US Dist Ct in Missouri just upheld state law that bars out-of-state retailers from obtaining license to ship to MO consumers, citing Circuit Ct precedent which upheld MO’s residency law and US Sup Ct’s Granholm decision.  That’s while federal courts in Illinois and Michigan ruled last yr that similar laws in those states which bar out-of-state retailers from shipping into their states are unconstitutional.  And those cases on hold pending US Sup Ct review of Tennessee’s residency law.  (These cases are why everyone expects such retailer restrictions to be “next one” to go before US Sup Ct, depending on TN outcome.)

In MO case, Florida retailer charged MO law resulted in illegal discrimination that violated dormant Commerce Clause.  But Missouri judge fully embraced argument put forth by states’ rights defenders and wholesaler advocates that, in Granholm, “the Supreme Court limited the prohibition on interstate discrimination to the first tier of the liquor distribution system: producers and products.”   The 8^th Circuit followed that same logic in upholding MO residency law, judge noted, ruling that “state policies that define the structure of the liquor distribution system while giving equal treatment to in-state and out-of-state liquor products and producers…are ‘protected’ against challenges based on the Commerce Clause.”  So, since claim here “concerns only the retailer tier” in MO, it is “foreclosed by the ‘bright line’ between the producer tier and the rest of the system described in” case upholding MO residency law for wholesalers. (Again, that “bright line” challenged by retailers elsewhere and in case pending before US Sup Ct.)  Thus, MO law a “legitimate” exercise of MO powers under 21^st Amendment, judge ruled here. 

Retailer had also charged MO law violated Privileges and Immunities Clause of Constitution, which protects citizens’ rights to engage in their jobs across state lines.  But 21^st Amendment’s “broad grant of power to states…to implement [multi]-tier liquor distribution systems which disparately affect non-resident wholesalers and retailers” means right to sell alc bevs across state lines not protected by Privileges Clause, judge further ruled.  He tossed the complaint.  Given that FL retailers’ attys are same as those on winning side in IL and MI, an appeal would not surprise.

True, she doesn’t put a date on it. But when ABI exec, Zx Ventures head of e-commerce in North America, Carolyn Brown, comments that online beer sales have “potential to reach 10% to 20% of total beer sales” in US, that jumps out.  Currently, as she notes in interview with retail touch points (an online publishing network for retail execs), it’s less than 1%.  But 28% of US consumers “don’t realize that they can buy beer online,” article sez and only 6% of adults have bought beer that way.

 “We want to see the e-Commerce business double year-over-year-over-year-over-year,” Carolyn said when asked about AB’s potential online. Tho it’s still really small, “we want online to be driving the growth of the beer category,” she adds.  Thru studies in US and UK, “we’ve seen… that online beer sales actually does drive incremental basket size…. It’s a huge trip driver for in-store grocery sales, so why wouldn’t it be online?”   Asked what have been the challenges in developing AB’s e-commerce biz, she cites “two big challenges.” One is just “making people aware that you can buy beer online” and the other is “because we’re a beer company we can’t own a DTC [Direct-to-Consumer] channel.  We can’t sell directly to the consumer because of the three tier system.”  There’s that pesky 3-tier system again.

US border not even closed, but import shipments tumbled 324K bbls, 11.4% in Jan, reports Beer Inst economist Michael Uhrich based on Commerce Dept data.  “Certain functions of the US Customs and Border Patrol” impacted by govt shutdown, Michael notes, and “likely” played a role in dropoff, tho hard to tell extent.  In any case, Mexican shipments took a 270K-bbl, 14% hit, and as Mexican shipments go, so goes the segment.  Dutch shipments eked out 2% gain, and Italian shipments jumped 44%.  But Belgian, Irish, Canadian and German shipments all declined, ranging from -2.4% to -34.4%.  Just one mo, but import dropoff wiped out modest domestic brewer gain in Jan, and then some.  Toss in Feb taxpaid dropoff and reported yr-to-date shipments

-160K bbls, -0.6%. Exports also down double-digits in Jan.  But looks like early shipments of Heineken 0.0 boosted imported no-alc brews biz by whoppin’ 13K bbls, 134%.  Dutch NA shipments soared 10K bbls, 768%.

Owens Illinois just agreed to buy glass plant near Mexico City that was “wholly owned affiliate” of Anheuser Busch InBev for $188 million, reported Toledo Blade.  Deal expected to close later this yr.  Deal will “contribute about $140 million” to O-I’s revs and $40 mil in EBITDA, with other incremental savings.  ABI gets near $200 mil, but now will have to pay O-I to make that glass.  Recall, last week city of Golden announced it had deal to buy building from Molson Coors for $12 mil.  These top global brewers are likely doing these comparatively small deals that give them money now at least in part to alleviate some financial pressure, given their huge debt loads.       

As MillerCoors’ sparkling canned cocktails, Cape Line roll out, MC is borrowing “tactics from startup brands” with “Instagram heavy marketing,” noted Ad Age.  As it prepped Cape Line campaign, MC “found inspiration from some unlikely places -- startup brands selling women’s underwear, shoes and swimsuits,” wrote Ad Age. “They do such a good job of targeting you with the right type of messaging at the right time,” Sofia Colucci, veep of innovations noted. “We are going to take a very similar approach. We are going to essentially act like an Instagram brand,” added Sofia.  Cape Line will be backed with “traditional advertising” as well with TV ads highlighting that line has “all the flavor” but “nothing artificial,” per mag. Ads will run on “roughly 20 TV networks and 100 shows.”  In MC’s Beer Blog, Sofia shared that Cape Line hopes to ride wave of hot variety packs for flavored malt bevs with 2 variety pks, in 12 and 6-pk options.  “We’ve seen sales of variety packs explode in this category, and people love options,” said Sofia. She cited Nielsen figures showing variety pks in FMB category have grown 97% last 52-wks thru Mar 9.

Several of 2018’s key trends continued into Q1 2019, consultant Bump Williams points out in current client memo.  Chief among ’em: beer sales soft, especially big mainstream brands, beer losing ground to spirits, FMB/ Mexican imports/superpremium segments driving what growth there is.  Looking at top-25 growth brands in yr-to-date IRI MULC data, ranked by $$ gains, shows some very familiar names.  Same top 2 as in calendar 2018, in same order: Modelo Especial leads with $61-mil pop, Michelob Ultra #2 at +$53 mil. (That’s about 40% of total $$ gain for top 25 “winners.”)  White Claw moved up from #5 last yr to #3 so far this yr, +$27 mil; Corona Premier slipped from #3 to #4 at +$24 mil.  Mich Ultra Pure Gold moved up 2 ranks to 5^th biggest $$ gainer, +19 mil.  So, 4 of top 5 gainers in Q1 same as top 5 last yr.  Corona Familiar, #4 last yr, slipped to #8 in Q1 ’19, +$11 mil.  What’s more, these 5 brands collectively up $184 mil, almost 2/3 of total $$ gain for top 25. 

Note too, 10 of top 25 $$ gainers are FMBs (7 are seltzers), 2 others arguably flavors as well: Bud Light Orange and Mich Ultra Lime Cactus. If you look at percentage gain in $$ sales, which includes some tiny brands, 16 are FMBs, 9 are seltzers, Bump points out.  Meanwhile, of top 10 $$ gainers, only Modelo Especial, Michelob Ultra and Natural Light in natl distribution for more than a coupla yrs.  And only those same three brands among top 10 brands overall.  Among remaining top growers (#11 thru #25), only Miller Lite and Corona Extra among top 25 brands in US by volume and 11 of the 15 are recent innovations or new to natl distribution.

While the number of craft brewers continues to expand at a double-digit pace in US, volume growth now characterized as “fairly stable” by Brewers Assn economist Bart Watson as he released 2018 estimate this morn.  Craft volume up 4%, Bart figures, to 25.9 mil bbls, in same range as 2016-2017 gain pace, following 6 straight yrs of double-digit growth 2010 thru 2015.  BA figures very similar to our estimates early this yr (+4%, 26.15 mil bbls), even tho BA and BMI define category differently.  (BA includes Yuengling, we don’t; BA excludes craft partners of big brewers, we don’t, etc).  Bart pegs craft share at 13.2, right where we’d have it, if you exclude FMBs like BA does.  Then too, BA figure significantly better than scan trends, as Bart picks up tuff-to-measure taprooms and newbies. (TTB reported last week that “premises use,” a rough proxy for taprooms, up 434K bbls, 16% last year.)   Meanwhile, craft retail sales +7%, Bart estimates, to $27.6 bil, giving craft just below 1/4 of total retail beer sales.  BA also reports 1,049 brewery openings last yr, about 60 more than in 2017 and 2016, to 7,346 operating craft breweries.  Closings bumped up to 219 from 165 in 2017, 116 in 2016.  Craft brewers added 150K jobs, BA reports, up 11% vs 2017.

Hits keep on comin’ for HUSA. Today TTB came down hard on Heineken USA for alleged trade practice violations.  TTB reached settlement (“offer in compromise”) with HUSA for $2.5 million “for alleged violations of the Federal Alcohol Administration Act,” said TTB.  That’s easily the biggest settlement yet that now activist TTB has extracted from suppliers and distribs.  Charges arose out of Heineken’s BrewLock draft system.  TTB “alleges that Heineken provided some retailers with BrewLock draft systems at no charge and reimbursed other retailers for the cost of purchasing BrewLock draft systems…. Reimbursements were disguised as unrelated credit card charges (also known as swipes).”

TTB continues: “Because BrewLock is a patented draft system developed by or for Heineken that only works with specially-designed kegs used by Heineken, TTB alleges that the system both obligated and induced the retailers to exclusively purchase Heineken products. TTB alleges that Heineken made slotting fee payments to retailers and disguised those unlawful payments as payments for permissible activities (such as consumer sampling) that never actually occurred. TTB also alleges that Heineken used third parties to pay for additional slotting fees to retailers.” 

The Heineken USA investigation started in a joint investigation with Florida ABC that began in July 2017 and eventually moved to NYC and state of Washington.  TTB said HUSA investigation “initially developed out of the joint operation conducted with the Florida Division of Alcoholic Beverages and Tobacco (ABT), Miami District Office, and subsequently expanded to cover alleged unlawful activities in Washington State and New York City.”  INSIGHTS first heard about HUSA as a target then, as reports came in that federal agents showed up at door of HUSA employee over weekend in Florida.

Here’s Heineken USA’s statement: “We recently finalized an ‘offer in compromise’ settlement agreement with the Alcohol and Tobacco Tax and Trade Bureau for alleged trade practice infractions within the Federal Alcohol Administration Act. The settlement doesn’t admit to any violation of the law, and HEINEKEN USA has been and remains committed to legal compliance in everything we do.  As part of our agreement, we are introducing an enhanced and robust compliance program and establishing an internal audit process.”

This is just one of many settlements TTB has gotten in alc bevs.  Recall, ball got rolling when TTB got $900K from Warsteiner last yr.  And just got $350K offer in compromise from Brewers Distrib Co, an AB distrib in Peoria.  TTB also tagged Elgin Bev in IL for $325K offer in compromise in 2018.  Numerous settlements in wine and spirits too, incuding $1.3 mil OIC from Sun Liquor in Seattle for not paying excise taxes and more. But now TTB has gotten its biggest settlement yet, with more in the wings, INSIGHTS understands.  TTB “remains committed to putting an end to anti-competitive practices that hurt law-abiding businesses and prevent consumers from enjoying a wide selection of products,” the agency said.

“Starting this season, Miller Lite is now the official domestic beer of the Indians,” MLB.com reported just before opening day last week.  “The left field porch has now been rebranded as the Miller Lite Porch and will feature branded drinks rails and two new Miller Lite bars,” report added.  So, while MC backed off coupla hometown baseball sponsorships (Miller Park in Milwaukee, White Sox in Chi), it’s still in the game.  And, as in corngate response, it’s being competitive with AB.  In Cleveland situation, took over what was Budweiser Home Run Porch and went from “shared category” to “domestic exclusive.”

Lots of “noise” these days surrounding Constellation’s expected wine divestiture and Canopy (lack of) earnings, but Constellation is setting itself up to bring “focus…back to beer,” wrote Consumer Edge analyst Brett Cooper in latest deep-dive report. If Constellation divests part of its wine biz (assumed ~40% of wine profits), its beer biz will then represent “over 80%” of total STZ profits, thus “becom[ing] an increasing focus for the stock,” he notes. And that could be good news for STZ stock that’s taken a couple backward steps over last yr and change, he figures. Yet there are “a number of concerns” for beer brands – on top of wine and Canopy – which Brett and co will be watching closely in this coming yr.

Slower Distribution Gains; Velocity Consistently Declining Lately; Outsized CA Share vs Other Regions For example: 1) Constellation distribution gains are slowing. Assumption is that co will “continue to gain or win in the placement war,” but “we have yet to see any sequential increase in distribution in the Spring,” Brett noted. 2) Velocities are declining as focus increasingly shifts toward innovations that turn less frequently than core brands.  3) California share gains are “diminishing over the last couple months,” and “at this point, share gains in smaller markets can’t offset slower gains in larger markets.” Recall, Constellation declined in CA during first couple mos of 2019, as did most beer suppliers, amid colder than usual weather (among other factors). Constellation’s Mexican beer portfolio at 30 share of CA beer in IRI scans, vs 13.4 share in South Central region, 12 share in Northeast and Southeast, 11.5 share in West, 10 share in Mid-South, 7 share in Great Lakes, and 5.5 share in Plains, he added. Then too, Constellation beer is “more or less maxed out on margin,” meaning “topline growth will dictate profit and cash flow growth.”

Corona Refresca 12-13% ACV with Just 0.1 Share of Beer in Test Mkts; Corona Family Up 10% Another potential watchout – Corona Refresca test mkt results suggest it’s likely to come in “a few turns lower than that of Premier and Familiar.” In test mkts such as CO and WI, Refresca “getting to between 12-13%” ACV with “low share uptake of ~10bps in Colorado,” Brett noted. That said, Corona Refresca will “result in solid distributional expansion” that’s largely incremental for Corona family. Corona family grew 11% in 2018 and remains up 10%, even with low-double-digit decline of Corona Light, and before Refresca’s natl rollout. Corona Premier distribution “started to plateau” around 70% ACV in IRI data, tho sales up 875% YTD thru Mar 10, velocity is increasing and brand has runroom in c-stores in particular, Brett notes. Familiar is more regionally focused as distribution gains similarly leveling out; sales up 54% YTD.

High on Constellation Beer Prospects Overall; $$ Up 13.5% YTD Ultimately, even with long list of watch-outs, Brett is high on Constellation’s continued growth prospects. Beer division expected to grow depletions 9.2% for full fiscal 2019 and +7.6% for fiscal 2020 (Mar ’19 – Feb ’20). And Constellation remains in “advantaged position to gain distribution” amid current beer biz climate. Constellation beer $$ grew 13.5% YTD in IRI. Modelo family made up 8 pts of growth, vs 5.2 pts from Corona family and rest from Pacifico. Ballast Point continues to drag, down 19% YTD in scans following $$ down 12% in 2018 and down 6% in 2017. But Ballast remains relatively insignificant to overall results and “basically the only weight on growth for the year.”