AB’s just-filed motion to dismiss claims against it by Rex Dist in Mississippi (see Feb 22 Express) stresses that it simply followed its equity agreement when it matched and redirected sale last yr of Miss distrib Rex from Adams Bev to Mitchell Dist.  Since neither AB, nor Mitchell for that matter, did anything to breach equity agreement, all of Rex’s charges vs AB ‒ including breach of contract, bad faith, tortious interference, conspiracy, violation of state franchise law, punitive damages – should be dismissed, AB insists.  Recall, Rex sued AB, Mitchell and Yuengling because it did not receive $3.1 mil for Yuengling distrib rights, value agreed upon by Rex and original buyer, Adams.  Mitchell fully prepared to pay “full purchase price” for entire Rex biz ($50.5 mil), AB sez.  But Yuengling terminated Rex day before deal closed and again “pursuant to equity agreement,” that $3.1 mil deducted from the price.  

Net-net: “the culprit here is Yuengling, who, as alleged in Rex complaint ‘unlawfully terminated its relationship with Rex pre-sale.’”  Since both AB and Mitchell followed equity agreement’s terms, none of the claims vs them based on Yuengling’s actions can stand.  “Rex’s claim is against Yuengling” for its decision to terminate Rex and disapprove sale to Mitchell.  “It would hardly be ‘fair’ to require AB,” it argues, “to compensate Rex for the value of its Yuengling distribution rights when it was Yuengling who terminated those rights and transferred them to another wholesaler.” What’s more “it would be an absurd result” to force AB to pay for “competitor Yuengling’s” distrib rights that Yuengling terminated.   Remains “unclear,” AB sez elsewhere in its motion, whether wholesaler who got those rights (FEB Dist), “paid Yuengling $3.1 million or compensated Yuengling in any way.”  Yuengling has not yet responded to Rex’s charges.

AB Refuses to Respond to “Unbridled Speculation” in Trade Press  Some other notable points in AB motion to dismiss.  They include declaration that “AB will not respond to those allegations” in Rex complaint “that quote the unbridled speculation of a trade newsletter.”  That would be us (and Beer Biz Daily).  Complaint quoted some of our coverage that included questions at time (which still remain) whether AB was “taking punitive action on Yuengling and/or rewarding Mitchell for not taking on Yuengling initially.”  We also raised issue of timing of these actions while DOJ considered consent decree on ABI-SAB deal.  Rex quoted that consent decree and its requirement that AB could not make deal decisions based on whether distribs carried competing brands.  But AB deems all this a “red herring.”  Why?  “As Rex acknowledges, the APA” (asset purchase agreement with Adams), was “entered into and presented to AB before AB entered into the Consent Decree.  Moreover, a consent decree ‘is not a federal statute from which a private right of action may be implied’ and Rex does not have standing to enforce it,” AB argues.  

AB reminds court that Rex started selling Yuengling in Feb 2016, “just a few months” before signing APA with Adams (June 27).  AB also reminds that “Rex does not allege that it paid any money to acquire its Yuengling rights.”  Yet “after Rex had sold Yuengling products for a mere three months, the APA assigned a value of $3.1 million” to distrib rights.  When it signed APA, Rex knew not all brewers would consent (APA lists 40 suppliers under heading “required consents”), AB points out.  But Rex and Adams agreed deal would close if Rex got AB’s consent and “sufficient other brewers to reach 92% of its estimated sales for 2016.”   Rex complaint cited section of equity agreement that AB would ensure full value if it disapproves a buyer “solely because” of specific issues, including footprint concerns or economies of scale and that AB breached that section.  But AB “did not disapprove Adams,” it “simply exercised its right to match and redirect” sale.  So that section does not apply here, in AB’s view.  Similarly, since AB did not disapprove Adams, prevent the sale of Rex or “unreasonably delay” transfer of biz, AB did not run afoul of MS franchise law, it sez.  Finally, no AB actions here meet legal definitions of bad faith, malice, tortious interference or conspiracy, AB’s motion states.         

Craft segment up 6% in 2016, according to Brewers Assn stats released this morn. That’s just half the 12% growth rate in each of prior 2 yrs. Number of craft brewers in US catapulted to 5,234 last yr even amidst slowdown (5301 breweries overall), with a whopping 826 openings and 97 closings.  Number of  US craft brewers has more than doubled in just last 4 yrs.   Craft at 12.3 share of mkt, using BA definition.  “By adding 1.4 million barrels, craft brewer growth outpaced the 1.2 million barrels lost from the segment based on purchase by large brewing companies,” said BA. But some of those acquired cos grew faster.  So BA estimate of segment growth rate slightly less than INSIGHTS (6.8%) as BA definition includes Yuengling, other regionals, while excluding some fast-growing acquired craft (up more than 25%), including Lagunitas, Ballast Point, AB and Miller buys etc. Craft segment has slowed further in scan data so far this yr.  More detail in Craft Brew News.    

Lotsa legislative, regulatory action in states these days.  Three very recent developments got our attention.  Last week, Utah Gov Gary Herbert signed law lowering legal limit for driving to 0.05, first state in US to do so.  He cited “public safety”; retailers howled that bill will “cripple” their biz.  (Other industry members mostly absent from coverage/debate we saw in Salt Lake Trib, Deseret News and AP.)  Gov and other supporters pointed out that lotsa European countries have 0.05 limit, that impairment begins with first drink.  Gov also cited Heineken’s Jackie Stewart ads that endorse no-drinking-while-driving message.  Bill does not take effect until Dec 30, 2018 and Gov sez there will be changes, possibly graduated penalties, possibly even a “pause” depending on what other states do.  Looks like similar bills in Washington, Hawaii are dead.  But it will be interesting to see what other states do, especially as highway fatalities, including alcohol-related deaths, recently on rise.  

In Iowa, state alc bev comm put out joint release with state economic development agency about a “working group of stakeholders” that reviewed all state laws regulating alc bevs.  Though intention was to “not disrupt Iowa’s three-tier system,” release supports entrepreneurs’ perspective that “our state liquor laws can be a hindrance.”  Statement singled out tied house rules which bar cross ownership between tiers as “one barrier to modernizing Iowa’s alcohol beverages industry.”  That law “out of sync with today’s marketplace,” opined ABC Admin and Director of state’s Economic Development Authority.  Vast choice of products available to consumers “practically rules out the possibility of any product or manufacturer dominating a market,” they wrote.  So IA needs policies that reflect current market, “not 1934.”  Iowa not lookin’ to boost consumption or dump regulation, but “policymakers must roll up their sleeves to make these laws practical and effective.”  Looks like more exceptions/carve-outs on the way there, with govt support.

In Texas, where state ABC (TABC) fighting a number of battles over tied house and other 3-tier issues, Texas Tribune ripped TABC for “partying on the taxpayers’ tab.”  Lengthy article detailed regulators’ trips and some expenses accrued for attending Natl Conference of State Liquor Admin conferences, including “junket” to Hawaii.  Pointed to “sponsored parties, a well-stocked open bar and a busy array of social events.”   Connecting the dots, article also noted Tex laws that have favored AB in past as well as “powerful beer wholesalers.”  And Trib could not resist reporting that when TABC hosted regional NCSLA conference last yr, “the boozing… spilled into the newspapers – after the agency was accused of failing to get the proper alcohol permit while serving alcohol in its own hospitality room.  TABC launched an investigation of itself and determined there was no wrongdoing,” an official told the paper.     

Highly unusual meeting between AB execs and its distribs in its #1 state, Tex (where it shipped about 10.3 mil bbls last yr) happened at Houston brewery last Friday morn.  Meeting lasted over 2 hours with sr execs like sales veep Alex Medicis and veep of wholesaler and biz development Bob Tallett as well as virtually all wholesaler principals and/or their top execs. Lots laid on the line.  

Over a period of time, wholesalers reportedly developed laundry list of festering issues that they agreed upon and presented as a group to AB.   Top of the list: inventory levels.  Back in 2009-10, statewide inventory levels at 12-14 days.  But last couple of yrs, inventories shot up to 22-24 days.  One source referred to this as a “step-staggering” of inventories, especially hard to swallow since AB’s biz in state down 8% since 2008.  Tex law already on books sez distribs don’t have to accept any beer not ordered.  Yet inventories keep creepin’ up.  Distribs even talk of potentially introducing new bill that would mandate hard cap on days of inventory.  AB definitely doesn’t want that.  So this meeting had tense backdrop, tho meeting itself alternated between “tense” and “gregarious,” said source.  AB distribs also upset about AB making them pay for POS materials suddenly after first trimester 2017, high turnover rate among sales employees, etc.  Didn’t sound like much was resolved that day, but it’s more evidence that AB still has long way to go in improving its relationship with distribs.

Following release of that awful Feb taxpaid shipments number by Beer Inst yesterday, further questions arise.  With a whopping 1.2-mil-bbl domestic taxpaid shipments drop in Feb, taxpaids now down about 1 mil bbls, 3.7% for 2 mos.  That 1 mil bbls about same amount that AB and MC had shipped ahead of depletions by end of 2016, INSIGHTS estimates.   So did AB and MC just pay piper all at once (AB and MC over 80% of domestic taxpaids)?  “Downward adjustements in inventory account for much of” Feb decline, wrote BI’s Michael Uhrich.  Shipments trends now likely worse than depletions, in a reversal of previous pattern.  

“Due to recent industry headwinds and weather impacts, our inventory levels for the first quarter of 2017 are higher than our original plan,” AB logistics and procurement veep Fued Sadala warned distribs awhile back (see Express vol 19, #22).   “We have actions in place to return inventories to last year’s levels by the end of March,” he added.  So was this that?  Or is there more to come?  For some AB distribs, inventories remain quite high, sources say.  And domestic brewers now in 1-mil-bbl hole. Will they be able to dig out?     

________________________________________________________________________

Today AB named Andy Goeler Bud Light brand veep, a role he held back in the 90s when he led the brand for over 5 yrs.  Andy’s the “most experienced marketer in our organization” (37 yrs at AB) and his “track record is just fantastic,” said mktg veep Marcel Marcondes, pointing to Andy’s recent work, leading mktg for the High End. At AB’s recent SAMCOM meeting for distribs, Andy played very prominent role, presenting panoply of craft/import programs for almost 2 hours.  Andy also started out in sales and has “commercial mentality” that Marcel wanted, so that mktg and sales will be “working together.”  

But will Andy be able to change trajectory of AB’s challenged #1 brand? “Absolutely,” said ever-enthusiastic Andy, who promised to bring some of knowledge he’s gained working on craft/import brands back to Bud Light. Like what?  “The ability to have stronger connections with consumers,” said Andy.  Funny he should mention that.  By appointing Andy, AB is addressing one of the most frequent critiques of AB’s marketing from its distribs.  AB’s mostly non-US born sr mktg execs in recent yrs “don’t understand American consumers,” distribs frequently say (or words to that effect).  Andy has pedigree, passion and mindset to change that.  Wholesalers will likely cheer the move.   

When Andy last led Bud Light, it was in a period of spectacular growth. Bud Light brand grew 20 mil bbls between 1990-2000, with double digit gains most yrs.  But Bud Light brand down last 8 yrs.  Dropped 6.4 mil bbls, 15%, including 4% decline last yr.  Down 3.8% yr-to-date thru Mar 11 in Nielsen all outlet.  That’s steeper than 3% drop in 2016 Nielsen.  So Andy and team clearly have their work cut out for ’em.   

Other personnel changes: Lucas Herscovici promoted to newly created role of global mktg veep of Strategic Functions (Innovation, Connectiong and Insights).  Lucas previously veep of connections for AB, “transformed our media operations, and evolved our position as a leading sports marketer,” said AB. Lucas kinda had the old Tony Ponturo role at AB (with additional responsibilities) and he just got promoted from there.  Replacing Lucas will be Joao Chueiri, most recently global vp of mktg for core brands.  He came to ABI 3 yrs ago from Nike, where he spent 7 yrs. Joao also spent time at ad agency Saatchi & Saatchi.  Then too, AB promoted Chelsea Phillips, previously sr director of value brands, to veep of value and near beer brands.  Chelsea led value team last 2 yrs, “driving all time high share of value.”  Previous veep of near beer Rashmi Patel will leave co.  Previous Bud Light veep Alex Lambrecht’s next role undetermined at presstime, “no rush” but in meantime he’s helping with transition. Asked about High End, Andy praised prexy Felip Szpiegel as “driving force” and “guru” of High End unit.    

Adding to recent onslaught of tech-based delivery innovations for alc bevs, new distrib concept, Liberation Distribution (LibDib) touts itself as “first alcohol distributor and technology company to offer a three-tier compliant web-based platform,” co announced. Yet “three-tier compliant” gets hazy, since LibDib looks to give suppliers “as much freedom from Franchise Law as legally allowable,” ultimately allowing suppliers to sell thru its online platform (for a fee)  directly to retailers.  Suppliers take on storage and delivery costs themselves. Suppliers upload “licenses and basic information” to the site, “the maker defines product selection, calculates the listed wholesale price and defines where to distribute.” Retailers are then able to order “from makers of any size and from any location, whether down the street or from across the globe.” And platform “automatically handles the invoicing, payment processing, collections and taxes.” Any winery, brewery or distillery that signs up will have access to any retailer where LibDib’s registered to sell. LibDib launches in CA on Apr 5 and NY in “coming months.” More states “coming soon,” per co website.

LibDib “also enlisting market friendly business practices,” it sez, such as: “charging a lower margin for makers, with most transactions at 15%”; “processing payments in 30 days or less and providing on-demand sales reports”; “large and varied selection of boutique products” for retailers to choose from; “direct communication within the platform between makers and accounts”; “creating a level playing field”; “no aging inventory sitting at the wholesaler warehouses”; “eliminating the middle man and any potential for a sales representative to strong-arm the sales process”; and allowing retailers “to buy only what they want, when they want it,” with “no minimums.”

“Distributor and producer consolidation has created a closed market where the little guys cannot get their product into distribution and accounts are being squeezed to purchase beer, wine and craft spirits from the very largest suppliers,” said LibDib founder and CEO, Cheryl Durzy, a 20-year wine vet. “All brands deserve a route to market and LibDib creates an opportunity where makers and buyers can work directly together.” Stay tuned.

Today, Moody’s “assigned an A3 rating” to ABI for its “proposed notes issue.”  A3 are "upper-medium grade and are subject to low credit risk,” according to website investinganswers.com.  Moody’s looks at everything including ABI’s strengths (#1 worldwide, “leading positions in some of the… most profitable beer markets,” wide portfolio, “excellent liquidity and large stable cash flow”) and potential weaknesses (“exposure to foreign exchange and somewhat volatile economies,” “declining beer consumption in developed markets,” “intense competition” and “significant debt”).   ABI’s gross debt to EBITDA “peaked at slightly over 6 times in December 2016,” which was “higher than originally expected because of weak performance in several markets including Brazil, and foreign currency movements.”  

Moody’s “expects leverage to improve to closer to 4 times over approximately the next two years, which is still high for the A3 rating.” That’s partly because of “a relatively high dividend payout.”  But ABI “will need to achieve synergies and cost savings as well as accelerate growth to enable more meaningful debt repayment.”  Still, ABI has “long track record of successfully integrating acquisitions” and mgt has commited to targeting 2x debt to EBITDA.  “This commitment, together with the company’s strong qualitative characteristics, help to support a relatively high investment grade rating despite leverage metrics that will be in speculative grade territory for several years.”  

“It is common for companies to seek media efficiencies via agency consolidations in the wake of major mergers,” noted Ad Age.  And so it comes as absolutely no surprise that following ABI purchase of SABMiller, ABI “putting in play planning and buying duties for the world’s largest brewer.”  Incumbent in US is MediaCom since late 2014.  Globally, ABI currently using 8 agencies “spanning all major holding companies in more than 50 countries” and looks to get down to “potentially as few as one or two agencies.”  There will be big winner(s) and losers once the dust settles.  

ABI was 20th largest US advertiser, “spending $1.68 billion in 2015,” estimates Ad Age.  Globally, it added SABMiller spending too.  So that’s gotta be some massive account, desirable even given ABI’s sometimes radical revamps.  Recall, in 2014, AB decimated long-running Busch Media Group to go to MediaCom.  At time, AB said it would be able to act “faster” and “spend smarter.”  It is likely to get more efficiencies yet again, but will those efficiencies lead to better sales results?  

Results of just-published study of nearly 2 mil UK adults is very good news and not just because it takes some sting out of tuff Feb shipments #.  Recall, some public health advocates, researchers and govt officials have voiced increasing skepticism about the links between moderate drinking and heart health established over decades of research. But this very granular study of 1.9 mil adults over 13 yrs, using electronic and other patient health records, found non-drinkers had significantly higher risks than moderate drinkers (up to 2 drinks/day for men, 1.5/day for women), 23-33% higher in fact, for coronary heart disease and cardiovascular disease.  More specifically, non-drinkers had 32% higher risk for myocardial infarction, 24% higher risk for heart failure, 33% higher risk for unstable angina, 32% higher risk for aortic aneurysm and 12% higher risk for ischemic stroke.  Moderate drinkers did not have lower risks for every one of the 12 specific conditions investigated, the authors point out.   Heavier drinking levels, which lumped together all drinkers above those relatively modest limits, had higher risks for many of the specific cardiovascular diseases than non-drinkers, tho still lower risks for myocardial infarction and angina.  What’s more, non-drinkers had higher rates of all-cause mortality than moderate drinkers and occasional drinkers.

Despite the findings, the authors, per usual, went out of their way not to advise abstainers to consider the habit. “It could be argued that it would be unwise to encourage individuals to take up drinking as a means of lowering their risk…. This is because there are arguably safer and more effective ways of reducing cardiovascular risk, such as increasing physical activity and smoking cessation.”  Still, conclusion of this “most comprehensive study to date of the relation between alcohol consumption and risk of cardiovascular disease” is basically the same as many previous studies: light/moderate drinkers have lower risk for several significant cardiovascular diseases than abstainers.  Indeed, in an editorial comment in the same issue of British Medical Journal where the study appeared, Harvard’s Kenneth Mukamal points out that the new study supports work from “over four decades ago,” by Dr. Arthur Klatsky in California and “does not offer a materially new view” of the links between moderate drinking and cardiovascular health.  Rather, like the “old” view, new study reports “lower rates of essentially every meaningful cardiovascular outcome except hemorrhagic stroke among moderate drinkers than among abstainers.  Four decades of epidemiological studies have largely found the same.”  Perhaps the new study will reverse some of that growing “skepticism” noted above.  But don’t bet on it.