Pendulum keeps swingin’ in spirits’ way.  While beer biz soft in in Jan, liquor keeps rollin’ along.  Control state spirit volume +1.7% in Jan, reports NABCA, with $$ sales +3.2%.  For 12 mos, volume +3%, $$ up 5%.  Meanwhile, state battles involving alc bev regs continue apace.  In latest news, Connecticut Gov Malloy continues to side with Total Wine folks to toss minimum price law for wine and spirits (Total wants to get rid of more than that).  Gov believes lower prices that would result would add to state’s coffers to tune of $5 mil over 2 yrs, reports Hartford Courant.  Mom and pop liquor stores continue to defend law to protect jobs; their assn’s lobbyist insists scrapping minimum prices would cost the state “millions of dollars in lost taxes.”  In other Total Wine news, mega-retailer testified in favor of bill that would allow it (and other retailers) to get license in Montgomery County, (MD), a control jurisdiction.  MD retailers assn there pushin’ back, natch, reports Bethesda Magazine. Turns out MD General Assembly holds an “Alcohol Day.”  That’s “when dozens of local bills are evaluated that aim to change state alcohol regulations,” mag reports.

Big deal in MillerCoors system.  Kramer Beverage will buy 2 NJ operations, Hub City and Warren South totaling almost 6.5 mil cases, pending supplier approval.  Kramer (Coors) and Hub City (Miller) combo marks another significant in-market consolidation of Miller and Coors volume.  Add in Warren South and Kramer will easily be the largest distrib in NJ.  Kramer will essentially double in size to about 11.5 mil cases, or almost one quarter of non-AB volume in NJ.  

Both operations owned by Chip Banko, who also owns smaller Warren North, about 1.5-2 mil cases.  That distrib  also reportedly for sale, tho no deal known at presstime.  It’s likely to be split between some other MC distribs in state.  Hub City and Warren South deals expected to close this spring, by early May.

Recall Kramer is owned 50/50 by JV of Kramer family and Honickman Group/Origlio.  With this transaction, Honickman Group will have ownership stake in over 75 mil cases of volume across  PA, NJ and NY.    Manhattan Beer (50% owned by Honickman) over 46 mil cases in 2016.  Origlio (50% owned by Honickman) around 18 mil cases.  And Kramer will be about 11.5 mil cases.  Those 3 distribs will be very nearly 1/3 of non-AB volume in those 3 states. With additional acquisitions, more and more, it looks like they are forming a mid-Atlantic corridor.

Extra 53d week in Boston Beer reporting period for calendar 2016 helped boost both reported shipments and depletions trends for the yr.  But 2017 off to especially rocky start.  Depletions down 15% for 6 wks thru Feb 11, as Boston “particularly disappointed” with first spring seasonal Sam Adams Hopscape, chairman Jim Koch noted.  Shipments ended yr -6%, just over 4 mil bbls, thanks to 2% increase in Q4 boosted by extra week.  Depletions also up 1% in Q4 with extra week.  For the yr, Boston depletions -5%.  Gains in Twisted Tea and Truly Spiked & Sparkling not enuf to offset dropoffs in Sam Adams and Angry Orchard.

Rev trend mirrored volume (-5.5%), so reported rev per bbl flat in 2016.  Cost of goods reduced overall, but increased on per bbl basis, as did gen and admin costs.  Boston reduced ad, promotion and selling costs overall and per bbl.  Add ’em up and operating income took $18.5 mil, 12% hit and slipped to $137.7 mil. So operating income back below 2014 level. Boston’s operating income had marched upwards from $95.6 mil in 2012 to $156.2 mil in 2015.

Boston “disappointed” with depletions trend, Jim acknowledged.  Attributed trends to “general softening of the craft beer category and cider category” and a “more challenging retail environment with a lot of new options for our drinkers,” provided by new craft brewers, new craft brands in all markets and tap rooms. CEO Martin Roper laid out Boston’s top 3 priorities for 2017: 1) “returning both Sam Adams and Angry Orchard to growth” via innovation, promotion and brand initiatives; 2) “focus on cost savings and efficiency projects” to fund needed investments behind brands; 3) “long-term innovation” with focus currently on Truly Spiked & Sparkling, which leads its segment now.  Boston’s guidance for 2017 especially wide given “uncertain volume outlook.” It expects 2017 depletions/shipments to come in between -7% and +1%.  Also expects price increases of 1-2%, slight increase in gross margins, and $20-$30 mil additional ad, promo, selling expenses.  Boston cut ad, promo, selling expsense by $29.4 mil, 11% in 2016.

California Dept of Alc Bev Control reached another settlement over allegations of illegal mkt activity.  Agreed with Heineken USA for $30K, in lieu of 45-day suspension if not paid, over consumer program HUSA ran with 3d party mktg co and “certain retailers who collaborated in the scheme,” according to Calif ABC release. Program had consumers register via website where they got coupon for a free Heineken on mobile device and directed to specific retailers.  ABC did inquiry, “determined it was an illegal marketing scheme” and told HUSA so in multiple warnings, even prior to implementation.  HUSA went ahead and ran program “for several weeks.”  It cost additional $30K.  

When AB used its “match and redirect” rights to shift sale of Mississippi distrib Rex from Adams Bev to Mitchell Bev at last minute last summer, and Yuengling terminated Rex at last minute to stop transfer of its brands to Mitchell, many expected a lawsuit.  That suit filed yesterday by Rex in Mississippi state court.  In a nutshell, Rex sez it had $50.5 mil deal to sell to Adams Bev for a little more than 3 mil cases.  But when AB matched and redirected to Mitchell (who had earlier offered lower $49.65 mil for Rex biz) two days before closing, and Yuengling “unlawfully terminated” Rex day before sale to Mitchell closed, Rex did not get $3.1 mil it deserved for Yuengling brands.  Rex wants that $3.1 mil, plus punitive damages.  

Rex’s 7-count complaint charges: 1) AB with bad faith and breach of contract since contract guarantees selling distrib “receives the same price” if AB matches and redirects; 2) AB and Mitchell with civil conspiracy and tortious interference with its deal to sell to Adams in order to “reward Mitchell and marginalize Yuengling”; 3) AB with violating state franchise law for refusal to allow sale to Adams and Rex’s subsequent loss of $3.1 mil; 4) Yuengling with  illegally rejecting transfer of its biz to Mitchell, a “qualified transferee” under that law.  Rex also filed for punitive damages from all 3 for their “machinations” that were “designed to benefit each at Rex’s expense.”  

Rex Details the Deal, Plus AB Pressures Not to Take Yuengling; Mitchell and Yuengling Actions  Lawsuit tells only one side of the story, but it’s got lotsa fascinating details.  Rex announced intent to sell in Apr 2016.  It got several offers.  Adams’ $50.5 mil was “highest and best bid.”  It included offer for owner Dan Magruder’s daughter Ann to stay on.  They expected Aug 26 closing.  Adams was a “model distributor” and an “Anchor Wholesaler.”  But “behind the scenes AB was working to redirect the sale to Mitchell,” Rex claims.  Mitchell thought it was “presumptive buyer” all along and Manny Mitchell had told Rex he “badly” wanted the biz, saying to Dan Magruder “the importance of this to the future of our company cannot be overstated.”  But Adams bid $850K more.  

Rex also asserts AB tried to convince its MS distribs not to take on Yuengling in late 2015.  AB “summoned the Mississippi distributors to St Louis” to “talk them out of doing business with Yuengling,” alleges Rex.  AB “sought to undermine their resolve” to take on Yuengling, offered incentives, but group decided to stick together.  Even Mitchell wanted brands at time, sez Rex.  

In follow-up phone call, AB regional sales veep Sanjiv Chhatwal allegedly gave explicit message to Rex: “take Yuengling’s business at your own risk” and that AB would make things harder on them if they did.  Tho such tactics “anti-competitive and unlawful,” they’re “nothing new” from AB, Rex sez.  MS distribs, except Mitchell, stuck together, took brands and “within months” Rex had built Yuengling biz worth $3.1 mil.  Why did Mitchell “yield” to AB and not take Yuengling?  Mitchell “needed help” in Baltimore mkt and “AB offered Mitchell concessions in Mississippi if Mitchell” rejected Yuengling there, lawsuit alleges.  With match and redirect, “AB would reward Mitchell for its loyalty.”  

Meanwhile, in Aug, AB execs, including Sanjiv and veep Bob Tallett, ensured Rex it would get “same consideration for the redirected sale.” They told Magruders that Rex “would not lose any money as a result of the redirect.”   Rex also pulls into complaint Dept of Justice allegations about AB punishing distribs that take on competing brands.  At time, Dept of Justice settlement, including stipulation that AB could not promote alignment by basing deal decisions on owners’ sale of rival brands, not official.  But AB “knew about it and knew it would have expressly prohibited AB’s match and redirect in Mississippi,” Rex alleges.  (Recall too, Yuengling made big deal of MS match and redirect in its lengthy comments to Justice last fall, as example of AB’s anti-competitive behavior, Rex reminds.)  Last shoe to drop fell day before Rex-Mitchell deal closed.  Yuengling terminated Rex. As result of AB, Yuengling and Mitchell “machinations,” “a sale that should have been for $50.5 million was for $47.4 million instead.”    Final point: co that may have benefitted most from deal, FEB Dist (owned in part by NBWA chairman Paul Bertucci), which got Rex’s Yuengling biz for nothing, absent from lawsuit.  INSIGHTS will publish comments/filings from AB, Yuengling, Mitchell in future issues.

Over the weekend, Kraft Heinz dropped its bid for Unilever in what Fin Times columnist Lex called a “humiliating reversal” amidst “risk of an extended brawl with European governments and the board” of Unilever, which rejected initial offer.  “Unilever’s shock defeat of Kraft Heinz mars an otherwise brilliant record of striking audacious complicated deals that have boosted shareholder returns,” added FT, noting that 3G principals who spearheaded Kraft and Heinz acquisitions also big shareholders of ABI.  But now Kraft Heinz “must lower its sights to Mondelez, General Mills or some middling US food group” and “next pursuit unlikely to implode in two days.” Lesson for other cos “planning vast cross border deals in the face of rising hostility to globalization is that politics beats economics every time.”    

INSIGHTS saw picture of King Cobra 25 oz cans advertised on a billboard for just 75 cents.  That’s really, really low.  Wholesale price to retailer is 66 cents a unit.  “Cheap suds in Arkansas,” our source e-mailed, adding “these are popping up everywhere.”

Diageo, MD craft brewers assn and MD retailers each have separate bills before Genl Assembly in wake of Diageo plan to build brewery and taproom in state, reports Baltimore Sun.  Recall, MD caps on-site sales by brewers at 500 bbls.  Diageo bill changes law for single county, where it wants to build, natch.  It raises on-site sales cap to 5K bbls.  Brewers’ guild has tried to raise cap for yrs and has separate state-wide bill that raises cap to 4K bbls.  A coupla brewers criticized Diageo bill for singling out one biz.  “I am completely opposed to legislation that favors any one of the 70” MD brewers, said Flying Dog’s Jim Caruso.  Hugh Sisson of Heavy Seas, in same neighborhood where Diageo plans to build, said everyone wants Diageo to be successful, “but we don’t want to pass another carve-out bill and have a large, international conglomerate have privileges that home-grown businesses don’t have.”  Diageo lobbyist sez either bill would be acceptable, but he fears statewide bill won’t pass, Sun reports.  “Very crucial,” that at least one of ’em passes, he said, for Diageo plan to be a success.

Meanwhile, MD retailers not lookin’ forward to competing with brewers running bars and fear impact on local taverns.  They’re taking stand for separation of 3 tiers, they say, and their bill limits what brewers can sell on site.  Meanwhile, Baltimore Sun gets to trot out the now very familiar charge that while retailers want to protect 3 tier, “others argue it’s time for Maryland to move past an antiquated system that doesn’t take into account changing consumer attitudes and innovations in the industry.”  Indeed, brewers’ assn director told Sun sales limits hurt brewers’ efforts to serve customers: “After years of trying to inch the licenses forward, the licenses now do not reflect the marketplace demands,” he said.         

Beer biz got tuffer last 6 mos or so, nearly everyone agrees.  So what changed?  What gives?  In recent conversation with one industry expert, we easily came up with as many as 10 reasons potentially affecting short-term trends.  With improvement later in yr, we agreed, things could still shake out more or less the same as last 3 yrs  (that is, up a skosh).  So here goes.  

Two longer term issues remain at top of our list:  wine and spirits still winning and growth of taproom biz not fully recorded.  But did either of those become bigger factor? Hard to know.  As mentioned above, calendar effects net out negative in 1st qtr 2017, so that’s a factor in recent trends.  Gas prices way up, likely another.  The rest are theories.  So we’ll pose ’em as questions.  Do rising public health criticisms and increased negative press on alcohol suppress consumption?  Is there more of a January effect, i.e the tendency to take Jan off from alcohol consumption?   Does legal marijuana mean less disposable income for beer?  With people buying more of their groceries online, does that reduce impulse purchases of beer?   Did the recent election deplete or exhaust people’s appetite for alcohol combined with social interaction?  Are people simply going out less to traditional establishments?  Tote it all up and perhaps it’s surprising that trends are only a little bit worse. But whatever the reasons, it’s making biz tuffer for everybody.

Reviewing slightly different Nielsen data set for 12 weeks thru Jan 28, Bernstein’s Trevor Stirling made similar observations. “Industry is suffering from a slow down in top-line growth, particularly price mix,” which slowed to 0.5% for 12 weeks and “is now running broadly flat.” It had “previously been running around 3%.” Then too, “we saw an abrupt slowdown in the growth of craft beer in the off trade,” Trevor added.  “We expect the slowdown to continue through 2017 and beyond, driven by a shakeout in SKUs and likely eventually brewers.”