CT’s Two Roads is one of latest craft brewers to enter hard seltzer arena with its own twist, founder and CEO Brad Hittle shared with INSIGHTS last wk (see sibling pub Craft Brew News – Jun 19 issue). H2Roads “craft hard seltzer” made with “100% real fruit in lieu of extracts and flavorings,” co touts in press release today. Indeed, Two Roads lookin’ to play up “craft” elements in branding. “Using extracts or processed flavoring agents was a non-starter for us,” said brewmaster Phil Markowski. And “the natural byproduct of real fruit is real color,” which further differentiates brand amid mostly clear-liquid offerings from competitors, sez co. Tagline is “Real Fruit. Real Color. Real Refreshing.”  H2Roads hard seltzers clock in at 4.5% ABV with 3 flavors – Raspberry, Grapefruit, and Cranberry Lime – varying between 95-115 calories, 2-3g sugar and 2-4g of carbs depending on fruits used.

Two Roads Brand Expects 68-70K Bbls in 2019; Looking for Managed Growth & Efficiency Growth Two Roads brand family projects 68-70K bbls in 2019, up from 64K bbls in 2018, Brad shared. Currently, depletions up 6% YTD, tho co expects pace to pick up in 2d half with boosts from H2Roads and several other beer innovations comin’ soon. Gotta note, 35-40% of biz is in CT, and depletions up 10% there YTD. Plus, its contract brewing biz remains solid, totaling 80K bbls in 2018, with VT’s Lawson’s still crankin’ as co’s #1 brewing partner among distinctive portfolio of contract volume. These days, it’s about “managed” sales growth coupled with “efficiency growth,” Brad added. Innovation, sales and marketing, and quality and efficiency investments are key areas of focus going forward. All told, Two Roads finding new ways to grow amid tuffer competition, while better managing complexities of its unique biz model, and has solidified itself among top new regional brewers that opened within the last decade.

Following the departure last mo of Beyond Beer veep Randy Ornstein, AB has now named 26-yr AB vet Sanjiv Chhatwal to become new Beyond Beer veep.  This is important role at AB as it seeks to build $1-bil biz in Beyond Beer, including both alc bevs and non alc bevs.   For last yr, Sanjiv vp of sales in India for ABI. But he is well known to distribs, having spent previous nearly 5 yrs as region veep in southeast and several yrs before that as veep of trade mktg.   In brief interview with INSIGHTS, Sanjiv talked about “huge growth area” of Beyond Beer, where “we need to innovate and change the game” with a “challenger” mentality.  That’s main lesson Sanjiv learned in India, he said, “how to act as a challenger and question the status quo.”  There are many segments that are “ripe for disruption,” Sanjiv said, and AB will bring that “innovation mindset… the mindset of a startup.”  Then too, “we cannot win if we don’t work closely with wholesalers,” Sanjiv added, citing lessons learned from previous AB roles.  Meanwhile, AB has fallen far behind in seltzers.  And that is increasingly on its mind.  It is reportedly trying to push up Natural Seltzer launch, and other initiatives are on the way.

While we continue to wait for US Supreme Ct to decide the Tennessee residency requirement case, a free speech case decided today could have implications for TTB’s treatment of alcohol labels and advertising.  In today’s case, a clothing maker challenged a US Patent and Trademark Office (USPTO) decision not to register its FUCT line.  Govt relied on Lanham Act, which bars registration of marks that are “immoral, deceptive or scandalous.”  A coupla years ago, Sup Ct tossed another Lanham Act provision that barred “disparaging” trademarks, ruling the provision “violated the First Amendment because it discriminated on the basis of viewpoint.”  Today’s decision took the exact same position, that the bar on “immoral or scandalous” trademarks also “disfavors certain ideas.”  So, FUCT appears good to go. 

Citing these Lanham Act cases last week in his presentation at the Natl Conference of State Liquor Admins, alc bev atty Richard Blau said they are “directly relevant to the labeling requirements under the Federal Alcohol Administration Act (FAA), as the words and logos on alcohol labels frequently contain trademarks registered with the USPTO, and many times those trademarks are obtained before industry members apply for COLAs” (certificate of label approval).  Therefore, question is “whether the federal government can articulate a substantial interest for regulating alcohol labeling that is distinct and different from the interest cited for regulating trademarks,” which has now been rejected by the US Supreme Court.  Recall, the FAA Act similarly bars labels that are “disparaging of a competitor’s products or are false, misleading, obscene or indecent.” In past, Richard notes, courts haven’t been very kind to alc bev labeling/advertising restrictions, tossing prohibitions on displaying alcohol content and ads that mention price and an attempt to bar Bad Frog beer’s label, which pictured an amphibian flipping the bird.  (Richard did not mention it, but federal court also punished Michigan alcohol regulators for attempting to ban Raging Bitch beer.) 

TTB is in the middle of revising its labeling and advertising regs, ostensibly to reflect “contemporary case law,” Richard points out.  But they still prohibit labels that contain a “false or misleading statement that explicitly or implicitly disparages a competitor’s product,” (note too that MC’s case vs AB charges “misleading, deceptive and disparaging” claims about corn syrup as violating same Lanham Act).  They also continue to bar “obscene or indecent” labels.  Today’s decision could make TTB’s rules “ripe for a challenge,” Richard concludes, adding “time will tell whether the courts will apply the rationale” of these two Lanham Act cases “to the FAA Act, or whether the courts will apply a higher level of scrutiny given the regulated nature of alcohol.”          

 A one-year extension of federal excise tax cuts that expire at end of this yr is in sight. US House Ways & Means Committee passed bill of assorted tax provisions last night, including measures that track tax relief for alc bev manufacturers and importers in separate Craft Beverage Modernization and Tax Reform Act. So this could be broader legislative vehicle to at least temporarily extend much-appreciated tax relief for brewers (and others) of all shapes and sizes. Leaders of trade orgs still pushing for separate permanent extension via CBMTRA. But both Brewers Assn prexy/CEO Bob Pease and Beer Inst prexy/CEO Jim McGreevy pleased that 1-yr extension included in House bill, natch. “This is merely the first step in a longer process,” Jim wrote to members in note last night. Must pass full House, while separate Senate version also in process, followed by needed reconciliation if versions differ. Meanwhile, support for CBMTRA expanded to 229 House members, Bob pointed out.

Constellation’s cannabis partner Canopy Growth reported net revs of $94 mil (Canadian) up 313% in qtr thru Mar, ending its fiscal yr.  Its revs for yr were $226 mil, up $150 mil from yr prior.  But total revs only 13% ahead of 3d qtr Oct thru Dec ’18 as recreational sales actually below the prior quarter, reported Mkt Watch.  Meanwhile, Canopy Growth reported operating expenses over 2.5x its revs, all the way up at $243 mil (Canadian).  Spent $53 mil on sales and mktg in qtr, $66 mil on gen and admin, up from $14.8 mil and $16.9 mil respectively.  What’s more, share-based compensation expenses jumped to $93 mil from $20 mil.  

Put it all together and no wonder Canopy Growth is still losing a heckuva lot of money. It reported $174.5 mil loss from operations in latest qtr and $577 mil loss for full yr.  Stock didn’t react well to these results.  Down 8% at presstime.  But stock mkt cap still at $13.8 bil, about $2 bil greater than Molson Coors. And it still had $4.5 bil (Canadian) in cash, cash equiv and securities available as of Mar 31.   Meanwhile, Constellation stock down 2%.  Its first fiscal qtr Mar-May will be reported next week. Given its slightly slower sales growth, Canopy’s losses and question marks, evolution of wine and spirits portfolio and more, Constellation’s results will be even more closely watched than usual. 

Despite lotsa “hand wringing these days regarding the future of alcohol consumption,” NBWA economist Lester Jones noted in recent blogpost and presentation to state regulators earlier this week (NCSLA), he sees glass half-full, not half-empty.  And it’s likely to fill up some goin’ forward.  Why?  Deep dive into demographic and personal consumption expenditure data tracked by US govt shows: 1) younger population shrinking (significantly) as percentage of US population; 2) their incomes are growing much more slowly than older counterparts and their spend on non-alc items has slowed.  In fact, total population under age 25 shrunk during this period, by 634K, 0.6% and that age group’s share of total population slipped from just under 34% to 32%.  Meanwhile, number of 55-74 yr-olds expanded by over 13 mil and their share of population increased from 19% to 22%.  More important: spending power among different groups.  Among those under 25, compound annual growth rate (CAGR) in spending just +1.2% 2010-2017 and only slightly higher, +2.5% among those 25-34 (millennials), vs +3.5% or higher for each older group.   

What’s this mean for alc bevs?  While expenditures on alcohol relatively stable at about 1% of total spend during this period, very different patterns in spend among different age groups from 2010 to 2017.  For younger consumers, “rent, entertainment, eating out, education, transportation and health care have all taken bigger bites out of their total expenditure budget since 2010,” Lester shows.  This “forced budgetary constraint,” has knocked back their alcohol spend, he adds.  At same time, trading up knocked back volume.  Among those under age 25, 7-year CAGR for alc bev spend declined 3.5% from 2010-2017; up just 2.8% among 25-34 yr olds.  Both of those CAGRs significantly lagged overall alc spend CAGR of +4.4% and the 6%+ trends for those age 45-64. 

“The End is Not Near for Alcohol or Beer”  Key question is whether the moderating trend in alcohol spend among younger consumers will continue as they age.  Again, Lester’s optimistic.  “Younger consumers have a great potential to impact the alcohol beverage market as they balance increases in current expenditures across the board.”  Then too, alc bev marketplace expanded significantly in recent years, adding many thousands of suppliers, retailers and products/brands.  Also, over 1800 alc-oriented laws passed since 2012 mostly aimed to “accommodate new technologies, new business models and new consumers.”  Net-net: as younger consumers age, they’ll spend more, sez Lester.  That “will translate into an absolute increase in spending on alcohol following a steady 1% share of total expenditures.”  Thus, “the end is not near for alcohol or beer, it’s the beginning.” 

Domestic taxpaids down 1.5% and state shipments flat, but depletions something else again. Scan data and anecdotal reports pointed to soft May.  In Region 3 (midwest), AB sales-to-retailers down 8% on selling-day adjusted basis.  Down 2.8% for 5 mos.  Bud Light down 6% for 5 mos, Bud down 7%.

Total US May taxpaid shipments down 1.5% as noted yesterday, so slightly surprising to see that shipments in 50 states down just 40K bbls, 0.2%.  Suggests that May imports (not yet released) strong.  Also, CA shipments bounced back in May; up 176K bbls, 9%.  Still down 2% for 5 mos.  At same time, rest of US down more than 1% in May, including 109K-bbl, 5.7% drop in TX.  Yet TX still up 2% for 5 mos.  NY down 64K, 6% in May. That’s about half its 122K-bbl, 3% drop for 5 mos. One more interesting point: beer continues to outperform in 2 long-standing legal recreational cannabis states.  Beer up 55,000 bbls, 3.8% in Colo, 28,000 bbls, 1.6% in WA.  Down 1% in OR. So, a mixed bag. 

On top of tariff battle with Trump Admin, Beer Inst seeks to join legal proceeding in US Ct of Intl Trade to recoup “substitution drawback claims” based on beer US brewers imported from foreign countries (other than Canada and Mexico) between 2015 and 2018.  Never heard of “substitution drawbacks?”  You’re not alone.  Here’s the deal, simplified.  Passage of law in 2016 opened door for brewers to receive refunds of the duties/ excise taxes they paid on beer they imported between 2015 and 2018.  Under that law (hypothetically), if brewer imported 100 bbls of beer, paid $100 in excise taxes/duties, it could file for refund from US Customs and Border Protection of $99, if it also exported 100 bbls during same period.  (That’s even tho US brewers don’t pay any US excise taxes on exported beer.)  Naturally, brewers filed claims for those refunds.  Subsequently, regulations amended late last yr to end drawbacks from Feb 2019 forward.  Final Rule also disallowed the retroactive claims that had already been filed but not yet paid.  

Roughly half of exports go to Mexico or Canada, ineligible for refunds, but Beer Inst still sez its members filed legit claims last yr for “tens of millions of dollars in refunds of excise taxes paid upon importation.”   This week, Beer Inst filed request with Intl Trade Ct to join suit brought by Natl Assn of Mfrs (NAM), which is challenging this “Final Rule to limit drawback claims filed before” Feb 19, 2019.  That suit seeks declaration that rule “invalid” at least to extent that it bars those claims.  More briefs to be filed next week.  Tho Mexico and Canada are biggest mkts for US beer, US brewers exported almost 4 mil bbls to other countries last yr.  And both AB and MC import beer from and export beer to Europe and elsewhere.  So, that’s gotta be lion’s share of the “tens of millions of dollars in refunds” at stake. 

Beer Inst prexy Jim McGreevy told INSIGHTS that BI joined NAM’s suit because “brewers filed drawback claims in good faith. We believe the Department of Treasury should not pick winners and losers and should honor all existing drawback claims from alcohol producers.”  Further, BI looks forward to working with NAM to ensure Treasury Dept “pays all historic duty drawback claims filed in accordance to federal law.”  Alc bev biz is “a highly competitive industry, and every day America’s more than 7,000 active breweries along with beer importers continue to provide Americans with an ever-growing variety of beer while holding existing brands to the highest level of quality. Ensuring brewers receive existing drawback claims is integral to brewers being able to meet these obligations.”

Heineken has “best intrinsic top line growth of the major global brewers,” notes Bernstein’s Trevor Stirling in lengthy analysis this morn, rating co “outperform.”  Asia Pacific “has been the stand out region,” adds Trevor (it’s currently run by former HUSA prexy Dolf van den Brink).  Even the “Americas have consistently delivered mid-single digits volumes, as strong Mexico and Brazil more than outweighed a soft USA.”  Trevor doesn’t dwell on US woes.  As on Heineken conference calls, it’s barely mentioned.  Also interesting: tho Trevor notes Heineken’s very manageable debt level (2.4x debt to EBITDA), he doesn’t speculate on potential M&A.