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Still Stumped by "Executional Miss," Boston Beer Execs Discuss "Cloudy" Q1, Uncertain Future
Core to that lack of clarity on how Boston's first qtr will end up (let alone full 2017) was "executional miss" on Hopscape, new Sam Adams Spring seasonal. Alternatively called a "stumble" and a "hiccup," Martin and co are "still diagnosing" what exactly went wrong. "We are still not completely clear of all the causes," he said. Recall, Boston decided to split Spring seasonal slot and provide 2 new beers, Hopscape in Jan followed by Fresh as Helles in Mar. The co had the "executional capability" and "opportunity" to go from 4 to 5 seasonals, Martin asserted. And past new intros in the Spring slot have led to 10-20% growth. Not this year. Recall, Sam Adams Seasonal volume down over 50% in IRI multi-outlet + convenience data thru Jan 22. In foodstores, it's down 56%, over 60K cases. It's now smaller than Sam variety pack (and Firestone 805) in the channel to start 2017. Just 2 yrs ago, Sam Seasonal had about 4 share of craft cases in IRI MULC during comparable period. That's down to under 1.5 this yr.
So what happened? Boston got "great retailer and wholesaler execution" on Hopscape, but hasn't "seen the repeat and the pull," Martin said. Is it because it appeared "a little early," after "Winter Lager performed well" and even "ran out early," he wondered. Were folks "still looking for the old seasonal," Cold Snap, which actually was still available in variety packs and as secondary seasonal SKU. Could it possibly even have been "too hoppy?" They're not sure. But it "blocked our system up." And so "the last eight weeks is incredibly cloudy," Martin said, even as execs try to "take the learnings to Fresh as Helles" in short order. Unstated on call, but beyond asking themselves what happened with Hopscape, Boston execs also surely working to figure out what will happen with all the Hopscape that didn't get pulled from shelves by drinkers.
On Retail Choice, Brewpubs, M&A: Consumers' Confusion, Execs' Reluctance Hopscape misstep alone shouldn't impact Sam Adams distribution, at least this year, as "a lot of those chain decisions are already made," Martin assured on call. Of course, "if trends persist long-term," then there could be longer term effects. But again, Boston execs already "seeing retailers sort of simplify their shelves a little bit," particularly within craft with "some cut of the tail." And that's "good for us long-term," he added. Indeed, "paradox of choice," when consumers faced with so many choices sometimes pull back on total purchases, founder and chairman Jim Koch noted, paired with retailers "maxed out" on space and getting "burned last year on hard sodas," has made some retailers "become more gun shy" when asked to take on new brands.
And yet, the tail grows longer as new breweries and brewpubs open. Boston Beer "should have been selling beer at our brewery in Boston earlier," Martin admitted. But execs "have always been a little reluctant" to expand direct sales to consumers due to questions of how that might "affect the rest of our business" (and perhaps, business relationships, i.e. with distribs and retailers). Plus, "the brewpub business is a local business," Martin noted. So even though it can provide a solid revenue source to small players, "we're not convinced that a multiple state beer hall type business makes sense," he noted. That said, the co is "benefiting" from taproom sales at small breweries under AS Beer umbrella (Coney Island, Angel City, Concrete Beach) and "we're taking that learning and trying to decide how to apply it to Sam Adams, particularly in Boston."
The Boston executive team has shown similar reluctance to acquire smaller players. "We have looked at 'em," Jim acknowledged. "People who follow the industry know there's been kind of a tsunami of potential brewers for sale, or books circulating," he said before noting again the largely high prices asked for by sellers. "And there have been aggressive buyers, who in our mind, have been willing to overpay," Jim quipped. In the future, Boston may buy, "should EBITDA multiples become reasonable," said Jim. But so far, the co's determined that "the best place to spend our money...is our own stock."
Boston Not "New, Local, Small" "What we have seen in craft," Jim explained late in call, "is a momentum shift, which may well be a passing phase, toward new, small and local. And Sam Adams has not been new for a long time, is not local in most of the country and is not small." In his view, Boston must continue to support Sam Adams "so that we emerge from this transition period with the strongest or one of the strongest brands in the craft industry," he said. SIG analyst Pablo Zuanic pushed back. When consumers drink a Sam Adams Boston Lager, do they believe they are "drinking a craft beer," he wondered (see below for more on Pablo's analysis). "Sam Adams, for a lot of people, was the first craft beer," Jim noted. Many consumers put beer brands in 3 basic buckets: "imports, craft and mass domestic," he believes. And most still file Sam under craft.
Certainly that's true for many drinkers. But all? Responses to Scarborough Research surveys suggest not. For example, over 28% of beer drinkers in Boston told Scarborough that they drank at least one Sam Adams beer in the last month. But less than 22% reported consumption of "any craft/microbrew" (which the survey does not define for respondents) during the same period. We've seen that same discrepancy in these surveys for years. It shows up again in results for Sam Adams/craft in NYC (14% vs 11%) and for Shiner Bock/craft in Dallas/Fort Worth (20% vs 15%) and Houston (18% vs 15%). So clearly some consumers don't consider some top craft brands "craft" and drink them all the same. Are there more? During this "transition period," as Jim called it, can larger craft companies and brand families win over consumers currently attracted to "new, small and local" to get back to growth? Brewers clearly can't turn their back on them completely. But the rise of craft brands that function a bit more like mainstream beer brands suggests larger opportunities (and challenges) exist elsewhere.
Legislative Notes: Trio of Bills Tackle Taproom Sales in MD; More Movement in MT, Southeast, More
More Debate on Self Distrib Cap in North Carolina, Backed by Group of Small Brewers Bill intro'd in North Carolina to raise self-distribution cap from 25K bbls now being pushed heavily by group of state brewers under "Craft Freedom" name. Recall, some brewers in NC have complained for years about cap and this yr state legislator crafted language to up that to 100K bbls. While state brewers guild has worked to change self-distrib cap and other regs in past, this effort largely led by separate smaller group of brewers focused on this particular issue. Trio of brewery owners advocated for law change in Asheville Citizen-Times op-ed this week, including common rhetoric about "archaic law" and "state-mandated middlemen." Editorial board for Charlotte Observer concurs, printing positive push for bill as well as story that its success impacts plans of the city's Olde Mecklenburg Brewery. That co could spend $7 mil to expand production at new site or choose to "build only a smaller facility with a beer garden," depending on outcome of legislative session. It shipped about 21K bbls last yr, up from about 19K the yr prior and nearing 25K-bbl cap. OMB co-founder John Marrino among those that penned above op-ed and one of core supporters of law change. This bill and broader legislative session still in early stages though, so stay tuned.
Reps Go Rogue in Montana After Coalition Collapse It's a case of legislators gone rogue (or at least claiming they have) in Montana. There, a pair of state representatives intro'd a bill to raise bbl-cap under which breweries may operate taprooms to 60K bbls from 10K bbls. Previous attempts to make similar changes failed. Recall, a coalition that attempted to find common ground between brewers, distributors and retailers did not. "We could never get anything over the finish line," one of bill's co-sponsors said to the Daily Missoulian. "So this bill is not a product of any of [the trade groups] telling us what to do," she said. "We are coming at this from a pure tax revenue perspective," Rep. Ellie Hill Smith told the paper, citing tax revenue from growing in-state brewers. "This isn't about everyone on the three legs of the stool getting what they want. This is about our ability to get our state more money," she noted, before calling breweries "true economic drivers in our state" and current limits "arcane" and the result of "backroom deals." A rep from the state brewers guild shared support for the bill, but the state tavern assn opposes, natch. Indeed, this bill underscores much broader issue in MT, which operates under a retail license quota system. Therefore, any potential changes require careful consideration of impacts on the value of current retail licenses.
Coalition Building Elsewhere, But Not Everywhere in Southeast; Tax Hike Proposed in NM Amendment tacked onto bill in South Carolina would allow breweries to get permits to sell liquor on-site and also clear up pathway for brewpubs to become packaging/distributing breweries. That bill approved by subcommittee with support from both brewers and distribs, according to report from The State. Meanwhile, process of legalizing on-site sales at brewery taprooms continuing in both Georgia and Mississippi. Recall: GA bill passed Senate; MS bill passed House. Folks in both states point to positive compromises among industry members. In Florida, self-distribution is back on the table. A bill to legalize the practice for small brewers has been intro'd there, according to Orlando Sentinel, alongside other bills focused on sales of other alc bevs. Florida Beer Wholesalers Assn (one of 2 distrib orgs in state) remains opposed, as in past. At same time, brewers and other industry folks in New Mexico fighting tooth and nail against proposed massive excise tax hike in state. Bill would boost beer taxes by 7.5X from 41 cents per gallon to $3.08. Yikes. Bill would similarly raise wine and spirits taxes as well, per Albuquerque Journal. Small brewers would still pay lower rate on first 15K bbls, but no one in alc bev biz welcoming this proposal with open arms.
Valuation: Holding Up for Distribs, Going Down for Craft Brewers; Two Big Brewer Examples
“What’s happening with valuation,” a friend asked recently. And so we asked around a little and bring the answers to all our readers. 10x EBITDA (earnings before interest, taxes, depreciation and amortization) is the “new norm” in distrib deals, Paragon Beverage Advisors Mark Hall said last yr at our spring conference. Has anything happened to change that? Not really, sources say, tho there’s more like a range rather than one hard and fast number, and it depends on your demographics and your portfolio. Is your mkt growing in population? Most important, do you sell Constellation’s portfolio? Distribs without Constellation might only fetch 8x, said consultant Joe Thompson, while those with it could get as high as 12x.
What about craft brewers? Craft brewer multiples got pretty crazy, with many in the 18-20x EBITDA range, some between 20-25x, said source; Ballast Point closer to 30x. But valuations have been coming down for months, as MillerCoors ceo Gavin Hattersley told INSIGHTS as long ago as last summer. It’s difficult to know where they are now. Not many deals getting done these days. “The bid and the ask are so far apart,” said another source, who believes that some craft valuations need to come down to the 6-10x EBITDA range in order to get a transaction done. A lot of valuation is “driven by growth,” and that’s either slowed markedly or gone away altogether for many. And we’ve just come through a period of great need among strategic buyers, who could pay the most, because of the synergies they would realize. But the big strategics aren’t as hungry for deals. Both those changes reduced valuations. Then too, distrib valuations holding up better because distrib deals are “much more stable” and “less volatile” than craft deals, said first source. Yet within craft, there exist some “jewels” with rapid growth, great geographic presence, good branding that could still command sky high valuations.
There are fewer big brewer transactions, so it’s perhaps harder to generalize. But to give 2 pertinent examples, ABI paid a multiple in the high teens for SABMiller last yr, sources say. And yet Molson Coors only paid 9.2x EBITDA for the 58% of MC it didn’t own, according to its 4th qtr release, to get 100% of MillerCoors. Since deals appear to average more like the mid-teens, seemingly Molson Coors got a reasonable valuation, as ABI had to get deal done.
Millennials are finally emerging from their parents’ basements. And they’re toting cases of Miller High Life, Busch Light and Bud Ice on their shoulders. Okay, we exaggerate. But hard to ignore that near premium category in Nielsen all outlet scans up 2%+ for 4 wks and yr-to-date thru Mar 11, while total biz off 0.6-0.7%. Near premiums have avg case price of $16.25 and just over half of total economy segment. Sure, imports and superpremiums still growth engines, driven by Michelob Ultra and Modelo portfolio. Those two segments each continue up mid-to-high single digits this yr. But 4 of top-10 growth brands in latest period are Busch Light, Bud Ice, Miller High Life and Busch. Only 1 premium brand in top-10 growers: Yuengling Lager. Premium light biz and premium regular biz down 3.2% and 4.5% respectively in most recent period, with Bud Light/Bud takin’ a -5% hit for 4 wks. Coors Banquet up, but MGD/Miller 64 and Bud Select still takin’ whacks. Note too, Keystone Light eked out tiny gain for 4 wks, Steel Reserve +1%, Pabst Blue Ribbon down just 0.3% and Natty Light reduced dropoff pace to under 1%. And MC’s new honey, Hamm’s, jumped 23% for 4 wks at hot price of $12.25/case, down almost a dollar and almost $3 below avg case price in Nielsen’s budget segment. The other 2 top-10 gainers, by the way: Stella and Heineken, up 14% and 4% respectively YTD.
In mega-brand land, Coors Light (-1.3%) and Miller Lite (-0.6%) far outperforming Bud Light for 4 wks
(-4.6%) and yr-to-date (-1% vs -4%, roughly). But some other very ugly numbers in latest scans: Sam Adams family down 20-22%; Sierra and Ritas down 14-15%; Shock Top down 30-33%; ciders and hard sodas sinkin’. On flip side, some solid growers: New Belgium up 15% for 4 wks, 7% yr-to-date; Blue Moon Belgian White up mid-singles, tho portfolio still down slightly; Leinenkugel shandies jumped 22-23%; Mike’s Harder up 19-20%; Twisted Tea +16-18%.
Gotta be notable when world’s largest brewer works with world’s largest online retailer to launch “a free dedicated skill” on its highly popular Alexa device. Ultra 95 “taps into the cutting edge voice recognition aspect of Alexa to deliver 12 customized fitness workouts to beer drinkers who enjoy staying active physically as much as they enjoy gathering with friends for a beer…. Each of the 12 audio workouts is designed to be quick and efficient, burning approximately 95 calories” (same as in a serving of Ultra).
This move definitely sounds on brand, and it’s a clever way for Ultra to utilize new technology. Could this also be a way for AB to forge a deeper relationship with Amazon? Meanwhile, Michelob Ultra remains the beer industry’s hottest brand. $$ sales up 27.4% for 4 weeks. Ultra gained 0.9 share of $$, 50% more than Modelo Especial, which gained a still impressive 0.6. And Ultra avg prices up nearly 3%.
Lacking Leap Day Made for Lackluster Spirits Sales in Control States; Tho Still Up 2.6% for 12 Mos
Extra retail selling days are meaningful. Control state spirits volume dipped 0.4% in Feb, NABCA reports, with loss of Leap Day. That dragged yr-to-date volume to up just 0.6%. For 12 mos tho, volume still up 2.6%, dollar sales +4.6%.
Ballast Point’s Higher Prices “Very Sustainable,’ Sez Paul Hetterich; Premiumization “Never Stops”
Constellation’s top execs’ confidence in growing high end didn’t end with Gold Network distrib mtg. Prexy Paul Hetterich continued to talk up high-end prospects in interview yesterday with Chi Tribune. Asked whether Ballast Point’s “most expensive six pack on the shelves” is sustainable and if Constellation would consider lowering prices, Paul insisted higher price “very sustainable.” Indeed, on premiumization, “I don’t think it ever stops,” Paul believes, “and what we call premium or high end might become 100 per cent of volume.” Paul pointed to wine biz where not long ago people doubted possibility of building a million-case brand of a $20 bottle. “Now there’s like 20 of them.” Ballast Point doesn’t “satisfy” Constellation’s “craft beer need,” and co needs to play across high-end spectrum, Paul also told Trib. Could be “organic development,” M&A, or thru ventures arm. But Constellation will be “patient. There’s no reason to say we have to do anything this instant.”
Paul also repeated another key message to Gold Network. Biggest “challenge” facing Constellation: beer biz going thru “biggest transformation” since AB, Miller and Coors gobbled volume at expense of regional brewers, sez Paul. Now, beer “transitioning to this more fragmented high-end space…. But what has not come along with that is how distributors think about their business, where it is and where it’s going. And how retailers think…. Our biggest challenge with that is how do you impact the shelf space, so hot brands like Corona and Modelo aren’t out of stock.”