“Some pretty alarming headlines coming out of” study IRI did with partner Cannabiz Consumer Group, Dan Wandel shared during BA Power Hour today. “Legal cannabis penetration is projected to settle at a level comparable to that of beer and wine,” so potential for “a new $50 billion industry,” he said. “We are seeing an impact on sales, make no mistake,” Dan underlined. Indeed, recreational marijuana could “cannibalize 7.1% of revenue from the existing retail beer industry.” Should it be legalized nationally, “it would be much bigger than that.” Survey results show that 63% of consumers interested in cannabis already drink beer. And 27% said they “would either decrease their beer consumption or stop consuming it altogether,” with 22% saying they’d cut back, 5% saying they’d stop drinking beer. Those surveys, by the way, had “one of the highest completion rates we had for our surveys,” Dan noted, “no pun intended.” Net-net, these are “some alarming stats” for alc bev industry, highlighting “threats that are outside of the category but are very much impacting” it.

Beer lost share of alc bev sales again in 2016, IRI data shared by Dan Wandel during BA Power Hour shows. Posting slowest overall $$ growth of last 4 yrs, +3.1% in 2016, beer lost 0.3 share of US beverage alcohol $$ sales for 52 wks thru Jan 1, 2017 in IRI’s multi-outlet channel (which excludes c-stores, a much bigger channel for beer than wine or spirits). Spirits held share at 17.9, up 3.8%. Wine sales grew by almost 5%, gained about 0.4 share to 32.9, Dan showed, exhibiting “impact that wine continues to have,” he said, “encroaching on beer’s space.” Between 30+ canned wine brands, recent Super Bowl ad and states that “loosen up the laws where wine can begin to sell in a lot of the same channels” as beer, Dan sees the “wine category increase as a competitive threat to beer.”

But “it can be a heck of alot worse,” Dan said. Beer was 3d largest edible category in IRI supers last yr, and it was one of just 6 of the top 15 edible categories to grow $$ by more than 1%. Beer had 4th largest absolute $$ gain in top-15, behind bottled water, salty snacks and wine. Three top-15 edible categories declined by over $100 mil each last yr, including top category, carbonated bevs (-0.8%), milk (#4, -5.5%) and cold cereal.

Beer by no means alone in share shift to smaller players over last 5 years. Across all CPG categories, about $20 bil in sales shifted away from large companies to smaller players since 2011, according to data from IRI that Dan Wandel shared during Brewers Assn Power Hour today. Back in 2011, large companies (over $5.5 bil in sales in 2016) had over 57 share of total CPG sales in IRI. Since then, they collectively lost 3.1 share, including a half share in 2016 alone. Collectively they were up less than 1% last yr, a bit slower than average 1.3% annual growth between 2011-2015 (CAGR). Mid-size cos ($1 bil to $5.5 bil in sales) held about 20 share across all yrs, gained 0.4 share from 19.9 to 20.3 between 2011-2015, stable in 2016. It’s small cos ($100 mil to $1 bil) and extra-small cos (less than $100 mil) that gained the most share and grew the fastest. Small firms gained 1.3 share from 14 to 15.3, putting up average 4.6% growth per yr thru 2015, but slowing to just 2.8% growth last yr. But extra-small cos actually accelerated slightly in 2016. The group gained 1 full share between 2011 and 2015, with CAGR of 5.3%. They passed 10 share of total CPG sales last yr, +0.4 share to 10.3, collectively up 5.4%. Key to continued craft growth (and there ain’t much these days): how long will this shift to small continue?

Rough start, indeed, especially since trends 7 weeks in typically don’t alter dramatically.  Beer volume dropped 1.2% yr-to-date thru Feb 19 in IRI multi-outlet + convenience.  What’s more, avg prices up just 29 cents, 1.3% with somewhat less trading up, but lotsa pressure on mainstream brands.  Imports up at similar pace to last yr, 6.5%. But Constellation (currently concluding its Gold Network Summit) capturing nearly all the growth. Volume up 13%.  Gained 0.9 share of volume, 1.3 share of $$.  

Meanwhile, craft has slowed down lots.  Up just 1.6% in IRI MULC.  And FMBs now declining 9% without big splashy new innovation. Hard sodas fizzling fast.  Not Your Father’s Root Beer still down 71% YTD, Best Damn Root Beer down 69% and Henry’s Hard Orange now down 52% for 4 weeks and 22% YTD.  Ouch.  

But biggest volume losses in industry’s breadbasket of big mainstream beers. All premium beers down over 3%, subpremium beers down 2%. Bud Light trends have not yet improved with new campaign.  Down 3.8% yr-to-date (down 2.5% in 2016).  Bud’s trends got considerably worse.  Down 6.2% YTD in IRI MULC.  Each of Coors Light and Miller Lite down 1%.  With avg subpremium prices down 12 cents a case, lower-priced beers losing less share tho still down 2%.  Perhaps subpremiums are even taking some from premium, now getting squeezed from above by imports and subpremiums below.   

On behalf of its branches in Pomona, Los Angeles, Sylmar and Riverside, California, AB agreed to “stipulation and settlement” with Dept of Alc Bev Control there over allegations they violated tied-house, retailer advertising specialties and free goods prohibitions for time period up thru Nov 28, 2016.  Agreement made to “promote an early resolution of the accusations” as parties agreed to “eliminate uncertainty and cost” of litigation and “no admission of wrongdoing” by branches.  But here are guts of agreement:

• AB will pay the ABC $400K.  Half of that, $200K, will be “stayed” for 3 yrs, based on branches following additional conditions.  Assuming no further accusations/violations, AB will pay the $200K after 3 yrs.

• Every yr, branches will train all staff who come into contact with retailers about Calif tied house, ad specialty, free goods and other laws.  New hires have to be trained in 1st month.

• Branches will “separate” sales reps/field employees from “administration of its cooler and draught system leasing program.”  Different staff will have to handle all payments for cooler leases.  And branches have to provide ABC with plan of how they’ll handle leasing program within 5 mos, copies of lease agreements upon request and “evidence of compliance” with training, separation conditions above.     

For its part, ABC won’t serve any new requests for data on cooler, TV monitor or draught system installations to retailers for period thru Nov 28, 2016.  So settlement resolves “all violations or alleged violations” on those matters thru that period.  But it does not cover any violations “not directly related” to those 3 specific issues or to any violations that may follow.  Stayed portion of settlement based on “condition that no subsequent final determination be made that any condition herein has been violated.”  

Net-net: $400K not a lotta money to AB.  Yet, settlement shows regulators, at least in one key mkt, are watching (or at least will respond to complaints) and will be watching.  Also, they’re willing to pursue significant settlements.  Will regulators elsewhere take Calif’s cue and step up tied-house/ pay-to-play investigations?  We’ll see.

ABI’s global results came in considerably below analyst expectations and so even tho it upped its synergy targets by several hundred mil from SABMiller deal, stock down over 3% today.  Down more than 15% since deal done in Oct.   

ABI’s own beer volumes declined 1.4% globally in 2016.  Compare to Heineken, #2 global brewer.  Heineken volume up 3% in 2016.  Even global EBITDA “decreased marginally.”  Biggest problem for ABI remains Brazil. So soft that ABI doesn’t even give # in report.  Total Brazilian beer mkt down estimated 5% and it lost 1.2 share in 2016, ABI estimates.  Of its top countries, ABI grew only in Mexico with “double digit top line growth.”  Besides Brazil and US, ABI down 1.2% in China, tho it gained share there.  And in Q4, it fell in 2 of SABMiller’s most important mkts too: volume down 3% in Columbia and 5% in South Africa.  “Performance has been disappointing,” said ABI, and “as a result, most of the Executive Board of Management will not receive bonuses this year.”  That’s first time Brito “will miss out on a bonus since 2008,” reported Bloomberg.  

Meanwhile, some analysts piled on. “When it rains, it pours,” wrote Bernstein’s Trevor Stirling, citing “another very weak set of numbers.” Exane BNP Paribas wrote: “Another shocker but that’s the trough,” adding “we had feared the worst this quarter and so it is…. There may well be an element of kitchen sinking here and AB InBev’s issues are predominately Brazilian-related.”  Others were somewhat more sanguine, but still “all in results were soft,” as Consumer Edge’s Brett Cooper noted.  “When the going gets tough, the tough get cutting,” said Bloomberg columnist Andrea Felsted, pointing to no bonus and bigger synergies.  But “investors should be wary of the company’s promises Thursday that this is the last of its poor performance.  Cuts are already getting close to the bone, and it can’t do any M&A for the next few years until it has digested the Megabrew deal and got the business back on track.”  Will ABI get any of its mojo back following conference call?  Stay tuned.    

Not a good report from ABI for 4th qtr and full yr in 2016 this morn, either in US or globally.  AB’s sales-to-retailers dropped 2.8% in Q4, and down 2% for full yr.  That’s a slightly worse STR trend than it had in 2014-2015, even with hundreds of millions in incremental investment in last few yrs.  AB STRs down 1.7% in each of 2014-2015.  For past 2 yrs, AB STR trend had been about 1 point better than MillerCoors.  But in 2016, it was just a half point better than MC’s 2.5% drop. And in Q4, they each had equally rough 2.8% drop. Unstated in results, but 2017 clearly ain’t off to great start either.  AB down 1.8% in Nielsen all-outlet yr-to-date thru Feb 18, compared to 1% drop in 2016.  It’s lost slightly less share so far but mkt got weaker, so that’s scant solace.  

Revs in US flat in 2016, shipments down 1.7%, suggesting about 1.7% rev per bbl gain.  So even with weak volume results, AB’s US EBITDA up 2.2% to $5.55 bil.  EBITDA margin expanded 84 basis points to 40.1%.  Like Molson Coors, ABI gave less detail about US than usual.

Still, some sobering stats, especially about its top 2 brands.  Both Bud and Bud Light STRs down mid-single digits. That’s steeper than INSIGHTS had estimated.  On Bud Light, ABI said it’s “encouraged by the positive results in the majority of states” but “challenges remain in a few large and significant US states.”  And Bud “continued to strengthen its distinctive brand voice,” according to ABI, with “big wins” like “America” packaging and this yr’s most viewed Super Bowl commercial.  Yet Bud brand off to rough start in scan data; down 5.8% YTD in Nielsen.  At least AB’s above premium portfolio up mid-single digits, with “strongest performance” from Michelob Ultra and Stella Artois, said ABI.

As legal recreational marijuana markets develop, competition rises, depressing wholesale prices and retail markup, according to stats published by Marijuana Business Daily. Total recreational marijuana sales topped $1.5 bil in just two states, Colorado and Washington, last yr, up a combined 66%, as we reported yesterday based on MBD’s reporting. Sales in slightly older, more mature CO market jumped 49% to $875 mil in 2016. But adult-use sales nearly doubled in WA to almost $700 mil. Mid last summer, WA eliminated medical dispensaries, which resulted in an almost 20%, over $10-mil boost to sales, month-over-month, in Jul.

However, that change and a simultaneous, related change in tax structure also resulted in precipitous drop in average retail markup for cannabis flowers in WA. In Jun, cannabis stores had been getting about 3X wholesale prices. In Jul, when a previous 25% tax on producers, processors and retailers was replaced with 37% excise tax, markups dropped to 2.4X, according to Top Shelf Data reported by MBD. By yr-end, they were closer to 2.1X, correcting for varying pkg sizes. “Retailers took the margin loss because the growers couldn’t,” MBD summarized thoughts from cannabiz observer Dr. James McRae. Indeed, in 9 mos leading up to tax change, wholesale flower prices dropped a dramatic 53% from $8.10 to $3.82/gram. Similarly, during that time, avg retail markup expanded from about 2.6X to that 3X level. But “retailers did not want their customers to see a change in pricing, so they immediately ate the difference,” McRae said. “The competitive market is in play now” and will likely be “the primary thing impacting the margins going forward.”

Meanwhile, CO seeing sharp declines in wholesale flower prices too. During 2016, avg asking prices per pound of flower headed to the recreational mkt dropped 38% from over $2,100 to about $1,300, MBD reports. That includes some natural seasonal swings. And that’s “asking prices,” not what growers actually got. But trend is “telling of the increasingly competitive nature in the cultivation segment of Colorado’s marijuana industry as new players rush in,” MBD wrote. That 38% decline in wholesale asking prices came alongside 22% increase in number of licenses for recreational cultivators in CO. And increased competition also brought in “larger, more sophisticated commercial-scale operations.” So cultivators “seeing more and more consolidation.” Small growers struggle to compete with larger ones. That sounds familiar.  “Previously, turning a profit was almost a given,” said rep from Cannabase, which tracks wholesale cannabis prices. “But not so much anymore.” While none of this data tracks retail prices, likely a more important factor in determining legal cannabis’ interaction with alcohol sales, it does remind of results of RAND study that suggested pot prices could fall by 25% per year. Recall, those researchers suggested that most generic marijuana could end up functioning as a sort of “loss leader,” like “beer nuts.”

In wake of harsh rhetoric and rants vs middlemen emerging from direct shipping advocates and craft brewers last week (see yesterday’s Express) comes support from free market think tank R Street Institute’s Kevin Kosar to “level the playing field” for all alc bevs in Virginia.  Kosar has written numerous op-eds on alc bevs, neo-Prohibitionism and more.  One of his roles at R Street Inst is project to “rationalize federal and state alcohol beverage policy.”  In blog post yesterday, Kosar detailed woes of craft distiller in VA faced with high taxes, severe limits on sampling and failed attempts to “seek legislation to equalize distilleries’ treatment” under VA’s “oppressive liquor laws.”  Along the way, Kosar echoes distiller’s charges that VA beer lobby is “very influential in state politics.”  That lobby “informed him they would continue to oppose all efforts to treat distilleries equally to breweries” and one beer lobbyist allegedly told him “we will allow you to grow your business incrementally” but not fast enough to threaten beer.  Another allegedly said distiller’s problems were “collateral damage” and beer folk would continue to make sure VA treated liquor as “demon water.”  Distiller informed Kosar, “the beer lobby is so powerful in Virginia that it essentially has veto power over any changes to state liquor laws.”   Indeed, distillers can’t match breweries in political contributions and state pols allegedly told distillers they didn’t want to risk losing beer money by accepting liquor dollars. (Pols turning away money?)  That further complicates liquor law reform and creating level playing field, distiller believes, and Kosar echoes.  

Kosar does not specifically call for equalized taxes, but gotta note that call recently came from British journalist Christopher Snowdon at UK Inst of Economic Affairs, another free market think tank. In recent article for UK’s Telegraph, Snowdon argued that “a 9p per unit tax would pay for all the costs imposed on public services by alcohol abuse and would incentivize the development of lower strength drinks across the board.... It would effectively create a minimum price ‒ as temperance campaigners have demanded ‒ and would tackle alcohol duty evasion.  It is time to tax alcohol, not fluids.”  Tax issues, inter-tier and inter-bev tensions, “antiquated” liquor laws, states’ rights to regulate.  The beats go on.

Looks like lotsa Americans preparing President’s Day toasts weren’t planning to do so at home with beer. Volume trends worsened again in most recent 4-wk Nielsen all-outlet scans: -1.6% for 4 wks thru Feb 18, pulling yr-to-date trend down to -0.7%.  And most of the damage done in grocery channel.  Volume -5% in grocery for 4 wks, -3.3% YTD.  In c-stores, trends are -0.1% and -0.2% respectively.  Even Crown up just 1.6% for 4 wks in grocery, the only gainer among top 10 suppliers.  Craft volume off 5.5% for 4 wks in grocery,

-2.6% YTD.  Lotsa double-digit drops among suppliers/brand families in grocery for 4 wks, including Sam Adams and Sierra franchises.  Shock Top, hard sodas and ciders tanking too.

Back to all outlet, Crown up double-digits for 4 wks and YTD, Mike’s up mid- to high-singles.  Diageo Beer and NAB down for 4 wks, but still up slightly YTD.   Otherwise, sea of red for suppliers and many top brands. Michelob Ultra and Modelo Especial still rockin’ 20% gains YTD.  Corona, Heineken and Stella healthy too.  But gotta note 4 economy brands are among top 10 growers for 4 wks, each with lower price than last yr, as we’ve been noting:  Busch Light (+3.8%), Miller High Life (+4.5%), Bud Ice (+6.9%) and Busch (+1.3%).