High end grew 9.5 share of $$ to 51.3 in IRI MULO between 2014 and 2018, showed Bev Mktg managing partner Brian Sudano at Bev Forum yesterday (high end beer defined as over $25 per case).  But “if you’re over 50% of $$, what is the high end,” Brian asked pointedly.  So, the industry must “redefine what high end is,” added Brian.  “If it gets to 70%, high end means nothing.”  Good point.  Industry nomenclature must be “recast,” he suggests.  Within high end, what Brian called “luxury” (over $35 per case) captured most of the growth.  It grew almost 8 share from 9.6 to 17.4 share of $$.  Meanwhile, what Brian called “super premium” (beers from $25 to $35 per case) climbed from 32.2 to 33.9.  So most of the growth in beers over $35 per case.

Coming off very soft Q4 2018 and despite easy comp (Q1 shipments tanked -7% last yr due to logistics snafus), MillerCoors depletions down 3.8% in Q1 ’19 and shipments dipped 2.7%.  Miller Lite held share in US, Molson Coors reported, and Coors Light performance “improved.”  And MC’s financial performance notably better than volume trend, thanks to price hikes and another cut in mktg, gen & admin expenses.  Net sales per bbl up a healthy 3.7%, “driven by higher net pricing.”  Then too, MC cut MGA another $17.5 mil, 4.5% in Q1, in part from restructuring last fall and “quarterly timing of innovation spend, partially offset by higher marketing investment” behind Miller Lite/Coors Light.  As result, operating income up $8.8 mil, 3.3% and underlying EBITDA up $13.1 mil, 3.4%.  CEO Mark Hunter “encouraged” by “meaningful” net sales growth in US, “increasingly strong” Miller Lite performance and Coors Light improvement. 

Early reaction from Brett Cooper at Consumer Edge on Molson Coors’ global performance: “Sales, EBIDTA and EPS came in below consensus.”  And even while expectations not “overly high…there wasn’t enough contained in the results or commentary to act as a positive catalyst rather, gross margin pressure and continued volume weakness likely continued causes for concern.”  Price bump in US, Brett noted, the “highlight,” exceeded scan measures and likely to be focus of this morn’s conference call. 

Elsewhere, Molson Coors reported Canadian volume down 6% and European volume -2.3%, but international volume +6.7%.  All in, worldwide volume -4.7%, net sales dipped 1.2%, underlying EBITDA -1%, tho Molson Coors booked tiny EBITDA gain (+0.2%) in constant currency.

Critics of TTB’s more aggressive industry trade practice investigations/offers in compromise/license suspensions have kicked it up a notch themselves.  Recall, vet alc bev atty John Hinman recently vented about TTB’s consignment sales allegations against small vintners (see Mar 13 Express).  Turns out he consulted with ex-TTB Chief Counsel Rob Tobiassen on that article.  And now Rob has penned a pair of similarly critical blogposts on John’s site.  Rob was chief counsel for TTB (2003-2012), ran consulting biz for a while and is now prexy of natl assn of alc bev importers (NABI).  No one has better grasp of fed alc bev law or inside understanding of TTB than Rob, which adds weight to his recent comments and criticisms.  Rob’s Apr 22 and Apr 29 posts are detailed and nuanced, but worth reading by industry attys, natch, and any industry member who anticipates (fears?) TTB’s knock on the door or footsteps in the hall. 

TTB “Extorting” Offers in Compromise  Among key takeaways of yesterday’s post: “In its recent trade practice investigations TTB has learned to use death as an enforcement tool,” Rob leads off.  How so?  TTB has strict reg that requires 30-day notice of any stock ownership changes for bizzes with fed alc bev permit if there’s change in “actual or legal control.”  Not everyone does the paperwork promptly, especially if they’re waiting for a will to be probated, or if they believe there’s no change in “actual or legal control” of a biz: if biz stays in same family under same mgmt, for example.  But TTB is treating “unreported changes in ownership in every case I know,” Rob writes, “as a change in actual or legal control whereby the basic permit terminated,” in some cases years earlier.        

What’s happening?  TTB is using lapses in reporting stock ownership changes to “extort offers in compromise for alleged trade practice violations.”  It’s not separating the “charges,” as it were, and “will only sign a global settlement offer in compromise covering both the alleged basic permit violation and the alleged trade practice violation.”  No legal reason for this, Rob insists, and in fact TTB’s practice represents “lack of due process,” since there’s no administrative review or a hearing if industry member disputes TTB on permit issue.  Nor is there avenue for independent judicial review, at this time.  Any “automatic termination” of permit based on the reporting requirements, Rob believes, “likely unconstitutional” if industry member has no oppy to challenge TTB action.  “The job now,” Rob concludes, “is to translate the mission of the TTB to serve the industry members it regulates rather than to serve itself by scoring penalties and assessments that are not justified and not subject to judicial review.” 

Consignment  Sale Charges Stifle Innovation  In his Apr 22 post, Rob reminded that TTB regs allow certain promotional activities and don’t consider them tied-house violations.  But those activities can’t be a “subterfuge” to violate prohibitions of exclusive outlets, commercial bribery schemes or consignment sales.  And now, “general position” of TTB’s current investigations “appears to be any successful promotion program is a ‘subterfuge’ because ‘I say it is.  I am the administrator of the law with expertise, remember.’”  Such an approach, Rob suggests, is “stifling” innovation.  Echoing John’s earlier comments, small vintners who reach a “mutually beneficial arrangement with a distributor who can legally sell their wines to local retailers,” are not using economic power to extract benefits from another industry member, Rob points out.  Quite the opposite.  Rather, they’re seeking ways to work within 3-tier system to get their products to market.  That’s a reasonable model, and “the policy harm identified by Congress,” the “social evils” that led to Prohibition, “is simply not present.”  Rob asks same question INSIGHTS did last month: are small players with “miniscule” mkt shares really “restricting consumer choice” and “preventing a level playing field,” as TTB alleges, with these innovative “marketing arrangements and business models” to simply ensure they can compete?

More to come on this debate, Rob and John promise, including, next up, “the human side of [TTB’s] trade practice enforcement initiative.”   

Tho neither Boston Beer’s Jim Koch nor NBWA’s Craig Purser view e-commerce as a major force in beer biz in near future, given beer’s weight and legal impediments, as we reported yesterday, grocers see oppy, especially in wine.  So suggests deep dive into “Why more retailers are raising a glass to alcohol delivery,” by grocerydive.com yesterday.  Article pointed to efforts by everyone from big brick-and-mortar grocers like Kroger, Giant Eagle and HEB to online natural grocer Thrive Market, often with assistance of 3d party compliance/delivery companies to handle legal issues, to beef up especially wine offerings (wine bottles pretty heavy too).  But some dabbling in beer as well.  Thrive guy said his wine biz flyin’: “The order rates are crazy, the uptick has been insane.”

Key reason for more online wine attention is same one “Beer First” folk making clear to retailers: alc bevs build basket sizes. “Basket size increases by almost 15% when alcohol is in an Instacart shopper’s basket,” according to Instacart veep. “It’s a growth driver for our retailer partners, and it’s one of the reasons that they do push to have more alcohol available and more states available,” he added.  Another reason: data collection, natch.  “Selling alcohol online allows retailers to collect customer data and deliver a more customized experience than they can in a store,” via personal recommendations, food pairings, etc.  That in turn allows retailers to “leverage” the resulting improved “relationships” between customers and stores.  A final advantage for some (don’t tell Craig): Thrive, for example, “goes far up the supply chain to work directly with producers, which cuts down on middleman fees and allows the company to sell wine to members at a lower price point.”  

Sobering review of beverage alcohol trends by Beverage Marketing managing partner Brian Sudano at this morning’s Bev Mktg Forum in Chicago.  Beer has declined 1% or so in recent yrs, but if you unpack FMBs and other fuller flavored beers, then “standard” beer declining even more.  Down about 3% or so last yr and in other recent yrs.  And if you “strip out” Constellation and Mich Ultra, it’s “worse, much worse.” Down 5%. 

So “there is stress” and “huge risk for beer” that declines could still steepen.  And with growth of FMBs, especially seltzers, increasingly there is question of “what is beer?  Beer is searching for an identity.  I believe you’re going to see duress in the category until that identity is discovered.”  It’s “very hard to grow” with 4 biggest brands declining 4-7%, Brian noted and with continued industry “infighting” like Corngate, he added. “How do you grow a category when you keep beating each other up?” he asked.

Wine Momentum “Eroding,” Even Spirits Slowing  Meanwhile, wine “essentially flat” in 2018.  CAGR for last 4 yrs just 1%.  “There are signs” that wine “momentum… eroding,” Brian said.  He characterized his views as “a little dovish” on wine, in part because “hemp helps you relax” and he believes its use in bevs “will affect wine more than other alcohol beverage segments.”  But some areas of wine still growing, like direct shipping and cans.  Direct-to-consumer up 9% in 2018, but still just 1.7% of biz.

While spirits still growing in 2% range, used to be 3%, said Brian.  And “flavor phase has hit saturation” in spirits, he added, noting it has “now shifted” to FMBs.  Craft spirits have 26% CAGR over last 8 yrs, and still continue to grow about mid-teens.  But they are still only 3% of spirits category.  So where’s some of the biggest/fastest growth?  Under umbrella of what Brian called “ABA” or alternative beverage alcohol. Includes FMBs and many other bevs that “reject” traditional forms of alc bevs.  They collectively grew 36 mil cases last yr, according to Bev Mktg.  All in, alc bevs up slightly last yr, but per capita consumption dipped, said Brian.

AB busy “reinventing ourselves,” said cmo Marcel Marcondes at Bev Marketing Forum, “to keep building brands.”   AB looks to go from “being a leader to leading” the industry and becoming a company “that really leads growth creation in the industry,” said Marcel. So, AB will “stop trying to protect our market share” above all else. It’s “about time for us to do something for the industry first,” he added.  “The industry needs to grow” and AB needs to “lead growth creation rather than just protecting market share,” tho “that’s easier said than done.”

AB Has 9 of Top 15 Share Gainers in IRI  In addition to top share gainer Mich Ultra, which has gained 0.64 share yr-to-date thru 4/14 in IRI, AB has 5 of top 10 share gainers in industry, said Marcel and fully 9 of top 15. “This is what gives us hope,” said Marcel.  It also captured 51% of innovation volume so far in 2019, including Naturdays, this yr’s top innovation brand.  And it has 4 of the top 10 innovations.  Michelob Ultra Pure Gold is again one of top 10 share gainers overall in 2019.  It was a $100 million biz last yr, said Marcel.  And in all, AB losing less share each of last 3 qtrs, said Marcel, citing IRI data.  ABI reports its Q1 totals next week. 

Happy days may not be here again, but 0.7% volume gain for 4 wks thru Apr 20 and $$ sales pop of 2.8% for period in run-up to Easter brought volume trend in Nielsen all outlet scans to down just 0.1% and $$ trend back to +2% yr-to-date.  Most segments and players benefitted from improved recent trends.  For example, AB volume off just 0.8% for 4 wks, MC down 2%, Boston revved gain pace up to near 20% and Mike’s posted 50%+ growth.  Even Bud Light and Coors Light improved trends, tho Bud Light still -6.2% for 4 wks, Coors Light -3.6%.  Miller Lite +2.2%.  FMB tear continued with segment gaining 1.2 share of volume, 1.6 share of dollars for 4 wks.  Constellation and Mike’s each gained virtually same share of volume (0.8/0.7) and $$ (+0.9 each) for most recent period.  Diageo Beer Co continued up double-digits, Pabst down doubles and HUSA off mid-singles.  Craft trend improved, but still -2.2% for 4 wks, -1.3% yr-to-date.  

AB scored Natty trifecta with Natty Light, Natty Daddy and Naturdays each among top-10 growth brands for 4 wks.  They joined Michelob Ultra and Pure Gold, so AB had half of top growers.  Constellation had a pair with Modelo Especial (+18%) and Premier (back to earth at +50% as it starts to cycle).  Mike’s 2 top White Claws and Boston’s top Truly round out the list.  Note too: Stella Artois rebounded with 6% gain for 4 wks, putting it back in the black yr-to-date.  Blue Moon Belgian White eked out 0.3% gain for 4 wks, tho still down 3% YTD.

“There is a lot to like” about 3-tier system, said Boston Beer chairman Jim Koch in discussion with NBWA prexy Craig Purser at Meeting of the Malts put on by Brewers of Pennsylvania in Hershey last week (moderated by BMI’s Benj Steinman).  But there are also “plenty of” ways  to “improve” 3-tier system, added Jim.  The 3-tier system “will be preserved as long as it evolves” and is “good for the consumer,” Jim emphasized, including exceptions for taprooms.  Craig pointed to big consumer benefit of great variety of craft here in US that is “wildly successful” and which “system gave rise to.”  And Jim appeared to concur, repeating his longtime credo: “No three tier no craft beer.”  So where did they differ?   Franchise laws and tap rooms, natch.  Craig pointed to recent forced distrib consolidations via threat of termination as showing need for strong franchise laws.  Jim asked why govt should weigh in on side of wholesalers if distribs not living up to provisions of contract. In MA, “we’ve been working on” franchise reform “for 10 years.” When INSIGHTS asked if this is yr it passes, Jim quipped: “You never know. It might take 20.” But “every year there are more of us and fewer of them.” 

Speaking of “more of us,” what about the explosion of taprooms and expansion of retail rights that are often exceptions to existing 3-tier?  System “has to have exceptions,” said Jim. “We wouldn’t exist if self distribution didn’t exist as a right in Massachusetts.” Taprooms are “good for the industry, good for customers” and politicians like them, so “you’ve got to embrace it.”  These aren’t “rights,” said Craig, but “privileges” that can get abused.  In other words, taprooms can work but shouldn’t run rampant.  Neither Jim nor Craig saw advent of e-commerce as a major force in beer biz in near future.  Beer will be “one of the last things Amazon becomes a big competitor in,” said Jim, pointing out “beer is heavy.” That maze of state laws could be an impediment too.  

Texas has nearly same % of population who are Hispanic as California (38-39%), but Constellation Brands has only half the mkt share in TX that it does in CA.  That suggests room to run.  Indeed, Constellation grew in TX at faster clip last yr and over last 5 yrs than it did nationwide or in CA.  Constellation nearly doubled in TX in last 5 yrs, jumping 1.064 mil bbls, 92% to 2.2 mil bbls.  That’s over 10% of Constellation total volume.  And last yr, Constellation jumped another 226,000 bbls, 11.3% in TX and grew 1.4 share, climbing to 11.3.  Up 5 share in 5 yrs.  

Meanwhile, AB lost 1.05 mil bbls, 10% and 5.7 share in TX last 5 yrs, falling under 50 in 2017. TX still AB’s biggest mkt by far. And it held share at 49.1 last yr as it reduced dropoff rate to 2% in down mkt.  MillerCoors lost 315,000 bbls, 6.6% last yr and 645K bbls, near 13% in 5 yrs.  Dropped 3.5 share to 22.6.   Top 3 at 83 share.  HUSA had good run in TX, jumping 30% 2013-2017. But HUSA fell last yr, down 45K bbls, 3.8%.  Still had 6 share.  Pabst down 9% and under 2 share. Craft still relatively small as all others (including Diageo, Mike’s) just 9.4 share, collectively down last yr (even with seltzers), but up 3 share in last 5 yrs. 

Delaware bill spearheaded by Dogfish Head’s founder Sam Calagione a couple of weeks back raised eyebrows and subject of discussion/speculation behind scenes.  Initially, bill sought to change licensed provisions for DE-based “brewery pubs” and “microbreweries” to conform to BA definition (up to 6 mil bbls is small brewer).  That would have been a first, conforming a legislative definition to directly reference an association’s.  But since BA def already changed several times, that first pass got plenty of pushback.  Last week, draft amendment circulated that just says provisions would apply to brewers up to 6 mil bbls. It has a good chance of passage, several sources told INSIGHTS late last week.  Current law lets suppliers/brewers  outside state keep existing license privileges for in-state operations as long as total production under 2 mil bbls like in Fed tax code.  New bill would pave way for brewers in range of 2 mil to 6 mil bbls to acquire either part or all of a DE-based brewer without having to give up any license privileges currently enjoyed by that brewer.   (Bill first reported in Craft Brew News, Apr 18; this article adds new details.) 

So why is Dogfish Head so keen on passing bill to enlarge size of out-of-state brewers who could keep those privileges?  Request for comment went unanswered. But most plausible reason: Dogfish working on some kind of deal.  Much more likely deal would be for stake in co than outright sale, INSIGHTS believes.  Recall, Sam long a champion of brewer independence, including BA seal on 60 Minute IPA.  But Dogfish Head sold 15% to private equity firm LNK partners in 2015 (tho Sam said he’d buy it back someday).  Some private equity deals have provisions that ensure they get paid and/or bigger stake in co if all growth objectives not met.  So could Dogfish be looking for a different dance partner before that kind of clause gets triggered? Also, there aren’t that many brewers that would conceivably fall in that 2-6 mil bbl range to buyout LNK’s stake and allow Dogfish to remain BA-defined independent brewer; some names include: Boston Beer, Duvel Moortgat, Yuengling.