Notice No. 176), flagging two main areas of concern among lengthier list of comments, suggestions, concerns. First, BI “respectfully requests that TTB refrain from” imposing “minimum standards for the quantity of malted barley or hops used in the production of malt beverages.” Minimum standards “are neither necessary nor appropriate,” according to BI, since it “would be at odds with the FAA Act definition, could adversely affect products in the marketplace, and serves no compelling purpose.” (Gotta think BI has bustling hard seltzer products top of mind in this instance.) Also, BI flat out opposes proposed change to “expand the tolerance for alcohol content on malt beverage labels from 0.3 percentage points to one percentage point above or below the labeled alcohol content.” While TTB says it would “encourage use of an optional alcohol content statement,” particularly for smaller brewers, this change “will impact consumers,” BI argues. FAA Act requires labeling and advertising of malt bevs to “prevent deception of the consumer, to provide the consumer with adequate information as to the identity and quality of the product, to prohibit false or misleading statements, facilitate value comparisons,” BI cites. This increased tolerance in variance “does nothing to help achieve any of these objectives.” Across 10-pg list of commentary, BI “encourages TTB to promptly address the changes proposed by industry.”