Predictably, Pabst termination of 3 Washington state distribs last week (see last two Expresses) already challenged in court.  Odom Corp and Stein Dist sued yesterday in US Dist Ct; Marine View lawsuit to be filed today, we understand.  Odom and Stein suits charge Pabst with breach of contract, which they say bars Pabst from terminating without cause, terminating without at least 60 days’ notice and without oppy to cure. Nor does state franchise law allow Pabst to terminate without cause, suits claim.  They seek declaratory judgment that Pabst doesn’t have right to terminate under contract or state law, plus atty fees, costs, etc.  Odom has distributed Pabst in eastern WA since 1940s; Stein serves southwest WA.  They’re workin’ under contracts signed in early 2000s, none of which allow Pabst to terminate as it did last week, replacing distribs virtually overnight, suits allege.  

Following “long history of successfully distributing Pabst throughout the Northwest,” Pabst “abruptly told Odom” on Feb 16 it planned termination, without identifying cause.  Pabst told Odom to “work something out” with Columbia Dist as far as compensation, Odom alleges.  Odom sent Feb 22 letter to Pabst citing value of Pabst distrib rights and investments it’s made.  “Stripping Odom of that distributorship without cause would render that investment wasted and damage Odom’s business,” it said.  Claimed Odom has “delivered quality service” over the years and “Pabst has not raised any problems or concerns with Odom that would justify termination.”  But Odom’s “pleas and requests to follow the law…fell on deaf ears” and Pabst sent short termination notice Feb 24.  (See yesterday’s Express.)  Stein complaint makes same points.  Interestingly, distribs haven’t yet filed for temporary restraining order, even while Pabst termination letter said Columbia would start selling its brands by Feb 27, yesterday.

Sales of recreational marijuana topped $1.5 bil in just Colorado and Washington, in 2016, a 66% increase over 2015, Marijuana Business Daily reported at start of what turned out to be quite an up-and-down week for weed last week. It ended with suggestion that the DOJ “will be looking into” enforcing federal law in states where recreational cannabis use has already been legalized, according to White House press secretary Sean Spicer during a Thursday press briefing. He underscored a “big difference” between medical and recreational use in mind of President Trump these days. “I do believe you’ll see greater enforcement” from DOJ, he hinted. Due to well-known anti-drug rhetoric of new Atty Genl Jeff Sessions, this move “not entirely surprising” to Cowen & Co in note published Friday. It expects “State AG’s will aggressively defend their tax revenues,” which surpassed $600 mil in 2016 in just 3 states: CO, WA and Oregon.

Indeed, AG in California, which voted to legalize recreational use last Nov but hasn’t yet instituted rules to add such sales to current regs governing medical use, promised “to protect the interests of California” after Spicer’s comments, LA Times reported. One state atty, already working with many marijuana bizzes, feels sure that any enforcement action “would go to court.” But a law professor at UCLA thinks there’s “not much California can do” when it comes to federal drug law enforcement. Meanwhile, one CA representative to US Congress has already intro’d a bill to block DOJ enforcement. Many of these proponents cite “states’ rights” in defense.

Notably, those ringing “states’ rights” bell cite comments Trump and/or his administration made in support of state power on this and other issues. During campaign, Trump deferred to states on cannabis issue, so now seems to be “flip-flopping,” CO rep Jared Polis claimed in statement to HuffPost. Some observers highlighted that, during same press briefing, Spicer explained that Trump rolled-back protections for transgender students because “it’s a states’ rights issue,” Slate reported. It then asked: “if transgender protections are a states’ rights issue, why isn’t marijuana?” Of course, “this isn’t an issue about states’ rights, it’s an issue of public health and safety,” a legalization opponent insisted to HuffPost. Indeed, Spicer also noted “the opioid addiction crisis blossoming in so many states,” while speaking about cannabis last week. However many sources perhaps most galled by this inclusion. Marijuana “could actually help solve the opioid crisis,” Slate wrote, citing studies that suggest a 16% drop in opioid deaths following legalization of medical marijuana.

Cowen went a step further and cited results of five separate studies that show, “far from being a gateway drug, legal cannabis looks to be quite effective in driving declines in opioid use and overdoses.” Any suggestions to the opposite “blatantly contradicts available research,” analysts wrote. Obviously, what states have rights to do and not do, especially as it pertains to the regulation of once-Prohibited intoxicating substances, is of particular interest to alc bev industry. With public health folks ramping up calls for tighter restriction alongside the kinds of commentary noted above, discussions of what’s a state issue and what’s a federal issue not likely to go away anytime soon. Meanwhile, plenty of discussion still to be had about interaction between marijuana and alcohol in terms of sales. So look out for more “In the Weeds” reports in future issues.

Not only did 3 WA distribs get termination notices last week, but anti-wholesaler rhetoric ratcheted up in 3 other states. Like how?  Like Reason.com’s Baylen Linnekin who proclaimed: “The Twenty-First Amendment Sucks.”  Baylen’s bitchin’ about Michigan law that allows in-state retailers to ship direct to Mich consumers but bars out-of-state retailers from doing so.  That law’s been challenged in court, as we’ve reported.  Direct shipping advocates hoping for Granholm-like decision that will force states to treat in-state and out-of-state retailers the same. So far states have been able to treat retailers differently.  But pressure’s building.  Along the way, Baylen whacks “the Constitution’s most overrated Amendment” which resulted in Mich and other states “having crappy 21st Amendment inspired alcohol-distribution laws in place.”  Meanwhile, long-time direct shipping advocate Tom Wark praised “perfect” bill intro’d in Texas that will end limits on how much out-of-state wineries can direct ship to Tex consumers, allow out-of-state brewers/distilleries to ship direct and allow out-of-state retailers to do so as well.  Wark sez it’s the kind of bill “that Texas wholesalers and most Texas alcohol beverage retailers will oppose with their last dying breath.”  Tex beer distribs, Wark sez in his blog post, “have outsized influence in the state,” and if there’s a hearing, “will throw everything they have at it.”  Tex bill, like Mich bill, indicates that direct shipping debate has shifted from producer rights to sell to consumers to a “retailer-directed battle,” Wark points out.  In addition to Tex, NY, KY and RI legislatures also lookin’ at bills to allow out-of-state retailers to ship direct to consumers.

That ain’t all.  A trio of NC craft brewers got op-ed published in several NC papers last week, titled in North State Journal: “Mandated middlemen hurt local breweries.”  One current battle in NC is whether to raise cap for self-distribution rights, now sitting at 25K bbls. Those 3 brewers part of “Craft Freedom” group aggressively pushing effort that would raise cap to 200K bbls.  In op-ed, they hit “state mandated middlemen” hard, as “needless third party” who “just want to reap the benefits of your hard work and dedication.”  They also play local card, charging that main beneficiaries of NC’s “rigged system are foreign owned brewing behemoths,” AB InBev, SABMiller and Molson Coors, who “exploit our antiquated beer law and use their outsized financial muscle to dominate the distributors’ product portfolios.”  They point to survey findings that suggest big majorities support self-distribution and only 20% “agrees with the state’s outmoded middlemen mandate.”      

Lastly, interesting tweak suggested by political scientist/biz columnist John Stoehr for CT Post yesterday.  He defended Connecticut Gov Malloy’s support to end minimum pricing law there, which package store retailers fighting to keep.  But Stoehr also understands plight of mom-and-pops who would have hard time competing vs mega-retailers like Total Wine (pushing for repeal, in lawsuit).  He believes minimum price law’s repeal “should be accompanied by an antitrust law restricting market share of any one firm in the business of selling wine and spirits.”  So Total Wine could grow, in his view, “but it could not dominate more than say, 40% of the market” and stronger mom-and-pops would survive.   Up to lawmakers to decide that cap, he sez.  Would cap change over time?    

As Constellation meets with distribs this week to celebrate an excellent yr in 2016 and share plans for 2017, in one key state, Florida, “our depletion numbers continue to rock,” veep/gm Jeff Weckback wrote distribs over weekend.  Indeed, Constellation up 14.3% thru Feb 20 there.  Jeff did warn that “inventory (specifically premium glass) will be running very tight for the coming months as we lead into summer,” noting there’s been some cut and cancelled orders.  Constellation team doin’ its best to “minimize” issues, Jeff assured, and avoid out of stocks.      

As we signaled last issue, Pabst terminated 3 distribs in Washington state last week ‒ Odom, Marine View and Stein ‒  moving its biz to megadistrib Columbia.  “Pabst is terminating all existing rights. . . to distribute all PBC products in all existing authorized Territories” in WA, one letter from chief sales officer Bruce Muenter started out.  Termination not for “deficiency of performance,” Bruce wrote, but “a determination by [Pabst] that a change in distributors” in WA is in Pabst’s “best interest.”  Columbia Dist chosen as “replacement distributor” and “will begin” selling Pabst in mkt today, Bruce continued.  Finally, Columbia tasked with reaching out to pick up and pay laid-in costs for all inventory and pay “fair market value of the terminated distribution rights.”  

The remarkable story of globalization in beer biz  is well-told in an entertaining and informative new book called “The Beer Monopoly” by Dr. Ina Verstl and Ernst Faltermeier (Ina has written about beer for German mag Brauwelt for the past 2 decades).  The authors frame the saga with a perhaps overplayed analogy to the board game of Monopoly.  Yet they capture the swashbuckling spirit of the age and the lead players who rose up from Brazil, South Africa and Belgium to take over the beer world.  

Indeed, Ina and Ernst point to Belgian brewer Interbrew’s takeover of Labatt in 1995 as when the games really began.  It was “the first transcontinental transaction between two market leaders” (tho leading Australian brewers had ventured into US and Canada in 80s).  And it set stage for so many other cross-border transactions to come.  Today 4 brewers control about half of the global beer mkt, up from 25% about 25 yrs ago.  ABI alone is almost 30% of beer and 50% of global beer profits, following SABMiller deal.  

“Beer Monopoly” details many of the deal high points in chapters on each of ABI, SABMiller, Heineken and Carlsberg, recounting the rise of each.  Chapter on ABI called: “The Greatest Rollup in History.”  But it also explores forgotten nooks and crannies, for example in the consolidation of the Russian beer mkt, thru various Icelandic and Eastern European entities, some of whom made out surprisingly well.  The global beer games will likely be studied in b-schools and written about for decades.  After all, it already created well over the $10 bil in incremental EBITDA that McKinsey consultants had forecast back in late 90s in a prophetic white paper.  If you want to get up to speed quickly on how it all went down, this book is a good place to start.      

Tide of alc bev retail sales bypassing distribs continues to come in.  Yesterday, NY Gov Andrew Cuomo sent out press release celebrating “significant growth of craft beverage stores statewide.”  NY now has 105 such “craft stores” statewide, with additional 32 in last year alone.  That includes 72 farm winery stores, 17 farm brewer stores and 10 farm distillery stores.  Note 1: these are off-site satellite stores set up by producers to sell their products direct to consumers, with “no additional licensing fees to open and operate.”  The state considers them “extensions” of the manufacturing facility. “The law allows farm-based beverage producers to sell any farm-produced wine, beer, cider and spirits by the bottle and by the glass, host tastings, open restaurants, operate gift shops and manufacture and warehouse their products at these branch locations,” the governor’s release touts.  Note 2: these numbers do not include taprooms, of which there are well in excess of 100 in the state (since you don’t have to be a farm brewery to run one).  They also sell beer (or wine, or spirits) in glasses, cans/bottles direct to consumers.  Brewery taprooms can sell growlers too.  

This is not a new story, of course, and has spread in the name of modernization, job creation, tourism and consumer demand.  But given this evolution, growing volume sold outside the 3-tier system, especially in a tight beer market, beginning to make a difference.  Hit on sales still modest, and there’s argument that taproom sales can build off-premise biz too.  At same time, every exception carved out of 3-tier likely makes other “antiquated” 3-tier separations tuffer to defend.  Finally, so-far sporadic resistance of traditional licensed retailers to this evolution remains a bit of a mystery.  

Whatever word you want to put to it, tuffer period in craft is definitely upon us. “We’re finally starting to see a bit of a craft shakedown,” Goldman Sachs analyst Judy Hong said on Boston Beer 4th qtr earnings call this week. So far, it sure ain’t helping Boston, she noted before asking “how long” it might last. Still without a crystal ball, Boston Beer chairman/founder Jim Koch and his team “don’t know how long the shakeout is going to take.” But it’s “likely to be measured in quarters or years rather than months,” he said. During this time, Boston believes it 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. (This article condenses deeper analysis in yesterday’s issue of sister-pub Craft Brew News.)

Early in 2017, Boston already running to catch up after “executional miss” on new Hopscape seasonal brand. Recall, Boston split Spring seasonal slot in two, launching Hopscape first, followed by another new brand, Fresh as Helles, in March. While Boston got “great retailer and wholesaler execution” on Hopscape, it hasn’t “seen the repeat and the pull,” CEO Martin Roper explained on call. It “blocked our system up” and co is “still diagnosing” what exactly went wrong. For first few weeks of this yr, Sam Adams Seasonal down over 50% in IRI multi-outlet + convenience thru Jan 22. “We are still not clear of all the causes,” Martin said. And it’s put a big damper on Boston trends. Again, total Boston depletions down 15% thru Feb 11 (see Express #35).

Due to this “stumble” or “hiccup,” as Martin called it, “the last eight weeks is incredibly cloudy,” making it hard for execs to determine where the co will end up in Q1 and for full-yr. “There’s a lot of uncertainty,” still, he said. And “larger than usual guidance ranges reflect that uncertain volume outlook.” Market did not react positively to these results or particularly wide earnings per share guidance for 2017 of $4.20-6.20. This time last yr, execs guided to full-yr EPS of $7.60-8.00, much tighter range. Just before results, SAM stock just over $166. It’s down about 6% since then, as of press time.

Constellation stock dropped 4% yesterday during cfo David Klein’s presentation at CAGNY (Consumer Analysts Group of NY).  Why?  Mainly because President Trump made some favorable comments about the possibility of “border tax” at same time David was speaking.  But David also said Dec “a soft month for the industry” for “a couple of reasons,” including “weather” (drought last yr, “floods now” that “dampen demand”).  Plus both holidays and weekends are drinking occasions, so when holidays are on a weekend, “you lose one occasion.”  Still, looking at Jan-Feb, “we feel fine,” and Constellation growth “in line with expectations.”  Given soft Dec, Constellation Brands Beer Division depletions will come in “slightly below the midpoint of guidance” of 10-12% for the fiscal yr thru Feb.  Under 11% growth? The horror.  As several analysts noted, that 1-mo dip not likely to have had much effect on stock.  Stock up 3% so far today.  

Constellation “Started to Lead” on Price; Corona “Money Machine” and Mktg ROI; STZ #1 in SoCal  Constellation used to be “effectively a price follower,” said David as it monitored “price gaps.” About 3 yrs ago it “started to lead” in individual mkts with individual SKUs. “It’s been working well for us,” said David, because of “brand health” of its portfolio.  Constellation still expects 1-2% rev per bbl increase, which CLSA’s Caroline Levy called “category leading.”  (Boston 2016 rev per bbl flat, MC up 1.3%, AB up 1.8% thru Sep). Editor’s note: some Constellation distribs believe it has left money on table by not taking pricing up enuf.   

Corona’s “Find Your Beach” campaign has “astounding” ROI, said David.  Corona is a “money machine.”  For every $1 spent advertising Corona, Constellation gets “a little more than $1” back in just 90 days, according to David, and “residual benefits beyond that.”  ROI not quite as robust on Modelo Especial advertising because awareness isn’t as high.  Meanwhile, Constellation pushing ahead with its efforts to be category captain for high end.  In response to question whether it can be overall category captain, David said not in most cases, but “in some markets, like Southern California where we’re the  #1 share guy, maybe we can do that.”  

Yet another big  story this week, this one pitting Pabst against several of its Washington distribs.  Last week, Pabst notified 3 of its Wash distribs, Odom, Marine View and Stein, that it would like them to sell their Pabst biz to megadistrib Columbia.  This notification not in writing.  Reportedly, done in person or by phone.  Pabst asked each distrib to cut a deal with Columbia.  By today.  That has not happened, we understand.  Nor is it likely to. If it doesn’t, Pabst threatened termination, according to several sources. In response, those distribs told Pabst it would be in violation of their contracts with Pabst and Wash franchise law, INSIGHTS understands.  Under Wash franchise law, suppliers over 200K bbls can move for FMV, determined by arbitration if parties can’t agree, sez source.  Unclear at presstime if brands will transfer right away; there could be legal battle ahead.

Meanwhile, megadistrib Columbia recently makin’ other moves in Pacific Northwest, picking up other brands.  In last couple of months, it has gotten Full Sail, Mac & Jack’s and NAB brands, basically across its entire Washington footprint.  Mac & Jack’s in particular represents a good opportunity for Columbia, because it is draft-only and will soon intro packaged beer.   Columbia has reportedly tried to buy these distribs outright in past.  Pabst is 5.5 share player in Wash.  Its Rainier brand is hot.  Incredibly, Rainier is #3 volume brand in Seattle/Tacoma foodstores by volume, according to IRI. Up 7% in 2016.  

Prospect of Pabst terminating 3 large distribs to go to 1 giant megadistrib already sending some shockwaves.  Pabst coo Brian Bousley sez:  “We cannot comment in detail at this time, but we are always looking carefully at our network to make sure that we have the right distributor partner and optimal route to market for our brands.  We value our distributor relationships tremendously, but unfortunately there are times when we need to make difficult strategic decisions in order to ensure the long term success of our brands.”  Stay tuned.