Pabst-MC legal dispute over their contract brew agreement kicked into higher gear. MC response to lawsuit tells very different story about negotiations with Pabst last yr over contract brewing agreement. Recall, Pabst made sweeping charges in lawsuit that MC: 1) misled Eugene Kashper that MC could supply future needs (after 2020); 2) tried to jack up price to assure supply (a "poison pill"); 3) refused to sell Eden plant to Pabst at reasonable price. MC insists it fulfilled its obligations in good faith, followed agreement down the line, never assured Eugene it would have sufficient capacity after 2020 and proposed several "reasonable solutions" that Pabst rejected. MC sez it has not "abandoned" Pabst as charged, but continued to seek solutions last fall and into this yr. Yet MC not obliged to "use its breweries to brew Pabst brands in perpetuity." Pabst rejected all proposals and responded with threats to sue and demand of "$250 million dollar payout" to end agreement early. Besides, current timeline gives Pabst 7 years to "make other brewing arrangements," MC points out, since there's 2-yr wind down period in contract.

Regarding potential Pabst purchase of Eden during talks last fall, "Pabst hinted (but never formally proposed) paying $100 million over an indeterminate number of years for a facility worth many multiples of that amount -- and then only subject to a procurement requirement extending through 2030." (Source tells INSIGHTS Pabst made several written offers.) While Pabst alleges MC originally contemplated raising fixed charge to produce Pabst by 10% to $20/bbl after 2020 (fee is now $16.83), MC denies this. Pabst also claimed MC wanted triple fee to $45/bbl. MC sez: "after years of brewing Pabst products at below-market rates, it proposed possible solution that contemplated Pabst's financial participation commensurate with MillerCoors' level of return on its own brands." MC also offered to "reduce its proposed per-barrel increase to $22" (which would have put it in $40 range). MC now proposes "reasonable solution," required by agreement: mediation.

Pabst Hadda Sue, Sez Eugene "MillerCoors' anticompetitive actions are a clear breach of our contract and have damaged a mutually beneficial 17-year relationship," Eugene Kashper told INSIGHTS. "We would prefer to find an amicable solution rather than engage in a protracted legal battle, but MillerCoors' refusal to consider our numerous settlement proposals leaves us no choice. We are proud to be an independent American brewer, and refuse to be bullied by anyone looking to stifle competition through unjust means."

While MC claims it has acted reasonably, Pabst clearly believes MC hasn't been transparent about critical, relevant and reasonable cost and capacity numbers (i.e. costs to brew Pabst vs costs to brew similar MC brands, and actual capacity calculations). Pabst also believes MC has been unreasonable in what it wants Pabst to pay to secure future supply, the lifeblood of any brewery. Looks like any "negotiation" over Pabst's bid to buy Eden started with very low offer from Pabst, very high counteroffer from MC, then went nowhere fast. Right now, typical of lawsuits, they disagree on virtually all key details.

Beyond the court, Teamsters jumped all over lawsuit during "investor call" set up to blast (again) MC's decision to close Eden. Combo of timing of Eden announcement and negotiations with Pabst along with ABI-SAB deal last yr adds up to "anti-competitive elimination of capacity" by MC aimed at "raising rivals costs" and increasing consumer prices down the road, antitrust atty Allen Grunes said. Then too, gotta figure lawsuit and accompanying rhetoric being brought to Dept of Justice's attention as it reviews potential antitrust concerns of ABI-SAB. So this thing's got legs in lotsa directions.  

Lively panel of high end leaders covered wide range of hi-end growth in fast-changing landscape and included several feisty exchanges between Constellation Brands Beer Division chairman Bill Hackett, Heineken USA prexy Ronald den Elzen and Boston Beer chairman Jim Koch at INSIGHTS Spring Conference. Composition of hi-end growth changing lots with FMBs and imports markedly outperforming craft and especially cider so far this yr. Total hi-end volume +6.9% in Nielsen all-outlet thru May 7 and gained 2.3 share of $$ to 41.8. That's about same hi-end gained last yr and all 3 leaders expected growth to continue.

Short Term "Noise" a "Distraction," But Craft Slowdown Real All panelists agreed that Apr softness short-term noise "largely related to calendar," (Bill) "not a surprise" (Ronald) "a big distraction, ignore the noise" (Jim). But none willing to say total industry trend has really gotten better. Big problem remains losing share to wine and spirits and declining per capita consumption. If per cap just held even over last decade, beer biz would have sold 10s of mil more bbls, Jim reminded. "That's really the prize. To me you have to keep your eyes on...the prize," he added. Jim acknowledged craft slowdown real: "You saw meaningful numbers" showing much slower growth. Later, he added: "We've been through this before" pointing back to mid-to-late 90s when "momentum shifted to imports" and "craft was stagnant for 7 years." He also pointed to BA numbers that showed craft grew 18% in 2014, 13% in 2015 and "You can do the math.... Nothing that's successful goes on this rocket ship trajectory," noted Jim, "where every year is double digit growth.... What you tend to see is karmic rhythms. Imports are doing well right now."

Ballast Point and Lagunitas Growing Great Guns Each of Bill and Ronald's parent cos are enjoying rapid growth from their new craft acquisitions. Lagunitas yr-to-date up close to 30%, said Ronald. They are "doing a super job" and HUSA can learn a lot from their "speed, nimbleness and closeness with the customer." Ballast Point is "doing terrific," said Bill. It's "not about where they are or where they've been but where they are going. We paid an aggressive price but we got a great value." Ballast Point more than doubled last yr, Bill noted. It's doubling again this yr thru Apr 30 in IRI, INSIGHTS notes. "The influx of big owners was always inevitable," Jim said. "The good news is guys like this, [Bill and Ronald] they're brand builders," he added. At same time, he argued for BA definition and need for "differentiation." If Goose Island is perceived as craft, he later added, "then we have $90 kegs. That's not a good thing for the industry." Some sparks flew between Bill and Jim on BA definition ("I [could] give a shit" said Bill), between Jim and Ronald (Heineken used to be brewed with "adjuncts," asserted Jim; "three ingredients," countered Ronald), and more.

Cider Down For Now; Some Reasons; Comeback Down Road What about formerly fast-growing cider? "Big influx of drinkers" came into cider "very quickly," noted Jim. And Angry Orchard "ignited the cider category." It brought "a lot of drinkers in, some of 'em will stay. Some will move on," he added. Then "you grow from that solid base." Some of what's happening "amplified" by "interest in gluten free," which is "starting to wane," said Jim and "emergence of hard soda has pulled away some of the drinkers." Still, "I'm a true believer in cider," said Ronald, even tho it's down 12% in Nielsen for 52 weeks. Strongbow up 27% same period. For the last 5 yrs, US cider has a CAGR of 50%. So if "we just go through the choppiness," according to Ronald, cider can get back to longterm growth and still someday reach 3-4% of US mkt.

Boston Beer Fine If It's Over Half FMBs, Cider, Etc; Constellation Coming With FMBs Twisted Tea still growing at double-digit pace. With Twisted Tea and Angry Orchard estimated over 40% of Boston Beer volume and Truly Spiked and Sparkling (hard seltzer) going national, could Boston Beer someday be over 50% non-craft beer and would Jim be fine with that? "Yeah, we have a mission that we've had for 32 years to seek longterm profitable growth by offering the highest quality products to the US beer drinker." So these products "fit squarely within that mission." Industry needs to have "a bigger definition of what beer can be." Meanwhile, Constellation "very focused on continuing to build what we have" (i.e. imports) and still sees lotsa "white space, but has "longterm commitment to be #1 in the High End," said Bill. That's why it bought Ballast Point and why it's interested in FMBs, tho "our hair is not on fire to do anything aggressively."

Consistency, Culture and Corona Keys to Constellation Success; HUSA 40% Mexican Imports Interestingly, Bill pointed a couple of times to how he started at Barton in early 80s with then prexy Mike Mazzoni who set out "brand positioning that still defines us today." Not only that but corporate culture also very much based on foundational principles that still resonate. When Barton started in 1983, it was well under 1 mil cases, last yr 220 mil cases. What's more Corona brand will pass its previous peak in 2016 (up almost 10% last yr, Bill noted), becoming first megabrand to do that in beer biz. Heineken USA also now over 40% Mexican beers (up from a third a few yrs ago) but "we cannot win at HUSA unless we win with Heineken." Heineken back in green last yr, but HUSA needs faster growth from Heineken. In one way or another, all 3 panelists talked about staying true to their brands' core propositions, whatever the short-term downturns (and all 3 have had 'em), weathering whatever storm comes along, and eventually returning to growth.  

Pabst's whirlwind of recent activity included its upbeat Apr 20 natl distrib convention in Milwaukee, filing a lawsuit against MillerCoors for breaching production contract and more. Pabst volume grew 4% in 2015 (7% in Q1) but its $$ sales growth more impressive; grew over 20% last yr, it told NY Times. Revs in 2015 "approximated $670 million," said Moody's ratings agency as it upped its Pabst rating based on Pabst's reduced debt to EBITDA ratio, "down to 5x at the end of 2015 from around 7x" when deal done in late 2014, good cash flow, growth prospects etc. Profits jumped 50% too, minority partner TSG told NYT. Pabst $$ sales up 26% yr-to-date thru Apr 23 in Nielsen, gaining nearly 0.4 share of $$. That's second only to Constellation in share growth. Pabst sold $191 mil worth of beer in Nielsen YTD, up $39.3 mil. All of that growth and more from the Not Your Father's franchise. Small Town Brewery up $40.3 mil in sales in IRI this yr to $42.2 mil. NYF franchise 22% of Pabst $$$, tho only 10% of volume. NYFRB almost all incremental, up $33 mil YTD and Not Your Father's Ginger Ale sold $7 mil. Pabst Blue Ribbon volume flattish in Nielsen, but $$ sales up 2%. PBR about 40% of Pabst net sales, said Moody's. It's 45% in Nielsen but 53% of volume. Meanwhile, Lone Star and Rainier each hot, volume up 20%+.

For its convention, Pabst took over a part of Milwaukee that is undergoing major redevelopment. Its hq located there back in the day, when it was #3 US brewer. Created whole "Pabst Experience" there. Mayor spoke to show support. Recall, Pabst building small experimental brewery in same area. Distribs responded positively to Pabst's message. Pabst went from almost no biz above premium to 25% last yr. Ambitious goal: Pabst hopes to get over 50% above premium by 2018. While many think NYFRB won't cycle launch #s, Pabst has lotsa new innovation, more media and big push coming. It also has many other high-end initiatives, including several new higher-priced heritage brands, alliances, and possibly M&A. So far, Pabst transformation heavily reliant on NYFRB and it's also far from complete. But for last 18 mos, Pabst growing and rapidly becoming more premium.

Not everything coming up roses. Pabst still embroiled in several lawsuits with distribs and new nasty imbroglio with MC suggests Pabst and MC may be headed for a divorce. Pabst filed lawsuit against MC for breach of longterm agreement, making lotsa sweeping charges. Basic problem: Pabst won't be able to get enuf beer after 2020, following closing of MC's Eden brewery (already there are supply issues). MC wants it to pay extra, lots extra, and sez it makes no money from contract production. Pabst cried foul, calling that claim "facially false and made in bad faith." MC looking to basically triple last yr's "fixed charge" to about $47 per bbl after 2020. MC spokesman Jon Stern told INSIGHTS: "We are highly confident that we have acted properly and in good faith." Pabst also offered to lease and/or buy Eden. Pabst offer "not legitimate" said MC insider and "an attempted Hail Mary pass with no receivers on the field." Stay tuned.  

How quickly things change! Instead of "how high is up," some sentiment behind scenes at Craft Brewers Conference more like "wha' happened?" Brewers Assn prexy Bob Pease, director Paul Gatza and economist Bart Watson acknowledged new reality in presentations. While craft "very strong," said Bob, there are "storm clouds" and a "battle" ahead between small indie craft and large global brewers. "We...must not cede an inch." Several statements supported importance of BA craft definition, even as big brewers buy up more of fastest-growing craft brewers. Tho still up big in 2015, craft "slowdown" started last yr, said Bart, with "early signs" of more of the same this yr. "Get used to that," he added, it's "going to be the new reality" partly coz growth off much bigger base.

But sales turned much softer for craft in recent mos. Volume up just 6% for 12 wks thru Apr 17 in IRI multioutlet + convenience, 4% for 4 wks. Six of top 7 BA defined craft brands down, some way, way off. Apr hit some craft guys like a ton of bricks, judging by many anecdotal reports at CBC. Sure, it's just one mo. But slowdown and comments more overarching than that. Another disconcerting data pt: with total beer -7% in GuestMetrics on premise data for 4 wks thru Apr 17, craft gained 0.3 share. That meant craft sales surely declining in this database for 2d straight yr. Combined off-premise and on-premise data suggests low single digit growth for craft overall last 3 mos in scanned data, perhaps with a couple point additional bump from continued rise of smaller local brewers. They often sell in accounts that don't show up at all in scan data. Still, total craft up double digits each of last 6 yrs. Whether craft will make it 7 now in question.

Meanwhile, manic M&A activity continues apace in craft. With over 30 deals in last 18 months alone, INSIGHTS knows of 8-9 more transactions in works. Craft segment radically transformed. Of the top 37 craft brewers who sold over 100,000 bbls last yr, 15 did transactions in last 3-4 yrs. Five sold part or all to strategics, 7 sold part or all to private equity/family offices and 3 more became at least majority owned by ESOPs (employee stock ownership plans). Others, like New Glarus, Deschutes and Alaskan did partial ESOPs. At least 4 of the pendng transactions INSIGHTS hearing about involve members of that top 37 (which accounted for 43% of craft segment last yr). So presuming these transactions come to fruition, over half of top 37 craft players will have done some kind of deal with more in works. But with less growth, buyers getting more wary about high valuations, sellers feelin' more pressure to do deals, sez informed source.

One other "note of caution" from Bart, perhaps understating. Craft building capacity faster than segment growing. BA tracked 40 mil bbls of craft capacity last yr. Holy Moly! That would be almost enuf for craft to get to 20 share. BA-defined craft sold 24.5 mil bbls last yr, leading to relatively low utilization rate of about 61% (Bart calls it production/capacity ratio, which he said at .61). And that was down from 2014 at 65%. So capacity already added well ahead of demand, but demand seemingly slowed.  

Neither AB nor MC lit up rev/bbl in Q1, AB +1.3%, MC +1.5%. MC said pricing was 0.8% of that increase (mix was the rest); Gavin noted that "net pricing" slightly higher than 2 previous qtrs.. But better-than-benign cost of goods sold/bbl, -5% for MC, -6.5% for AB in North America, really helped profits. AB EBITDA up 2.1% in Q1, following 4.3% EBITDA drop in 2015, 1.4% drop in 2014. That's even while AB jacked sales and mktg expenses double-digits. Mktg boost focused on first half this yr, Brito said on call. Per bbl EBITDA up 2.3% at AB. MC reported big underlying profit gain, +22%. Even after factoring in another $36 mil charge for closing Eden (after $110 mil last yr), operating profits up 9% and operating profit margin expanded a full point. But MC CFO Tracey Joubert said MC doesn't expect same cost breaks for rest of yr; MC figures CGS/bbl for full yr will be flat. MC also boosted mktg, gen & admin expenses in Q1, tho that was "employee related expenses" and IT. MC plans to "invest incrementally behind our brands in the 2d qtr of this year."

Tracey also said MC "seeing increased competitive promotional activity in key markets across the US." Probed on that comment, Gavin cited increased activity in CA, TX, FL and WI but "we also continue to experience positive pricing and mix." Industry "pretty competitive," added Gavin, and "current level of discounting that's prevalent in many markets is a watch out for us." Brito seemed less concerned. AB's Q1 rev/bbl increase, "in-line," he said, as well as its "promotional activity." He did say AB "will always be looking for better ways to invest the same envelope of promotional dollars." Gavin made much the same point on brand and other investments: "we'll continue to invest behind what's working. We'll stop investing behind what's not working."

Wholesaler Shout Outs; What's Resonating? AB Q1 report stated "We are working more closely than ever with our wholesalers…. This continues to be one of our major priorities, focusing on increasing engagement and collaboration" with distrib partners. Brito picked up same point on conference call, praising distribs as "amazing operators," and "when you give them a good program they will execute the hell out of it." He also noted work with wholesaler panel that's gotten "acceptance and traction." Kevin and Gavin made similar points when asked: "What's resonating with these distributors?" Kevin said: "What's actually working is our new kind of approach of treating or distributors as customers, as we do our retailers, and that's resonating incredibly." MC's job, "like selling to Kroger: we have to provide solutions." When MC does that with strategies and solutions "that actually are simple for them to be able to execute, they actually take it to market. And we've made significant progress with them since July" last year. Gavin pointed to positive feedback MC's getting from distribs coming out of sales convention: "They really like this focus that our organization is bringing to them.... We saw meaningful improvement in the score results, from whether they like the strategy, they liked the focus [to] whether or not they were prepared to invest more behind our brands."  

Common theme emerged from AB InBev and MillerCoors Q1 reports/conference calls. "Improving" trends in US that run across volume, profits and distrib relations. Start with volume. ABI reduced shipments-to-wholesalers decline to 1.3% in Q1, following 3.3% drop in Q4 2015, -2.2% for full yr. And AB's 0.3% Q1 STR decline followed 12-straight qtrs of down 1% or more. AB figures its share of STRs dipped 45 basis pts in Q1, vs a 65-pt loss in 2015. Modest improvement perhaps, but real. Again, MC put up best shipments number in JV history. MC's STR trend (-1.3%) was its best since Q2 2014. MC also claimed share gain in premium lights for 4 straight qtrs. Coors Light and Miller Lite each flat, also a first in JV history and MC premium lights had "best quarterly performance in 5 years," said ceo Gavin Hattersley. AB said Bud Light "improved" in Q1; STRs declined just over 1%.

In key above premium, lotsa moving pieces as AB and MC each makin' moves to expand biz. Right now AB lookin' a bit better. AB gained 0.5 share above premium in Q1, it sez. Mich Ultra up 20%+, a pace that would mean over 1-mil-bbls gain this yr. Stella shipments slowed, but up 14% in IRI multi-outlet + convenience yr-to-date thru Apr 17, Goose goin' well and AB has 7 other craft partners in high gear, up 40%+ yr-to-date in IRI. At MC, above premium up low-singles, but not enuf to gain share. Tenth & Blake volume down low-singles; Blue Moon off slightly, Leinie's flat. While MC "eager" to make St Archer "more widely available," priority is "realizing" its potential in Calif, Gavin said on Q1 conference call. Then again, while AB buyin' up multiple crafts (Brito said "very few" given there's 4K+ out there), MC clearly focusing investment on Blue Moon and Leinie, "two great big players," as Tenth & Blake prexy Scott Whitley called 'em. Asked about further craft M&A, Scott said MC would "selectively and strategically take a look at opportunities. But frankly, we don't think increasing our own fragmentation and losing focus is the right play for us, going forward." AB has internal craft prong too, Brito reminded on AB call, noting Shock Top "gaining share organically now since February."

Both AB and MC playin' hard in FMBs/hard sodas. AB calls 'em "near beers" and said they "contributed to the share trend improvement," due mostly to Best Damn. MC even more encouraged about Henry's Hard Sodas and Redd's "momentum," tho Redd's actually down slightly in Q1. On MC call, cmo David Kroll and sales prexy Kevin Doyle enthused about "headroom to grow" and "massive opportunity" in FMBs. FMB's "much more productive per SKU and per point of distribution than the long tail" in craft, David asserted. Kevin said MC "starting to see retailers recognize the growth in the segment" and better productivity. Supporting David and Scott, (and MC's focus on "power brands"), Kevin claimed with "one merchandising event for...Summer Shandy, [it takes] 150 of the tail brands to make up for the volume." Finally, on economy brands, AB mum. Gavin acknowledged MC has to improve its trend, at least to segment trend, if not grow the brands. He and David said MC has plans for economy brands, but didn't disclose 'em. AB and MC combined still have 40+ mil bbls in segment that continues down low-mid singles; that's a drag that needs improvement.  

While US shipments up 900,000 bbls, 1.9%, we estimate, AB figures industry STRs up 0.7% in US for the qtr, after adjusting for extra selling day. (Shipments number is unadjusted.) For 12 mos, US shipments up 1.5 mil bbls, 0.7%. Not bad. On supplier level, Constellation continued up strong double-digits and dominated industry gain for both periods. But three key differences in Q1: 1) MC posted modest shipments gain, its best qtr since JV formed; 2) Boston trend reversed to negative for its first down qtr in yrs; 3) craft slowed.

AB sales to wholesalers -1.2%, about 265,000 bbls. STRs off just 0.3% tho, as AB adjusted distrib inventories. Even so, AB reduced 12-mo shipments decline to just 0.8%. So it's makin' modest progress to reduce share loss on both shipments and STRs. MC shipments up 160,000 bbls, 1.3% in Q1, but STRs -1.3%. For 12 mos, MC still off 2%. Constellation not only continued up double-digits with Modelo brands, but now also has incremental Ballast Point volume. With those extra bbls, Constellation shipments up nearly 600,000 bbls, 17% in Q1, we estimate. Ballast added about 2 pts. HUSA continues to gain modestly; up about 1% for Q1 and 12 mos, we estimate. Pabst still gettin' mostly incremental pop from Not Your Father's Root Beer; shipments up 6-7% for Q1 and 12 mos. NYFRB starts cycling in Q2 and beyond. Boston's 6% shipments decline in Q1 dragged 12-mo trend down to just +1%. Yuengling slipped 3% in Q1. Full MS launch got delayed due to distrib issues. Looks like All Others, mostly craft, up about 335,000 bbls, 4% in Q1. Yet another sign of that segment slowing down. Note too: 12-mo trend for All Others slowed to +5.6%.  

As Mar taxpaid, import and state shipments numbers came and book mostly closed on Q1 (always revisions), more plus signs than usual. Domestic brewers' Jan-Mar taxpaid shipments up 420K bbls, 1%, estimates Beer Inst economist Michael Uhrich. Taxpaids aided by Leap Day and very easy comps in Jan-Feb (-6% in 2015). Then too, imports +510K bbls, 6.8%. All in, looks like US biz up near 900K bbls, 1.9% in Q1. Among big states, Tex and Fla healthy, +2.5% and 1.7% respectively. Pennsy too at up mid-singles. Calif up slightly. But NY and big Midwest mkts soft. Meanwhile, 4 of top 6 players posted shipments gain in Q1. But: available data, plus industry buzz at Craft Brewers Conference and anecdotal reports elsewhere already darken picture somewhat. April was lousy. MC's STRS down mid-single-digits thru Apr 23. Scan data thru Apr 17/Apr 23 showed off-premise trends went negative for 4 wks. Scans up and down all yr, given Super Bowl and Easter timing, but Apr numbers suggest approx 1% decline off-premise. And on-premise trends worsened: beer volume -6.8% for 4 wks thru Apr 17, reports GuestMetrics. Down 5.5% yr-to-date. What's goin' on? Don't know for sure, but with all calendar puts and takes, craft slowdown, unknown oppy for hard sodas, flurry of new products, pending comps, sell days (+/-), it's shaping up to be especially unpredictable and uneven yr.  

Pingree distrib Reyes bought in 1989 was Miller not Coors.  

You won't want to miss this year's Beer INSIGHTS Spring Conference, one of our richest and deepest programs ever. It starts mid-afternoon Monday, May 16 and goes all day Tuesday, May 17 at the Ritz Carlton in Chicago. Remember, this yr we're expanding the program to include the high end and the deal environment for both brewers and distribs. The conference features a panel with three leaders of beer's high end: Constellation prexy Bill Hackett, HUSA prexy Ronald den Elzen and Boston Beer chairman Jim Koch. You'll hear from some of the industry's leading dealmakers and deal experts: consultant Joe Thompson, First Beverage's Bill Anderson, plus Paragon Bev partners Mark Hall and Randy Jozwiakowski.

You'll also hear from AB's High End prexy Felipe Szpigel and Sierra Nevada's Brian Grossman and Joe Whitney. A pair of top-notch panels are also on tap. The first one includes a trio of prominent craft founders on the shifting landscape: Dogfish Head's Sam Calagione, Stone's Greg Koch and Victory's Bill Covaleski. And the second features 3 leading industry economists NBWA's Lester Jones, Brewers Assn's Bart Watson and Beer Inst's Michael Uhrich. In a new feature, we'll open the conference with a "lightning round" of hot stories on a wide range of topics from 4 BMI editors from 2 generations. We've just added Small Town Brewery's prexy Greig DeBow to a panel which includes MillerCoors sr director of mktg and innovation Bryan Ferschinger to discuss the hot hard soda category. BMI publisher Benj Steinman will also give you his annual overview with key stats and developments. Click here for more info. Click here to register.