More signs that craft biz keeps changing more rapidly than anyone can keep track of and not always for better.  As trends slow, even some of hottest craft brewers discounting more, especially on slower moving variants.  Case in point: Ballast Point.  Recall, it grew 60% in Constellation’s 1^st qtr and about 20% in its 2d fiscal qtr (thru Aug). But source just sent us pictures of big stacks of Ballast Point from upper midwest with Sculpin Pineapple priced at what ad said was “hot blowout price”of $3.99 per 6-pack. And if you buy 4, get ‘em for $3.50 each.   Price was “$14.49” per 6 pack.  That’s about 75% off if you bought 4.  Then too, flagship Sculpin, Grapefruit Sculpin and Pineapple Sculpin also shown in separate ad with “Buy 2 get one free” promo, more common among Bud and Bud Light.  Net price is $9.13 per six, sez ad.  

“We expect all-in synergy & cost saves of $900 million over 4 years,” wrote Goldman Sachs’ Judy Hong, reinitiating coverage of Molson Coors with yet another “buy” rating for TAP stock.   Synergies as a “result” of deal to buy rest of MillerCoors, i.e. $50 mil a year already announced, are “generally well understood.”  But “capacity for not only MillerCoors but for TAP as a whole to extract costs savings on top of the synergy targets remains underappreciated.” 

On Nov 1, Molson Coors will announce an “all-in cost savings” number, which Judy expects to be $225 mil annualized for next 4 yrs.  That will also include “ongoing savings” of $100 mil per yr for MillerCoors (about what it’s averaged in recent yrs) and another $75 mil in Canada and Europe for Molson Coors (ditto) that are on top of synergies from this deal.  Much of these savings will be used to pay down debt quickly, expects Judy.  While Molson Coors currently at 5.3x debt to EBITDA ratio, she expects it to be under 4x by 2d qtr 2018. “We believe TAP’s priority with cash usage will be to de-lever as quickly” as it can to get back to investment grade rating on its debt.  So first make the money, 2d pay down debt, then Molson Coors will have “high strategic optionality over time.” 

MillerCoors Margins Expected to Jump 6 Points in 4 Yrs; Make $1.8 Bil in 2019  MillerCoors (70% of TAP profits) will be biggest margin beneficiary for Molson Coors in next few yrs.  MC oper income margin expected to climb from 16.2% in 2016 to 22.5% in 2019, expects Judy.  She models $1.775 bil in oper income for MillerCoors by 2019.  “How high can MillerCoors margins get,” asks Judy. “We believe a mid 20s% level is achievable over time.”  That would still be about 10 points below ABI and STZ operating margins in US.  Structurally, MC margins lower because of “contract brewing” (about 10% of MC volume), “price/mix” (MC has less of its portfolio in high end) and “platform leverage and scale,” i.e. AB has “scale advantage in marketing and other fixed cost leverage.”

MillerCoors “Faces a Tough Path to Flat” by 2018  Judy models a 1% per yr decline for MillerCoors from 2017 to 2020. “We remain cautious on” MC’s “volume prospects in the near-term given noise in more recent scanner data.”  MC down 2.5-2.9% in recent 4 weeks periods in Nielsen all-outlet.  STRS should be down 2% in 3d qtr, estimates Judy (given reports on Sep we’ve heard, that could be generous).  Going forward, MC “has relatively unfavorable portfolio mix” but “near term reinvestment could drive improvement.”  Then too, “recent slowdown” in MC high end is a “concern” with Henry’s the “primary growth driver.” But even Henry’s has flattened out in scan data as a % of MC sales; at 1.6% of sales in Sep, compared to 1.5% in Aug, 1.7% in Jul, Judy shows.  

Mixed bag from R Street Inst sr fellow Kevin Kosar on fed excise tax issue in article penned for The American Conservative.  Kosar supports tax cut, to be sure.  And he points out Craft Bev Modernization Tax Reform Act has 51 Senators (52 now) and 283 House Reps aboard.  At same time, “hurdles” bill faces “not insubstantial,” he opines.  Neither House nor Senate version reported out of committee, Congress ain’t in session much longer this yr and Senate bills usually need 60 votes to pass.  (Kosar neglects possibility bill will be attached to something else, much more likely scenario, as BA and BI sources acknowledge.)  Then too, bill “may come with budgetary costs” and Congress doesn’t like creating red ink these days.

Then Kosar veers toward liquor land.  “Second and more fundamental issue is that the legislation leaves in place most of the iniquities in drinks taxation.”  Turns out this American conservative embraces tax equalization and standard drink notion, noting that taxes “wildly different” on latter across beer, wine and spirits.  Taxation is “fundamentally irrational,” Kosar concludes, and “pits the various drinks-makers against one another.”  Editor’s note: Current bill supported across the board, at least publicly.  “Obvious solution” to Kosar: “abolish taxes entirely” or “tax each alcoholic beverage based on the amount of alcohol it contains.  Perhaps one day a brave legislator will propose one of these reforms.  The tax man may hate it, but the thirsty electorate will cheer.”  But who cheers if the tax man decides to equalize up? 

We like literary references, and Forbes writer Chase Peterson-Withorn provides a whopper in lengthy profile of Dick Yuengling and the company that bears his name (tied to latest Forbes 400 list, which puts Dick at $1.9 bil).  Much of article is familiar history of Yuengling and Dick’s role in its recovery on ongoing strategy.  But, “like a coal-country King Lear he knows he’ll soon have to cede his throne to one of his four daughters.  If he can actually let go.” 

Cutting to climax of Peterson-Withorn’s 5 acts: one of four daughters will get 51% of co and she’ll be full-time at that point (Dick: “It’s not going to be a part-time person with 51%”). That’s even tho there’s possibility, at least in some of the four daughters’ eyes, of running Yuengling as a team.  Dick told Forbes in May he hadn’t picked a successor, but in Sep “confessed that there actually has been a plan, on paper at least, for years.”  Most “likely successor,” according to Forbes, is Wendy, the “administrative maestro,” rather than “production-obsessed” Jennifer.  But last time Dick reportedly discussed this “plan” with them was 4 yrs ago and “they haven’t spoken about it since.”  That’s a long time ago, so who knows?  “One thing that is clear,” said Forbes, “no one in the family has any clue about when the sixth generations reign will begin,” including Dick, who “shows no sign of slowing down” at age 73.  Typical transition moves ‒ “board of directors, active strategic planning and regular family meetings” – not part of current Yuengling practice or intentions (“What positive effect can a board of directors have on a family business?” asks Dick. “I can’t figure it out.”)  Tip to whoever directs the stage version: have a forklift handy for the lead to ride thru any storm.           

Gulf Distributing Holdings (Maisel family) has deal to acquire majority of Supreme Bev Co (Shilleci family) in Birmingham and surrounding areas, about 4 mil cases.  Deal expected to close by year end.  That will place total volume Gulf Distributing Holdings sells up to about 16.5 mil cases, Chairman Elliot Maisel told INSIGHTS. That includes its Fla operation Goldring-Gulf, where Elliot partnered with Louisiana’s Bill Goldring 15 yrs ago. In this deal too, the Maisels will partner with the Shillecis who will be an “active part of the ownership” and sr mgt team in Birmingham, sez Elliot while Gulf team runs biz. In addition, the Shillecis will continue to own and run Supreme in Huntsville, Ala.  Birmingham is unconsolidated MillerCoors mkt.  Supreme sells Miller in Birmingham.  Birmingham Bev/AlaBev (Kampakis family) has Coors, Constellation and lotsa craft.  Large wine and liquor distrib has Heineken.  In Ala, AB at 55 share of 46 mil cases in 2015.  So there were about 20 mil cases of non-AB volume.  Following this deal, Gulf should be somewhere around half of non-AB volume in state, INSIGHTS estimates.  

You won’t want to miss the 23d annual Beer Insights Seminar, at the Waldorf=Astoria in New York City, with a reception Sunday eve November 13th and a jam-packed day Monday November 14th. This is one of our widest-ranging programs ever.  Our exceptional lineup includes the top exec at the world’s largest brewer, ABI ceo Carlos Brito, plus the top beer execs at the #2 US brewer MillerCoors ceo Gavin Hattersley and #3 US supplier Constellation Brands Beer Division president Paul Hetterich.  We will also feature global thought-leader FIFCO ceo Ramón Mendiola Sánchez (FIFCO owns North American Breweries), plus two generations of leaders at independent craft brewer Bell’s Brewery, founder Larry Bell and his daughter and vp Laura Bell.  Consultant Bump Williams will discuss the fast-changing retail landscape, with his trademark high energy style and hard-won knowledge.  An expert panel of 3 top-notch alc bev attys will probe provocative 3-tier, trade practice and other legal issues: Marc Sorini, Mike Moses and Michael Halfacre.   Beer Marketer’s INSIGHTS president Benj Steinman will provide an industry overview.  Seating is limited.   Click here for more info.  Click here to register.  

Within 30-45 minutes of publishing Yuengling’s letter yesterday we got 2 very interesting and opposite responses from supplier-related sources.  One said: “I think Yuengling went too far,” and the other said “Way to go Yuengling.”  A 3d response today called Yuengling’s position “inexplicable.” 

Source who said Yuengling went too far said Yuengling had gotten “to ride on the coattails” of existing AB system “and take market share to boot.” He also asked more generally: “How does Craft continue to grow? PLUS, show me the evidence that craft beers struggle to get to market (look at SKU trends at retail the past 10 years).  If anything, the current system has served them well in that the installed base and rampant innovation strategy of large suppliers has provided the sophistication to enable more complexity in the beer distribution system….which has made craft WORK and thus, grow more rapidly.” 

Yet the other rapid-response source applauded Yuengling because DOJ “now letting AB do whatever it wants with respect to CBA [Craft Brew Alliance], craft brewers and other industry participants (whether by acquiring outright or circumventing antitrust with a creative structure)—as a result of that the DOJ’s so-called efforts to support an independent middle tier will amount to absolutely nothing. AB can now promise its distribs that it will buy (or gain de facto control of) a full portfolio of brands/SKUs for them to max out their capabilities so everyone will be left with one option – the superfragmented MC network.” And MC could go down similar path to AB, in this source’s view.  “Independent suppliers are already feeling it and over the course of a few years an emboldened AB and MC will make a huge impact.”

In yet another interesting response, a beer biz atty wondered why Yuengling’s left $50 mil+ on the table by not collecting $$ for distrib rights during its expansion.  (Recall, Yuengling pointed out in letter to DOJ that none of $3.1 mil paid for distrib rights in Rex sale in Mississippi went to Yuengling.)  This atty sez he’s included such payments to brewers for over 2 decades with nary a complaint, from brewers, distribs or regulators.  Brewers happy to get the payment (natch), distribs happy to pay (since those rights worth much more as soon as contract signed) and no legal issues.  What’s more, this atty suggests that negative comments about AB and its network in Yuengling letter to DOJ likely to result in “severe diminution in interest” among distribs in taking on Yuengling going forward, given the pressure AB can bring to bear on them.  Yuengling’s approach here, he sez, is “inexplicable.”

Constellation draft biz up 30% in qtr thru Aug, ceo Rob Sands said during conference call and was “a significant contributor to our growth.”  But “most of that growth driven by Modelo Especial,” with its draft biz up almost 50%.  Still, STZ “seeing positive trends throughout our draft portfolio.”  Draft is under 5% of STZ biz and “could eventually reflect” industry draft totals.  “Nothing but up there.”   Meanwhile, Constellation has another brand that is hotting up big time: Pacifico. STRs up 20% in qtr. Recall, Pacifico launched tv ads in 11 states and has 24 oz can that is #1 new item in IRI.  Corona can depletions also grew in the high teens, and yet they’re still only 6% of Corona biz, and “not distributed at anywhere near the same level as Corona glass.”  Finally, Ballast Point biz up 40% YTD, said cfo David Klein.  But recall, it was up 60% in 1st qtr of fiscal yr (thru May). Implies growth 20% or less in latest qtr.  But Constellation “very optimistic” about Ballast, added Rob and even tho “you’re going to see some shakeout” in craft, “bigger, stronger faster growing brands like Ballast Point will and should be given more space, more SKUs for obvious resaons.”  They are “moving” and “highly profitable.”  More details from call in Beer Marketer’s INSIGHTS and Craft Brew News.   

Tho Mexican shipments slowed in Aug to +0.5%, volume gains from each of top 6 countries in Aug resulted in 89K-bbl, 3.5% import gain for the mo, reports Beer Inst based on Commerce Dept data.  Dutch, Belgian and Canadian gains in Aug didn’t do much to move yr-to-date needle as 8-mo shipments remain down mid-singles to high-doubles from each of those countries, as well as UK.  Irish shipments runnin’ +22% (114K bbls) for 8 mos; German shipments up 38K bbls, 8%.  Mexican shipments still driving import bus this yr: +1.9 mil bbls, 14% Jan-Aug. That’s about same trend Constellation reports for its Modelo portfolio for 9 mos thru Aug.  With Aug import and domestic taxpaid gains, total US beer shipments up 1 mil bbls, 0.7% for 8 mos.           

In wake of US Dist Ct judge in OH granting Southern Glazer’s TRO/injunction halting attempted termination by Great Lakes Brewing (see Sep 26 Express), Great Lakes filed counterclaims vs Southern Glazer’s and Southern Wine & Spirits. Brewer charges: 1) breach of contract (for failing to get Great Lakes’ consent to Southern-Glazer’s merger); 2) violation of state franchise law (ditto) ; 3)  fraudulent inducement (to sign contract when Southern Gazer’s “always intended to claim” that key sections of contract “void and unenforceable and [which it] never intended to abide”;  4) tortious interference (vs Southern Wine for forcing Glazer’s Ohio/Southern Glazer’s to violate its contract); 5) conspiracy (vs Southern Wine and Glazer’s for structuring merger in a way that would violate Great Lakes’ rights under the contract and OH law).  Great Lakes seeks damages, including punitives, and declaration that “there is no franchise” between Southern Glazer’s and Great Lakes. 

Simultaneously, Great Lakes filed request to accelerate discovery and trial (similar conflicts have gone on for years in OH).  Why? “Great Lakes is being harmed each day that this dispute is ongoing” by being deprived of its contractual rights and “damaged in the marketplace because it is being forced to work with a distributor it did not choose and that lacks beer focus.”  Finally, recall judge put termination of SG by Boston on “standstill.”  Attys for both brewers are same and request that if settlement talks fail, similar expedited process will apply to dispute with Boston.