Globally, ABI had far better qtr than Molson Coors and the markets reacted accordingly.  While Molson Coors missed analyst earnings estimates, AB in-line and showed progress.  Molson Coors stock dropped almost 5% yesterday, hitting a 52 week low.  In European trading this morning, ABI stock up 3.5% at presstime.  “After two big misses,” wrote Redburn’s Chris Pitcher, ABInBev reported Q1 EBITDA broadly in line with consensus expectations

ABI global beer volumes down 0.2% in 1st qtr, with “good growth” in China, Brazil and Mexico and “declines” in US, Colombia and South Africa.  Global brands rocked; up 12%.  Stella revs up 21%, Corona revs up 18% and Bud revs up 7% (16% outside US).  And ABI returned to solid EBITDA growth. Up 5.8%, $319 mil to $4.8 bil in qtr, with margin expansion of 76 basis points.  No surprise: ABI achieved $252 mil of synergies from SABMiller deal and “SAB integration continues at a fast pace.”  

First, the good.  AB’s first qtr results again showed that between continued trade up, pricing discipline and some front-line increases,  AB can still capture solid revenue per bbl increases, up 2.2%. That’s fully 2 points better than MillerCoors; MC rev per bbl up just 0.2%.  Then the bad:  AB’s selling day adjusted sales-to-retailers softened further in 1st qtr.  Down 2.9%, compared to MC’s 2.0%.  AB STRs down about 2% each of last 3 yrs.  Typically its STR trend about 1 point better than MC’s. But in 1st qtr MC outperformed by almost a point in volume. Yet all depends how you look at it, volume or revs.  

Finally, the ugly: Bud Light dropoff steepened to mid-singles for 2d qtr in a row.  Bud also off mid-singles.  For last 6 mos, AB’s top 2 brands, over half its biz, down 4-6%. Despite AB’s continued high end share gains (30 basis points) and “value brands performed well,”  it’s  exceedingly difficult to grow with your top 2 brands down mid-singles.   Also ugly: AB took the hit on volume, after fourth qtr inventory build.  Its shipments down 4.7%, slightly over 1 mil bbls for qtr.   

Bud and Bud Light Lost 1 Full Share; EBITDA Off Slightly  Bud Light volume trends “were mixed with positive share trends in some states not enough to reverse the negative trends in our largest markets.”  AB estimates that it lost 60 basis points of mkt share overall.  But Bud Light down 0.65 and Bud down 0.35.  Michelob Ultra “was the top share gainer in the US for the eighth consecutive quarter.”  AB’s EBITDA down 1.6%, but margins up 41 basis points to 40.2. Each of AB and MC (-3.6%)  EBITDA down in qtr, but AB took less of an earnings hit, even though its shipments drop steeper.  Why? Because it got some price realization and better mix shift to high end.  

One of this yr’s notable upside surprises so far is the return to strong growth for the Diageo Beer Co USA portfolio, especially Guinness and Smirnoff franchises, and they are 85% of its portfolio.  INSIGHTS first flagged this back in late Mar, when we noticed a sharp jump in Guinness brand trends in scan data, right around crucial St. Patrick’s Day holiday. But these better trends have continued, DBC prexy Tom Day shared with INSIGHTS.  

DBC’s improved results are a tribute to “power of listening” to distribs/retailers, according to Tom. What did they say? Top messages were to bring “simplicity” and be “consistent,” Tom said.  If that’s what it takes, seems to be working so far.  Guinness franchise up double digits for 2d mo in a row in Nielsen all-outlet; up 11.7% growth for 4 weeks thru Apr 22, following 14.7% in 4 week period thru Mar 25.  Guinness up 11% for 12 weeks too.  In same 4-week period thru Apr 22, total Smirnoff Ice portfolio up 12.7%, boosted by seltzer.  But even excluding seltzers, Smirnoff Ice up almost 10%, 9.7%.  

Digging a little deeper, Guinness Extra Stout up 8%, Draught in a Can up 8.5%, Draught in a bottle up 7.5% in latest period. So what’s driving that extra shot of growth that gets Guinness franchise into double digits? New seasonal program up 192% (including Antwerpen, Rye Pale Ale and Wheat).  Gotta lap that next yr.  Perhaps more significantly, Guinness on premise biz up 6 months in row, Tom said.  And Guinness again growing points of distribution, following yrs of losses to craft stouts in particular.  Yet now consumers are returning to Guinness, distribs tell INSIGHTS, after period in which they were overwhelmed by (craft) choice. 

Smithwick’s and Harp’s franchises remain drags on trends.  They are down steeply but relatively small.  And at least trends are improving.  Smithwick’s dropped 9% for last 4 weeks. That’s first time in several yrs that it didn’t drop double digits in 4 week period, DBC said.  And Harp’s a “much larger struggle,” acknowledged Tom. It’s down 19% for 4 weeks.  

Total DBC up 7.5% for 4 weeks, 3.8% yr-to-date thru Apr 22 in Nielsen.  If these trends continue, this is likely to be best yr for DBC in a while.  Last time that Diageo Beer Co up more than 1% in US was back in 2010.  And recall, DBC way below its (Smirnoff Ice induced) peak fifteen yrs ago. In fact it lost 1.3 mil bbls, 37% since 2002.  Diageo Beer Co is 11% of Diageo sales in US.  But it’s still about a $600 mil biz.  

These much better trends and its recent move to build a $50 mil brewery in Maryland potentially represent a new seriousness about beer for the world’s largest distiller.  DBC prexy Tom Day in role for 2 yrs, and he continues to get high marks from distribs. So far, he’s stuck around (unlike many others), keeping largely same leadership team and marketing platform intact.  In what’s been a tough year for most leading suppliers in the beer biz, can DBC become another avenue for growth like Constellation and Mike’s?  While still too soon to make that call, DBC currently headed in right direction.  And DBC will “put our foot on the gas” and “pedal to the metal,” promised Tom. 

As expected, MillerCoors took shipments hit in Q1, to draw down higher yr-end inventories: down 4%.  But STRs off just 2%, improvement vs previous 2 qtrs.  Molson Coors gives far less color on brand trends than previously.  STR decline attributed to lower premium light and below premium volume.  Trend better than scan data indicated.  MC down 2.5% thru Apr 1 in Nielsen all outlet.  But MC’s soft pricing in scans showed up as just 0.2% increase in reported rev per bbl, tho Molson Coors did note “favorable net pricing, partially offset by negative sales mix.”  As cost of goods sold/bbl bumped up 1.7%, gross profits in US took a hit, -5%.  But Molson Coors cut mktg, gen and admin costs, and special charge attributed to closing Eden shrank significantly.  So US operating income up 4% on pro forma basis to $315.6 mil.  

Elsewhere, Molson Coors got 9.6% volume pop in Europe, as it transferred some volume into that segment from intl division and added some intl Miller brand volume.  Canada eked out 0.7% volume gain.  All in, Molson Coors global volume +2.1%, net sales dipped 0.5% (+1% in constant currency), underlying EBITDA off 3.6% (flat in constant currency). Earnings per share of 93 cents was big miss from Wall St expectations, reports AP.  Stock will likely be down this morning.  With MC purchase and resulting changes “2017 will be a transition year as we build a larger, stronger First Choice-focused company,” said ceo Mark Hunter. “Consistent with this, our results today reflect increased investments in the building blocks that will drive top-line growth, cost savings, profit growth, cash generation, debt pay-down and total shareholder returns in the years ahead.”  That’s a full plate as Molson Coors moves ahead in very competitive North American and Euro mkts.     

With around 130 drivers and warehouse workers out on strike at AB distrib Clare Rose, in Suffolk County, Long Island, co called in replacement drivers and sent employees firm letter letting them know their job was not guaranteed with instructions on how to leave Teamsters union, reported Daily News. “Striking employees who have been permanently replaced will not automatically have the right to displace permanent replacement workers,” read letter dated April 25. So now those out on strike will only get a job back “if a position is available.”  Clare Rose is currently run by grandchildren, prexy Sean and vp Lisa. News report notes that Rick Rose, retired son of founders Clare and Mildren,  visited striking workers and held brief meeting with some at local hotel but the two sides remain in stand-off.  Strike over proposed pension and pay changes/reductions has backing of Teamster head Jim Hoffa. “The full might of the International Brotherhood of Teamsters is behind the members of Local 812 in their fight at Clare Rose,” he wrote in statement.

“While trade up has slowed,” of late, leaving investors “somewhat concerned on the pricing environment,” thru Q1, Consumer Edge Research’s Brett Cooper believes current pricing pressures are “more likely to be tactical or a passing trend as opposed to a structural change in industry dynamics.”  “We are believers that the US beer pricing environment will be rational and that pricing concerns will prove overblown as they have proven to be historically,” wrote Brett.  He attributes 2/3 of pricing/volume slowdown to “less trade-up” and other third “to less front-line price, mostly in sub-premiums, which we attribute to a reset by MillerCoors rather than a structural change in industry dynamics,” noted Brett. With its portfolio “underweight” in high end, for MC “the practical requirement is that they gain share at every price level.”  MC has “succeeded” in mainstream, doesn’t compete in mainstream plus, had good results in the high end, but is now struggling on craft rationalization and Redd’s moving off its peak,” per Brett. Also, sub-premiums “have been a consistent share loser.” So what we are seeing from MC now “are tactical pricing moves to better position the portfolio to get stable or reduce share losses in the future,” according to Brett.  Further evidence for a rational pricing environment, Brett points out, is that both ABI and Molson Coors “have substantial debt loads” to pay down, and “historical evidence” shows lower pricing “does little to deliver substantial volume over any reasonable amount of time.”

Score a win for Texas Alc Bev Comm, very busy in courts these days defending Tex laws/regs, and a biggie for tied house restrictions. And given language, other state regulators will embrace the decision too.  Net-net: Tex Supreme Ct upheld several lower court rulings and ABC’s original decision to deny FEMSA’s retail subsidiary Cadena/ OXXO (it has 10K stores in Mexico) from obtaining license to retail beer and wine in Tex. Reasoning pretty simple: FEMSA owns 20% of Heineken Group and Tex tied house laws bar doing biz in multiple tiers. After exhaustive review of statutes and the dictionary, court found that allowing Cadena to operate in Tex would have violated “four separate provisions of the tied house laws” in Tex, which bar “overlapping interests” in manufacturing and retail tiers.  Cadena pointed to other entities with cross ownerships that acted in more than one tier, but Sup Ct agreed with Ct of Appeals that those examples not “similarly significant.”

Tex Sup Ct Took Broad View of “Interest” and “Tied House”  Importantly, Tex Sup Ct considered language in specific laws in “context of statute as a whole,” not piecemeal.  That led to “conclusion that the Legislature was concerned with interests that result from the various business dealings among and between participants in the alcohol industry.”  Sup Ct took fairly broad view of these “interests.” Cadena tried to argue that since FEMSA didn’t “control” Heineken, the interest not significant enuf to bar retail license.  But, “Cadena can hardly make a credible argument that FEMSA’s 115 million shares in the Heineken Group is not significant when it is unwilling to give it up so Cadena can obtain the permit it seeks.”  Nor did court buy argument that Cadena is separate entity from the FEMSA subsidiary that owns the Heineken stake.  An expert report showed state pension funds and other Tex entities have cross ownership in companies in different tiers, i.e. via mutual funds. But none of this “similarly situated” as Cadena, ct ruled. Rather these cross ownerships are “demonstrably and qualitatively different from those of Cadena, FEMSA, the Heineken Group, and its brewers.”

Ct also took fairly broad view of “tied house.”  In this case, “a fair reading” of key statute “in light of the Legislature’s multiple policy statements shows the statutes are designed to prevent far more than the historical paradigm of a tied house, in which manufacturers directly owned retail outlets. When viewed in context, this statute manifests Legislative intent to prevent more tenuous relationships.”  This seems to give ABC broad mandate to regulate tied house.

Court Punts on One-Share Rule  Cadena also hammered the “one share” argument, as we have previously reported, that under TABC’s interpretation here anyone who owned single share of brewing or retail co could not operate in multiple tiers.  TABC called it “red herring” to divert fact that FEMSA has 20% of Heineken, not single share.  Tex beer distrib assns and NBWA-sponsored Center for Alcohol Policy, who filed briefs supporting Tex ABC, asked ct to clarify its position on one-share question.  But ct said “no thanks.”

The one share theory “advocates argue that if the court of appeals’ decision is upheld, the TABC will have unlimited discretion to reject a permit application based on the applicant’s ownership of single shares of stock in two of the three tiers. The essence of the argument is that this would produce an absurd result and give the TABC unbridled discretion to suspend almost any permit or reject almost any application.”  Yet “addressing the one share issue head on would unquestionably be advisory in this case” and ct viewed that as inappropriate, since this case did not involve applicant with a single share in another tier. Rather “this case is about  FEMSA’s 100% ownership of Cadena, its ownership of over 100 million shares” of Heineken stock, “and the resulting financial interests.”

Nice Kicker for Tex ABC  Finally, Tex ABC and colleague elsewhere will cheer this comment: “In this case, the Legislature provided a broadly inclusive statute but pared its reach by leaving its enforcement to the TABC. The TABC, an administrative agency, is afforded a great deal of discretion and deference.”  

Should be “no surprise when states take action to clarify retail privileges” for brewers, NBWA prexy Craig Purser advised members at Legislative Conference this morn.   Indeed, handful of states took action in 2016 and 2017 legislative sessions and via regulator action: MD, MT, PA, GA and more.  And plenty more battles shaping up down road, i.e. Tex.  While brewer tasting rooms “not new or novel,” Craig said, brewers selling on-premise “should be limited to products made on that premise.” But lotsa craft brewers “aggressively” seeking to expand retail sales, creating “modern-day tied houses” and now “competing with the very bars and liquor stores that helped” craft brewers get established in first place.  Then too, retail privileges granted to assist small brewers, allow them to interface with consumers and establish brands, Craig said.  They were “not envisioned” for big brewer craft acquisitions, to bring in products not made at that location or to allow brewers to open outlets across town or in another city, he added.  And all that’s happenin’ right now in states across US.  Clearly, NBWA’s interest here: this volume does not go thru 3-tier system and traditional on-premise customers (who often operate under more onerous regs) are gettin’ hurt.  Net-net: as very recent battles in MD and MT show, state distrib assns and retailer assns now more engaged to place limits on retail privileges.  And, no surprise, so is NBWA.

When Do Taprooms Become “Entertainment Venues,” Lester Asks; “Complicated” for BA  NBWA economist Lester Jones picked up taproom issue via numbers that show “tax determined” beer, one measure of beer sold in brewpubs and taprooms, up 53% in 2016 to just below 2 mil bbls.  It’s an “easy business to get into,” he reminded, and big brewers involved, citing recent announcements by Diageo (Guinness) in MD, NAB/Labatt in Buffalo, NY, AB’s Goose Island in Philly, Deschutes in VA, Founders in Detroit and more.  Question is how many taprooms there will be, how they’ll get along with traditional retailers, how many seats they’ll have and of course, how much beer will be sold (outside 3-tier).  Lookin’ at size, Lester wondered whether we’re lookin’ at limited number of relatively small operations (say, 1 location with 100 seats) or multiple locations with thousands of seats, (say 6 locations with 1K seats each).  And when do these “breweries,” once you add music, food, other manufacturers’ products and more, become entertainment facilities?  Ultimately, how much will they “disrupt” the beer biz?    

Predictably Craig also brought up taproom issue during panel of DC alc bev assns.  Brewers Assn prexy Bob Pease acknowledged issue is “complicated for us” but insisted that in flat overall beer biz, taprooms and tasting rooms are “epicenter of brand building” and bring new drinkers to beer. As such, “we see [them] as positive” and where the “excitement” is in beer biz.  BA’s workin’ with state guild leaders to ensure states address their individual concerns.  He compared taprooms to “advent of brewpubs,” the “original disrupters” and “no one says that was bad thing.”  And while some in biz refer to current taprooms as tied houses (like Craig), Bob drew distinction between them and “old school tied houses,” calling them instead “community gathering places.”  Back to this being complicated for BA, Bob acknowledged his members don’t want Lester’s “doomsday scenario” of huge taprooms with thousands of seats, operated by big brewers.  But nor does think this “doomsday scenario” is a “realistic” one.

More Scrutiny, “Lots of Trepidation” Among Traditional Retailers Speaking on behalf of traditional retailers, John Bodnovich, prexy of American Bev Licensees, acknowledged both “heightened scrutiny” among his members about taprooms and “a lot of trepidation.”  Easy to “fall into the trap” of thinking these outlets as “just small guys,” but they “transcend the large and small.”  The “exemptions and exceptions intended to” help local start ups “can be taken advantage of” by anyone, John reminded. So there will be “more scrutiny” from his assn and members and analysis of “what’s right for us.”  Traditional retailers want taprooms to succeed, but they’re seriously asking “where does it put existing” retail rights/retailers.        

Gist of Rex Distrib’s response to Mitchell Dist in Miss case over $3.1 mil Rex didn’t get when AB redirected sale to Mitchell mirrors its response to AB (see Apr 25 Express).  Recall, AB and Mitchell say they merely followed equity agreement and AB’s right to match and redirect.  But Rex sez their “machinations” – the agreement to have Mitchell reject Yuengling in first place, then match and redirect Rex sale to Mitchell, rewarding Mitchell for that rejection and “marginalizing Yuengling” in the process ‒ benefitted AB and Mitchell and damaged Rex.  Those machinations add up to tortious interference with Rex’s agreement to sell to Adams, civil conspiracy and support Rex’s demand for punitive damages, it argues.  Like AB, Mitchell “ignores” detailed charges in Rex’s original complaint, sez Rex.  Everyone agrees Rex lost $3.1 mil (Yuengling distrib rights that Mitchell did not get or pay for), Rex points out.  “AB and Mitchell blame Yuengling and Yuengling blames AB and Mitchell.  Ultimately someone, not Rex, is to blame.”  And Rex wants the money, plus damages.  

Other specific points from Rex about how Mitchell interfered with its deal to sell to Adams.  Mitchell sez it fulfilled all obligations of asset purchase agreement Rex had with Adams.  But that’s not point, Rex counters.  “The question is whether Mitchell and AB caused Adams not to perform.” In fact, they “unquestionably prevented Adams from fulfilling” agreement.  Also, Rex had “enforceable right” to transfer Yuengling biz to Adams, under MS law. Mitchell interfered with that right.  Third, Mitchell sez Rex did not allege Mitchell acted with malice.  Rex insists that: 1) its charges detailing the scheme; 2) the fact that AB exercised match and redirect unlawfully since Rex did not get the same price it had agreed to with Adams; and 3) because Mitchell and AB interference was “calculated to cause damage” it all adds up to malice, not to mention conspiracy.