Ain’t just MC in legal dispute with IT co.  In reverse situation, IT giant SAP, which creates integration software for tons of companies, suing AB InBev.  It seeks damages in $600-mil range.  That’s 6X amount in dispute in MC suit vs HCL.  Computer Weekly dug up statement in AB InBev SEC filing that SAP America commenced arbitration vs Anheuser Busch Co LLC in Feb, alleging “multiple breaches” of Sep 2010 software licensing agreement (SLA) “based on allegations that company employees used SAP systems and data – directly and indirectly – without appropriate licenses, and that the company underpaid fees due under” the agreement.  SAP looking for “reformation” of agreement and damages “potentially in excess of $600m.  We intend to defend against SAP’s asserted claims vigorously.”   

Turns out SAP recently won dispute with Diageo in London over similar charges; SAP sought $54 mil.  Software critical to runnin’ bizzes these days, natch, and looks like these disputes becoming more common.  Computer Weekly quotes expert: “Major corporations strive to be compliant, but often seemingly minor technology changes can create major risk down the line when the next software audit is triggered.”  One area that can lead to SLA violations: when sales reps and suppliers get “indirect access” to software.  SAP claims “76% of the world’s transaction revenue ‘touches on a SAP system,’” expert said, its rules “far-reaching and unpredictable” and access can trigger “very high license fees.”   And lawsuits too.  

Pabst execs recently made reference to promise of upcoming  innovation for this summer, but didn’t name it.  Turns out that Small Town will intro Not Your Father’s Mountain Ale in 12 oz bottles and 24 oz cans.  It supposedly tastes like Mountain Dew, with “citrus flavor profile”; it’s a “bold, fruit styled brew” with “light carbonation, multi citrus notes and a fresh crisp, finish” and 5% ABV.     

Boston ceo Martin Roper took lead at Boston Beer’s Investor Day, laying out case of how Boston Beer can regain its footing, get back to growth and ultimately double.  That’s “reasonable to dream about, think of and plan for,” sez Martin. If it happens, he won’t be around to see it tho.  Martin announced his retirement by early next yr; search for a new ceo is on.  Recall, Boston shipments declined 15% in 1st qtr. It has recently replaced most of its sr mgt team.  Today featured presentations from new chief mktg officer Jon Potter, who has lotsa new plans and programs and new cfo Frank Smalla.  Each gave disciplined, granular presentations and sounded like seasoned pros.  Today’s meeting included 2 hours of presentations, plus Q&A. There’s lots going on. Jim just there for Q&A.  Here are brief highlights of presentations. More next issue and in Craft Brew News.

Key question is will new directions work?   Jon gave glimpses of where Sam Adams is headed with new mktg that will be more “modern” and “disruptive,”  and “cut through.”  Biggest departure: bold-looking new ad and packaging to support big push for Summer Ale.  That ad started running just this week.  Boston will also focus more on becoming “locally relevant”; hence signs that appeared around its hometown during recent Marathon that said: “I Am Boston.”  And Boston will also tell consumers more about its “Brewing the American Dream” program, which has made 1300 loans, totaling $16.5 mil, to 885 bizzes including nearly 40 craft brewers. That’s another way of potentially becoming more “locally relevant,” Jon suggested as well as demonstrating that Boston was involved in community-building.  Jon showed lots more work across Boston’s brand portfolio.

Boston built to grow and indeed it experienced “phenomenal growth,” doubling between 2010-2105. “When it stops, there is a little bit of denial,” acknowledged Martin.  Organization “scaled more than we needed.”  CFO Frank Smalla gave a sense of of that scaling.   In 2012, Boston had 3 brand families, now it has 8. Back then, Boston had 200 SKUs.  Tripled to 600 SKUs in 2017.  Had 950 employees, now has 1505.  Had $311 mil in property, now $662 mil.   So now there is “very significant opportunity to optimize cost structure,” noted Martin “and eliminate waste.” Frank talked about this too, but they didn’t give much detail as to how they will get there.   

Just this morn, beer marketers INSIGHTS reported Constellation slowed to 3% shipments growth in Q1, tho depletions still trackin’ at +9-10%.  That slowdown reflected in import shipments from Mexico Jan-Mar, up just 94K bbls, 1.7%, following 2.4% gain in Mar.  Overall, imports up 54K bbls, 2% in Mar, reports Beer Inst economist Michael Uhrich based on Commerce Dept data. Dutch, German, Canadian and Italian shipments posted gains in Mar too.  Shipments from Belgium, Ireland and UK down for the mo.  In Q1, total imports slowed to 259K-bbl, 3.2% increase.  Shipments from several key import source countries outperformed Mexican shipments for the qtr, based on percentage change.  Dutch shipments +78K bbls, 7%, Belgian shipments +32K bbls, 9% and German shipments more than doubled, tacking on 157K bbls.   UK and Irish shipments each off near 30% for the qtr tho, and Canadian shipments off 4%.  Italian shipments up 20%, supporting MC statement that Peroni up double-digits.  Cider imports whacked in Mar, but up modest 5K bbls, 10% in Q1.  Finally, exports back on fast-track: +363K bbls, 36% Jan-Mar.

Like Yuengling, Teamsters askin’ US Dist Ct to reject settlement DOJ made to clear ABI-SAB deal (see Apr 17 Express).  Ct not simply a “rubber stamp” for DOJ, Teamsters insist, and not obliged to approve settlement that has such a “fatal flaw.”  What’s that?  US beer biz “plagued by coordinated pricing” between AB and MC, Teamsters argue again, via “tacit collusion” among top 2 dominant players.  “No indication” in DOJ’s complaint or response that such “anticompetitive activity has ceased and will not recur.”  What’s more, DOJ “failed to show, as it must, how its behavioral remedy will effectively open the relevant beer markets to competition and prevent ongoing tacit collusion.”  In Teamsters’ view, DOJ provided “no argument, no citation, and no other indication – that explains how or why placing behavioral limits on what ABI can do with its owned or independent distributors will cause price coordination between Anheuser-Busch and MillerCoors to cease or prevent its recurrence.”

Teamsters have a remedy, however, a “structural” rather than “behavioral” one.  What’s that?  “The divestiture of MC’s already closed Eden brewery or “another large and efficient brewery.”  Such a divestiture would “effectively open the beer market to competition” and allow a competitor to “disrupt and prevent the recurrence of tacit collusion” on pricing.  Also, “it would allow independent brewers to have significant expansion capability” and make them better competitors who could “easily scale up in response to a price increase” by AB or MC.  Not surprisingly, Teamsters bring up Pabst’s suit vs MC over their contract-brewing deal, Pabst’s alleged offer to buy Eden and the timing of the closing vis a vis the ABI-SAB deal and Molson Coors’ purchase of SABMiller’s stake in MC.  Court cannot order a brewery divestiture, Teamsters acknowledge, but it can “refuse to enter the Proposed Final Judgment in the absence of structural relief.”  Putting a big, efficient plant in competitor’s hand “would immediately inject much needed competition into this industry.”  

Really? Like who?  Teamsters neglect to ID a potential buyer of a 9-mil-bbl brewery in a US beer industry that already has more capacity than it needs.  Who’s going to need anywhere near that much capacity in foreseeable future?  Pabst may or may not have made bona fide offer for Eden.  But it just terminated option to purchase much, much smaller Woodinville brewery from Craft Brew Alliance.  Yuengling needs capacity to expand westward, but probably not in NC.  Would Constellation want to make Mexican beer in NC?  Does Heineken, Diageo or another foreign brewer have designs on [big] US production?  Certainly no craft brewer would entertain the idea in the current environment.  Then there’s basic question of whether US Dist Ct will actually unwind  ABI-SAB at this point.  Yet, Yuengling and Teamsters are takin’ their shots, seekin’ at least some changes and it ain’t officially over yet.

Following a weak Q1, and ahead of Boston Beer’s analyst day tomorrow, Goldman Sachs’ Judy Hong explored co’s best options for improving biz, from SKU rationalization, “tactical” pricing, cost savings, but also noted that “more dramatic strategic action may be needed” to drive share value, including M&A options.  

While SAM can “moderate its sales decline,” by taking “tactical steps,” Judy points out, “restoring brand equity on Sam Adams beer could take time.”  The brand, which is around 50% of co sales, is facing “declining household penetration and repeat purchases and weakening trend among key younger-age cohorts.”  SAM also sells way too many SKUs which “may be creating shelf-set clutter and causing out-of-stocks for its fast-moving brand SKUs,” she wrote.  

Nielsen currently tracks 116 brand SKUs for SAM, and “top 40%” of those account for “94% of total volume” over last 52 wks. “Or, put another way, 17% of SAM’s distribution points go to serving a full 60% of SAM’s line extensions that only produce 6% of total measured volume,” Judy noted.  SAM should “de-emphasize 24-pks, tweak 12-pk pricing,” and intro 15-pks, to be more competitive with craft competitors, she believes.  Also, while Judy sees opportunity for SAM to get margins “in low 20s” vs 15% it reported for 2016, she sees that as “unlikely.”  For starters, co has “already guided to 1pt gross margin improvement per year over 3 years, we see potential for negative volume leverage and mix shift,” and also while incremental improvement in SG&A costs is possible, co “would likely reinvest a portion of upside” back into mkting/ad spend to improve volume trends.

Strategic Actions: Sell, Buy, Get Value for Twisted Tea? While acknowledging co mgt has consistently indicated it doesn’t want to go sell or buy route, and founder Jim has voting power to veto any deal, Judy noted: “We continue to see SAM as an attractive takeout candidate, with underappreciated value in its Twisted Tea asset, and potential to more aggressively deploy its balance sheet.” Also, given tough Q1 and share price “underperformance over the past 9 months, investor inquiry” into possible deals “has risen.”  She values Twisted Tea brand at $776 mil, with rest of co valued just under $1.2 bil. (That’s while Twisted under 20% of Boston volume, INSIGHTS estimates.)  Twisted Tea has “shown consistent 10-14% volume growth” for several yrs running. With ACV “at only 40% currently, we believe growth could be sustainable as SAM expands” its reach.  Another reason to value Twisted Tea highly: it “generates by far the highest volume velocities of major brands in the FMB category,” per Nielsen, noted Judy.  SAM could also “pursue additional opportunities to expand abroad,” given that 95% of sales are US only. Int’l expansion could include a strategic JV along lines of Brooklyn/Kirin.    

Heineken “has acquired all the remaining shares in Lagunitas,” the cos announced this morn.  Founder Tony Magee will continue as Exec Chair with mgt team intact and Tony will “oversee culture, brand and recipe creation.”  Lagunitas and Heineken USA will continune as “completely separate operating entities,” Tony told INSIGHTS and there will be no changes in distribution.  “In the Heineken structure, we will be at the  same operating level as HUSA…. We will work with them shoulder to shoulder.” Separately, Heineken  has agreement with Tony to “consult… in a leading advisory role as Director of Global Craft to Heineken and its Executive Board on the global and local craft strategy.” Since Lagunitas biggest US winner in terms of bbls gained in craft since 2010, Tony should be helpful to Heineken in building its craft presence globally.  

Recall, Heineken formed 50/50 JV with Lagunitas in Sep 2015.  While Tony acknowledged Heineken had a path to control back at our Beer INSIGHTS Seminar in Nov 2015, this happened sooner than anticipated, Tony said.  Why?  Lotsa reasons, including built in “obstacles” to “structure of the partnership.” Tony didn’t spell this out, but Heineken units set up as operating cos. It would be rational for them, and they might be incentivized,  to emphasize Heineken brands that co made full margin on and got Heineken transfer pricing on, rather than 50%-owned Lagunitas brands.  Then too, Lagunitas couldn’t address local pricing landscape effectively because of its bank’s margin requirements.  Here’s Tony: “we need to be able to get our pricing right to get perfectly aligned with the operating companies in individual countries and our banking covenants were driving our margin requirements.  By integrating our finances completely with Heineken, we will be able to align ourselves and pursue our goals without that anchor around our waist.”  

Lagunitas expects to do about 50,000 bbls of international business this yr, according to Tony.  That will be a doubling and about 5% of volume.  But combo of Lagunitas and Heineken “will help the companies to accelerate the growth of craft beer internationally by removing the complexity of the joint venture.”  As well as Lagunitas has done, still growing double digits even in more difficult craft environment, it too didn’t meet original growth expectations.  Recall, Lagunitas got over $450 mil for half of implied valuation back in 2015.  Was there a back-end adjustment? Likely there was, but both cos mum and it may not have been much less.  Tony: “The details have not been released publicly, call it the dignity of privacy. Suffice to say that Heineken places great value on their relationship with us and we on our relationship with them.”     

Goin’ against very easy comp (-10% in Q1 2016), Craft Brew Alliance posted modest 6K-bbl, 4% shipments gain in Q1, while depletions even.  Kona’s still rockin’ it, with shipments +16%, depletions +14%.  And new biz with Appalachian Mountain and Cisco more than doubled on modest base.  But Widmer and Redhook still sinkin’: shipments off 17% and 21% respectively.  Better topline boosted gross profits 45%, but CBA still in red on operating line: -$2.8 mil, vs -$5.2 mil in Q1 2016.

Then too, CBA’s deal with Pabst to contract brew Pabst brands in Woodinville, WA brewery thru 2018, with option for Pabst to then buy brewery/adjacent pub, terminated earlier this week.  Pabst agreed to pay $2.7 mil to terminate agreement, on top of $1.6 mil in “contract brewing volume shortfalls for 2016-2017.”    CBA will close Woodinville brewery Jul 1, but keep pub open.  AB’s Fort Collins, CO brewery “on track to begin shipments [of CBA brands] this month,” CBA reported.         

Goin’ against very easy comp (-10% in Q1 2016), Craft Brew Alliance posted modest 6K-bbl, 4% shipments gain in Q1, while depletions even.  Kona’s still rockin’ it, with shipments +16%, depletions +14%.  And new biz with Appalachian Mountain and Cisco more than doubled on modest base.  But Widmer and Redhook still sinkin’: shipments off 17% and 21% respectively.  Better topline boosted gross profits 45%, but CBA still in red on operating line: -$2.8 mil, vs -$5.2 mil in Q1 2016.

Then too, CBA’s deal with Pabst to contract brew Pabst brands in Woodinville, WA brewery thru 2018, with option for Pabst to then buy brewery/adjacent pub, terminated earlier this week.  Pabst agreed to pay $2.7 mil to terminate agreement, on top of $1.6 mil in “contract brewing volume shortfalls for 2016-2017.”    CBA will close Woodinville brewery Jul 1, but keep pub open.  AB’s Fort Collins, CO brewery “on track to begin shipments [of CBA brands] this month,” CBA reported.         

AB bought its 10th US craft brewer, Wicked Weed yesterday, subject to regulatory approval.  Wicked Weed in Asheville, NC sold about 22,000 bbls last yr and expects to double this yr. It’s only sold in 8 states, but it has an outsized impact.  Wicked Weed is “hipsters’ favorite beer company,” headlined Winston Salem Journal.  Acquisition “sends shock through the craft beer world,” headlined Charlotte Observer.  Wicked Weed  is best known for its sour beers, but most of its volume in IPAs.  Some predictable reactions since announcement.  North Carolina Brewers Guild “stripped Wicked Weed of its voting rights,” as Winston Salem Journal reported.  And Tex craft brewer Jester King pulled out of its collaboration with Wicked Weed, Tex media outlets noted.  Purchase “brought on storm of social media criticism.” But Wicked Weed founders all staying on, “the same people” brewing the “the same beer,” with the same aim to “elevate” what beer can be, as founder Walt Dickinson told our sister pub Craft Brew News.