ABI keeps finding new ways to build on success of its craft acquisitions so far and its High End craft team in different mkts across US. “This summer we will be launching a Latin-American inspired craft beer brand, VEZA SUR Brewing Co, and opening a brewpub of the same name in the Wynwood neighborhood in Miami, Florida,” co wrote to wholesalers. (Same neighborhood as Craft Brew Alliance’s newest partner, Wynwood Brewing, and Boston Beer’s Concrete Beach Brewery.) Interestingly, VEZA SUR is newly invented “brainchild” brand of 10 Barrel co-founders Jeremy and Chris Cox along with Colombian craft co Bogota Beer’s (acquired by ABI in 2015) founder Berny Silberwasser and Max-Antonio Burger from The High End. So brand’s “origin” only dates back to when Chris, Jeremy and Max-Antonio traveled to visit Bogota  and “shortly after . . . were immediately inspired . . . and plans for VEZA SUR were born,” per letter. Brand will just be available in Miami thru local wholesaler.   

AB’s High End craft acquisitions up 29% yr-to-date thru Mar 19 in IRI multioutlet + convenience.  Tho Goose Island has slowed to 12% gain, its IPA still up 34% and #3 IPA overall.  But Elysian leading charge for the High End so far in 2017.  Up 123% and led by recent natl launch of its Space Dust brand, which is already #10 IPA nationally.  

AB Personnel Moves: Brendan Whitworth and Michael Zacharias Switch Jobs  Veep trade mktg Michael Zacharias (known as Z) will trade jobs with Region 1 Veep Brendan Whitworth.  Z “led the turnaround of our on-premise business and significantly improved our sales execution,” according to AB.  In region 1 for last 2.5 yrs, Brendan “led our AB and wholesaler team to strong market share trends and overall performance on top brands, namely Bud Light,” AB wrote.   

Yuengling fired off sharp, two-pronged response to Rex Dist lawsuit in Mississippi seeking $3.1 mil it did not get for Yuengling distrib rights when AB matched and redirected deal to Mitchell last yr. First, in answer to lawsuit, Yuengling seeks dismissal of Rex’s charges that Yuengling violated MS law by failing to approve transfer of its distrib rights to Mitchell.  Also insists it owes no punitive damages for any alleged “machinations” (conspiracy, contract interference, etc) that resulted in Rex not getting paid for those distrib rights.  Yuengling also filed numerous cross-claims against AB and Mitchell for violating MS law via the match and redirect process (in same brief).  Yuengling sez match and redirect represents restraint of trade, group boycott, tortious interference with contract/prospective biz relationships, civil conspiracy, attempt to monopolize, unlawful refusal to consent to biz transfer and more.  

That’s just first prong.  Second, Yuengling also hammered home “horror story” and “havoc” caused by ABI’s “significant, unbridled anti-competitive behavior” in MS as it filed request that US District Ct oppose DOJ’s final judgment.  Recall, Yuengling filed lengthy comments with DOJ back in Oct and included details of what happened in MS.  Yet DOJ “simply ignored” those comments and Yuengling clearly miffed.  (Final judgment still not finally approved.)  At very least, Yuengling seeks hearing to air this all out.

Yuengling’s “Concerns” that Mitchell Would Not “Expend Reasonable Efforts”  Yuengling’s answer to Rex suit has three sections.  First, it admits or denies in bare bones fashion each of Rex’s specific “facts” and allegations.  Clear from this section that Yuengling rejects part of Rex’s narrative (or unaware of some of it) where Rex detailed original negotiations with Adams, the original buyer.  But Yuengling agrees with Rex’s recounting of pressures ABI put on Miss distribs not to take Yuengling in first place.  Importantly, while Rex charged (and ABI/Mitchell repeated in their responses) that Yuengling “unlawfully terminated” Rex on day before closing of Rex-Mitchell deal, Yuengling claims that the match and redirect to Mitchell was unlawful, “that it damaged Yuengling and that Yuengling lawfully exercised its rights under the Distributor Agreement [with Rex] and Mississippi law not to consent to the sale of its brand rights to Mitchell.”  Why?  “The due diligence material Yuengling received from Mitchell failed to assuage Yuengling’s concerns that Mitchell could not and would not expend reasonable efforts and resources to promote and distribute Yuengling’s products in Rex’s former territory.”  Yuengling also suggests that DOJ settlement restrictions, which bar AB from considering sales of third party products when approving distrib deals and would have barred match and redirect, were binding at the time.  Finally, no law required Yuengling to approve transfer of its rights to Mitchell, Yuengling insists.  Recall, Rex had charged Yuengling illegally withheld rights since Mitchell a qualified buyer.

ABI Violated DOJ Settlement, Sez Yuengling Then comes Yuengling’s narrative of what happened in Mississippi and its litany of cross-claims. Yuengling repeatedly claims that ABI and Mitchell agreed that Mitchell would reject Yuengling distrib rights in Dec 2015.  Tho Rex suit sez it announced it was for sale in April 2016 (it started distributing Yuengling in January), Yuengling sez it got “formal notice” of Rex intentions on Jun 30.  Things happened fast.  Original deal with Adams scheduled to close Aug 26.  AB told Rex it intended to match and redirect on Aug 24, but didn’t say to whom until Aug 30 when ABI named Mitchell and anticipated Oct 14 close. ABI decided to match and redirect Rex deal approx 1 month after it reached settlement with DOJ.  In that settlement, Yuengling reminds, ABI agreed not to “condition its relationships” with distribs or exercise right to match and redirect based on sales of 3d-party beer.  Yet Yuengling sez that’s exactly what happened here.  In fact, ABI action in MS, which Yuengling sez was “reward” for Mitchell originally “yielding to AB’s demand” not to take on Yuengling is “violation” of ABI settlement with DOJ, it claims.  What’s more, Yuengling charges that “AB committed financial incentives to Mitchell that would deter Mitchell from promoting and distributing products of AB competitors including Yuengling.”  

Mitchell-Rex closed on Oct 14.  Yuengling appointed FEB Dist in Rex’s territory Oct 16.  “Disruption and delay” caused by AB and Mitchell actions benefitted them and “greatly damaged Yuengling as a market competitor and Mitchell received additional AB territory at a reduced price in addition to other incentives from AB for its cooperation.”  Third part of Yuengling answer turns disruption, delay and damages to Yuengling into 12 counts of illegal activities by ABI and/or Mitchell including restraint of trade, attempt to monopolize sale of beer in MS, interference with contract and prospective biz relations (with Adams), conspiracy and more.  

“Horror Story” and “Havoc” in Mississippi Means Fed Court Should Reject ABI Settlement with DOJ  In brief request to US District Ct, Yuengling really dials up the rhetoric to recount again “horror story” of what happened in MS and “havoc” caused by match and redirect there.  It provides a “road map to uncover significant, unbridled anti-competitive behavior exhibited by ABI,” Yuengling charges.  Yuengling also takes oppy to trash settlement DOJ made with ABI for, among other things, ignoring Yuengling’s original complaints about ABI’s behavior.  Specifically, DOJ “gutted” the prohibition placed on ABI from preventing distrib from using “best efforts” to sell 3d party beer by allowing ABI to require same distrib to use “best efforts” to sell ABI beer.  While DOJ “blithely insists that these provisions are not in conflict,” Yuengling comments, DOJ “apparently has no understanding of what a best efforts undertaking involves.”  In fact, “best efforts often goes hand in glove with exclusive dealing,” Yuengling argues, and idea that distrib could provide best efforts to both ABI and Yuengling is “preposterous.  Yuengling is left with hoping to get efforts that are ‘pretty good’ or maybe ‘better’, but certainly not ‘best.’”  

Yuengling also slams DOJ for allowing ABI to provide incentives based on proportion of revenues that ABI brands represent, rather than following up on requests that ABI’s ability to condition any incentives on its sales in a given area be eliminated entirely.  And though DOJ’s complaint “expressed concern” about ABI’s “conduct relative to distributors, DOJ essentially tossed in the towel after getting its desired divestiture at the manufacturing level,” the sale of SABMiller’s stake in MC to Molson Coors.  Yuengling now has to rely on distribs who are “independent in name only.”   Besides, “existence and expansion of branches only add more pressure.”  Then too, MC “has already begun to follow ABI models and has drastically changed how it co-ops marketing expenses with its wholesalers.  The tinkering around the edges of the distribution market does not alleviate the competitive harm clearly alleged in the complaint.”  Yuengling has told its story to independent monitor named by DOJ, but he “has taken no action,” so that “remedy provides no protection.”  Court should hold hearing to “ensure the public interest is appropriately addressed,” Yuengling concludes, which may entail an amended consent decree or a “rejection of the proposed merger in its entirety.”  At very least, Court “should require DOJ to make a supplemental filing to explain in greater detail why it believes brewers such as Yuengling will not be thwarted in their efforts to find capable, reliable distributors in a market” where ABI can still promote exclusivity and limit sales of rivals’ beer, as in Mississippi.

As promised last yr, Pabst is brewing in original hometown Milwaukee again, and in building on original site.  Pabst Milwaukee Brewery opens to public tomorrow.  It’s got 8 brewing lines, capacity of 4K bbls and will brew recipes from Pabst’s archive and new beers, reports Milwaukee Biz Journal.  Draft-only for now, but it’s got crowler machine to fill 32-oz cans to go.  Among 8 brews available now: Andeker, a one-time competitor to Michelob in superpremium category.  Old Tankard Ale also on tap along with handful of new brands across style spectrum.          

It didn’t take long for pay-to-play issues to come up during Craft Brewers Conference seminar with TTB administrator John Manfreda yesterday. Once opened up to the floor for Q&A, one audience member called for Justice Dept to get involved ‘cause it’s “organized crime.”  He called fines “not truly punitive” and asked John to “consider fining the retailers” who “in many instances, expected pay to play,” and “now operate under that business practice.” John agreed that retailer expectations are “the motivating factor in some of these cases.” Yet one of TTB’s “shortcomings” is “ability to reach the retailer,” he reminded, due to current trade practice provisions that only apply to an “industry member,” i.e. producer or wholesaler. “That’s a huge problem” and “we’ve actually talked about amending the FAA [Federal Alcohol Administration] Act,” and “looking at ways in which to deal with that.”  TTB’s “trying to make a dent” in “looking at the conduct that does tie up those retailers under the guise of category management,” like tied house, giving something of value, "re-shelving," etc. But “if anybody has “solutions that we haven’t thought of [on ways to reach retailer], boy I’m open.”

Another issue: “nobody wants to be the snitch,” and state regulators unwilling to act, another audience member commented during Q&A. So what role can TTB play? “Our laws have a lot of quirks” and with 35 statutes, it’s “not a slam dunk just by identifying the activity,” John responded. And constant “limitation” of TTB is “number of inspectors and investigators,” John added. With just 67 investigators vs 50 states, “we have issues” (current hiring freeze in govt adds to hiring issues, natch). TTB total staff is now down to 470 total, a 10% decline in last 6 yrs.  That’s because of “sequestration, budget cuts...downsized government,” etc. While org was able to drastically improve label approval process with additional hires and amended processes, there are still issues with brewery permit approval lead times and number of inspectors/investigators. So staffing continues to be a primary issue for TTB across the board.

Echoing AB’s response to Rex Dist lawsuit seeking $3.1 mil Rex didn’t get when it sold its Mississippi biz to Mitchell Bev instead of original buyer Adams Bev last yr (see Mar 28 Express), Mitchell Bev seeks dismissal of all tortious interference, conspiracy and breach of contract charges.  “It is undisputed that Mitchell Beverage fully complied with its obligations under the terms of its contract with Rex,” Mitchell insists.  Mitchell paid for distrib rights it received; it “tendered what was owed under the Asset Purchase Agreement at the closing of the matter. Mitchell Beverage was not, and should not be, required to pay Rex for rights it did not acquire in the transaction.”  Yuengling rights “expressly excluded” from that contract and Rex’s $3.1 loss (agreed upon value of those rights) occurred when Yuengling “refused to consent to Rex’s request to transfer Rex’s Yuengling distribution rights to Mitchell Beverage, and then ‘unlawfully terminated’ its contract with Rex.”  

Like AB, Mitchell repeatedly lays Rex’s loss at Yuengling’s door.  It was Yuengling’s action, Mitchell asserts, that “forced a reduction in the contract price” owed by Mitchell Bev.  Yuengling, not Mitchell Bev, “interfered with Rex’s rights to the $3.1 million,” Mitchell argues.  Also: “Yuengling was the sole decision-maker in the transfer” of its distrib rights.  (Recall, AB called Yuengling the “culprit” here.)  Mitchell also points out that when AB matched and redirected deal to Mitchell in late Aug last yr, “Yuengling had not given its consent to the transfer of its distribution rights to Adams.”  Therefore, Rex can’t argue it would have gotten full purchase price from Adams at planned Aug 26 closing if AB hadn’t redirected deal.  Net-net: since Mitchell “fully performed” under its agreement with Rex, didn’t interfere with any contract and didn’t damage Rex in any way, all charges should be dismissed, it argues.  Yuengling’s response due next week, we understand.       

Here’s yet another example of intra-tier tensions (see yesterday’s Express), lengths to which legislators and lobbyists will go to protect status quo and latest shoe to drop in South Carolina over Total’s Wine’s court win to expand # of licenses it can have there (Mar 30, Apr 4 Expresses).  State Senate there already trying to stymie Total’s expansion. It “voted to amend the state budget to require an owner to hand over the equivalent of a year’s total gross sales from one of its existing stores to get a license for a fourth store,” reports The State.  Law would only be in effect for one year and would require similar payment for any additional locations.  Funds would go for enforcement and “health impacts” from “anticipated additional sales of liquor,” according to amendment.  Sponsor sez change demanded by court, which should not be writing state laws, hurts existing stores and gives legislature oppy to “address the Supreme Court ruling on a law that has been on the books for 80 years.”  He also raises specter of big-box domination: “WalMart could open up 46 liquor stores within a year.”  Another legislator called ownership limits “arbitrary” and the fee “kind of laughable.”  He also suggested Total “would be right back in court” if amendment becomes law.  He’s got that right.

FMB drinkers remain fickle, tryin’ and droppin’ new brands galore.  Yet a coupla constants, even in this volatile segment.  Mike’s Hard is a steady winner.  So is Twisted Tea.  Sparkling set of numbers for Mike’s Q1 shared by prexy Phil Rosse.  Mike’s depletions up 12% in Q1.  How good is that?  It’s an acceleration vs +10% in 2016 and an almost a 20-point swing compared to -5.4% trend for FMB segment in Nielsen all-outlet scans.  A few more numbers: Mike’s Harder 24-oz cans pickin’ up distribution and +51%, even as 16-oz cans +16%.  Cayman Jack now in 15 states, $$ sales +27% in Q1.  White Claw hard seltzer #1 in category, Phil sez, and “has highest repeat purchase rate” in segment. Mike’s will boost 2017 A&P spend 20%, Phil reminds, and it will put over $10 mil in mktg $$ behind White Claw this summer.  Like Constellation execs, Phil pushing message to distribs/retailers that high end deserves more focus and shelf space.  “Currently, the high end only has 33% of the off premise shelf space, but 50% of the dollars and 100% of the growth.”

Meanwhile, Twisted Tea remains brightest spot in Boston’s portfolio.  Up 15% in Q1 Nielsen scans, also a 20-pt swing vs category trend.  Same scans show Mike’s Harder up 19%, but Mike’s Hard off about a point.  Smirnoff Ice portfolio up near 5% yr-to-date.  And Redd’s Wicked scratched out 2% gain in Q1.  Other big players getting’ clobbered. Not Your Father’s -62%, Henry’s Hard -29%, Redd’s Base -17% and Ritas down 15%. Nielsen report we see doesn’t list Best Damn.  But IRI scans thru Mar 19 show top 3 Damns down 53%.  

“Very crowded and competitive marketplace” discussed from many different angles in Brewer Assn’s state of the industry report by director Paul Gatza and economist Bart Watson at Craft Brewers Conference this morn. “It’s a new world” and it’s “changed significantly,” said Paul, with “regional brewers squeezed from large brewers above and small brewers below.”  It’s now “beyond the point where everyone rising with craft,” Paul added.  Microbrewers (3,132 of ‘em), under 15,000 bbls, jumped 27% to 5 mil bbls.  That’s a gain of at least 1.050 mil bbls.  So microbrewers accounted for almost 75% of the segment’s 1.4 mil bbls growth (in BA definition).  And about half of total craft growth came from taprooms, which grew from 1.75 mil bbls to 2.3 mil bbls, according to Bart.  Paul called microbreweries and taprooms the “happiest part” of the segment. “For a lot of people in this room, you are selling everything you can make.” (Also includes lotsa newbies).  Paul added: “I will caution you.  It may not always be that way.”  Meanwhile, brewpubs (1,916) also generated some of their best growth in recent yrs; up 14.8% to 1.35 mil bbls.  But regional brewers (186) up just 0.9%.  They are almost 75% of BA craft volume, but up not much more than 150,000 bbls. Got about 10% of segment growth.

MillerCoors won clear but not complete court victory in yet another of a string of lawsuits challenging brewers over product origin.  This plaintiff charged MC “tricking consumers” into thinking they buy beer made in Australia since Foster’s brand uses Australian imagery, slogans and references in mktg, advertising and website presentation.  Charges included, per usual, deceptive practices, false advertising, fraud, unjust enrichment and more.  But fed ct judge tossed ’em all.  He agreed with MC that “allegedly deceptive practices would not have misled a reasonable consumer.”  Why not?  Nowhere does MC claim Foster’s made in Australia, MC pointed out.  What’s more, the label “explicitly states that it is not” and points out it is made in Albany, GA and Fort Worth, TX.  

And tho Plaintiff tried to argue the brewing location disclosure does not “remedy the confusion” created by brand imagery, judge disagreed.  “The idea that consumers purchase products based on certain of a label’s statements or images (e.g. pictures of a constellation and a kangaroo) but are blind to others (e.g. a statement in plain English of where Foster’s Beer is brewed) in close proximity on that label strains credibility,” he wrote.  And he tossed all of the specific claims.  Yet he gave Plaintiff another bite at the apple, or sip of the beer, as it were.  Rather than grant MC request that he bar Plaintiff from amending the complaint (again), judge ruled “plaintiff may move to amend its Complaint.”    

In past when investors inquired about whether Boston would sell, Consumer Edge analyst Brett Cooper writes that he would point to the co’s and Jim’s comments to effect of Boston “emerging from the shakeout stronger” which “would make a sale in the short-term less likely.”  But following Jim’s NYT op-ed, Brett detected a “meaningful change in tone,” suggesting that notion Boston would be “in a better place” after shakeout becomes “less valid.”   The “piece spoke to the competitive pressures being applied to his business by the big brewers, but left out the pressure he is facing from small players and potentially the rise of private label craft.  If our read is correct in terms of his opinion, it may result in a different set of strategic decisions.”

But if Jim looked to sell, “challenge is finding a buyer,” Brett argued.  ABI and MC are “out of the hunt from a debt standpoint” and too big. Constellation “is out as they aren’t going to buy something which is a weight on growth.” And Heineken “seems a very longshot.  They would have to see huge upside to the global Boston Beer opportunity to swallow the declining US business.”  That “leaves a financial buyer (possibly with a view that it can extract margin and turn the brands) or another international brewer looking for a US footprint and USD cashflows. Net it would seem unlikely there is a long line of buyers for this business.”  Brett found timing of piece “somewhat unusual” insofar as there is an “ongoing CEO search” and picture Jim painted “in a widely read newspaper is not terribly inviting for a CEO candidate.”