Pressing for clearer guidelines for the non-psychoactive hemp-derived compound cannabidiol (CBD), speakers at Food & Drug Administration’s 1st hearing on the topic last Friday asked the agency to act quickly. Given 2 or 5 mins each, 120 speakers (selected from over 400 applicants!) ranged from industry lawyers and trade assn leaders to medical researchers and grieving mothers. But just one thru-line emerged, according to numerous reports: hurry up. “The industry is growing rapidly with little oversight,” an AP report summed up, citing speaker from grocer org Food Marketing Institute that “there is mass confusion in the marketplace.”  A dietary supplement lobbyist, concerned about “an underregulated shadow market,” argued that the “FDA does not have the luxury of time,” according to PBS. It’s already “a new gold rush,” according to an atty for a synthetic CBD-producing medical co. And “the horse is so far out of the corral here that it will be interesting to see what the FDA decides to do — or can do at this point,” he continued, the NY Times reported.

But two words, pulled from the FDA’s earlier, formal notice about last wk’s hearing, may still sum up its position: “questions remain.” Lots of ’em. “We’re really in the infancy of understanding the physiological effects of cannabidiol right now,” a UCLA researcher offered, according to NPR. Questions about how CBD can safely be used, at what doses, for how long and by whom are still largely unexplored with the kind of scientific rigor FDA prefers to see. Testimony from the producer of the only drug approved by the FDA to employ CBD (in very high concentrations for treatment of epilepsy) underscored the need for clinical trials, which that company underwent over research period of 20 years, as PBS pointed out.

But the FDA probably doesn’t have 20 years. Far from it. Purveyors of pet products and cosmetics already tout health benefits. Food and drink makers continue to market CBD-infused options while mostly tamping down on health claims to avoid stricter FDA scrutiny (the agency still bars these products, tho some states have specifically allowed them). And lawyers already suing pharmaceutical companies over opioid marketing actually admitted that “if our dreams come true, we’ll have the same thing going against the marijuana industry in a year or two,” the NY Times cited. So some expect the agency to take a stab at regulating CBD the way it does some dietary supplements, like folic acid, as NYT wrote, which can be used more freely at low doses but needs more attention and specific clearances at higher doses.

Adult Use Cleared by Illinois House, Too; NY Next? New Steps in Existing States  While fed govt weighs CBD, states continue to move toward legalizing adult-use cannabis. In Illinois, the state House also approved a bill to allow adults to buy and possess cannabis starting Jan 1, 2020, following Senate vote last week (see last Thursday’s issue for details). Again, new governor expected to sign. In NY, local control to opt out of cannabis sales a key issue to passage (still unclear with 2 wks left in legislative session), as a set of NY papers extensively explored late last week. New bill would put issue on the ballot in each municipality, adding cannabis to statute written for alcohol. But opposition to bill would rather see elected officials (in some cases more likely to opt out) make that call. In nearby Massachusetts, regulators took first step toward testing social-consumption sites (limited to a handful of interested communities, but likely to require legislative action, so no time soon), according to Salem News.  At the same time, some doctor & scientist groups step up criticism, highlighting that “marijuana is a gateway drug just like alcohol is a gateway drug” in the Boston Herald. Oregon could already have 6 yrs worth of cannabis supply on hand, a glut that caused legislators to pass a bill aimed at limiting new producer/cultivator licenses, according to AP reports. And finally, a new study in Addiction and highlighted by free-market mag Reason underscores issues with using THC blood levels to pinpoint intoxication in drivers. Despite 18 states with laws on the books using the measure, the recent study shows no statistically significant relationship between THC levels and responsibility for car crashes. Still lots of moving pieces.

Alc bev sales were up approx 4% while Constellation beer sales estimated to be “up a robust 10%,” over Memorial Day weekend, based on Wells Fargo Securities survey of around 15K c-stores across US.  “We sense that sunny skies & happy consumers brightened the mood of our c-store retailer contacts,” over Memorial Day, noted sr analyst Bonnie Herzog.  Alc bev sales gains were led by imported beers (+9.3%) while craft beer up estimated 5.3% and domestic beer +2.4%.  Constellation gains reflect “continued share gains & incremental shelf space,” added Bonnie.  Survey found retailers anticipate increasing Constellation’s shelf space in c-stores by over 8% in 2019, which is up from expectation of +5.3% from Q1 survey. Retailers estimate Constellation’s full year sales to increase 8.2%, up from estimate of +6.3% in Q1.  At least some retailers are not concerned about any tariff threats, as “a couple” mentioned they “expect to pass through any tariff-related costs to consumers, a reflection of STZ’s strong brand equity & pricing power,” wrote Bonnie.

Memo to distribs from AB’s Bob Tallett (biz & wholesaler development) and Brendan Whitworth (chief sales officer) lays out results of “constructive conversation” they had with wholesaler panel recently about The Pestalozzi Agreement.  That agreement will cover AB’s wine and spirits brands, “our journey beyond beer,” as Bob and Brendan put it.  Traditionally, wine and spirits distribs have nowhere near same protections as beer distribs, of course, and Pestalozzi Agreement in that tradition, which has caused some pushback.  Why’s that?  Agreement does not grant right to distribute across all channels; nor does it guarantee brand extensions will go to distrib, tho AB may offer line extensions.  Then too, current version grants AB “ability to terminate a product addendum without a termination payment” if AB cancels the “applicable addendum with all wholesalers of such a product.”   But memo also offers clarification: “AB will include language in each addendum that articulates the termination payment terms in the event that AB terminates all applicable addendums in conjunction with a product divestiture.”  There will be no payment if a product “is discontinued or otherwise unsuccessful.” 

AB’s #1 priority is “health and success of our brands,” Brendan and Bob note, and AB “predisposed” to sell wine/spirits through current system.  Distribs gotta sign agreement tho to get brands, and AB will review distribs’ “organization, capabilities, training, licensing and local laws” in determining best route to market for given brands.  “Wholesalers’ decisions to sign The Pestalozzi Agreement or one of the product addendums could impact AB’s route-to-market decisions within certain geographies.”

Despite grumbling, Express heard from one AB distrib who said “any wholesaler who does not sign is very short sighted.”  AB can’t give “full beer type rights” for brands AB does not own, this distrib points out, and AB has to have way out with brands that don’t sell or if AB encounters issues with those brand owners.  Net-net: this distrib believes in and trusts AB will “do what is right by their wholesalers.” 

AB Seeks to Build Pilot Distillery in Bend  While distribs mull over Pestalozzi Agreement, AB movin’ forward with beyond beer strategies.  Latest: AB “wants to license and operate a pilot distillery on the northeast side of Bend, OR, not far from [craft partner] 10 Barrel Brewing Co’s” hq, reports Bend Bulletin.  10 Barrel already cans its own cocktails with spirits from outside vendor, and “not clear whether the new distillery means the company intends to create its own brand of bottled spirits.”  Planned house-distillery is 600 liters, and “not by any means meant for distribution-type scale,” ops director told paper, but more like an R&D project.  But a craft distiller competitor said it’s big enuf for many craft distillers to run their entire operations.

Consultant Bump Williams clearly lookin’ at beer glass half empty (at best) in current missive to clients.  Despite some “success stories” so far this year in beer, “most of the news has continued to be dismal and dreary for the category,” mostly due to ongoing decline in mainstream, still 2/3 of volume.  Still no end to loss of “shoppers, volume or loyalty” in premium or dropoff in below premium either, in Bump’s view.  Only growth comin’ from Mexican imports, flavors, “better for you” brands linked to “health and wellness.”  What’s more, “this trend of preferences will NOT change for the next 5+ years,” Bump believes.  Major headwinds that bode continued category decline include: still-high share for eroding mainstream; cannabis on rise (Bump believes in substitution); “new LDA drinkers think Alcohol is Evil”; ready-to-drink cocktails gaining traction and spirits in general still rockin’, and growth strategies across 3 tiers remain mis-aligned. 

Based on surveys, Bump ID’s producer growth strategies focused on innovation/diversification.  Distribs looking at alternative categories, culling SKUs.  Retailers seek to improve category mgmt around efficient use of shelf space, improving ROI on features/displays, price sensitivity, market basket size, shelf-set changes to replace losers with winners and building traffic. 

What’s the future?  Bump’s crystal ball tells him IPAs “will continue to dominate craft,” with newer styles comin’ on: brut, easy-drinking, organic, etc. Tons of runway for seltzers too, which Bump thinks will triple over next 2 yrs given growth of shopper base, purchase frequency, better-for-you appeal, flavors, cross-gender popularity, draft potential, lower ABV, mixability with spirits, you name it.  Then too, “some serious growth” in beyond beer: teas, kombuchas, vitamin-laced drinks and NAs.

As we noted earlier this week, federal antitrust suit brought in US by small Wisconsin brewer Mountain Crest (Minhas) vs actions by AB InBev and Molson Coors in Canada still alive.  That case tossed by US Dist Ct, but on appeal. Recall, Dept of Justice weighed in with brief asking US Appeals Ct to return case to US Dist Ct “for more fact-finding” on some of Minhas’ allegations that the brewers conspired to hurt small competitors even beyond the agreement big brewers made with Canadian govt to restrict 12-/24-pack sales.  (See May 13 Express.  Our May 29 article misstated that US Dist Ct kept those charges alive, rather than the DOJ requested they be considered.)  In any case, both sides rejected DOJ arguments in their latest briefs, reports Law360.com.   

Brewers “blasted the department’s Antitrust Division for urging the revival of ‘a few last crumbs’ for ‘some remaining possible claims’” that DOJ said were separate from the agreement brewers reached with Canadian Govt over Beer Store rules.  Mountain Crest seeks “redo” with new arguments, brewers say, which should be barred, and if not, should still be rejected.  Mountain Crest unhappy with DOJ’s position as too protective of actions by “private business counter-parties” when they make agreements with foreign govts.  Mountain Crest also argued it had “‘clearly pled’ at the district court level that its claims go beyond the agreements with the Ontario government,” per Law360.com.          

Canned hard tea heading into Portland, ME, under brand name Wandering Whistler is yet another effort quietly backed by Anheuser-Busch InBev’s Zx Ventures venture arm and it was brought to life in a mere 3 months with help of Boulder, Colo-based incubator called Interact that has since broadened its role to include another nascent brand associated with Zx Ventures, Up Mountain Switchel, the colonial-style drinking vinegar. 

Wandering Whistler Brewed Alcohol Tea is “a collection of international teas with a twist,” melding tea leaves, botanicals, water and cane sugar in brew that comes in at 4.5% ABV.  The line, whose name is intended to connote adventure as well as authenticity of traditional teakettle, is currently launching in Portland, ME, in Earl Grey & Elderflower, Jasmine and Chai flavors, in 12-oz cans decorated with line drawings of London, China and India, respectively.  They go out at $11.99 per 6-pk.  Line is among many these days offering alcoholic take on styles familiar from premium end of NA biz, whether in teas, sparkling waters or juice drinks.

Interact principal Blake Mitchell said that after successfully handling other assignments at Zx, founder Jackie Atlas concept-pitched the venture arm’s board with idea of offering more upscale, subtle hard tea entry than the dominant entries currently.  “We wanted an authentic tea, and let others own sweet tea,” Mitchell said.  Atlas’ pitch came in 2d, was greenlighted for phase 1 funding “and she ran with it,” Blake told us.  “Our focus is to connect with tea drinkers in crafty places,” as Mitchell put it, in choosing Portland.  (Twisted Tea gets its highest shares in Maine. That might have been factor too.)  Working with local Bud distributors, the brand will target both retailers and craft beer bars whose patrons might be seeking an alternative.  Atlas signed on as an “intrapreneur” at Zx in NY in Jul 2017, founding Wandering Whistler last Aug.  Now she’s shuttling between NY and Portland to orchestrate launch.  Her partner in development, Interact, has worked with entrepreneurial brands for over a decade.  Worked on sweeping packaging redesign for Dogfish Head.

Time marches on and as similar trends continue, Constellation $$ share in largest scan mkt in US is almost as big as AB and MC combined.  Total volume down 2.2% in LA IRI multi-outlet + convenience yr-to-date thru May 5 (that’s quite a bit better than 5% statewide shipments drop thru Apr), but $$ down just 0.4%.  Constellation up 6% in $$ and volume.  Gained another 2.1 share of $$ to 35.5.

Meanwhile, AB $$ down 3.8% (volume -5%) and it dropped 0.9 share to 25.1 in LA.  Still has near 30 share of volume.  MC $$ and volume down 6.5-7% YTD.   It also lost 0.9 share.  Down to just 14 share of $$, near 18 share of volume.  HUSA also continues with very tuff trends in CA.  Its $$ sales down 13.4% and it lost 1.1 share of $$ to 7.6.  Top 4 players still have over 82 share of $$ sales in LA mkt.   Mike’s on fire, but smaller than nationally.  $$ sales up 44% and it gained 0.6 share to 1.9 (almost a point lower than natl).  Passed Diageo, Lagunitas, Firestone Walker and Boston to become #5 supplier. And all of those players up in LA.  But only 1 of them gained more than 0.1 share of $$: Firestone Walker still growing double digits. Up 13% and gained 0.2 share of $$ to 1.7.  It’s #8 supplier.  Pabst volume and $$ down more than 25% in LA, where it’s based, far steeper than natl trend.  Pabst fell to #13 in LA.

Modelo Especial Over 20 Share, Up Double Digits A few brand notes. Modelo Especial continues red hot in its biggest mkt. Its $$ sales up 13% and it gained 2.6 share to 20.6.  Brands #2-5 each down at least 7% in $$.  Bud Light down 9%, Corona down 12%, Coors Light down 8% and Bud down 7%.  Pacifico passed Heineken (also down 9%) to become #6 brand.  In LA mkt, Constellation sells 3 of top 6 brands.

Overnight, beer biz prospects changed as Trump administration said it will impose escalating tariffs on all goods imported from Mexico starting June 10, unless and until Mexico alleviates immigrant “crisis.”   On June 10, tariff will go up 5% and increase in increments, up to 25% by Oct 1 unless US gets relief at border.  Prospect of increased tariff already hitting Constellation hard. Stock down 6% so far this morn. Heineken down 3% and even ABI down 1% today too on tariff threat.  ABI gets 10% of global profits from Mexico and tariffs expected to negatively affect Mexican economy. That could in turn hurt both ABI’s and Heineken’s Mexican beer biz, plus Heineken’s Mexican import biz in US.  Turns out 37% of Mexican economy in form of exports, according to WSJ.  So this could be big.

But recall, we’ve seen this movie before. Threat of taxing profits from goods made in Mexico back in 2017 knocked STZ stock down more than 10%, reminds Consumer Edge’s Brett Cooper.  Constellation’s beer COGS (cost of goods sold) roughly $2.4 bil in latest fiscal yr, sez Brett, so 5% increase amounts to $120 mil, 25% to a $600 mil hit.  That’s real money.  There are offsets, including potentially pricing. But Constellation not likely to take too much price, speculates Brett, for fear of losing sales “momentum.”  

While Brett sees implementation of tariff as “highly likely,” Morgan Stanley’s Dara Mohsenian sez “situation remains fluid and uncertain if tariffs will actually be imposed.” Even if they are, “there are likely mitigating factors,” sez Dara, “including a possible secondary benefit of a peso devaluation given concerns regarding the Mexican economy (which would benefit STZ beer margins given 25% of beer COGS are peso denominated.”  Got that?  Then too, STZ would “potentially ship extra volume pre the commencement of tariffs, helping delay the impact temporarily.” But at this time of yr, STZ already likely shipping all it can.  No comment from Constellation at presstime.

NFL is latest professional sports org to loosen alcohol ad policies, including allowing official sponsors to use active players in beer ads for first time, reported AdAge following Morning Consult article based on league email sent this Tuesday to team presidents and mktg/sponsorship execs. AdAge regards news as a win for beer cos and specifically “win for AB,” similar to when it struck deals with NBA and MLB player assns.  While liquor brands still can’t use active players in ads, they now can “promote themselves as the ‘official’ product of teams they sponsor.”  Spirits cos banned from running ads during NFL games up until 2017, but now can use team logos on mktg materials including packaging. “Similar” arrangement made for wine brands.  

“With the NFL’s recent announcement, we now have rights to partner with active players in the three biggest leagues in the US,” AB cmo Marcel Marcondes confirmed with AdAge. “This is a win for fans, the league and its players as well as the sponsors,” he added. MC and other cos with individual team sponsorships “also stand to benefit,” paper notes. There are some restrictions in how cos can advertise with active players, natch: for instance, “creative materials cannot imply that players are endorsing the product” and if using more than one player, cos must use “minimum of six players,” sources told Morning Consult. Also, individual cos must sponsor an entire team in order to use one active player in ads. And players in ads must be in team uniform when depicted.

All in, hard to say whether lift in ad restrictions has been or will be beneficial to beer cos. AB biz lookin’ a bit better overall, tho still down in 2019. And its most advertised brand, and official sponsor of the NFL, Bud Light, continues to decline at steep mid-single-digit rate regardless. Down 7% yr-to-date in Nielsen all-outlet scans.  Plus, both AB and MC have been spending less on traditional ads over recent yrs. Will active player ads come at a price? “Players included in marketing materials will also get a piece of the pie,” and get “paid a group licensing fee if they’re featured with others, and players pictured alone will get their own deal,” source told Morning Consult. IEG Research, which tracks sponsorship spending, found that beer cos “shelled out 4.3 times more than any other sponsor category during the 2018-19 season,” paper added.

Can Illinois Do What NY and NJ Haven’t So Far, Legalize Cannabis Via Legislation? Senate Passes Bill

Despite much-anticipated legislation to legalize recreational cannabis for adults in New York and New Jersey this year, legislators unable to get their acts together so far.  But Illinois Senate passed a bill yesterday, via bipartisan 38-17 vote, to legalize recreational cannbis. It’s “the first time a state passed a legal pot initiative through the legislature rather than by ballot,” Huff Post notes.  Gov Pritzker (who recently proposed big hike in alcohol excises taxes, by the way) already endorsed the bill, which now goes to the House.  Legislature on tap to close shop on Friday, so House will have to move fast.  Opponents already complaining that “they’re trying to ram it down our throats at the last minute,” as one state rep told Chi Tribune.  Supporters credited 2 yrs of negotiations/study in crafting bill that Sen Heather Stearns said “makes sense here for Illinois” and will create “the new gold standard for doing this in the right social justice way.”  Details on the Senate bill from Chi Trib:

·      Residents age 21+ will be able to possess 30 grams of cannabis, 5g of concentrate, 500 milligrams of THC in cannabis-infused product.  Non-residents could possess 15g.  Bill could take effect as soon as Jan 1, 2020.

·      Bill creates licensed cultivation and dispensary system, with cultivation fee for largest operators set at $750K.

·      Gov gets power to pardon/expunge the records of those with past convictions for low-level cannabis violations, not linked to violent crime.

·      A “social equity” program will be set up to help establish minority-owned cannabis bizzes, and fund programs in communities “disproportionately affected by the war on drugs.” (Chi Trib’s language.)

·      Expected state revs in 1^st year approx $90 mil, to be split up among general fund, biz development, community grants, mental health, enforcement, public education, debt service.

·      Employers will be able to maintain drug-free workplaces.

So, looks like IL legislators covered most of hot-button issues, including social justice and minority biz oppys, that have so far stalled action in NY and NJ.  But it ain’t over yet.  Opponents vow to battle bill in IL House. 

Meanwhile, NY Times reported this morn that “all signs seemed to indicate” that bill to legalize recreational cannabis “could be resurrected as Gov Cuomo declared legalization one of his end-of-session priorities.”  New bill emerged in recent days aimed to “appease key players…by scaling back some of the more far-left proposals.”  Not sure exactly what NY Times meant by “far left,” but Leafly.com report on new bill points out that compared to earlier proposal, it significantly reduces personal possession limit from 2 pounds to 3 oz, includes higher tax rate, gives broader regulatory authority to Office of Cannabis Management and tweaks criminal justice and biz oppy measures.    

Both Financial Times and Yahoo interviewed AB prexy Michel Doukeris recently, publishing articles week after ABI met with investors on US. Heretofore, Michel had mostly kept lower profile.  FT article focused on how AB “sets its sights beyond beer” because beer is declining.   Its JV with Keurig, Drinkworks, Michel described as “perhaps the single biggest opportunity” for co outside beer.  Interesting statement, considering that Drinkworks only in Missouri and now Florida, while other beyond beer oppys, like Teavana, are higher profile and bigger so far.  “The mega trend Drinkworks addresses is convenience,” added Michel. “You only need to press one button and you have this unbelievable high quality cocktail.”  In beer, AB revs can improve trend in part thru trading up. “We’re going to capture consumers back and perhaps turn the volume trends around,” Michel told FT.