Each of 3 financial

analysts on panel at this morning’s Beverage Digest Future Smarts conference took very seriously the notion

that ABI may buy Pepsi or Coke next, once it pays down debt.  Look at ABI’s “cash generation power,” said

Rabobank’s managing director Ross Colbert, “and its ability to delever.”  When ABI gets back down to its

targeted 2x debt to EBITDA, “they’ll have the ability to do a $200 billion transaction,” said Ross.  Yep, you

read that right.  $200 Billion.  That would give ABI “the ability to buy any big brand,” including Coke or Pepsi,

said Ross. Their “appetite doesn’t stop in the beer aisle,” he added, noting recent comment from ABI ceo Brito

that ABI reaches 100,000 more accounts than Pepsi.  

There’s “nothing left in the beer aisle that is meaningful” to buy and M&A is a “core competency” of ABI, said

Consumer Edge veep Brett Cooper.  ABI will continue to grow likely through “verticals within the CPG world

that they’re looking to dominate over time,” Brett continued.  He also pointed out that ABI is “opportunistic” so

look for a “stumble, market related or otherwise,” like the beer price war in 2005 or the emerging market

currency problems that emerged in recent years.  Even tho Pepsi could be easier to digest in some ways (ABI

would sell off snacks and it still own most of its distribution),  Coca Cola “is sort of their dream in soft drinks,”

concluded CSLA’s Caroline Levy, as “they like to buy leading brands.”  

Separately, Brett said in his introductory comments that with “beer struggling for volume growth” and AB, MC

and Pabst all down, “it would not surprise us to see” brewers “get more active in non-alcoholic beverages.”  If

this happens, it will be “in order to gain favor with distributors as well as retailers.”  That was certainly one of

the motivations behind AB’s deal with Starbucks for AB and its distribs to sell Teavana brand.

Coca-Cola’s New CEO a Dealmaker Too? James Quincey, is “the right person to lead KO into the future,”

wrote Bonnie Herzog, senior analyst at Wells Fargo Securities following announcement that Quincey, current

prexy/coo will takeover ceo role May 1, while Muhtar Kent will remain in chmn position. Besides bringing a

“refreshing approach,” one reason Bonnie positive on move is that “given James’ background and significant

deal experience, he could accelerate KO’s growth even further through stepped-up acquisitions over the next

several years.”

Focus on Buffett Board Move While media and mkts focused on major managerial shift at KO, “we think the

focus should be more on the Buffets relinquishing their Board seat (held by Howard, Warrens son), as that may

pave the way for Berkshire Hathaway to divest its $16.6Bn stake in KO,” wrote Pablo Zuanic of Susquehanna.

Why is that key? Because “those counting on an eventual bid some day from 3G/BUD for KO, may think BH

being out of the picture would make it less awkward for that group to buy KO,” noted Pablo. That way,

“Buffett’s ultimate legacy would not be having handed over the keys of the most iconic American brand to a

group of foreigners.” However, Pablo notes Susquenhanna take differs and that Buffett board move “may point

to, some day, BH helping 3G/BUD buy another soft drinks company.”

Spirits have been much stronger competitor to beer in recent yrs for share of Americans’ alc bev consumption.

But wine has also chipped away long-term. Same premiumization that’s occurred in beer (and spirits) has

happened in wine, too. And just as beer execs talk about building per capita consumption in US, wine folks

focused there as well. Indeed, Stephanie Gallo, mktg veep for vintner with her name on the door, recently

spoke about need to “democratize wine,” with perhaps less focus on selling pricier bottles, and “getting

American consumers to drink more,” reports The Press Democrat. A coupla key figures from Stephanie:

1) only 33% of wine drinkers drink it on regular basis; 2) per capita wine consumption in US still only 2.3

gals/yr, vs 6.3 gals in Germany, 14 gals in France. We’d add that our calculations suggest adult per capita

consumption of absolute alcohol as wine up just 0.03 gals from 2005 (0.36 to 0.39, about 8%) while per capita

consumptions in absolute alcohol for spirits rose .12 gals, 17%. Same measure for beer dropped 10%, by the

way. Wine still less than 16% of absolute alc consumption in US. So it has plenty of run room.

Wine could double growth to 700 mil cases with higher per caps, Stephanie believes, and said “change is

starting to happen. Consumers are starting to view wine as a casual social beverage, and not as an elitist

beverage.” (Hmm, a casual social beverage. Sounds like…beer.) Part of the plan, millennials, natch. They

“do not have a snobbish view of wine…because of their willingness to embrace concepts and products not

necessarily steeped in traditions.” Like what? Like sweet moscato and Gallo’s “sweets line, a slightly fizzy

wine in,” wait for it…fruity flavors. These brands, Stephanie claimed, grabbing drinkers new to the category.

And in a final resonance with beer marketers’ talk, Stephanie asks familiar question in how to “democratize

wine.” “How can we continue to expand category occasions?” Gallo’s comments, together with spirits execs

(from Diageo and Pernod most recently) expectations of continued mid-single digit rev growth for that category

goin’ forward, together with fact that per capita consumption of absolute alc doesn’t change much in US,

suggest competition in alc bevs will get no easier going forward.

Big brewers got some good news going into the holidays. Not only did scan trends pick up – volume up 2.7%

for 4 wks thru Nov 27 in IRI MULC, echoing Nielsen trend for similar period – but big brands had a solid

month. Nine of top 10 brands gained volume and 17 of top 20 in the black this period. That included each of

top 3 premiums lights, Bud Light, Coors Light and Miller Lite: +0.1%, 3.4% and 1.6% respectively. Bud was

sole top-10 brand that dipped, -2.1%. But 4 top subpremiums gained: Natty Light (+1.2%), Busch Light

(+2.5%), Busch (+2.5%) and Miller High Life (+3.1%). Michelob Ultra and top imports each gained, 4 of ’em

at double digit pace: Corona, Modelo Especial, Stella Artois and Dos Equis. Other gainers in top 20: Bud Ice,

Pabst Blue Ribbon and Yuengling Lager. Down: Key Light and Natty Ice. Constellation trends stood out yet

again. Each of its brands in top 20 shone: Corona Extra (+10.4%), Modelo Especial (+28.7%) and Corona Light

(+6.2%). Rest of portfolio even brighter: Pacifico +28%, Especial Chelada +36%, Negra Modelo +34%.

Big brand success drove positive top supplier trends too. AB, MC Constellation and HUSA each up for 4 wks.

So were Mike’s and Yuengling. But Boston, Pabst and NAB each down for the mo, as were several big craft

players: Sierra Nevada, New Belgium, Gambrinus, Craft Brew Alliance and Deschutes. Up double-digits for 4

wks: Lagunitas, Stone, Bell’s, Founders, SweetWater, Firestone Walker, New Glarus and Dogfish Head.

Highly

detailed, analytic 192-pg report on Heineken from Evercore ISI’s Robert Ottenstein concludes that Heineken

has “vulnerabilities” and “purchase of TAP [Molson Coors] more than any other strategic step would address

those vulnerabilities and help keep ABI in check.” Robert views “potential purchase” of TAP as “longterm

positive,” while acknowledging upfront that “many investors may disagree.” Heineken has “4 broad

vulnerabilities that ABI can exploit over time,” according to Robert: “Relative scale, limited Americas position,

brand concentration and competitive asymmetry…. We see the potential for ABI to turn up the heat in 3 large

Heineken strongholds: Vietnam, Mexico and Nigeria.”

ABI 4x Heineken EBITDA; Heineken a “Bit Player” in S. America; “Risks Losing Relevance” in US ABI

generates 2.5x the revs and 4x the EBITDA as that of #2 global brewer Heineken. The Americas are “over 50%

of global industry margin pool,” but Heineken is “a bit player” both in South America and Canada, and “risks

losing relevance” in US. Mexico “looks solid today but Heineken’s share could tumble post 2020 when the

existing Oxxo contract ends.” Recall, Oxxo is leading c-store chain, owned by FEMSA family. Heineken’s

exclusive could end in 2020.

Heineken “Subscale” in US; US is 5% of Profits, Down from 33% “We estimate that Heineken generates

5% of operating income from the US (that would be less than $200 mil) down from 33% in the early 2000s,”

wrote Robert. US is “largest market” for brand Heineken, but total Heineken only has around 4.5 share in US

(including Lagunitas stake). Its US portfolio “is well aligned with consumer trends,” but “is that enough long

term for the world’s #2 brewer?”

Heineken Brand at 30% of Global Co’s Profits; But “Lost Cachet” in US; Down 25% in US Since 2007

Heineken brand is about 14% of Heineken’s global volume, but 30% of profits, Robert estimates. “We see a

risk of ‘mainstreaming’ of brand Heineken in some markets,” Robert sez. Heineken could be vulnerable

globally to ABI targeting with Stella and Corona at higher prices, Beck’s and Bud at lower prices. Here in US,

brand Heineken “lost its cachet as craft nearly doubled” and it “ceded share of import segment to Stella… and

Constellation,” Robert headlines, citing our #s. Since 2007, brand Heineken down 1.3 mil bbls (flattish last

few yrs), INSIGHTS estimates, while Stella Artois gained 1.545 mil bbls. Heineken’s Mexican portfolio has

grown but “lagged STZ’s.”

“Most Critical Question”; “Best Path” for “Long Term Prosperity” and “Credible Deterrance” “The most

critical question facing Heineken,” according to Robert: “How to thrive long-term vs competitor with vastly

greater resources? A combination with TAP has compelling industrial logic” and is Heineken’s “best path for

ensuring long-term prosperity.” Deal with TAP would “vastly improve Heineken’s position in North America,

unleashing brand Heineken and its Mexican cousins,” “strengthen Heineken’s positions in South and Central

America with the Coors and Miller brand families.” Robert thinks Heineken could use MillerCoors brands for

global expansion as AB has with Bud. Bud brand up big globally even tho still down in US. This deal would

also “expand its premium portfolio further protecting brand Heineken”and “add global scale and purchasing

economies.” Robert sees $450 mil in synergies (similar to Stifel’s recent $500 mil estimate).

Finally such a deal would make “Heineken a credible threat in ABI’s core US market.” This is one of Robert’s

core arguments. With its vast resources, ABI could potentially punish Heineken in 3 strong mkts that are about

1/3 of Heineken operating profit (Vietnam, Nigeria and Mexico). If Heineken acquires Molson Coors in US

and becomes a strong #2, that could serve as “credible deterrance” from ABI attack and “allow it to counter

pressure.” It would also add about “$1.5 billion of additional hard currency cash flow before financing.”

Finally, Robert sees “limited other potential M&A options which would address challenge from ABI.” He

concludes there is 50% chance of deal happening by 2020, “but could be sooner.”

Total beer industry volume stayed strong, up 2.8% for 4 weeks thru Nov 26 in Nielsen all-outlet, +0.7% YTD.

But imports continued to be best-performing segment by a mile. Up double digits and gained 1.1 share of $$,

gained 1.5 share of $$ for 4 weeks. Modelo Especial biggest gainer by far among imports; $$ sales up 32% last

4 weeks and it gained 0.8 share of $$. But Corona, Stella and Dos Equis all up double digits too.

Avg import prices up 2%, while all industry prices up avg 1.4%, thanks to continued trade up. Mainstream avg

prices up just 17 cents, 0.8% last 4 weeks. And economy pricing down 13 cents, 0.8%. Both segments’ volume

up slightly and lost slightly less share during period.

Import Beer Outpaces Spirits On-Premise; In “Sweet Spot” Meanwhile, on-premise update from Nielsen

shows import beer actually outperforming spirits category in bars/restaurants. Import volume +3.8%, $$ up

5.4% for 52 wks thru Oct 8, vs spirits gains of 1.8% and 3.4% respectively. Overall, beer still very soft on-

premise: volume -3.1%, $$ -1.5%. That means very tuff trends for other categories. Indeed, domestic premium

volume -8.8% for 52 wks and $$ down 8%. So not much price and no volume relief. Craft volume eked out just

0.8% gain, $$ up 2.6%, so still gaining share in beer. Interestingly, cider still growin’ on-premise, volume

+2.3% for 52 wks. But below premium, coolers and FMBs each down 4-9%. Superpremiums flattish.

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Imports benefitting from distribution gains (+1.8%) and velocity gains (+1.9%). Imports in several “sweet

spots,” sr veep Scott Elliott pointed out. They have sessionability, provenance, strong branding and premium

price point. Then too, Nielsen research shows import drinkers “younger, wealthier and more frequent visitors to

the on premise for both eating and drinking occasions”: 55% of millennials drink out once/wk or more and go

out avg 9 times/mo, spending avg $155/mo on premise. Avg consumer goes out 6.8 times/mo and those 55+

spend avg of $92/mo. But more data too showin’ millennials more promiscuous in drink choices than older

drinkers. They drink across 5.5 categories vs 4 for avg consumer and 1 in 4 millennials “don’t know what drink

category they will drink prior to entering an on premise venue.” That’s challenge and oppy.

Expect “Muted Pricing” in Spirits to Continue Spirits prices continue to lag beer prices and inflation, off-

premise at least, as we’ve regularly reported consumer price index trends. (On-premise pricing has exceeded

inflation across alc bevs, according to govt.) In conference call with Wall St last week, Diageo’s North

American prexy Deidre Mahlan called spirits mkt a “very muted pricing environment today,” reports Wine &

Spirits Daily. She doesn’t expect fiscal ’17 to show “real net price,” tho Diageo “taking price in the categories

where this is price strength,” W&SD wrote. “Most of the difference between volume and net sales will come

from mix,” Deidre said.

Import shipments slowed in

Oct but continued to build volume: up 97K bbls, 4% reports Beer Inst economist Michael Uhrich from

Commerce Dept data. For 10 mos, imports up 1.9 mil bbls, 7.1%. That offsets estimated 1.7-mil- bbl dropoff

for domestic brewers’ shipments Jan-Oct, but not by much. With cider dropoff, industry goes into final two

mos dead even. Imports have especially tuff comp Nov-Dec: +890K bbls, +22% last yr.

Mexican imports slowed a bit in Oct, +5%. But still up 2.3 mil bbls, 14% yr-to- date, carrying the category (and

rest of US biz). Belgian shipments eked out tiny Oct gain and big numbers from Ireland and Germany for the

mo. Dutch shipments off slightly in Oct. For 10 mos, Dutch shipments down 213K bbls, 5%. Belgian

shipments down similar 6%, 112K bbls. And Canadian shipments swoon continuing: -303K bbls, 20%. Irish

and German shipments flyin’ tho, up 22% and 24% respectively. UK off near 30%.

Is subpremium

becoming more of a battle ground between AB and MC? AB will use one of its precious Super Bowl ad slots to

advertise subpremium Busch, sources tell INSIGHTS. That’s a big departure from its perennial premium-and-

above ad platforms in the Super Bowl. After all, this is very expensive real estate. So why go there? At same

time, different AB branches in Southern Calif, not exactly a hotbed of subpremium sales, offered exceptionally

low prices for 2 weeks 11/28-12/11. Initially, these prices weren’t even offered to indy distribs, INSIGHTS

hears. In response to inquiries, distribs reportedly told that these prices were “experiments.” All these prices

were at least several $$ below what independent distribs were charging.

In Pomona, AB selling Bud Ice quarts for $14.40/case (12 qts); in Riverside, AB selling Natural Light and

Rolling Rock 12-packs for $8.90; in San Diego, AB did all those discounts plus Cobra, Hurricane, Natty 25-oz

cans ($11.25 for 15). Indy-LA area distrib Straub also had 25-oz can promotion at $11.25. But no other indy

distrib so far doing these particular promos as far as INSIGHTS knows. Meanwhile, both AB branches and

indy distribs will have hot $13.20 12-pack premium prices next week and for 2 weeks in Jan. Unclear at

presstime whether these low subpremium prices happening in other geographies, possibly related to inventory

or perhaps some other explanation. What’s going on?

Tho many speculate that legal pot will negatively affect

alcohol consumption, that’s mostly not borne out by data so far. Looking at Beer Institute state-by- state data

thru Oct 2016, shipments to states where pot’s legal are mostly up. In Colo, beer shipments up 117,000 bbls,

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3.7% again in 2016, following a 1% drop in ’15, 4% gain in ’14 (pot legalized in 2012). So mixed bag, but

generally trending upwards, whether because of pot tourism, complementarity or whatever other reason. In

Oreg, shipments up 41,000 bbls, 1.6% for 10 mos in first yr that pot’s legal. And Alaska beer sales up at a

double-digit pace. Up 49,000 bbls, 12%. Only Wash showed decline so far. Shipments dropped 65,000 bbls,

1.7% thru Oct, following 2.6% gain in 2015, 6% gain in 2014. Meanwhile, lengthy article in Politico points

out that “with little more than the stroke of his own pen, the new attorney general” (nominee Jeff Sessions),

who stongly opposes marijuana use, could reinstate “aggressive enforcement” against growers, sellers and users

and “cause chaos in the $6.7 billion industry.”

ABI will “roll out its first European chain of

pubs based on its popular US craft beer brand, Goose Island,” wrote the Daily Telegraph on Friday. “A pilot”

will open in London before Christmas “and a second site planned for the capital next year alongside a third in

Belgium.” This upcoming launch is “first venture” for ABI’s “brand experience” division, “which it set up last

year to grow its stable of craft beer brands.” Goose Island Vintage Ale House will offer consumers “a different

style of beer than many people are used to,” ABI’s Toby Cowan, who heads up new division, told Telegraph.

Recall, AB now owns over 20 retail outlets here in US, but has said that these are brand-building, not a retail

strategy. “We do not have a strategy at retail,” High End prexy Felipe Szpigel said at Beer Insights Spring

Conference in May. Now those “brand experiences” are going global.

ABI will “roll out its first European chain of

pubs based on its popular US craft beer brand, Goose Island,” wrote the Daily Telegraph on Friday. “A pilot”

will open in London before Christmas “and a second site planned for the capital next year alongside a third in

Belgium.” This upcoming launch is “first venture” for ABI’s “brand experience” division, “which it set up last

year to grow its stable of craft beer brands.” Goose Island Vintage Ale House will offer consumers “a different

style of beer than many people are used to,” ABI’s Toby Cowan, who heads up new division, told Telegraph.

Recall, AB now owns over 20 retail outlets here in US, but has said that these are brand-building, not a retail

strategy. “We do not have a strategy at retail,” High End prexy Felipe Szpigel said at Beer Insights Spring

Conference in May. Now those “brand experiences” are going global.