Oct 10 closing date for ABI-SAB less than a week away and final pieces falling into place. UK high court just “sanctioned the scheme of arrangement,” or okayed the acquisition of SABMiller.  Japanese brewer Asahi prepared to bid $4.87 bil for SABMiller’s eastern European biz in Czech Republic, Hungary, Poland, Romania and Slovakia, reports Nikkei Asian Review.  Asahi said it had “no policy on such a buyout plan or offering,” but if it happens, purchase would be on top of Asahi’s $2.84 bil offer for Peroni and other SAB brands in western Europe.    Finally, US Dist Ct judge in Oregon dismissed federal antitrust suit filed vs ABI-SAB by consumers/activist atty Joseph Alioto, since they could not show deal would increase AB InBev’s share in US, reports Law360.  That’s on heels of US Supreme Ct rejecting oppy to review fed ct rejection of Alioto’s suit vs ABI’s purchase of Modelo earlier this week.  Alioto sez he’ll appeal ABI-SAB ruling, natch.  

As beer biz got tuffer in recent mos, Constellation Brands Beer Division got even stronger.  CBBD $$ sales jumped $203 mil, 20% to $1.2 bil  Jun-Aug, Constellation reported, including $46 mil of Ballast Point revs, all incremental. Organic beer $$ sales up 15%.  Shipments jumped 9.9 mil cases, 15.5%.  Organic shipments up 13%, 8.4 mil cases. That means STZ shipped about 1.5 mil cases of Ballast Point in Q2. 

Constellation beer shipments up 18.5 mil cases, 15% for 6 mos thru Aug.  That’s an extraordinary 1.3 mil bbls (including about 200,000 bbls of Ballast).  Wow.  And Constellation’s depletions trend actually accelerated in Q2; up 13.8%, compared to 11.9% for 6 mos.   With numbers like these, unsurprisingly Constellation raised its guidance on beer net sales growth to 16-17% and beer operating income growth in the high teens. 

Perhaps even more impressive than its sales trends: Constellation making money hand over fist.  Constellation operating income up a whopping 27% in Q2, even with increased marketing investments.  Its beer oper income jumped $95 mil in 2d qtr.  Up $168 mil, 24% to $860 mil in 1^st half.  Operating margin jumped 1.3 points for 6 mos (2 points in Q2) to 36.2. 

Here’s a couple other ways of looking at Constellation’s continued stellar sales growth.  Total beer $$ sales up 2.8% in IRI multi-outlet + convenience for 12 weeks thru Sep 4, and on-premise biz down slightly.  So Constellation’s 20% $$ sales growth is about 10x as fast as industry.   Constellation notes that its beer biz “contributed 60% of IRI category dollar growth for the US beer industry” in Q2.

Constellation also added to its arsenal of high end alc bev assets, announcing deal today to purchase High West Distillery for $160 mil. High West up double digits each of last 3 yrs and sells about 70,000 cases annually, wrote WSJ, adding that it’s “become a favorite among aficionados for its distinctive high price styles like Bourye, a limited edition blend of sweeter bourbon and spicier rye whiskeys that sells for more than $75 a bottle.”  Recall, Constellation also bought high end wine cos Meomi and the Prisoner as well as Ballast Point in last yr or so.  “This [acquisition] is foundational for us to build a truly significant craft spirits business and fill out the third leg of our stool,” Constellation wine and spirits prexy Bill Newlands told WSJ.  With all this good news this morn, Constellation stock looks poised for yet another jump.  At presstime, it’s up 4% premarket opening, according to Yahoo.  

Recall, Diageo is getting into the hard soda biz too, but it’s taking an unusual approach (see Aug 5 issue). Diageo partnered with ad agency/“drinks architect” Quaker City Mercantile to help create new line, Quaker City Malting Co (nicknamed QC Malt), reminded AdAge.  So agency’s name will be on the label, it’ll “collect a royalty on each sale” and “we are actively involved in dealing with distributors, dealing with liquid development, dealing with glass -- every single part of this business that an ad agency is never involved in we are deeply steeped in,” said founder Steven Grasse. 

QC Malt will start with Lemon Shrub “made from lemon extract and fruit vinegar” and “Old Dutch, whose ingredients include birch, allspice and licorice.  Both varieties include cane sugar.”  The brand strives to “stand apart with unusual ingredients,” described by Steven as a “gourmet, old-timey soda.”  And interestingly, Steven believes showcasing the word “malt” on label will be a competitive advantage.  “In his view, other flavored malt beverages shy away from the word malt,” noted mag, but “malt is a good thing.  Malt is an agricultural thing.  Let’s put it right on the label and make it our key selling point,” said Steven.  QC Malt launches this week in Denver and Philly (Quaker City’s hometown). 

Alc-Only Agency a “Competitive Advantage” This is by no means Steven Grasse’s first rodeo when it comes to creating brands.  He’s responsible for creating both Sailor Jerry Spiced Rum and Hendrick’s Gin.  In 2009 his co acquired a stake in Narragansett brewery “and shop still handles the brand’s marketing.”  Last yr he “opened his own distillery in New Hampshire called Tamworth Distilling” and “collaborated with E&J Gallo Winery on the creation of Lo-Fi Aperitifs” brand.  And he’s previously worked on other Guinness innovation brands and “global positioning” of Pilsner Urquell in the last couple yrs thru SABMiller.  Since Quaker City Mercantile only works on alc brands, “I can actually go in and have an honest conversation about what is wrong with your business,” Steven said.  “I can actually guide you in a way that an ad agency can’t.  Because ad agencies are generalists and as generalists you can’t really help me with anything.”  In fact, Steven believes “all these companies should fire their ad agencies and all the ad agencies should do what we’ve done, which is to concentrate on a single industry.”

“Notions of Exclusivity and Conflict Need to Go Away”; Working on Miller High Life Too However, “to do that, these notions of exclusivity and conflict need to go away and we’ve been able to navigate that by being really good at what we do,” Steven noted.  Recently co just took on MC’s Miller High Life brand, which is lookin’ to return to “if you’ve got the time, we’ve got the beer” jingle (see Sep 28 issue).  “One of the reasons we like them is their understanding of alcohol and consumers,” said MC mktg vp for economy brands, Ashley Selman.  “We are not concerned about them working on other alcohols.”  Diageo North America beer brand director agreed that there’s an “advantage” to working with industry specific agency tho also thought that general agencies can “bring a different way of thinking [and] a different creativity” to their brands.     

Beer volume, including FMBs, down a full 1% for 4 weeks thru Sep 24 in Nielsen all outlet data. That dropped yr-to-date growth trend below a half point; now up 0.4% YTD.  Gain pace cut in half since end of July.  Just another data point (that adds to mountains of it) that industry got tuffer in last several mos.   AB down 2.1% for 4 weeks and MC down 2.7% for 4 weeks.  In 4 weeks prior to that, AB and MC down 2.1% and 2.4% respectively.  So each got softer last couple of mos too.  AB now down 1% and MC down 1.7% YTD.   AB and MC each lost 0.5 share of volume last 4 weeks; that’s less share loss than YTD.  Editor’s note:  AB sales veep Alex Medicis talked about 0.2 share loss in most recent periods in Nielsen last week at AB reception at NBWA.  That number came from database that Nielsen sells to Wall St, which INSIGHTS got peek at; apparently it’s beer only, doesn’t include FMBs. That’s the difference.

Two big growth segments are no longer providing growth.  Each of craft and FMB volume down a little less than 1% for 4 weeks.  So volume share flat.  But craft pricing up solidly (trading up), so it gained 0.2 share of $$, while FMB pricing down, with avg prices off 43 cents last 4 weeks, so it lost 0.2 share of $$.  Overall, above premium volume growth slowed to 3% last 4 weeks, compared to 6% growth YTD.  All above premium segments gained 1.7 share of $$ for 4 weeks, compared to 2.3 YTD.  And Constellation still truckin’ along at double-digit gain pace. Up 1.4 share of $$ for 4 weeks, capturing over 80% of hi-end share growth.  

Yuengling reveals that its brands valued at $3.1 mil in Rex deal to Adams “after a mere nine months of sale,” in its comments to DOJ.  “Appointment of these distribution rights is immediate equity to the wholesaler,” but “not one dollar of that inures to the benefit of Yuengling.”  Don’t know overall case volume of Yuengling in deal, but total purchase price believed to be in neighborhood of $50 mil.  Recall, Mitchell applied for Yuengling brands, but Yuengling had many reservations and asked some tuff questions, like why Mitchell rejected Yuengling first time around.  Mitchell “stated that it ‘could not afford to assume the responsibilities of introducing Yuengling as an additional brand.’”  But “a mere nine months later, Mitchell has shed those financial considerations to gleefully accept the ‘match and redirect’ transaction from ABI and can now afford the transaction in the tens of millions of dollars.”   Yuengling concludes that “match and redirect” deals “usually only” go to AB’s anchor distribs, “who are… quasi branch operations,” according to Yuengling and “despite financial issues are able to complete transactions in the tens of millions of dollars.  This certainly begs the question of how ABI is empowering these Anchor Distributors to complete these transactions.”  Recall, AB said it did not provide any financing to Mitchell in this deal.  

Claiming that final judgment Dept of Justice reached with AB InBev on SABMiller deal is “inadequate” regarding ABI actions vis a vis distribs in US, and expressing “serious concerns” about DOJ’s investigation, Yuengling filed long list of grievances and recommendations with DOJ today.  Fifteen-page letter signed by Yuengling atty Ted Zeller concludes that ABI commitments “vague and easily evaded” and Yuengling “has no confidence that the barriers it has attempted to overcome over the years” regarding its distribution in US “will be any less formidable as a result of the proposed Final Judgment.” Yuengling seeks reconsideration of transaction or at least these “amendments,” which go further than what NBWA or BA sought:

• “Barring ABI from exercising any ‘match and redirect’ rights” in its contract, which allows ABI to “foist ineffective” indie distribs on 3d party brewers. 
• If ABI allowed to “match and redirect,” it “should be required to pay the full purchase price to the selling distributor in consideration of the selling distributor releasing all the other brand rights for Third Party Brewers without any additional consideration.”
• Barring ABI from “insisting” on any given level of distrib promotional expenses for its brands or curbing investments in other brewers’ brands.
• Prohibiting any ABI financing of distribs, directly or indirectly.
• Barring ABI from “manipulating ‘delivered price’ amounts to similarly situated” distribs as an incentive to align with ABI or reward distribs for winning or losing a “match and redirect” deal.

Those are just the specific asks.  Remainder of document lays out litany of horribles at ABI and its distribs’ doors.  Makes you wonder: 1) how Yuengling and its “fellow craft brewers” could have possibly grown by 1 mil bbls and 13+ mil bbls respectively since the formation of AB InBev, which dropped about 13 mil bbls during the same period; 2) why “approximately half” of Yuengling’s 180 distribs are in AB system, and it appointed them this yr in MS and small part of LA.  Regardless, Yuengling’s arguments make for must-reading.   Yuengling considers “recent events and proposed” ABI-SAB deal as “one of the biggest threats to its existence, short of a second round of Prohibition.”  Why’s that?  Here are highlights of the litany:

• Beer distribution has become a “duopoly in many markets,” and distribs “remain subservient to a supplier which is 80-90%” of their biz.  In branch states, 3d party brewers “can only look” to MC as option, which “disadvantages” 3d party brewers and advantages ABI.  If MC’s Tenth and Blake follows ABI’s craft acquisition strategy, that “will seal the fate of any independence at the middle tier and that is alarming.”  What’s more, ABI exerts “complete domination” over some of its distribs, especially “anchor distribs” which are “monitored and policed by ABI” just like a subsidiary.  Elsewhere, Yuengling calls anchor distribs “quasi branch operations” that are “Independent in name only.”  ABI’s level of control “is routinely exercised to make life miserable for” 3d party brewers, Yuengling maintains.
• While Yuengling mostly uses broad brush, it details events in Ohio and Mississippi, where Yuengling charges ABI “targeted” Yuengling to create “chaos” and disruption.  Yuengling had to “cobble together” distribution in OH after OH distrib sold to ABI branch and “find multiple wholesalers” in MS after Mitchell left Yuengling at the altar at last minute.  Yuengling also includes for DOJ many of the same MS issues and questions it posed to Rex Distrib a coupla weeks ago (see Sep 23 Express) and some new details (see below). 
• Just as Yuengling posed pointed question to Rex/Mitchell in MS, it wants to know if DOJ: 1) looked at ABI’s “delivered pricing” to see if it’s using lower FOBs as incentive to keep distribs aligned; 2) really dug into “mobility” ordering system to assure ABI does not get info on competing brewers in distrib’s house; 3) looked at whether ABI’s control of distribs extends to “employment practices” that reward sales of ABI brands, hurt other brands; 4) analyzed whether ABI’s contract allows it to minimize/ eliminate investments in competing brands.  Yuengling believes distribs simply can’t give “best efforts” to “800 pound gorilla” (ABI) and “the other denizens of the beer jungle.”
• “ABI can effectively control pricing of Third Party Brewers,” Yuengling claims.  Distribs do have “independence in pricing,” letter acknowledges, but they often simply raise prices of similar products when ABI goes up. Points to Fla situation “several years ago” when Yuengling did not take an increase, but ABI/MC did and “our products/prices in retail were raised.”  

There’s more, but you get the gist and the tone.  Despite some details of the OH and MS situations, broader charges of price control and creating “chaos” for Yuengling and other 3d party brewers, what’s not in the letter are specific examples of (AB or other) distribs de-emphasizing Yuengling in any given market or falling short on distribution, sales and/or mkt share goals as result of ABI interference.  Comments like Yuengling’s (due today) won’t impact closing of ABI-SAB, we understand.  But it will be interesting to see how or if any of Yuengling’s concerns affect DOJ’s consent decree and/or monitoring of the deal going forward.  

Mike’s Hard Lemonade Co advocated SKU efficiency with emphasis on continued rationalization heading into next yr at its annual distrib mtg (see yesterday’s issue).  So even while Mike’s launching handful of new brand/SKUs and packaging refreshes, net-net co’s not adding any additional SKUss next yr. 

Mike’s Hard Family Expects 5% Growth; Harder +15%; Package Refresh & New Brands/Seasonals; “Distinct” Difference Mike’s lookin’ for Hard family to grow 5% and Harder family to grow 15% next yr, collectively investing another $22 mil into brands ($16 mil on Hard and $6 mil on Harder).  While co laid out plenty of oppys thru increased distribution with both brand families, it’s also launching new packaging tweaks, several new brands and strong seasonal programs.  This yr’s summer seasonal, Hard Watermelon was top selling Mike’s Hard seasonal ever.  Helped drive total seasonal biz over 1 mil cases.  So next year Mike’s will bring back Watermelon again for 6 mos, expecting 1 mil cases on its own in 2017.  And new Mike’s Harder Watermelon version will launch for next summer season.  But co switching other Hard seasonals to new Chilled Cherry and Pink Grapefruit styles.  Both will have 15-20% less sugar than “entire competitive set,” Anthony von Mandl noted.  Mike’s also launching new Harder Purple Grape and Passion Orange Guava for Harder limited edition series.  All in, co lookin’ to make Harder family more “distinct” and separate from Hard family, vp of mktg Sanjiv Gajiwala explained.  Harder consumers are typically multi-cultural males 21-29 who care about taste, ABV and price and are “bold” “clever” and “masculine.”  So it’ll feature Harder “more prominently” with a “bold and aggressive” look, showing a “clear difference” from Mike’s Hard packaging. 

Then too, instead of spelling out full “Mike’s Hard Lemonade” on the 6pk carrier, “Mike’s” will be sized up and further emphasized on new 6pks.  The 6pk basket will be taller and the fruit image will be showcased “more firmly.”  Variety pk carriers will go back to standard size.  Flavors of America canned variety pk will add Hard Blood Orange style that was well received this past yr.  And core variety pk will include Watermelon style yr round.  Gotta note, Mike’s Variety pk actually the largest selling variety pk of any beer brand in scans; $$ still growin’ 8% YTD thru Sep 4.

Palm Breeze Flat But has Variety Pk, Midwest, Indie Channel Oppys; Cayman Jack Expanding to 15 New States Palm Breeze hit a bit of a road block overall after launching last yr and will finish 2016 at 1 mil cases, flat to down a bit.  But there’s still a handful of things to highlight for the year.  Variety Pk launched this yr and is already a top-3 variety pk in FMBs.  It’ll add a 4th flavor, Key Lime Cherry to the pack in 2017.   Meanwhile, there’s a clear geographical component to Palm Breeze growth since Midwest region up 31% and South Central up 4%.  And Palm Breeze up 60% in independent channel.  So Mike’s will invest $5 mil into brand family next year, expecting 1 mil cases again (flat) in 2017.  Cayman Jack will expand into 15 new states and 17 metro mkts thruout the Midwest and Southeast in 2017.  Currently it’s only in 3 states, MN, TX and TN, and each mkt seeing strong growth: up 80% in Minneapolis, 44% in Nashville and 42% in Dallas.  Mike’s will spend $5 mil into Cayman Jack next yr, expecting 30% growth overall thru new mkt expansion.  

Amidst persistent reports of soft Sep from almost everyone we talked to out at NBWA, beer down 0.9% for 4 weeks thru Sep 17 in Nielsen all-outlet.  Not good.  But ya gotta place it in context of a weak economic environment.  “There is no question that the consumer environment has softened since the end of the first quarter,” wrote team of RBC Capital Markets analysts earlier this week.  “Grocery prices are plunging,” headlined alarming Bloomberg piece highlighting that “food prices have fallen for 9 straight months… the longest streak of food deflation since 1960” with exception of 2009 when financial crisis winding down.  “The severity of what we’re seeing is completely unprecedented,” said Wolfe Research analyst Scott Mushkin. “We’ve never seen deflation this sharp.”  It’s attributed to “low oil and grain prices” and “cutthroat competition,” according to Bloomberg.  And there’s a wave of restaurant bankruptcies, including Cosi this week, “largely due to a decline in sales at restaurant chains that is particularly harmful to companies that are already walking a balance sheet tightrope.” Amidst this context, flat sales with tradeup and modest price hikes looks pretty good.    

Recall, megadistrib Lakeshore Bev (AB in Chi metro) cut deal this summer to acquire Fred W. Losch Bev, 1-mil-case distrib in its footprint, with Constellation  serving as its primary brand, about 70% of GP.  But huge monkey wrench thrown into deal yesterday as Constellation declined to approve Lakeshore. Constellation “does not consent to the sale of the right to distribute” Constellation brands, it said in its brief letter to Losch. “This decision is based upon our knowledge and review of the subject marketplace” plus Lakeshore’s application, interview and presentation as well as  Constellation’s “resulting belief” that Lakeshore “does not meet our reasonable standards necessary to service our brands.”  Those standards not defined in letter.  Lakeshore already distributes Constellation in another (small) part of IL.  Recall, Lakeshore is 30% owned by Hand Family Cos and 70% by private equity firm BDT Capital and sells about 25 mil cases of beer and bevs in IL.  Hand Family Cos also sells Constellation in part of Tennessee.  Ironically, Hand Family Cos literally just named “distributor of the year” by Market Watch mag.  

Then too, Constellation doesn’t say who it prefers will get the brands.  “If you continue to be interested in transferring your distribution rights,” wrote Constellation, “we would like to discuss their transfer to a distributor that meets our reasonable standards.” Constellation has about 11 distribs in Chi metro area.  In addition to much of MillerCoors cluster, it also has several from the original Pabst/Constellation network.  And Fred W. Losch a part of that.  MC distrib Kloss in territory doesn’t have Constellation. 

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.  We’ve just added consultant Bump Williams to complete our program.  Bump will discuss the fast-changing retail landscape, with his trademark high energy style and hard-won knowledge from decades of experience. 

Our exceptional program also 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.  You’ll hear a panel that will probe provocative 3-tier, trade practice and other legal issues with a pair of veteran alc bev attys with vast experience representing clients in each tier: McDermott Will & Emery’s Marc Sorini and Mike Moses of Siegel and Moses.   Beer Marketer’s INSIGHTS president Benj Steinman will provide an industry overview.  Seating is limited.   Click here for more info.  Click here to register.