Almost every analyst report that INSIGHTS saw came away “optimistic” on US (Morgan Stanley), “increased confidence” on US (Evercore ISI), or even saw ABI as “best idea” in sector (Guggenheim) following ABI Investor Day.  Tho AB STRs still down 1.9% in Q1, AB execs pointed to a number of improvements in results. Chief sales officer Brendan Whitworth teed up a few of these at Beer Insights Spring Conference last week.  He and other execs focused on similar themes at Investor Day. Revs up 1.6% in Q1, compared to 2.8% drop in 1^st half 2018 and 2% drop in 2017. Improved revs a “sanity check” that shows AB “headed in the right direction,” Brendan said.  AB gained share in “large format” and on-premise in first quarter; also gained share in 28 states in Q1, compared to 21 last yr.  Meanwhile, points of distribution increased 4.9% as well.   

Michelob Ultra remains #1 share gainer, with a 19% CAGR last 3 yrs, showed North American zone prexy Michel Doukeris at Investor Day.  AB’s acquired craft portfolio up 19% in Q1, compared to 12% in each of 2017 and 2018 (AB now calls this Brewers Collective).  Bon & Viv getting triple digit growth, but AB “very much unsatisfied,” Brendan said at Spring Conf, given even faster growth of seltzer segment and has “plans to accelerate that growth” (see below).  And Michelob Ultra Pure Gold, already with $100 mil annualized net revs, is “growing like crazy” he added, including in unlikely place like TX Rio Grande Valley, which is 93% Hispanic and only has $33K avg annual income (compared to $55K nationally).  Yet Pure Gold at 4x US index. Why? “Premiumization,” said Brendan. 

Beer biz volume has been flat-to-down over last couple yrs, and so has its total economic impact, latest Beer Serves America economic study joint effort by Beer Institute and Natl Beer Wholesalers Assn shows (survey conducted by John Dunham & Associates every other yr). Yet beer biz still packs a sizable economic punch, contributing 2.1 mil jobs and whopping $328.4 bil to US economy in 2018. That’s down from $350 bil and 2.2 mil jobs in 2016. Part of drop can be attributed to “redefinition on what defines a brewery job” by Bureau of Labor Statistics, BI prexy Jim McGreevy explained to INSIGHTS. But the other reason is all too familiar – “Americans are drinking less” and “volume is down.”

At same time, both distributor and brewery/importer jobs continue to grow. Distribs jobs were up 19% over last decade, accounting for 141,600 directly employed folks that collectively account for $9.5 bil in wages last year. That’s up 5-6% from 134K distrib jobs in 2016. Distribs investing more in personnel to account for both influx of new brands and innovations from big brewers and as well as number of craft brewers looking for distribution “beyond 20 miles away” from home turf, NBWA prexy Craig Purser noted. These are “high paying” jobs with good benefits relative to many other industries, he added. Brewers and importers directly employ just under 70K workers in the US, up from 64,725 jobs in 2016. Thousands upon thousands of microbreweries opening across the country have certainly added to totals, but 58% of jobs are still linked to large and mid-sized brewers and importers (same % as in 2016). Suppliers to the brewing industry, that supply bottles and cans, cardboard cases, brewing equipment, marketing displays, etc, are responsible for 436,650 jobs and nearly $102 bil in economic activity on their own. And retailers account for more than 912K workers directly employed in beer biz, up from ~900K in 2016.  

Even with 30+ years of consecutive double-digit growth, Modelo still in “earlier stage” of growth with significant run room, according to Constellation CEO Bill Newlands. Modelo is “key growth driver for STZ” and “still has 50% distribution opportunity,” wrote Macquarie Research’s Caroline Levy in latest report, covering Bill’s remarks at Beer Insights Spring Conference. Indeed, Modelo only just breaking into general mkt sales, as 70% of consumption still in Hispanic mkts vs 30% non-Hispanic, and brand only has 6% household penetration, Bill shared. Non-Hispanic consumption for Modelo vastly outpacing total mkt, +60% vs +20% for total mkt. And natl mktg for Modelo still relatively new, entering “more general markets” and sports sponsorships over last few yrs. Roughly 50% of growth still from distribution gains. While those will slow over time, Bill acknowledged, Modelo likely to continue to “race up the list” of top beer brands. Modelo #6 brand in IRI data by $$, larger than Corona Extra and growing 20% YTD thru Apr 21. Last 4 wks, $$ larger than Bud and not too far behind Miller Lite. It’s a “massive opportunity” and “we’re going to after it,” said Bill.

Then too, “even STZ, with its long runway for growth in Modelo and [Corona] Premier, must balance growing its big brands, with innovating to stay relevant and attract new consumers,” Caroline stated. While Corona Refresca in midst of natl launch, “we would not be surprised to see some spend that is earmarked for Refresca move to Premier, given the clearer path to meaningful sales and profit impact from the brand.” Recall, Corona Premier already getting $40 mil in mktg spend this yr. It’s “dangerous to bet on categories” when you don’t have first-mover advantage, she added, pointing to FMB category’s reliance on hard seltzer growth currently.

Caroline Expects More Consolidation, More Reyes While Bill denied further plans for consolidation in CA or elsewhere, Caroline expects “further consolidation into hands of well-funded operators – those who will invest in upgrading IT, distribution/warehousing and sales,” she said. “We believe Reyes will continue to play a role in consolidating the West Coast, and possibly other regions where it already operates (Midwest and East Coast).”

Early May wasn’t too great in beer biz, according to anecdotal reports.  Beer volume flat for 4 weeks thru May 11 in Nielsen all-outlet, still including benefit of later Easter timing in latest result.  Down 0.2% yr-to-date.  But AB down 2.4% for 4 weeks, compared to 1.9% yr-to-date. Lost 1.1 share of volume and 1.3 share of $$ for 4 weeks, both steeper than YTD. MC volume down 2.9% for 4 weeks, 3.3% YTD.  Lost 1 share of $$ for 4 weeks, 0.9 YTD.  Constellation volume up 8.7% for 4 weeks, 9.6% YTD.  It gained 1 full share of $$ YTD, but up 0.9 last 4 weeks.  And finally Mike’s up 52% for 4 weeks, 45% YTD.  Gained 1 share of $$ for 4 weeks, 0.8 YTD.

Constellation discounting Corona Extra, Corona Light and Corona Premier can prices from this week thru end of July, nationwide from our understanding.   Going down about 2 bucks per case on cans, sometimes to Ultra prices or even below, sez one source; others cite prices not quite as low.  Constellation seeks to get more of its Corona volume into cans, only mid-to-high single digits of mix, also giving distribs incentive for cases of cans sold over-and-above last yr. This is presented as low risk move, since cans small % of biz.  But some sources not happy about this discount, even tho they went along.  “You manage brands. You don’t manage packages,” said one distrib source.  Seems too that Constellation volume, tho still growing nicely, is a bit below targets heading into peak selling season.

ABI held 4.5 hour meeting with investors yesterday, all about US, then it had breakout meeting/reception for another several hours.  “While there was little to move the stock short-term,” Evercore ISI’s Robert Ottenstein wrote in note this morn, “we came away with increased confidence that the firm’s commercial strategy will drive improved U.S. top line trends and profit growth over the next several years.”  Regarding ABI’s “evolution” since it got here, Robert  characterized it as: “180 degrees in 10 years” as note titled. 

Back in 2009 “the mantra was all about simplicity, focus, scale and strength to drive >$2.25 bil of synergies and hit deleveraging targets in the wake of the financial crisis.  Since then the firm has lost >600 basis points of market share, the product of limited exposure to the highest growth sectors… and a range of unforced errors from how the firm managed distributor and retailer relations, significant headcount turnover and often erratic marketing efforts,” said Robert. Despite this somewhat withering assessment of first decade, Robert said “several beer industry veterans told us” at Beer Insights Spring Conference “that AB was finally getting its act together in the US.”  How?  He cites several “key elements” (from ceo Brito): “portfolio approach,” “evolved innovation approach,” “more constructive relationship with distributors” and “leveraging new technology.” 

The Power of Michelob Ultra; Could be Almost ¼ of Volume in 5 Yrs; At 17 Share in Louisiana  In another note, Robert waxed rhapsodic about how “Ultra checks the key boxes for our ‘next wave’ brand framework: Premium, better for you, gender neutral and functional (Pure Gold now USDA organic).”  Ultra growth “likely to drive revenue and profit stabilization” before total co “volumes turn.”   If Ultra family continues to grow mid-high teens for next 5 years and Bud Light drops 6-6.5% per year, Bud declines 5.5% (Robert’s “base case” scenario), then Ultra “reaches” 24% of volume in 5 yrs. 

Ultra family shares vary widely by region, Robert showed, using IRI data.  Ultra family at 16.8% in Louisiana, but just 1% in Oregon, Robert showed.  It’s 6.1% in total US for 52 weeks thru Apr 21 in IRI MULOC.  Highest shares mostly in southern states, including 12 in AL, 10 in TN, but also high in west south central mkts like TX  (9.2%) and OK (11.2%).  Top Bud Light family share is 28 in WV, but its lowest is only 4 share next door in Pennsy.  Go figure. 

Welcome news late last week when Trump admin lifted tariffs on aluminum/steel from Canada and Mexico, natch.  Over last 10 mos of 2018, US bev industry “paid an additional $250 million in aluminum ‘tariffs,’” wrote Beer Inst prexy Jim McGreevy Friday evening.  Meanwhile, brewers still face metal tariffs from other countries, as well as “tariff-loaded” Midwest Premium charge on supposedly tariff-exempt aluminum, even on “cansheet with 70% scrap content.  As long as this practice continues, it’s impossible to say if things will get better for American brewers,” Jim added.  So, brewers and other bev producers will continue to seek “complete elimination” of all tariffs and action vs “antisocial behavior” connected to Midwest Premium.  Then too, Trump admin “also implemented tariffs on just about everything imported from China,” including brewing equipment and promo items, to tune of 25%. 

Also last week, Rob Tobiassen, prexy of Natl Assn of Bev Importers, testified at US Trade Rep committee mtg against “the proposed retaliatory tariffs on imported grape wines…non-alcoholic beers, liqueurs and cordials,” plus brandy.  Imported bevs, said Rob, raise “significant excise taxes” for US Treasury and “are not interchangeable” with domestic brands.  Then too, non-alc beers support anti-drunk driving efforts. “There is no sound policy reason to deny American consumers access” to import brands.  “Nor should they have to pay higher prices for their preferred tipple,” said Rob.  “Tariffs on these products are essentially taxes on happiness.”  

Finally, distillers got some relief last week too as Canada and Mexico dropped retaliatory tariffs on American whiskey imposed last yr.  When metal tariffs went into effect, Canada added 10% tariff on US whiskey; Mexico retaliated with a 25% tariff.  Exports took a significant hit.  Next up for distillers: trade partners “build on this momentum to resolve all of the remaining retaliatory tariffs,” including the 25% tariff on US whiskey imposed by European Union, Distilled Spirits Council prexy Chris Swonger said.   

AB “quietly brewing its own U.S. creative in-house agency for the past year,” began Ad Age in extensive piece timed to agency launch last Friday.  Agency, called Draftline, grew from team of 3 to 55 employees in US. And it works on all 42 of AB’s brands. “Along with working alongside” AB’s agencies for “large brands like Bud Light, Budweiser and Michelob Ultra, it also handles the entire creative and media needs of new brands like Patagonia, said Ad Age” AB has over 50 ad agencies in all.

In addition to Patagonia launch, Draftline recently responsible for Natty Light tv spot on paying down college debt and tv spot for Busch “related to the brand’s millennial pink car” which just debuted, Ad Age noted.  Draftline offers “range of services including tv production, packaging, out-of-home, radio, email marketing and data collection and fulfilling all programmatic media buying.”   In-house shops have become “a rising threat to external agencies,” notes Ad Age.  But “we’re not doing this to create competition,” said AB cmo Marcel Marcondes.  “It’s to do more.” 

ABI is “treating Draftline like any other agency it works with,” according to Marcel.  But exec at one of AB’s agency partners told Ad Age (anonymously) that AB trying to “cut corners and will sacrifice creativity” with in-house agency. “AB InBev cares about creativity only in as much as it helps their bottom line,” said exec. “Because creativity from truly talented people costs so much money, AB InBev is trying find ways to beat that system, but what they don’t know is you get what you pay for.”  Tho AB can “create an average agency,” said exec, “for them to create a world-class organization, I would discount that.”  Draftline didn’t start in US.  It “took off in Colombia and now has more than a hundred employees” and will expand further internationally, including Toronto office about to open.

As pace of innovation in beer keeps ramping up and lines blur further, beer has become “most dependent on innovation” for sourcing its growth among all alc bev categories, Nielsen’s Danelle Kosmal and Kelly Nielsen highlighted during BMI Spring Conference.  Their presentation titled: “Innovation across the beer industry… everything but beer?” In fact, beer category $$ would be down 3.4% for 104 weeks (2 yr-period) ending Apr 20, 2019 in Nielsen All Outlet data without growth from new items, Danelle noted. Beer $$ up just 0.3% for 2 yrs altogether. Beer’s also “least efficient” category when it comes to innovation. Total number of new beer items per year grew from 3,854 in Apr 2016 to 4,856 in Apr 2019, accounting for 25% of total category items and just 5% of total $$ sales. Both spirits and wine had fewer new items tracked in same period, representing ~10% of total items and ~4% of $$ sales for each. And notably, non-alc bev innovation represents both 5% of new items and 5% of total $$.  Craft category is big reason for innovation inefficiencies in beer, representing 78% of new beer items and just 39% of new $$. On the flip side, FMB/seltzer space appears underdeveloped with 12% of new items and 26% of new $$. Danelle’s “not saying we should stop innovation in craft.” But this gap on FMB side could mean there’s “still room for growth on FMB and seltzer innovation,” she added.

76 New Hard Seltzer Items in Last Yr; 2 Share for 4 Wks; Is Variety Pk Dominance “Sustainable?”

FMB category wouldn’t be healthy without hard seltzer, Danelle noted. Hard seltzers reached 2.2 share of total beer $$ and 1/4 of total FMBs for latest 4 wks in Nielsen, still growing 250% (see May 7 issue). That’s “nearly double the size of cider” and just 3 brand families, White Claw, Truly and Bon & Viv, make up 89% of $$ sales. But 76 new hard seltzer items launched “in the past year” and total of 22 hard seltzer brands now being tracked, many of them growing at fast clips off of smaller bases as well. Brands like Oskar Blues’ Wild Basin sparkling seltzer singlehandedly able to change trajectory for these smaller cos in many cases, as CANarchy prexy Matt Fraser acknowledged during separate Beer Insights Spring Conference discussion. But dominance of variety pk, representing 2/3 of total hard seltzer sales, has Nielsen wondering if variety pk sales are “sustainable” from supplier standpoint as category develops. Variety pks represent just 5% of total non-alc seltzer $$.

Beer Can Speed Up on Non-Alc Inspired Innovations Even as pace of innovation ramps up in beer, Danelle argued that beer should move quicker to test non-alc inspired flavors. Pomelo, sea salt, and kombucha non-alc bevs each began tracking in Nielsen scans anywhere from 5 to 9 years before alc bev versions launched in scans, she showed. Since roughly 2/3 of “common flavors” in alc bevs “started” in non-alc, “why is it taking this long?” she asked. Currently, energy bevs, sparkling/seltzer water, kombucha and RTD coffee are best trending non-alc bev categories YTD in 2019 Nielsen data. And perhaps combo of “non-alc bev flavor and health and wellness” could be “tomorrow’s bev al inspiration,” she posed.

Cannabis Bevs Led by Carbonated Drinks; 957 Products, 114 Brands vs 66 and 13 in 2014 Taking it one step further, burgeoning cannabis space has become “more a part of health and wellness,” said Danelle. And cannabis bevs are still “really small” but “growing very quickly,” led by “carbonated” drinks, which represent 45% of total cannabis bev sales across CA, CO, NV and WA in Headset data. There were 114 brands and 957 products tracked currently, vs just 13 brands and 66 products in 2014. But everyone’s waiting on FDA to clarify CBD beverage oppy – “that’s where we really think we’ll start to see changes,” said Danelle.

Is It Beer? Consumers Don’t Care There’s a dizzying amount of criss-crossing and blurring of the lines within beer innovation, sourcing inspiration from all bev segments and beyond. But “does the consumer care” about the distinction between beer, wine or RTD cocktail? “I don’t think they do,” said Danelle. Indeed, whether you like it or not, all signs point to more launches in “beyond beer” space.

Mike’s Hard Lemonade Co may need to consider changing its name at some point. After White Claw reached 11 mil cases in 2018, it’s still growing at 350% clip in year-4, prexy Phil Rosse and svp of mktg Sanjiv Gajiwala shared during Beer Insights Spring Conference. Total Mike’s Hard Lemonade Co up over 50% and on clear path to hit 5-year growth target of 50 mil cases in just 2 yrs, with White Claw pulling away as lead brand. While growth pace could slow thruout the year, White Claw’s “not suffering from out of stocks at all” and depletions are right in line with “what we budgeted.” Distribution partners are “betting” bigger on the brand, and co’s “expecting a huge summer” with “zero out of stocks.”

Hard seltzer category as a whole continues to exceed expectations year after year. Now hard seltzers expected to reach 60-65 mil cases in calendar 2019, up from co’s initial projection of 50+ mil cases. It’s “pretty difficult to peg,” said Phil. Seltzers have “long term potential” and not far-fetched to imagine 100 mil cases and then some in its future, in his view. Recall, White Claw already has over half of seltzer category share and counting this yr in scans. “This could be one of those large macro brands,” he reiterated. And “not just in North America.” Indeed, “we think there’s an international opportunity,” and “definitely looking, preparing to see where the opportunity is beyond the US.”

But White Claw also looking to become “a brand at scale without being ubiquitous,” Sanjiv explained. Co’s “being smart about how we spend” $25 mil mktg budget, joining the “conversation where they want us.” New initiatives like White Claw Pure and on-premise sales represent further oppys, since 20% of non-alc seltzer is “plain” flavored, and on-prem already represents 12% of White Claw’s total volume with relatively minimal distribution, he added.

Always Lookin’ to Innovate; M&A Not Off the Table Mike’s sees “significant opportunity” in space it already plays in, but co’s not resting on its laurels either, “always thinking about what’s next,” said Phil. That’s “one of our strengths,” he added. Mike’s is “always looking at new products” and “interested in things that could be scalable and significant.” With lotsa cash on hand, Phil didn’t rule out possibility of M&A exploration either. “Of course we want to find the next Mike’s [or] White Claw,” but co’s “laser focused” and won’t “take our eye off the ball,” said Phil. Excluding White Claw, Mike’s Hard co still up “high single digits” this year and “very healthy across the board.”