Given Easter timing, no surprise that scans actually softened in most recent period, down nearly 3% for 4 wks thru Apr 1 in Nielsen all-outlet scans.  For Q1, volume -1.2%, $$ sales eked out just 0.1% gain. AB down 4.5% in Mar, 2.5% for the qtr.  MC down 3.8% in Mar, also -2.5% for the qtr.  Constellation still up 8.6% in Mar, almost 12% for 3 mos.  Only other gainers in Q1: Mike’s +13% and Diageo Beer Co +2.3% riding good St Pat’s numbers.  Premium biz down near 4% yr-to-date while economy off just 1%.  Above premium slowed to 2.4% gain, but still picked up 1.1 share of volume, 1.4 share of $$.  But that’s all imports and Mich Ultra as craft volume down 0.6% for the qtr and share flat.  Ugly short-term numbers: Bud Light and Bud each off at least 7% in Mar, -4.6%, -6.2% respectively yr-to-date.  Less ugly, but not pretty: Coors Light and Lite each took over 3% hits in Mar, down 1.8%, 1.4% respectively in Q1. Still lookin’ good, Q1 gains for: Michelob Ultra (+20.2%), Corona (+6.6%), Modelo Especial (+17.5%), Heineken (+2.5%), Stella Artois (+13%).     

Mar shipments #s not available yet, but recall Jan-Feb -2.4%.  Meanwhile, beer purchasers’ index (BPI) prepared by NBWA economist Lester Jones, a measure of distrib orders, significantly lower in Mar 2017 (49.4) than same time last yr (66.3). While Mar index suggests again “slower beer shipments in the first quarter,” Lester points to modest silver linings.  Mar index “a nice increase” vs Feb 2017’s 43.8.  Plus, index coming so close to 50 “indicates a steady state for beer orders as we head into spring.”  Yet, separate index for “at risk inventory” bumped up 4 pts to 58 in Mar from Feb.  “As inventories are depleted in Q2,” Lester wrote, “the industry should see lower ‘at risk’ index readings.”   Imports and crafts were only segments where Mar BPI over 50 (which suggests growing segment), at 63.3 and 62.4 respectively.  But those down from 72.4 and 81.6 last Mar.  Below premium index rose from 36.5 to 38.3 and was higher than premium regular (29.6), just a few pts below premium light (42), which was down 5 pts.  FMB index went from above 50 to below, cider index sunk too.  

It took a few months and multiple bills, but industry stakeholders and Maryland legislators found bill they could all live with.  Diageo’s brewery/taproom project in Baltimore County will move forward.  Final Senate bill quadruples amount of beer that production breweries can sell on-site to 2K bbls, with additional 1K if they get permission from state and they buy from distribs.  Also, brewers can sell up to 25% of on-site volume with beer not brewed there.  That was critical for Diageo since it wanted to ship some Guinness, other brands to Baltimore to sell on-site.  And local brewers wanted to do collaborations.  

Final compromise: existing taprooms, and those already in approval process, will be able to stay open for as long as local county laws allow.  But production breweries that open taprooms in future will have to close at 10 PM.  This was key competitive concern of retailers.  Brewers with different licenses ‒ farm breweries, brewpubs, microbreweries ‒ unaffected by legislation, reports Baltimore Sun.  Bill bounces back to House today and expected to pass. Diageo’s happy to move forward, brewers assn called bill “incredible improvement over the version that came over from the House” and even tho retailers “don’t love all parts of the bill,” they say “it’s in everyone’s best interest.”  Key takeaway here is probably extensive pushback from distribs and retailers vs expansion of craft brewer retail rights.  Seems to be happening in more states as those retail rights get increasingly important, competition for local bars/restaurants increases and more and more beer eludes 3-tier.     

Huh!! Period of relative quiet on craft deal front ended with a bang over the weekend, as BrewDog announced that private equity firm TSG bought 22% of co for 100 mil pounds (about $124 mil) in shares and another 113 mil pounds ($140 mil) used to buy out existing shareholders.  BrewDog generated $100 mil in revs for latest fiscal yr, with EBITDA of only about $10 mil, according to the Guardian.  So how on earth did TSG pay a price that implied a value of $1.25 bil for this co? TSG equity in BrewDog is in form of preferred stock that gives them return of 18% per yr.  Preferred stock “has a higher claim on its assets and earnings than common stock.  Preferred shares generally have a dividend that must be paid out before dividends to common shareholders,” sez Investopedia.   So these guys get paid first if value for all is not created.   

Still, that’s highest valuation for a craft purchase yet. The two co-founders James Watt  and Martin Dickie dilute their stakes from 35% to 25% and 30% to 22% respectively.  But “are understood to have made about 100 million pounds between them as a result of the deal,” wrote the Guardian.  About 125 million $$.  Not bad.

“We’re looking to go public in four or  five years,” co-founder James Watt told the Guardian. “That’s the timeline we’re working towards.”   Recall, this is the third investment by TSG, a US based private equity firm, in the brewing industry. It invested in Pabst and SweetWater in 2014 and now BrewDog in 2017.  But so far there is no connection between these 3 assets, except all had aspiration to go public. After a terrific start, Pabst went backwards last year.  And SweetWater initially looked to go public too but had to retreat from that when the numbers weren’t there; recently its growth has picked up steam again with lower prices. Its volume up 19% yr-to-date thru Mar 19 in IRI multi-outlet + convenience, but its revs up 14% as avg prices down over 4%.

But does this latest move hint at a broader TSG strategy in beer down the road? Recall, Pabst repeatedly reminds of focus on premiumizing its portfolio in part behind “local legends” brands, but currently has none of its own brewing capacity. But it does have option to buy CBA’s Woodinville, WA plant, where it’s already contract brewing some Rainier (still flying there), and is building a small brewery in original Milwaukee home. It also looks to strike more marketing/distribution partnerships with small US brewers, as it did with New Holland last year. Meanwhile, last year a couple of Seeking Alpha analysts (who assume that AB will someday buy Kona from CBA, based on agreements struck between those co’s last year) suggested there’s something to TSG/Pabst/CBA connections, making even more assumptions about what assets may end up where following a Kona deal. There’s still no there-there, at the moment, but taken together, TSG’s beer investments look towards a potential widespread public beer vehicle.

INSIGHTS received a half dozen or so comments about Jim Koch’s column over the weekend.  The ones for the record were from AB/AB craft, unattributed others from distrib, ex-big brewer exec now working with craft, craft exec, etc.  Virtually all negative.  The AB comments no surprise.  But wholesaler source said: “I can’t believe what I was reading ‒ does Jim Koch actually believe anyone who knows what’s been going on in the beer industry over the past 10 years is going to take his op-ed seriously,” he began.  “Taprooms are killing the on-premise business because these craft brewers make so much with this business model, have the ability to line up food trucks without the cost of capital of traditional bars/restaurants, while at the time closing out other beer products INCLUDING Sam Adams,” he continued.  “Most distributors I know are fighting tooth and nail to attract craft into their houses,” he added.  Jim “needs to look in the mirror and figure out what the consumer wants and stop trying to blame government oversight or lack thereof, OR state regulations for his company’s performance woes!”  

Two other savvy vets called the column “whining.”  One also wrote that Jim’s column “not displaying that good old Jimmy confidence.” The other said: “Well this is one of the whiniest things I have ever seen. I realize that venal regulators and an apathetic DOJ have prevented craft beer from achieving the success of craft tissue paper, craft tuna fish and the like.  I had been erroneously thinking that the exploding number of craft beers and the spillover of craft success into the creation of new (and competing) malt beverage categories (and cider) had stifled the growth of existing craft.  I had forgotten the dominant craft shares being gained by AB and MC.” (That’s a joke. They have about 7 share of segment between ‘em.)

On Twitter, most folks sharing the story didn’t comment on Jim’s arguments. But the majority who did comment viewed Jim’s piece favorably, adding “good read,” “he’s right,” or tying it to their pre-existing misgivings with DOJ or broader govt (in)action.  Reddit, Beer Advocate and others had lengthy threads with many comments in either direction.  

Here are 2 AB comments, 1 from communications veep Gemma Hart, 1 from Devils Backbone founder Steve Crandall.  “We understand Boston Beer sales are hurting right now and it is easy to blame the bigger brewers. But with 5,300 breweries out there, the numbers don't stack up, and we only see positive, exciting things ahead for our industry and for craft in particular, certainly not its demise!" said Gemma Hart.  “Jim’s piece…  sounded a lot like chicken little saying the sky is falling. Craft beer is alive and thriving and the 5000 plus small craft breweries are thankfully here to stay, but some larger national craft brewers are seeing their domination wane…. Jim complains about multiple factors… but it is mostly the little guys that are eating his lunch. The only constant in business is that there is none,” said Steve Crandall.  Odd that we’re now in strange, bizzarro world where BA brewers fretting about bad times for craft, while AB spouting unrelenting positivity about the segment.  

While “this is the greatest time in history to be a beer drinker in America,” Boston Beer chairman Jim Koch begins in op-ed in NY Times over weekend, “the  horizon isn’t so bright” for craft brewers.  Why not?  Craft’s deceleration to single digit growth is “to be expected in a maturing part of any market ‒ but it’s also the result of a pushback by gargantuan global brewers, aided by slack government antitrust oversight,” sez Jim.  Then this: “I worry that yet another major shift in the beer landscape is upon us ‒ and this time American consumers will be the losers.”  That sounds pretty dour for a segment that grew 6-7% last yr with a record 5300 brewers, including over 800 newbies added last yr alone and some 2000 in planning.

What could be the problem?  Basically, the govt blew it in Jim’s view “by greenlighting these two big brewers to extend their duopoly into craft beer by acquiring craft brewers.”  And the ABI SABMiller deal “was approved with largely meaningless conduct restrictions,” according to Jim, while AB and MC “given a free pass to continue buying craft.” He gives example of Karbach deal approved in Dec in big state where AB already has 50+ share.  “When it comes to protecting American companies and workers, at least in beer, our government does make bad deals.”  

Jim and other craft brewers see dark times ahead, according to Jim: “Get some craft brewers really talking, and they’ll tell you we are headed for a time when independent breweries can’t afford to compete, can’t afford the best ingredients, can’t get wholesalers to support them, and can’t get shelf space and draft lines.” The result: “Beer lovers won’t have the range of choices they have today.”

“Is It Last Call for Craft Beer?” Asks Headline; Answer: No Turns out that ill-informed headline was not Jim’s but rather the NY Times, Jim told INSIGHTS.  That’s good to know, because there is clear one word answer to this headline.  “No.”  Craft is still incredibly vibrant and likely growing overall, even if it’s increasingly volatile, with many companies, including Boston, not doing so well these days.   Jim submitted his column months ago.  Shift to Trump administration “part of motivation,” with its aim to “use government to advance American economic interests,” Jim told us.   

Column not just dark but reductive.  Never mentions that “all-powerful” AB/MC duopoly has lost 25 million bbls (350 million cases!) and 11 share since the inception of duopoly.  Nor that thousands of tiny craft brewers emerged in that time too with many still growing very rapidly.  And concerning his comment about distribs holding back other brewers/suppliers because they are doing AB and MC bidding, well, Constellation continues to make big gains in AB/MC houses.  However, column born of very real fears that are widespread among craft brewers about AB (especially) and MC invading craft space with what they view as unfair advantages.  Jim’s column “basically his presentation” to DOJ, said source.  “Obviously, they didn’t buy it.”  

Jim does make some interesting points about govt allowing top 2 to buy into craft space.  Basically, his argument is that it’s “the government’s job to think about preserving medium and longterm competition.”   DOJ inaction here will lead to less competition down road, according to Jim, say in 5 or 10 yrs. But DOJ didn’t look at it with longterm perspective.  It just looks at deal in front of it and whether it will raise prices to consumers. If the answer is no, then DOJ AOK.  Plus AB probably argues that it’s losing 1.5-2 mil bbls a yr, how is it anticompetitive to buy 50,000 bbls?  Then too, it has bought 9 craft brewers and still only has 5 share or so of segment. Jim’s column shows that even tho some BA arguments didn’t hold sway with DOJ, their arguments ain’t going away.  Jim is back on BA board, but sez this column not a BA piece; it’s Jim.  

Still, timing just before Craft Brewers Conference in DC, when thousands of craft brewers descend on nation’s capital, not likely a total coincidence. And at this moment, Brewers Assn staff, board and other small brewers on annual Hill Climb, meeting with staffers while Congress is on recess. So even if beer biz insiders not so convinced by Jim’s arguments (see below), they provide clear talking points for not just discussions on the Hill, but in rallying indie brewer troops at the Convention Center. Many of those brewers do feel tuffer times these days. So the op-ed also tells this story (regardless of missteps) to a broader public, in the hopes to getting more of them to factor it into their beer buying choices.

Craft Under “Fierce Assault” from Big Brewers, Sez Charlie Papazian  Jim’s op-ed echoes closely Charlie Papazian’s Commentary in current edition of Brewers Assn’s New Brewer mag.  Founder and past prexy of BA Charlie wrote: “Now, more than at any time in the history of beer and small and independent brewing, there is a fierce assault upon craft brewers’ core values.”  Assault’s coming from “those who wish to monopolize the beer market.”  That would be big brewers using big money and “sometimes legally questionable tactics” (not specified) to “squeeze out” small, indie craft brewers.  And like Jim, Charlie believes ultimate losers will be consumers.  Numerous times in column Charlie argues big brewer moves will end up “limiting beer drinkers’ access to choice.” Charlie advises craft brewers to “take the high road” via “sustained engagement” and not betray those core values: dedication to small biz, locally made products, quality, business ethics, etc.

Charlie and Jim echo formal comments from BA, others to DOJ about threat posed by AB (and MC) purchasing craft brewers and pressuring distribs.  Issue then, and now, as Jim acknowledges: this is best time to be a beer drinker in US.  Consumers are awash in great choices, (some craft brewers even suggest too much choice), distribs still taking on new brands and tho retailers may be doing resets, still tons of independent craft making it to shelves and grabbing taps.  In lotsa bars in US, AB and MC brands can’t get arrested.  Oh, and then there’s exceedingly healthy taproom business, where in many cases, ain’t so much choice, but rather tied houses.  Can  AB’s clout/craft portfolio eventually threaten consumer choice broadly enough to warrant govt attention?  Possibly.  But very few visible signs of that in the mkt right now.  Indeed, quite the contrary in most places.   

Yuengling joins other cos like Constellation in recent broadening of brewers/importers that are cutting sponsorship deals with major league sports teams that perhaps can no longer count on AB/MC to step up to plate in as significant a way.  Yuengling is first new beer sponsor for the Phillies in 40 years.  Sponsorship will include an “outfield wall sign, digital sign and in-stadium sign featuring the brewery’s flagship beer.”  Also, this week Yuengling entered Indiana with packaged beer, reportedly greeted by $17.99 cases of Michelob Ultra.    

Happy National Beer Day!  Have a  beer!  Have two!

Constellation ceo Rob Sands a staple on CNBC’s Mad Money show featuring Jim Cramer and he was back again last night, bigger than ever.  In 8 minute feature, Cramer twice touted STZ as “fastest growing CPG” (consumer packaged goods co).  Their results were “incredible,” “amazing” etc.   Rob only too happy to agree that STZ “firing on all cylinders,” he’s “extremely optimistic” and it’s “hard to ignore this level of performance.”  Analysts were almost as uniform in their praise. “A very ‘Especial’ growth story,” headlined Goldman Sachs Judy Hong.  “A Caliente Quarter and Fuerte Forecast,” featured Wells Fargo’s Bonnie Herzog. “Fully Recovered from the Trump Effect… Focus Is Back on Fundamentals,” headlined RBC’s Nik Modi. “Beer Continues to Be Best in Class,” Vivien Azer at Cowen and Co.  “Why Shares Point Higher,” Stifel’s Mark Swartzberg. “Guidance Looks Conservative,” headlined Morgan Stanley’s Dara Moshenian.  Dara was not only analyst that viewed guidance as conservative.  He made one of more interesting remarks noting that “implied volume growth of 7-9% seems low given a 9-10% start in calendar Q1 and given 70% of FY18 volume growth is expected to be driven by distribution/innovation.”    

Celebrating National Beer Day, anniversary of when Prohibition for beer ended, Beer Inst economist Michael Uhrich reviewed 2016 stats and gave preliminary forecast for 2017.  Very early days, with just 2 mos of shipments data in, but Michael’s lookin’ at flat to down 0.5% for the yr, which would be softer than last 3 yrs of modest growth.  Key factors: less improvement in unemployment rate (which fell to 4.5%, govt reported today) and slower income growth compared to 2016.  Otherwise, lotsa familiar points about segment, package and channel shifts last yr, i.e. import growth vs other segments, cans gaining from bottles and on-premise losing share.  Overall spend on beer up 1.9% to $117.2 bil, Michael said, based on Nielsen data.  Off-premise spend +2.3%, on-premise spend +1.5%.

Conservatives Boost Volume, Liberals Boost Trade Up  In new look, Michael found correlations between political persuasion and some beer trends, based on sales trends and results of Presidential election.  Two key findings: 1) overall volume did “significantly better” in conservative-leaning counties; 2) above premium segments did “significantly better” in liberal-leaning counties, as craft and imports gained more share in them.  Michael also provided data about beer losing share again to wine and spirits in in 2016 and suggested that part of reason why may be that “dialog” around beer tends to be over-weighted to styles like IPA as opposed to most popular style by far, pale lagers, still 84% of all beer sold.  Pale lagers, Michael noted, represent beer’s “real strength” vs wine and liquor, as they’re more refreshing, more affordable and have lower alcohol than wine or liquor.  His point: “The intense focus on minority styles like IPAs does not play to beer’s strength” vs wine and liquor and hasn’t grown the category.  True or not, IPAs continue to rock.  In IRI multi-outlet scans thru Mar 19, craft up just 2% yr-to-date, but IPAs up 17%.  Could it be that without IPAs, beer category would be even softer?

Bombshell in NC.  AB filed fed ct suit for declaratory judgment to clear its disapproval of proposed monster merger of RA Jeffreys (NC), Southern Eagle (GA) and Crown Bevs (SC).  Merger would create 30-mil-case behemoth (that’s AB brands only) across 500-mile territory serving 13,000 accounts in 3 states.  AB claims its disapproval “consistent” with NC franchise law (and SC’s too), but sez distribs “disagree and dispute AB’s decision here.”  So AB likely filed suit as pre-emptive move before distribs sued. It wants fed ct to enter judgment that “AB’s approval of the proposed merger…was not unreasonably withheld.”   

Why did AB disapprove deal? Sent letter to distribs on Apr 3, same day as suit filed, that details numerous reasons.  Letter notes merger would create “sprawling, three-state entity…with only one Equity Agreement and one Equity manager, which would not be able to fulfill its obligations under the Equity Agreement,” which AB reminds is “personal services agreement.”  Reminded too that over last decade AB approved 5 deals each for Jeffreys and Southern Eagle, that Jeffreys AB volume jumped from 3.868 mil cases to 16.018 mil cases and Southern’s AB volume grew from 1.244 mil cases to 12.246 mil.  Among “disadvantages” and “downsides” for distribution of AB brands in merger:

•   “Uneven performance” of Jeffreys and Southern indicates both “already stretched to the limit and much work remains to be done.”  (One factor AB Equity Agreement includes for deal approval: “whether    sufficient time and attention can be devoted” to additional mkts.)

•   Single territory will be “unwieldy,” 30 mil cases spread over 3 states and 500-mile span.  Each state has “unique ABC laws” and regs.  Rather than improved performance, merger has “potential to dilute    efforts and lessen performance.”  

•   Proposed Equity Mgr will be Southern Eagle’s Will Dorminy, with whom AB has “experienced shortcomings.” In AB view, “there is simply no way that Will Dorminy can serve” as equity mgr for all of his     current operations and proposed additions.  As AB sez in lawsuit, “hopping from operation to operation on a private plane (which is what has been proposed to AB) is the very antithesis of personal           service,” required by Equity Agreement.  

•   Right now each equity agreement mgr lives in his territory and has vast experience there.  That ends with merger; Ab sees “no advantage to replacing Schipp Johnston and Robert Jeffreys in their           territories” and delegating day to day control to someone who won’t live in those territories and has no experience in them.    

•   No big synergies to deal, since no plans to close any locations.  Proposed back-office synergies “can be easily achieved” via shared services agreement.

•   Current mgrs say they have good “working relationship,” but AB sez actually “you do not have a working relationship,” but rather operate separate entities, making their own decisions, sometimes             consulting with various family members.  With different ownership groups come “potential conflicts” that could disrupt biz and/or create problems with passing it on.  If relationships deteriorate, that           could “virtually paralyze the entire operation and jeopardize” AB biz across much of southeast and damage to AB brands “would be incalculable”.

•   AB also has “material concerns” about finances.  No valuations provided to AB and entity would be “highly leveraged.”  (AB put debt amount in letter, but it’s redacted in copy filed with court.) That could   lead to “forced sale of merged entity,” while none of current bizzes face that possibility.  That undercuts ostensible rationale for deal, AB sez, protecting the biz for future generations.  Then too, pool of     potential buyers for merged entity “would be extremely limited.”       

All in, proposed transaction both “unprecedented and highly unique” in structure and “size, scope and complexity.”  AB just couldn’t see how deal would benefit its brands, letter concluded, signed by Bob Tallett, veep of business and wholesaler development.  

Lawsuit includes similar points and lays out timeline.  Briefly, AB sez idea “originated with a business broker,” not the distribs.  AB got notification from broker on intention to merge Aug 9, 2016.  AB met with principals and “expressed concern.”  Nov 14 request for approved change, without detailed info, disapproved by AB on Jan 4, 2017.  After proposal resubmitted Feb 3, AB had another meeting with distribs Mar 9.  On Apr 3, AB sent second letter of disapproval.  

Not surprisingly, Tex legislators now taking very seriously charges that state alc bev comm (TABC) officials partied at natl and regional conferences with colleagues from other states, via Natl Conference of State Liquor Admins (NCSLA).  After Tex Tribune dug into story about TABC officials “jet-setting and partying” on state’s dime at mtgs heavily funded by alc bev industry (see Mar 27 Express), two state legislators have filed amendments to shut down all out-of-state travel by TABC.  One also aims to “restrict state liquor regulators from using money from outside groups that are funded largely by the liquor industry,” including NCSLA.  Records show travel expenses incurred by Tex officials at regional, natl mtgs, some reimbursed by NCSLA, but state funded some trips too, Trib reports.  There are also questions about expenses at mtgs TABC hosted in state, disclosure and record-keeping issues and more.  Texas Tribune detailed, at length, specific expenditures, entertainment oppys and even a Photoshop graphic prepared for Power Point presentation by TABC admin at one NCSLA mtg that showed her and colleagues enjoying a beer.  

Combo of using state funds for travel, “partying” and hosting mtgs, plus scope of industry participation/funding of NCSLA drove one legislator to charge: “To be that close to the industry that you’re regulating, as executives of an agency, is just unacceptable.  This is just government at its worst.  This is exactly what people are fed up with.”   He doesn’t appreciate value of regulators networking with colleagues and industry stakeholders, especially in places like Hawaii or San Diego.  Rather, “they need to focus their attention on cracking down on bad bars, cracking down on human trafficking, underage drinking, those things.... I’d rather see us hire people to crack down on the issues…and not be out there just blowing money to expand their networks.”  So he and another colleague proposed amendments to cut off out-of-state travel for next two yrs. One also bars TABC from accepting “payments from or spending authority on behalf” of any group like NCSLA or other industry-affiliated orgs, Trib reports.

For context, back in the day (decades ago) suppliers (especially distillers) hosted incredibly lavish parties for regulators and other attendees at NCSLA mtgs.  (We recall a particularly lovely Seagram-sponsored party on a small island in Hawaii.)  That shut down to bare-bones hospitality for a brief time, then built back to open bars, modest entertainment and separate outings for participants.  But associate members’ (industry) dues have always paid the freight for NCSLA.  Question is whether legislators in the 30 or so other states that participate with NCLSA will pick up Texas Trib stories (how could they not?) and what blowback will be elsewhere.