Despite

all of the churn, new brands and new flavors in flavored malt bev space, Phusion Projects and its total portfolio

(Four Loko and other products) runnin’ up 20% this yr and likely to regain a near-peak volume of 8 mil cases,

co-founder Jaisen Freeman and prexy Jim Sloane told Express. That would put Phusion in neighborhood of

600K bbls. “We lost every point of distribution we had,” in the wake of attacks from state AGs and others that

started back in 2010 on the caffeinated version of Four Loko. And even while Phusion’s got those points of

distribution back, it’s sold almost exclusively in just 2 channels, c-stores and independents. Virtually all

grocery and drug placements disappeared, said Jim, and “we’re just starting to get them back,” creating oppy for

“all new business” in them. Phusion also has growing intl biz in addition to sales in 49 states (UT is only US

mkt where Four Loko not available). Distribution is 60-40 MillerCoors/AB, said Jaisen, and each network

performing about the same, with 1 quarter of a percentage point difference between them, he added.

Why is Phusion doing so well in midst of very crowded segment, including big brewers’ efforts? Jaisen points

to: distinctive liquid (of course), flavor and packaging innovation (Gold in 2015 and Sour Apple in 2016 were

top new packages in IRI) and sales execution between Phusion team and distribs. Distribs like the margins on

single-serves: “we are golden cases…and we are easy to do business with,” sez Jaisen. Phusion counts 270

SKUs in single-serve, with 30 doing about 80% of the biz. Four Loko has significant number of those top

SKUs and “sticks to the knitting” via social media and experiential events, sez Jaisen. Who’s the Four Loko

drinker? Age 21-26, 60/40 male to female, often “pre-gaming with a single can before moving to something

else,” said Jaisen. Also, Four Loko mostly competes with spirits drinks and spirits occasions, he believes, not

beer. The “only competing we do with beer is for shelf space.” Tho it may be counterintuitive, Jaisen sees “a

high correlation between craft beer and Four Loko” since millennials like “big flavors” whether it’s hoppy or

sweet. “They think in terms of flavor and they want a lot of it.” Asked whether calories an issue for Four Loko

drinkers, Jaisen noted last time he was in an airport there was long line at Starbucks of folks ordering high-

calorie flavored coffees with no one on line at the Argo tea cafe.

Wow! There are 5,005 US brewers, Brewers

Assn said today in yr in review release titled “A Big Year for Small Beer.” That’s up 736 from 4,269 at the end

of 2015. And there are still over 2000 in planning. BA’s celebratory and extensive release was timed to

coincide with anniversary of repeal of Prohibition. It focused on continued craft growth (8% in 1 st half), styles

that are gaining share, like IPAs and “more sessionable” beers, now totaling 30% or so of craft, “freedom of

choice,” “homebrewing impact,” “beer destinations” and more, including pointing out that there are 10,000

wineries in US. Release made no mention of slowdown, m&a, definitional dilemmas, overwhelmed consumers.

This glass was more than 3/4 full, as you’d expect.

Big distillers trying to crack the code and revive sluggish on-premise biz, just like big brewers. Diageo’s

“Activation Army” ‒ sales force members who coordinate activity with operators on pricing, profitability across

portfolio ‒ movin’ the needle, it told analysts on investor call yesterday. These AA accounts (6K of ’em) “grew

12% vs other accounts +2%,” reports analysts at Exane BNP and CLSA. And just as AB and Marlboro

challenged on their “big reds,” so is Diageo’s Smirnoff Vodka. But Smirnoff volume “stabilizing,” it sez, in

part via “lowering prices to be in line with competitors,” wrote CLSA’s Caroline Levy. Diageo hasn’t been

keeping pace with overall spirits growth, but it believes, and analysts buyin’ in, that it can match industry rev

growth of 4% in North America by fiscal ’18 or ’19. Diageo Beer is #2 focus area for North American biz,

wrote Exane BNP, behind US/Canadian spirits biz, natch. Not a lotta beer details, but Exane noted expansion

of Guinness portfolio and that Diageo will “pursue a single trademark strategy for Smirnoff” flavored malt

bevs, “one that is aligned with the core spirits brand.” Diageo Beer Co’s volume +2.2% in latest 4-wk Nielsen

all-outlet scans thru Nov 12, +1% yr-to- date. Smirnoff Ice franchise even stronger: +7.4% for 4 wks, 2.7%

YTD. Interestingly, even with constant flavor churn in FMBs, and Diageo faces same issues with some of its

spirits brands, FMB mainstays among best performers in category right now: Smirnoff Ice, Mike’s and Twisted

Tea.

AB closed off part of 24th St in

NYC this morn so it could bring hitch of Clydesdales down the street and celebrate both the official opening of

its Commercial Strategy Office in Chelsea neighborhood and upcoming 83d anniversary on Dec 5 of the end of

Prohibition.  AB ceo João Castro Neves and panel chairman Philip Mullin rode in with Clydesdales.  João

welcomed NY Lt Gov Kathleen Hochul with beer in ceremonial echo of first case of beer delivered by AB to

then-NY gov Al Smith in 1933.  The Lt Gov talked about how state is promoting economic development and in

Chelsea particularly there’s “entrepreneurial spirit” and almost a “start-up” environment that AB now part of,

along with other big companies like Google, Cadillac, Chobani, etc. 

AB’s 24th street office in works for almost 2 full yrs and it has come a long, long way.  Houses over 300

people, including over 250 from North American team and 2 floors for Disruptive Growth unit of ABI.  First

floor is called Celebration and includes recently opened bar, a small pilot brewery called 24th Street Hops (will

have 2-bbl system installed soon).  Outside the building, window decaled with this statement: “You’re looking

at what’s new and next in beer culture.”  

Just-opened twelfth floor is rooftop biergarten with a skylight, an inviting, comfy NYC space.  Whole office

recently opened up in middle with large airy staircases between several floors.  People veep Sandro Bassili said

he studied many other co’s offices, sought to create open, collaborative, dynamic environment. He and entire

leadership group are on 9th floor on floor called Culture.  For this event, AB also brought in many historical

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artifacts, aided by archivist Tracy Lauer, who gave brief tour of them showing AB’s early history, creation of

Budweiser in 1876 and that during Prohibition the brewery survived by making over 20 different products.

Constellation’s “beer scanner data revenue growth is coming in better than expected this quarter,” wrote

Morgan Stanley’s Dara Mohsenian in report today. That’s “key new point” in driving even higher earnings

estimates, he added. Nielsen data thru Nov 19 shows “year-on- year growth actually accelerating and two-year

average sales growth reaching new modern history highs in recent weeks.” Those rates in rarefied +20% range,

Dara noted, and improving across every key brand in portfolio. So STZ not exactly bein’ boxed out by AB/MC

duopoly. Meanwhile, Dara believes “potential Trump policy risks look manageable.” While “concerns” of

potential tariff on Mexican products, reduced consumer demand via deportations/departures and “relative STZ

tax risk vs US-centric peers” are “appropriate,” Dara thinks regressive beer tax “unlikely” and “deportation

rhetoric [is] likely much harsher than actual implementation.” Constellation has boosted growth even under

“ramped up” deportations and migrations under Obama admin, Dara notes. Relative tax risk a “larger potential

wild card,” Dara acknowledges, but would take time and may be offset by broader tax reform.

In the rest of the world, “if you have a 40 share you don’t get to buy stuff,” stated Pabst chairman Eugene

Kashper during Brewbound Session in San Diego yesterday.   But ABI continues to buy brewers outright here

in the US and “circumvent antitrust” in other ways while “our DOJ doesn’t want to deal with it.”  DOJ is “kind

of focused very short term,” he went on.  “If something is not going to result in prices going up in the industry

tomorrow,” then DOJ feels “they shouldn’t really waste time.”  Perhaps state AGs will become “more active

going forward,” he suggested.  But Eugene “surprised at how it’s developed so far.”  

He listed “tying them up” (seemingly referencing CBA), “doing something with distributors,” (he “fully

sympathize[s] with” Yuengling’s “situation” in MS), and venues/stadium sales as specific ways AB

circumventing antitrust now.  ABI’s “been quite successful in their interactions” with DOJ and it’s likely

“emboldened” them and “probably MillerCoors as well...to do more things” to “cement their duopoly in the

US.”  There will always be taprooms, he acknowledged, but as far as national shelf space and “share of the

profit pool,” “they’ve been put in a position where they can really box everyone out.”  So far it hasn’t “gotten to

the stage yet where other industry participants are really feeling what they’re doing, but they’ll get there.”

Pabst

Brewing Co hired former Duvel Moortgat USA prexy/ceo Simon Thorpe as its chief exec officer, starting

tomorrow. Current chairman/ceo Eugene Kashper will keep the chairman role. But there “will be a 60-day

transition period between” Simon and Eugene to “ensure a smooth handover.” Simon is “both a true industry

visionary and a highly respected operator,” according to Eugene in release.

In Eugene’s original vision, he “would have preferred” to split the ceo and chairman role right away, he told

INSIGHTS. While it was “great to be deeply involved” in day-to- day last couple of yrs, co has so much going

on that it needs both a ceo and “full time committed chairman owner.” Pabst never went into a “formal

process,” searching for new ceo, it hadda be “good fit.” Eugene knew Simon and after he left DMUSA, they

talked about what he would do next. Gradually it emerged that Simon would be “great fit.”

Grow PBR and Local Legends; “Pursue Partnerships” with “Like-Minded Brewers” In note to

distribs/partners, Eugene said: “Simon will be 100% focused on executing against our two main strategic

priorities: 1) To take advantage of our unique brand portfolio and accelerate the growth of Pabst and our Local

Legend brands. 2) To build a best-in- class sales and supply chain platform that will allow us to expand our

portfolio in the longterm through collaboration with like-minded independent brewers.”

With Simon’s “deep marketing background,” he “gets these heritage brands” and “will take the bold actions

necessary” to build ‘em, sez Eugene (Recall, Simon had multi-yr stint at InBev too, as ceo of InBev USA and

head of M&A/Strategy.) With his “deep experience in the high end” and many relationships he has formed,

Simon can be key for Pabst to “pursue the right partnerships with like-minded brewers” where there are “huge

opportunities,” sez Eugene. Simon can “help us capture the right ones.” Simon also has “the right

temperament.” Pabst already built “great” team, but Simon “will really round it out.” He’s “next step in our

evolution,” tho Pabst not planning to change its “team, strategy or organizational structure,” added Eugene.

Not Your Father’s “Return to Growth” Next Yr; Incubation Unit Following 20%+ rev growth last yr, 2016

turned into a much harder yr, after Not Your Father’s Root Beer started cycling intro numbers. 2016 was a

“tough year for us,” conceded Eugene, but he’s “optimistic” about plans and programs coming on stream, and

2017 can be a “great year.” Hard soda segment “settling in” and Not Your Father’s franchise has robust

innovation pipeline, Eugene said. Next yr, Not Your Father’s franchise can “return to growth.” Also, Pabst

“getting a lot better on supply chain side” and “can be a great partner.” Then too, it will dial up local legends

thru an “incubator unit” within mktg that came up with Old Style Octoberfest (“couldn’t supply enough”) and

Stroh’s Bohemian (Stroh brand up for first time in 20 years).

Pabst $$ sales still up 3% in IRI multi-outlet + convenience yr-to- date thru Oct 30. Volume up just 0.2%. For

last 12 weeks tho, Pabst fell into a hole. Its $$ sales down 19% and volume down 10%. Not Your Father’s

Root Beer $$ fell over 70% last 12 weeks, but $$ sales up 4.6% YTD. Pabst Blue Ribbon brand $$ flat and

volume down 1.4% yr-to- date in IRI MULC. Those 2 brands accounted for 62% of Pabst $$ sales in scan data.

Shelton Bros has “no right of private action” for alleged violations of Mass alc bev laws and no right to seek

damages from distrib Craft Brewers Guild. What’s more, Shelton’s breach of contract charges “dead on

arrival” and it acted in “blatant violation” of law by specifying alleged damages in its complaint. So sez Craft

Brewers Guild in motion to Mass state ct seeking immediate dismissal of Shelton Bros suit filed earlier this mo

(see Nov 7 and this morning’s Express). CBG also refutes many of Shelton’s specific allegations, but even if

they were true, suit should be dismissed, CBG insists.

Shelton’s allegations about CBG’s lack of efforts to sell its brands, pricing policies, pushing competitive brands

and more “all essentially based on allegations that Craft violated provisions” of specific Mass alc bev law. But

that law “grants Shelton Brothers neither an express nor an implied right of action,” sez CBG. Mass Alc Bev

Control Comm (ABCC) has “sole authority” over such charges and any violations, CBG argues. So Shelton

Bros has no right to sue, as courts have repeatedly ruled in similar cases. Mass Superior Ct “simply does not

have jurisdiction over the specialized alcoholic beverages subject matter” here and Shelton “first required to

exhaust its administrative remedies at the ABCC.” Mass ABCC can hold hearing, require discovery and

determine whether Shelton can terminate CBG for good cause and stop shipping beer. (That process already

underway.) Even as Shelton Bros did file request with Mass ABCC to act on its complaints, lawsuit is “clear

attempt to circumvent the appropriate administrative procedure.” So again, “dismissal is entirely appropriate.”

Tho Shelton sought injunction barring CBG from trying to deter other distribs from carrying brands, CBG

points out Shelton “failed to articulate any particular conduct” by CBG that’s causing Shelton harm or

“harassing or intimidating” CBG’s competitors. In fact, Shelton has no exclusive agreement with CBG in first

place and it is already “dualing” CBG and selling brands thru other distribs.

Shelton has statute of limitations problem too, CBG argues. Complaint alleges CBG “not making good on its

promises” to build Shelton biz back in 2011. But Shelton waited over 5 yrs to file suit, so any breach of

contract charges “barred by the four year statute of limitations.” Finally, Shelton specifically barred from

naming an amount of damages in such litigation under Mass law, sez CBG, since it “provided no verification”

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or any “ascertainable calculation used to reach” its allegation of $1.7 mil in damages. Shelton’s claimed

damages “served only as a mechanism to create sensationalism for the benefit of the press.” At very least, court

should strike the number and order Shelton to file “a legally compliant complaint, or, in the alternative, dismiss

on this basis as well.”

Shelton Creating “False Narrative” for Legislators and Press, Sez CBG While courts (and defendant) have to

assume facts alleged by plaintiffs are true, CBG “vigorously disputes” many of those as well, it sez in footnote.

And as Express reported this morning, CBG includes charge that Shelton’s complaint is “just a vehicle to

denigrate Craft’s reputation in the industry, create a false narrative to further Shelton’s lobbying agenda to

attack existing alcoholic beverage law in Massachusetts, and to extort Craft to release its rights to continue to

purchase beer from Shelton. Instead of first serving the Complaint upon Craft, Shelton Brothers immediately

released it to the press and it was quickly reported on by the Boston Globe.” CBG also notes Shelton’s claim it

did not file suit earlier because of “shaky finances.” That claim, sez CBG, “almost certainly false” since

Shelton “extremely litigious and has sued or been sued by many wholesalers (including other affiliates of Craft)

on numerous occasions during the time it was allegedly” short of funds to litigate vs CBG, which then lists

same cases it cited in statement released this morning.

Mass ABCC Orders Shelton to Continue Sales to CBG; Spring 2017 Hearing In addition to motion seeking

dismissal, CBG obtained order from Mass ABCC requiring Shelton Bros to “make sales of the Brand Items [75

of ’em] and continue to makes sales and deliver same” to CBG until a hearing is held and decision rendered.

Shelton and CBG have to complete discovery by end of Mar, 2017, file pre-hearing memos a month later and

hearing will follow within 60 days. Meanwhile, “the ABCC urges the parties to resolve their differences prior

to the scheduled hearing.”

Crazy 2016 numbers continue. Even as we reported better Nov retail scans this morning, turns out Oct not only

lousy on the street, but domestic brewers’ taxpaid shipments took biggest hit since Feb 2015. Taxpaids off 1 mil

bbls, 7.3%, estimates Beer Inst economist Michael Uhrich. That put taxpaids down 1.7 mil bbls, 1.2% for 10

mos, and down 1.3% for 12 mos. That’s even softer than last yr’s calendar trend. Also wipes out import gain

thru Sep. So US beer shipments dead even in reported yr-to- date figures, down a touch if you include soft cider

biz. Thru Sep, biz had still been up estimated 0.5%.

What Happened? Contraction and Convergence Oct had one less selling day, consumer beer prices continue

to outpace wine/spirits prices and distrib inventories high at end of Q3, Michael noted. Indeed, drop reflected

tuff “beer purchaser’s index” in Oct. That’s a measure developed by NBWA economist Lester Jones. Each mo

he surveys distribs about their beer orders. Oct figure was “lowest index in the past two years of the survey,

indicating a contraction in volume for total beer.” And quite a contraction it was, at least for taxpaids. (Oct

imports will be reported next week.) At same time, gotta note STR trend for both AB and MC softer than their

shipments thru Sep, to tune of about 1 mil bbls combined, we estimate. That matches overall Oct taxpaid drop.

Recall too, AB InBev reminded that it “expects our STRs and STWs to converge on a full year basis” when it

reported Q3 figures. MC’s STR and STW trends usually converge as well. What are prospects for rest of yr?

Taxpaids have fairly easy comp: down 1.5% or so in Nov-Dec 2015. But imports surged almost 900K bbls,

20% in Nov-Dec last yr, including unreal +28% Dec surprise. Better Nov scans and 2016’s up-and- down

patterns suggest better Nov numbers. But who knows?

Picture this: historically huge, iconic brand, sometimes called “Big Red,” loses favor and share among

millennial consumers. It responds by trying to make brand hipper via pkgng and mktg tweaks. It succeeds.

No, this “Big Red” ain’t Bud. It’s Marlboro. Fascinating story in Wall St Jnl yesterday detailed how Philip

Morris USA engineered revival of Marlboro franchise among millennials unmoved by macho, cowboy imagery.

Vast majority (85%) of young adults don’t smoke and most that do weren’t choosing Marlboro; brand lost 9

share of smokes biz among 18-25 yr-olds from 2005 to 2011 govt data showed. (Sound familiar?) So PM put

out Marlboro Black, a “bold, modern take” on brand, marketed via direct mail and “digital shorts about graffiti

artists, lowrider cars and Chicago city photographers.” Moves are “making Marlboro relevant again,” Wells

Fargo’s Bonnie Herzog told WSJ. Brand grabbed full share of smokes, she estimates, and lifted Marlboro’s

popularity among millennials, again per govt stats.

Ironically, Bud Black Crown, a hipper, more upscale version of Bud, barely got off ground in 2014 and now

being pulled from mkt. Here’s huge strategy difference. AB priced Bud Black Crown as superpremium to

match image and try to steal spirits occasions. In contrast, PM USA parent “Altria’s leadership recognized not

only that Marlboro’s appeal among young adults was slipping but that its higher prices were challenging a

generation hit particularly hard by the 2008 recession.” So it discounted Marlboro Black, to tune of $1.50 per

pack lower than Red. Flavor altered too, to be “less harsh” than Red. Black also helped “boost sales across the

entire Marlboro portfolio of brand colors,” including Red, Gold and Green, two chain retailers told WSJ. Could

be success of such image-price- flavor tweaks unique to cigs and this brand. Could also mean that flagging

flagships of all kinds can be revived with the right moves.