Industry consultants Sam Kursh and Mark Hall provide sharply contradictory opinions on key issues in distrib Southern Glazer’s (SG) dispute with Great Lakes Brewing and Boston Beer in OH fed ct.   Issues include whether distrib can suffer “irreparable harm” from losing brands and concept/calculation of distrib’s “good will,” if any.  Beyond this lawsuit, their views have implications for any distrib/supplier that gets involved in termination battle, and/or needs to value brand/distrib rights.  Recall, Southern Glazer’s sued Great Lakes and Boston Beer for wrongful termination.  SG got rare preliminary injunction to halt Great Lakes attempted termination (Boston’s on hold too) last yr.  Great Lakes and Boston argue SG failed to get their approval for ownership change when Glazer’s and Southern Wine & Spirits merged.  Most of Glazer’s beer biz went to separate beer-centric operation; in OH they stayed with Southern Glazers’ Columbus branch, primarily a wine/liquor house, and primary reason Great Lakes and Boston want to move.  Case on tap for fed ct trial in Jul.  Documents include details of just how far apart Sam (who represents brewers) and Mark (SG) are on valuation/ damage issues.  Neither is stranger to beer biz.  Sam has done >100 brand valuations.  Mark ran AB’s distrib M&A dept for over a decade.  Here are 2 key areas where Sam and Mark differ.  More in Part 2.

Can Distribs Ever Suffer Irreparable Harm?  Key area where Sam and Mark totally disagree: whether distrib can suffer irreparable harm from termination.  Sam: “In virtually every case,” where distrib loses brand(s), whether move is voluntary or not, “there is no such thing as irreparable harm.”  Any harm, Sam insists, can be “monetized.”  That’s “incomplete,” sez Mark, who sez as matter of law “irreparable harm” occurs when injury can’t be fully compensated by monetary damages and if nature of loss “would make the damages difficult to compensate.”  That’s case here where SG Columbus branch faces loss of 75% of its beer revs (Sierra Nevada, which has not tried to terminate, most of the rest).  Sam sez a fair mkt value determination for lost brands would “fully compensate” SG for any “financial losses, including good will.”  Mark counters that reliance on FMV approach incorrect and ignores specifics of this case and “other forms of damage that, while difficult to calculate, are nonetheless significant” to SG’s biz.  Besides, tossing irreparable harm as concept when termination unlawful would lead to more suppliers violating franchise protections to force consolidation, Mark suggests.   

FMV is FMV, Sez Sam; Depends on Context, Sez Mark  Distrib rights bought and sold all the time, sez Sam and fair market value can be determined, regardless of why brands move and who buyers are.  Mark disagrees with notion of “one FMV that applies to all buyers.”  In-market buyers “can and will pay more for particular brands” than buyers from outside mkt, Mark believes.  FMV can also vary depending on “buyer’s respective synergies and particular circumstances.”  While Sam relies heavily on FMV, based on “willing buyer and willing seller,” Mark points out “there is no willing seller” here, and that makes a difference.  

In lieu of proposed 72-day suspension, NJ Alc Bev Control Div agreed to $1.75 mil “consent order” with Hunterdon Brewing Co, Sheehan family craft-distribution arm in NJ.  In addition, Hunterdon will hire 3d-party CPA firm to “ensure compliance” with NJ reporting requirements and hold annual compliance seminars.  Payments of $500K each spread out over 2 yrs, beginning Jun 15 this yr, and half of final payment will be waived if “no substantial violations” occur.  

Original notice of charges sought 120-day suspension for alleged violations between 2013 and 2016, including: 1) extension of credit to retailers beyond 30 days; 2) failure to maintain info transmittals, “other credit records” and mktg manual that details services to retailers and repayments; 3) providing “unequal financing for retailers repayment of draft tap systems”; 4) “inaccurate and misleading invoicing” regarding tap systems; 5) other recordkeeping lapses.

Hunterdon statement sez it “fully cooperated” with NJ ABC investigation.  Charges “stemmed from Hunterdon not maintaining accurate records and reporting delinquent accounts.”   Hunterdon has “taken steps to educate its employees” on NJ laws/regs and improved record keeping.  This is 2d Sheehan operation tagged with a big fine by a state ABC.  Recall, its Craft Brewers Guild (CBG) distrib paid $2.6 mil in Mass, and $750K to feds, in wake of pay-to-play charges there, tho CBG still in court battling state.

Despite decades of research that link moderate drinking to health benefits, including lower risk of heart disease and better cognitive functioning, several studies that emerged over last coupla yrs prompted some researchers/ advocates to cast doubt on those links.  Two more just appeared.  Yesterday, British Medical Journal ran study that found even moderate drinking, less than 2 per day, linked to kind of brain damage “that can cause Alzheimer’s disease and dementia,” as one report noted.  Moderate drinking was also associated with declines in language fluency, but not necessarily with other measures of mental acuity.  Authors pointed out “there was no evidence of a protective effect of light drinking over abstinence on brain structure or function.”   They acknowledged that the link is not causal, and two experts pointed out that other lifestyle factors weren’t taken into account.   But the authors concluded nonetheless that their findings support Britain’s “reduction in alcohol guidance” last yr and “question the current limits recommended in the US,” up to 1/day for women, 2/day for men.

Of course, headlines accentuated the negative: “This is your brain on alcohol – and it’s not good; Declines found even in moderate drinkers”; “Even Moderate Drinking May Dull the Brain”; “Social Drinking Might Cause Dementia.”  Meanwhile, a separate study appeared recently that even called into question any link between moderate drinking and heart health, especially for drinkers under age 55.  The authors concluded: “There remain grounds for skepticism about the hypothesis that alcohol use can be cardio-protective.”  Expect this skepticism to increasingly emerge as public health advocates push for new (and old) restrictions on alcohol sales, higher taxes, etc.

Molson Coors’ 22d annual meeting with analysts in boardroom of New York Stock Exchange yesterday afternoon turned out to be memorable, but not in way Molson Coors might have hoped.  “TAP Falls Flat at Analyst Meeting,” headlined CITI.  Stock tanked during course of meeting.  Dropped about 7% from peak to trough.  That’s almost $1.5 bil in value.  Gone. Whoosh.  Molson Coors stock now down well over 20% in 7 mos since deal to buy rest of MillerCoors consummated, in a period when mkt up double digits. That’s around $5 bil in stock value that went away, as many analysts rated it “buy” or even their top pick.   Down another 2 bucks so far this morn.  Now Molson Coors stock mkt cap down below $19 bil.  Compare to Constellation, at $36 bil.  That’s almost 2 to 1.  

Why did stock drop yesterday?  On one hand, Molson Coors put meat on bone of how it will get $550 mil in savings in next 3 yrs.  Savings will come in 3 buckets: 40% supply chain, 40% procurement, 20% shared services, with $175 mil this yr, $210 next yr, $165 in yr 3 as cfo Tracey Joubert pointed out.  So that wasn’t problem.  Problem was guidance for margin expansion of 30-60 basis points, far less robust than analysts had modeled to justify higher stock price.  Several questions at end of meeting dealt with this directly.  As one noted, Molson Coors revs are $11 bil, so increase in EBITDA margin of 50 basis points means $55 mil.  But if Molson Coors will get $175 mil in synergies this yr and EBITDA increased by $50 mil or so, that means less than 1/3 of savings flow thru to bottom line.  And that freaked out the Street.  One analyst showed us stock chart on his phone and said something like this: “Here’s stock when they said they would give clarity.” At $97 at 2 PM.  “Here’s stock after they gave clarity.” Under $90 at closing bell.  Not a good day.  

Beer Biz “Softer” April-May, MC Share “Improving”; Less Than 8 Share Above Premium; Up in 19?  On top of all the noise on earnings, beer biz trends ain’t great this spring.  Asked if slightly better MC trends continued in Q2, ceo Mark Hunter said “overall industry demand has been softer” Apr-May and you can “see it in Nielsen.”  But MillerCoors “underlying share” has “consistently improved,” he added.  Earlier, MillerCoors ceo Gavin Hattersley said MC got its “best share performance in 4 years” in Q4 2016 and Q1 2017, citing Nielsen All Outlet.  MillerCoors down 0.4 share to 26.4 of volume last 13 weeks thru 5/27.  It held 43.6 share of premium light, up 0.9, and 32.4 share of economy, down 0.4.  But MillerCoors got only 7.6 share of above premium, down 0.7 same chart showed.  Gavin showed one other chart to illustrate improvement, noting that gap between MC STR trend and industry trend has narrowed lots.  In the 3d qtr of 2015, industry STRs were flat, but MC down 2.5%.  Eight months later, in 1st qtr of 2017, industry STRs down 1.6% but MC STRs down 2%.  So gap narrowed from 2.5 points to 0.4 points.  

Yet towards end of meeting, Evercore ISI’s Robert Ottenstein brought up MC’s goal of flat volume in 2018 and up in 2019, which Gavin again called a “plan.”  Robert said that virtually everyone he talks to thinks that’s “a  stretch” and he pointed to stock’s drop during meeting, noting there might need to be big reinvestment and mkt “very nervous about that.”  Mark again pointed to better premium light trends, without massive reinvestment and credited better mktg, plans like MC has on those brands.  But at least yesterday, analysts did not react positively to what Molson Coors execs said.   In addition to CITI comment cited above, here’s sample from some other analysts: Molson Coors “has a lot to prove,” sez Consumer Edge’s Brett Cooper; “Managers See Growth We Don’t See,” sez Stifel’s Mark Swartzberg; “Margin Guidance Disappoints,” sez Susqehanna’s Pablo Zuanic. Yet both Pablo and Mark still have buys on stock, based on free cash flow and value.  

Connecticut’s key alc bev pricing laws – post-and-hold, minimum retail prices and uniform pricing (to retailers) – survived round 1 of Total Wine’s legal challenge in US District Ct.  But given that Total’s owner David Trone’s battled similar restrictions in MD in courts for over a decade (and won), no one expects CT challenge is over.  Indeed, David told the Hartford Courant “Total Wine & More will not stop fighting the package store cartel that rips off all Connecticut consumers.  We will work diligently on behalf of consumers to ensure that this pricing scheme in Connecticut does not continue.”  Fed judge painstakingly reviewed the statutes, arguments and past cases. She concluded none of the statutes pre-empted by federal antitrust law.  There’s a ton of talk about “unilateral” vs “hybrid” restraints, per se vs rule of reason analysis and parsing of court precedents (including cases involving virtually the same laws in other states).  But in the end, judge rejected Total’s arguments and ruled against pre-emption down the line.  

Notably, judge signaled early on that she was not concerned with consumer impact or wisdom of these laws.  Total argued in and out of court all along that CT pricing scheme is “price fixing,” unfair to consumers and restrains it from offering lower prices.  But “whether or not” CT pricing scheme “is wise is not a question for this court,” the judge wrote in an early footnote.  Court restricted to determining whether federal law pre-empts the state laws here, she pointed out, adding: “Arguments as to harm inflicted on the consumers by this scheme are more appropriately directed to Connecticut’s executive and legislative branches of government.” CT Gov Malloy has basically sided with Total, the legislature, not so much.  Note too, in this round, Total’s challenge was based solely on pre-emption issues and per se antitrust violations.  So there was no analysis of whether the pricing scheme was legit under “state action” immunity (if clear state policy goals are advanced and the state actively supervises the scheme). “Similarly,” the judge pointed out, “neither the defendants nor the intervenors,” including CT beer wholesalers assn which defended scheme, “have suggested at this time that any of the challenged provisions might be saved by the 21st Amendment.”  So, many more miles to travel in this journey.

The Most Interesting Man in the World “is about to start working with a new ad agency, assuming he survives an account change on Dos Equis,” Ad Age wrote, as it broke news that HUSA has moved from Havas, agency that created MIM back in 2006.  HUSA will show Havas work thru 2017, but chose Droga 5 to work “on the evolution of the campaign as well as new ways to engage our consumers,” HUSA told Ad Age. Droga 5 parted ways with HUSA only last summer, sez Ad Age as it joined ABI’s “roster of agencies” to “handle strategic planning and creative execution” for AB’s Best Damn line.  Droga 5’s “Dos Equis win could cause a conflict” with ABI, but no comment from ABI in Ad Age article.

Dos Equis has slowed. There are growing questions from distribs about new Most Interesting Man. So this move does not come as complete surprise.  Dos Equis franchise only up 0.5% in Nielsen all outlet thru May 27, tho Dos Equis Lager up 1.9%.  

Beer volume down 1.1% for 4 weeks thru May 27, Saturday of Memorial Day weekend, down 0.6% yr-to-date.  It was an especially weak 4 weeks for AB.  Volume down 3.4% and it lost 1.3 share of $$, compared to 0.9 yr-to-date. MillerCoors volume down 2.5%, same as $$, as it once again got literally no price realization.  It lost the same 0.6 share of $$ for 4 weeks as it had yr-to-date.  Meanwhile, Constellation gained a whopping 1.7 share of $$ for 4 weeks, easily the highest 4-week gain we’ve seen yet.  Gained 1.3 share of $$ YTD.  $$ sales up 16% for 4 wks, compared to 15% YTD.   Total craft volume declined 1.1% (same as category) for 4 weeks.  So it gained literally no share of volume, tho craft did gain 0.1 of $$.    

Beer volume down 1.1% for 4 weeks thru May 27, Saturday of Memorial Day weekend, down 0.6% yr-to-date.  It was an especially weak 4 weeks for AB.  Volume down 3.4% and it lost 1.3 share of $$, compared to 0.9 yr-to-date. MillerCoors volume down 2.5%, same as $$, as it once again got literally no price realization.  It lost the same 0.6 share of $$ for 4 weeks as it had yr-to-date.  Meanwhile, Constellation gained a whopping 1.7 share of $$ for 4 weeks, easily the highest 4-week gain we’ve seen yet.  Gained 1.3 share of $$ YTD.  $$ sales up 16% for 4 wks, compared to 15% YTD.   Total craft volume declined 1.1% (same as category) for 4 weeks.  So it gained literally no share of volume, tho craft did gain 0.1 of $$.    

Molson Coors stock “underperformed” since it acquired 100% of MillerCoors, noted Goldman Sachs’ Judy Hong yesterday, pointing to 14% drop in period when S&P up 13%.  “Investor sentiment has become decidedly mixed,” she noted “amidst softer beer industry data, limited evidence of cost savings flow-through in 1Q17 and inconsistent disclosures on various pro-forma figures.” Whoops.  Looking ahead to Molson Coors Investor Day, she expects “mixed news” with “details on cost savings” that “could be reassuring,” but “offset by indications of lower profit contributions” from Molson Coors International and “higher corporate spending.”  She knocked her earnings estimate back 3%, but also still has “buy” on stock, based on its relatively low valuation.  MillerCoors remains “biggest strategic priority.”  And MillerCoors trends “should see improvement,” tho she doesn’t expect MC to reach target of flat in 2018, up in 2019.  She sees “potential green shoots for ‘less bad volume’” with declines moderating to down 1% in 2d half and going forward.   

MillerCoors will finally get to participate in red-hot Mexican beer segment, albeit in a modest way. Two global giants Heineken and Molson Coors “jointly announced” 10 yr deal for MillerCoors to “import, market and distribute” Sol for next 10 yrs, starting this fall.  Sol totaled about 1 mil cases last yr, a little less than 1% of HUSA volume, INSIGHTS understands.  

This deal constitutes a win-win.  Heretofore, MC had zero presence in Mexican imports, 11 share of US biz and up double digits last yr. And Heineken placed little emphasis on Sol brand. Now Sol will get much more investment, effort from MC. And HUSA free to focus even more on Dos Equis and Tecate.  It’s even possible, as one source speculates, that its licensing fees could exceed whatever little it was making on Sol brand.  Heineken can re-acquire Sol in 10 yrs.  But this is also just another way that global Heineken and Molson Coors are playing footsie, as they already have relationship in Mexico, Canada and Ireland for example.  But this time, it’s right here in the US of A.  Could this be the beginning of a beautiful relationship?