Diageo ceo Ivan Menezes devoted a number of slides to discussing opportunities in Diageo’s beer biz during Diageo Capital Markets Day earlier this week. Beer 16% of Diageo’s total biz, or about $2.2 bil in revs in fiscal yr ended June 2016.  (This info taken from Ivan’s deck on Diageo website.)  “Our beer business is in a unique position,” said Ivan, with “half of our sales” in sub-Saharan Africa, “forecast to be the fastest growing geography” in world over next 5 yrs.  

Guinness “Sits in the Middle Between Big Beer and Craft”; Export Irish Learnings Guinness brand “has seen improving trends in our developed markets over recent years,” said Ivan.  It grew organic net sales 2.5% in latest fiscal yr, compared to -1.6% CAGR between 2009-2014.  It’s up 1.6% in Diageo’s fiscal first half thru Dec.  Guinness is 75% of Diageo beer biz in US and Europe.  And Guinness “sits in the middle between big beer and craft -- we are more famous and more widely distributed than craft, but we are also more different and flavorful than the big brands.”  So “to take advantage of this position, we started to rebuild our brewing credentials” as a “great brewer” in part through “experimental brewery” in Ireland known as The Open Gate “for consumers and beer writers to come and taste what has been made that week, before it launched anywhere else. It is working, performance has improved.” Guinness brand gained 1 full share in Ireland in last 2.5 yrs. “We now plan to export these learnings to the US,” added Ivan, “with the new Guinness brewery in Maryland.”

Hop House 13’s a Hit  “Within this,” Hop House 13 a “tremendous success,” said Ivan. “Double Hopped for more Taste  & More Character,” sez ad.  It’s a lager from the House of Guinness, and got 3 share of lager in Republic of Ireland “on trade.” It “continues to grow rapidly” in Great Britain and Ireland and is basically doubling compared to last yr. “We have built a brand with strong potential and we continue to invest behind it,” launching new campaign last mo.  Hop House 13 also “bridges the divide between craft beer and mainstream beer,” said Ivan.  Unstated, but gotta wonder when this hot little brand will make its way across the pond.

Guinness has 25 share of beer in Nigeria, 39% in East Africa, 23% in Ghana, 13% in Ethiopia.  Diageo “has the scale to compete and win in this attractive market,” asserted Ivan.  And finally, if you didn’t take seriously all those other reasons why Diageo sees opportunity in beer, consider this:  “Spirits grow faster in markets with beer platform…. Our beer platform can help accelerate our spirits growth.”  In last 5 yrs, Diageo up 18% in “TBA” mkts (total bev alc, i.e. with beer) in Africa, compared to 7%  “in spirits only markets.”  

For first time in four mos, “beer purchaser’s index” (BPI) reported by NBWA economist Lester Jones based on distrib reports, came in over 50, and well over at that, at 58.9.  That signals an “expanding” biz.  (Under 50 means biz is contracting.)  Apr index not only 9.5 pts higher than Mar, but slightly higher than last Apr.  At same time, index for inventory “at risk” for going out of code within 30 days dropped under 50 for first time in 3 mos, Lester noted.  His take: “Putting negative volume trends from Q1 behind us, and inventories moving into line with sales, the BPI should see some recovery with May and June surveys.”

Above premium still indexing highest, with imports, crafts and FMBs at 67.6, 62.3 and 51.5 respectively in Apr, tho each lower than last Apr.  Craft index fell almost 15 pts.  Premium light index flattish at 45, premium regular up 5 pts, but still only 33.3.  And below premium picked up almost 5 pts at 31.9.

When Ces Butner sold Horizon Bev to ABI back in Sep 2015 (over $90 mil), he probably didn’t imagine that he’d buy Speakeasy Brewing by May of 2017.  For one thing, back then Speakeasy was fast-growing and seemingly thriving. Grew from 13K bbls to 33K bbls between 2011-2015, according to BA stats.  But things change.  Recall, Speakeasy shut down in early Mar when it couldn’t pay its debt to Union Bank nor its employees. Bank took over and appointed Jigsaw Advisors to sell Speakeasy. Shortly after that, it reopened with skeleton staff and began contract brewing at Shmaltz in upstate NY.  And now Ces has bought Speakeasy under the auspices of a new co called Hunters Point Brewery.  

Deal was finalized yesterday and terms of purchase not disclosed.  But it’s likely cents on the dollar.  (INSIGHTS hears in low single digits of millions.) “As an investment, the company has some obvious appeal,” wrote San Francisco Chronicle last mo.  “A beloved brand, distributed in 11 countries.  A big brewery ready to go, with room to grow, plus a taproom.  Tried and true beer recipes like Prohibition Ale and Big Daddy IPA.  Real estate in San Francisco.” Back in 2015,  Speakeasy built brewery with capacity to brew 90,000 bbls.  Some suggest that there could be contract brewing, private label, or other M&A opportunities down the road as craft resets.  Ces brings along Sam Cappione as vp and gen manager for Speakeasy.  Sam worked closely with Ces for many yrs at Horizon; both stayed on for a time after he sold to AB.  

Craft M&A Picks Up; 3 Deals in 1 Week  After a slow period, which we called “Craft M&A in Limbo” recently, suddenly pace picked up dramatically in last week.  There were virtually no craft deals of consequence in first few mos of 2017.  But 3 significant craft deals came down in just the last week.  AB bought Wicked Weed, Lagunitas sold the rest of itself to Heineken and Ces Butner bought Speakeasy.  Ces’s purchase of Speakeasy on surface certainly less significant.  But Ces  didn’t likely buy Speakeasy to stay pat. “Keeping Speakasy’s San Francisco born and brewed tradition alive is very important to me,” he said on Speakeasy’s blog.  Other craft deals coming soon, INSIGHTS hears.

This deal tied to another deal that we reported back in Dec 2016.  Recall, Eagle in Huntington, WV bought Proud Eagle of South Charleston.  Eagle is part of Triple Crown Bev, which also owned Spriggs in OH and Eagle Dist in KY and totaled about 5 mil cases.  But now Triple Crown has sold Spriggs and Eagle to Perry Dist in Hazard, KY.  The two smaller distribs sit on border of each state;  Spriggs alone sold about 700K cases.  This is first finalized AB distrib deal INSIGHTS reported on in 2017 and it has been speculated for mos.  

Even with better Apr (beer biz up 1.3% for 4 weeks), industry volume down 0.5% yr-to-date thru 4/29 in  Nielsen all outlet.  And $$ sales up 0.8%.  Each of AB and MC volume down around 2%.  But AB still getting more pricing and so AB $$ sales down 1%, while MC $$ down 1.9% thru 4/29.  AB lost 0.8 share of $$, MC down 0.6 YTD.  For 4 weeks, it’s worse.  AB lost 1 full share of $$, MC down 0.7.  Constellation $$ sales up 14.6% YTD, gained 1.2 share of $$. For 4 weeks, just preceding Cinco de Mayo period, Constellation en fuego with $$ sales up 17.1%. Gained 1.4 share.  

Trading Up Accelerated in April; 3 Brands Gained 2.1 Share Trading up picked up steam in latest period. All above premium segments gained 2.1 share for 4 weeks, hitting 45 share of $$, compared to gain of 1.6 share of $$ YTD.  Also absolutely en fuego: Michelob Ultra.  Ultra $$ sales again up 30% for 4 weeks and gained fully 1 share of $$. Modelo Especial up 24% and gained 0.7 share. Corona $$ sales 11% for 4 weeks, gained 0.4 share.   So those 3 brands gained 2.1 share of $$ for 4 weeks, 1.8 share YTD. Entire craft segment gained 0.2 share of $$ YTD, with $$ sales up 2.7%.  As did Mike’s Hard Lemonade Co, $$ sales up 15.1%.  No other top supplier gained even 0.1 share.  FMBs in total down 0.4 share of $$, cider down 0.1 YTD.        

Massachusetts Alc Bev Control Comm still investigating pay-to-play issues.  Just sent notice of hearing to August A Busch & Co of MA, AB branch there, over charges it violated law that prohibits giving “money or any other thing of substantial value” to induce retailer to purchase brands or not purchase competing brands.  Investigation goes back to Oct 2014 when pay-to-play story broke after craft brewer charged distribs were buying tap handles.  MA ABCC met with branch to look into placement of coolers/draft systems in 2014 and 2015.  AB stopped providing equipment, cooperated with ABCC and provided info to investigators.  Investigative Report sez documents provided by branch show that between early 2014 and early 2015, branch “provided draught equipment valued at approximately $245,000 to 70 retail outlets and refrigeration coolers valued at approximately $697,200 to an estimated 371 retail outlets.”  Documents also showed how equipment ordered/purchased/delivered, that it was provided at no cost and no invoices issued to retailers. Then too, retailers told investigator that “August representatives offered the refrigeration equipment to the retailer at no cost, provided that the equipment was only utilized for Budweiser products.”  

AB will contest the charges.  It believes that providing the equipment was permissible under MA law, that the items had no “substantial value,” which is not defined in MA law.  Nor was equipment provided as inducement to buy AB brands to exclude others. AB’s statement:“We have been working with the Massachusetts ABC since they first raised questions about permissible trade practices by wholesalers within the state. We believe that we lawfully provided branded point-of-sale items to retailers and plan to contest these allegations. We take trade practice compliance seriously and are committed to following the law.”

Recall, pay-to-play investigation led to charges vs distrib Craft Brewers Guild and a bunch of retailers.  Almost all of the charges vs retailers subsequently dropped.  CBG paid fine but is contesting it in court.  Meanwhile, MA has set up task force to review laws and regs, which AB, CBG and others have said are vague and sorely in need of clarification, on issue of “substantial value” and more.   

Last week we reported Craft Brew Alliance’s shipments grew 4% for Q1, depletions flat. Gotta note, that doesn’t include contract brewed shipments – with contract brews, CBA shipments up just 2% and depletions still flat, reflecting lower than expected Pabst production in Woodinville and winding down production at both Woodinville and Memphis facilities.

Schofferhoffer Grapefruit’s surprising success (on smaller base) continues so far in 2017. It’s up 31% YTD thru Apr 30 nationally; over 40% of national biz in NY, NJ and Fla, all still flying. Nationally, it’s up 52%  with just 33.7 ACV in IRI food for last 52 weeks, Radeberger USA evp Anthony Giardina wrote disribs today.  It’s 4th largest grapefruit flavor, behind Leinies’s Grapefruit Shandy, Ballast Point Grapefruit and Sam Rebel Grapefruit.  Unstated by Anthony, but Leinie’s Grapefruit Shandy slowed to single digits last 4 weeks, Ballast Point Grapefruit recently dipped to decline.  Schofferhoffer is #1 grapefruit beer in liquor channel, according to Anthony.  

Strike at AB’s Long Island, NY-based Clare Rose Dist entered 15th day with no settlement.  Recall, replacement drivers were called in last week with Clare Rose drivers and warehouse workers out since Apr 23 to protest co’s decision to pull out of Teamsters’ pension fund for a 401K plan instead, noted NY Daily News. Clare Rose would pay approx $1200 a yr per employee into new plan, and final contributions could be higher but, “we didn’t get to finish negotiating that because we reached an impasse over pulling out of the pension,” said prexy Sean Rose.  Workers not happy with proposed 30% pay cut, while Clare Rose countered that “more than half of workers” would see a raise under new deal, with drivers averaging $70K a yr, per Newsday.  Striking workers raised ruckus too after learning Clare Rose saved lots after being rewarded local tax breaks for building “massive new facility” in East Yaplank back in 2010. Docs of a local industrial development agency show Clare Rose paid under $50K in 2016 for town, county and school taxes, while it would have had to pay over half mil without the subsidy. “I don’t believe a labor dispute negates any of the impact we’ve provided by developing and building a facility that provides jobs,” Sean told News.  

They Rallied Where? Meanwhile, approx 100 striking Clare Rose workers chose an odd or shrewd location (depending on your perspective) for a rally this past weekend: AB-owned Blue Point Brewery, which was hosting the “Big Brew” event for homebrewers. Blue Point “told us they supported the strikers at Clare Rose,” claimed a union rep to Newsday.

Shore Point Getting Pushback for Lockout  In NJ, Shore Point Dist Co. has locked out 113 workers since Apr 30 “in an attempt to force them to give up their pension, accept a 3-year wage freeze” along with accepting health insurance plan changes, announced Teamsters. Lockout affects workers earning approx $21 per hour, plus commissions, per Asbury Park Press. Teamsters claim local retailers are supporting their cause and refusing to stock MillerCoors brands. Also, Shore Point may not be welcome at upcoming Belmar Seafood Festival, according to Mayor Matt Doherty who felt the “working-class community” would not welcome co that locked out union workers. He told NJ Advance Media that local craft brewers have contacted him to replace the Shore Point brands.

“We walked away with a better understanding of SAM’s turnaround strategy and appreciate a more cost-disciplined mindset to fund brand investments,” noted Goldman Sach’s Judy Hong following Boston’s 3-hour investor day on Friday. There’s a “clearer strategic focus” with “three major…priorities (returning Sam Adams/Angry Orchard to growth, eliminating waste and long-term innovation).” Judy one of several analysts who noted lotsa new mktg and liked approach: “New brand messaging appears a step in the right direction,”  she wrote. Consumer Edge’s Brett Cooper noted that new cmo Jonathan Potter “doing a good job at taking an outsider’s perspective on the Boston Beer brands and refocusing the marketing more towards the experiential side of the spectrum.” And Susquehanna’s Pablo Zuanic said: “We were impressed by the changes being implemented by the company’s new cmo”; “brands will connect better with cultural trends, digital will be increased, regional marketing capabilities have been upgraded and the agencies have been upgraded.”  

But will many mktg changes lead to big improvements in sales? “It will take time to see a dramatic improvement in top line and margins,” said Judy.  Boston’s strategy “similar to what we hear from other struggling CPG companies,” said Brett; Boston sez they will “stabilize their struggling brands,” “cut costs” to “invest,” and “drive growth from emerging brands.” But “ability to stabilize declining brands on a sustained basis tends to prove more elusive than thought and new brands tend not to grow enough to offset core brand declines,” noted Brett.  “One area that generally has proven successful is the area of cost saves.”  

Only Pablo, who recently upgraded Boston Beer stock, largely on valuation, said he walked away with “increased conviction” in Boston’s “medium term outlook” after seeing “significant changes” in sr mgt, its “new marketing initiatives and brand  messages, sales and distribution push and a more disciplined approach to cost management and investments.”  Pablo sees “opportunity for well-managed independent national craft brewers like SAM (despite the challenges posted by tap rooms, local brewers and the encroachment in craft by the larger brewers).”  He also noted that “stable leadership and ownership” and “independence” were “words often repeated” during seminar and Boston in “middle of search” for replacement for ceo Martin Roper.  Pablo sees very low probability of sale of co in next 5 yrs (1%).