Alltech Lexington Brewing and Distilling is not your average mid-sized US craft brewer. It shipped around 30K bbls in 2014 and, like many other breweries about that size, is in the middle of expanding its capacity with a much larger brewery. Unlike many of them though, it's got a multi-billion-dollar company behind it. Dr. Pearse Lyons founded parent co Alltech 35 years ago, he explained at our Beer Insights Seminar in NYC this week. It's grown to well over 4000 employees across 128 countries. It earned approximately $2 bil in revs and is on its way to $3-4 bil in 3-4 years, Pearse said. "We're on the acquisition trail," he said, adding "we'll sign one tonight." That wasn't in beer, of course. Alltech is a top animal nutrition company and on Tuesday announced the acquisition of Masterfeeds, another animal feed co in Canada. "Our business is yeast," Pearse said simply about Alltech, which operates the "largest yeast factory in the world in Brazil." Why beer though? "It's about marketing," he noted, insisting that "at the core of your core you have to be different," to stand out, that is. Plus, beer is a "passion" for Alltech and "very near and dear to our collective hearts."

Family of Irish Coopers and Biotech Career Leads to Brewery, Kentucky Bourbon Barrel Ale; 10 New States Dr. Lyons' interest in beer, in part, comes from growing up in a family of coopers, or barrel-builders, in Northern Ireland. He interned at the Harp brewery and with Jameson and studied biochemistry. He spent the better part of 2 decades running Alltech before re-opening the Lexington Brewery in 1999. Its lead brand by far is now the Kentucky Bourbon Barrel Ale, a "marriage of coopers, whiskey and beer," Pearse said this week. It's also a "classic example" of a beer that's "switching the wine guys," he said. "Our business is small guys: we'll hit 40-million maybe this year," he said, presumably referring to revs (Sunday Business Post pegged annual beer and whiskey revs at $45 mil in July). "But we're growing at about 40 percent," he added.

Kentucky Bourbon Barrel Ale currently up 20% by $$ in IRI multi-outlet + convenience data thru Oct 25. It represents over 2/3 of Lexington biz in this channel. So total Kentucky portfolio up similar 19.6% to near $3.9 mil. Seasonal Pumpkin Barrel Ale jumped 27% to its #2 brand in IRI, ahead of Bourbon Barrel Stout, +14%.

Alltech sells beer in 31 states currently, Pearse shared this week, with plans to add 10 more in 2016. While he said "we have to control our distribution," he specifically called out that the co self-distributes mostly abroad. It now operates small breweries in Ireland and England (which it acquired earlier this year), Mexico, Chile and Brazil.

Over 10,000 Craft Breweries Across Globe, About 40% in US, 80% in Top 10 Countries Alltech recently conducted its own survey of the number of craft breweries operating globally, reaching out to local associations and trade groups. The co found about 10,200 craft breweries (though not clear what parameters it used here). So about 40% of global craft producers located within the US, the only country with over 1000 breweries, let alone 4X that. All of the top 10 countries in Alltech's survey had 200 craft breweries or more and as a group they represented about 80% of the world's craft breweries. The UK (723), France (654), Italy (500) and Russia (561) all have over 500. Canada comes close at 483, followed by Switzerland with almost 400. Indeed, Switzerland has more breweries per 100K people than any other country studied. In all, Europe had just 3 breweries more than all of North America (but at pace of openings in US, North America may have passed the European continent in just a couple days). Japan had the largest number of craft breweries in the Asia Pacific region, at 200. Brazil (217) and Argentina (167) lead in South America. New Zealand's 159 craft breweries is about twice the 77 that Alltech counted in Australia. As for other key European beer countries, the co counted just over 300 craft breweries in Germany and 176 in Belgium. The study's author estimated global craft brewing at $50 bil, so a little less than half the price ABI will pay for SABMiller.  

As we've written all yr, California is gettin' most, if not all of its craft growth collectively from in-state brewers while other out-of-state brewers are havin' a tuffer time. So interestingly, Duvel Moortgat USA ceo Simon Thorpe took time to explain why out-of-state brewers would want to come in at recent Calif Beer and Beverage Distrib mtg. Aside from the "obvious" ones like "great demographics, high income, year round weather," and "dense population centers," CA alone is 10% of the global high-end beer mkt, Simon shared. So "getting a small piece of the pie…is relatively easy." Also, it's an "incredibly evolved market as well" since "the amount of specialty distribution" is "second to none," and there's an "experimental, well-educated beer community." Simon referenced that CA is a "chain state," which makes it attractive when "you look at the economics of how you service, how you get into it." And "more-so than in any other state in the US," Calif social media is "completely widespread throughout the state," said Simon.

Yet it's a "totally crowded market" and "a lot of you in this room have large portfolios," he acknowledged to group of Calif distribs. So "why should any think of out-of-state?" For one, out-of-state brewers are mostly "bringing their higher end of the portfolio" to CA (as well as other out-of-state mkts). High-end, which he defined as above $45/case, is growing 40% and margins "are phenomenal." Simon and co believe "we're going to see some downward pricing pressure on craft over the next 10 years," so managing high-end portfolio "is really important" for "the long term." And in many cases, these out-of-state brands have "already proven that they work." It's only a matter of "can the brands travel?" And "most of them have already figured that out" by the time they decide to enter CA, sez Simon, "standing for something more than just local." Indeed, local "isn't going away," but simultaneously is distribs' "toughest bet." Editor's note: in a sense, Simon was making a case for his out-of-state brands to these Calif distribs, as he also shared history/background for Duvel, Boulevard and Ommegang brands thruout his speech. Yet either way, in Firestone Walker, DMUSA has inherently become very important to many Calif distribs.

Next 3 Chain Shelf Resets are "Pivotal": "Will Force a Number of" Brewers "Out of the Equation" Simon elaborated a bit more on a point he's made previously, that "the chain shelf resets that we're negotiating now and the next two to follow will be pivotal for craft breweries" (see Aug 14 issue). "Right now everyone's got distribution" to an extent, but lots are "not supporting their brands enough," and chain retailers are becoming "increasingly" clever at "figuring out what viable rates of sale" are for them. "So there's going to be some sorting of that out," and "I think it will force a number of brewery brands out of the equation." Meanwhile, Duvel's ramped up its chain personnel in recent years: just 3 yrs ago they only had one "chain person," and now they have 7, and Firestone "has more chain people on top." And that's mostly for "making sure our chain rotations are working." So Duvel "putting our money where our mouth is on that" in the next 3-5 years, sez Simon.  

What a year for beer! From the biggest beer deal of all time to a blizzard of landscape-shifting craft deals to the recently concluded Senate hearing on MegaBrew, it was a year to remember. Filled with excitement and action, all of which made our job that much more challenging. And that much more fun. So we close out the year once again expressing our great gratitude and thanks for being part of this wonderful, dynamic industry. We also send seasons greetings and our warmest best wishes to all of you.

This year more than ever, you could feel the winds of change in the beer business and even at Beer Marketer's INSIGHTS. Once again, we went to press with more publications more often than ever before. That's required with so much going on. We also developed more of an infrastructure to deal with increased demands and faster news flow.

Let's pause and reflect for a moment. I turn 60 next year and my longtime friend and colleague Eric Shepard turned 60 this year. We've both been at BMI for over 35 yrs. At our advanced age, we're entitled to take "the Long View." And we did just that in a special report which detailed massive industry changes since 1980. WOW! We've seen a ton over time. And we're still going strong, not slowing down. But we are also bringing along a next generation. My son David and Eric's son Christopher are playing increasingly integral roles at BMI. Plus we get huge contributions from our long term team of Jim, Galia, Gerry C and Gerry K and invaluable contributions from my wife Robin as well. Our founder Jerry will turn 92 in Feb and is still in great shape. He sends his best.

That's an overview of our team that brings you the mountains of material BMI puts out in a given year. So that's it. And now is the time for all of us and all of you to take a break from all the crazy action and spend more time with loved ones and more fully celebrate the season and all that remains right in our lives. From all of us to all of you, here's wishing you and yours a very Merry Christmas and a Happy New Year . . .

This is a bonus 24th issue of the yr. Next issue in 4 weeks barring major development.  

Swarms of govt officials, lawyers, politicians and media investigating, reviewing and commenting on AB InBev these days, and not just on SABMiller deal. Coincidentally, or not, other, separate AB actions coming under close scrutiny, even from some of same folks, who seek more info about many aspects of ABI's biz/strategy, here and abroad. Big story this week was Senate hearing (see above). At same time, Dept of Justice will run fine-tooth comb thru deal before it decides whether proposed remedy (sale of SABMiller's MC stake to Molson Coors) is enough. Will DoJ take as broad a view as hearing witnesses and some Senators seek, or focus on much narrower issues, as ABI and Molson Coors prefer? Who predicted AB would have to sell a brewery outside US to get Modelo deal done? Not to mention agree to conditions about how Modelo brands would be treated in branches/indie distribs. ABI also faces nuisance suit filed in fed ct by atty Joe Alioto on behalf of consumers to stop deal. Prospects no better than his previous attempts. But ABI's gotta spend time to respond. And it ain't just US. Antitrust authorities in other countries will analyze deal, possibly force concessions. Complexities mean deal could take a yr or more to close.

Broadening Scope to Branches, "Aggressive Tactics" Some in industry and media pull together strands such as pending ABI-SAB, AB's purchase of craft brewers, branch buys and announcement that DOJ and Calif AG looking into implications of Calif branch buys to portray ABI as being out to monopolize mainstream, dominate distribution and crush craft. At same time, Calif Alc Bev Comm recently tagged AB branch for distributing illegal "bar bucks." More to that investigation, we hear. At DC hearing last week, Iowa Beer Guild's J Wilson not only teed off on ABI-SAB, but testified that Wash State Liquor and Cannabis Board has AB branch in Seattle under investigation after allegations of "aggressive tactics," including illegal activity involving concert venues and football stadium. These are separate strands. But ABI's got a lotta splainin' to do to a lot of people.

Ain't Just ABI; Mass ABC to Grill Retailers; Kroger/SW&S Under Fire AB InBev, per usual, has big target on its back. But other co's subject to scrutiny too. Recall, Mass ABC still pondering sanctions for Craft Beer Guild (a distrib) after pay to play investigation in Boston. ABC will grill Boston on-premise retailers at hearing this wk over same charges. Meanwhile, group of industry supplier, distrib and retailer assns, including each of the natl beer assns, seek guidance from TTB over proposed Kroger planogram program that will be run by Southern Wine & Spirits via third party owned by Kroger, but paid for by suppliers and distribs. NBWA and others charge proposal goes far beyond "schematics" TTB allows and violates laws that prohibit giving "things of value" to retailers. Question is whether these requests will prompt TTB to finally take action on CatMan practices in biz.  

Well over $120 billion committed or paid out in brewer deals in 2015. Final price for ABI-SAB plus what Molson Coors will pay for rest of MC alone will hit about $120 bil. The other billion-dollar baby: what Constellation will pay for Ballast Point. Lagunitas sold half of itself to Heineken for about a half-bil. And Firestone Walker sold for half of that to Duvel Moortgat. All in, we count 20 deals in craft alone in 2015, including stakes, ESOPs, 100% sales, you name it. Each of top 4 expanded craft presence, with Heineken and Constellation taking very pricey positions. If you go back to mid-14, 10 of top 30 craft brewers did some kind of deal. And Pabst got bought too. Plenty more in hopper. Key question: how many more craft deals can go for such heady valuations? NBWA economist Lester Jones used to call craft expansion a "gold rush," but he was talkin' about rush for volume, building capacity. In 2015, a bunch of craft brewers really grabbed gold.

Meanwhile, distrib deal landscape a bit quieter in 2015, especially in MC system, tho a bunch of smaller AB deals got done. No real blockbusters (not even 5+ mil cases). Biggest news: Constellation pulled brands from 4 AB branches, in toto about 6 mil cases and almost $200 mil. AB used the money, plus what it got from loss of Monster, to expand branches in northern Calif, Colo and Staten Island, NY. After Ky legislature banned branches, AB decided to deal rather than fight (via lawsuit), swapping Louisville and Owensboro for Colo bizzes. Tho AB's activity raised eyebrows from within and outside AB system, AB also said it would limit its branch biz to about 10% of volume going forward. At presstime AB sold off pieces of NJ and Colo branches (about 2.4 mil cases) to distribs.

Less Tension; Tax Peace As brewers and distribs did deals, less public tension between tiers in 2015. Battle to ban branches in Ky got nasty, and Tenn banned branches too without acrimony, but that's it. Craft brewer rhetoric that rose sharply in 2014 about needing more self-distrib options and franchise reform didn't turn into lotsa state battles in 2015. Craft brewers pivoted more to expanding retail options. It will be interesting to see how craft self-distribution/retail issues develop as pace of craft brewer start-ups accelerated to more than 2 per day. BA announced its craft brewer count of 4,144 last week, an all-time high. At same time, "concerns" about craft brewer access continue to surface amidst AB branch moves and ABI-SAB deal. Then too, "peace broke out" between big brewers, small brewers and distribs on fed tax issue in mid-2015 via compromise tax bill.

Big Time Transitions at the Top Three of top 4 suppliers welcomed new leaders in 2015: João Castro Neves at AB, Gavin Hattersley at MC and Ronald den Elzen at HUSA. At AB, João set kinder, gentler tone at several mtgs with distribs, intro'd new incentives for greater % of volume in AB brands and promised $150 mil more in investments. Gavin moved quickly at MC to replace top sales/mktg execs, and committed to improving volume. MC also reshuffled ad agencies and announced it would close Eden brewery. Gavin also set to oversee transition to MC with single parent in Molson Coors. At Pabst, new owner Eugene Kashper also a whirlwind of activity, from riding biggest new brand of the yr Not Your Father's Root Beer to announcing new brand/partnership strategies and building workforce. As BMI went to press, Eugene announced deal to sell, mkt and distribute C&C cider brands, in US starting next Mar. At Constellation Brands Beer Div, leader Bill Hackett steered his ship to record double-digit volume and earnings gains while Constellation took big step towards becoming totally independent from ABI as supplier in building out its Nava brewery.

Volume, Pricing Math Has Changed 2015 solidified two very important changes in basic industry math. First, outsized growth of Constellation and craft (combo will be up another 4+ mil bbls) offsets continued declines of AB and MC. That doesn't mean industry will be up for the yr. But Constellation and craft combo now nearing 20 share of volume. Then too, those players change the pricing dynamic. Constellation led price hikes in key Calif and Fla mkts in 2015 and ceo Rob Sands acknowledged he now pays less attention to price gaps with premium domestic beers. And craft getting outsized price hikes (10X more than premium lights in off premise) without hurting volume, so far. Will competition from AB and so many new players change that? Meanwhile, AB and MC unable to get same level of rev per bbl hikes in 2015 that they'd gotten earlier. One very stubborn trend that has not changed: beer will lose share of stomach to spirits again this yr. And if that doesn't change, and without significant industry growth, not everyone's volume goals can be met, whether it's the ambitious Constellation (doubling by 2023) and craft (20 share by 2020) goals or AB and MC returning to volume and/or share growth.  

Whatever its ultimate significance, Dec 8 US Senate hearing on ABI-SAB unprecedented, a major moment in recent beer industry history. It played to a packed house. Flashes popped liked mad at outset and massive media coverage followed. Some top execs in global beer looked none too thrilled to be there, while Senators basked in camera's spotlight. Senators seized opportunity to tell their constituents back home just how very concerned they were, how important craft is in their community and how they're on the case. Witnesses also used oppy to advance agendas. Theater for sure. But what did it all mean? After all, US Senate won't decide fate of MegaBrew in US. Dept of Justice will; DoJ attended hearing. And so much of what was discussed was not even directly related to deal. But will DoJ ignore broad range of concerns or somehow incorporate them?

Senator Mike Lee, chair of Senate Judiciary Subcommittee opened hearing noting proposed transaction between ABI and Molson Coors (to buy SABMiller's 58% of MillerCoors) would "obviate vast majority of concerns" and once consummated, any other issues "likely to be negligible," he said. That didn't stop several witnesses and his colleagues from raising issues, often and at length. Especially about distribution, craft access to market, etc. But Lee asked pointedly: "how will this deal have any impact on distribution?" Further: "Isn't it true" that ABI's "negotiating leverage" with distribs "will be no greater the day after this deal closes than the day before?" No one had much of an answer.

Yet distribution major focus of testimony by Brewers Assn prexy Bob Pease, NBWA prexy Craig Purser (natch) and others. Bob in particular swung for the fences. He argued that DoJ should review ABI-SAB in broader context, "in light of other developments affecting competition." BA asked that DoJ require that ABI divest its branches as condition of ABI-SAB deal. That's first time ever that BA broached AB divesting branches publicly in any forum. BA also took aim at AB's new voluntary incentive program. DoJ should mandate AB "modify its anticompetitive financial assistance and incentives to wholesalers to refrain from distributing other brands of beer." Didn't say how. Bob's asks clearly beyond scope of ABI-SABMiller deal and among surprises of hearing. But perhaps more surprising: BA returned to its 2014 rhetoric about "mandated" 3 tier, "totally inadequate" allowances for self-distribution and "special" treatment of distribs thru franchise law protections, etc. BA used Senate hearing as platform to air laundry list of grievances against which it has made little progress and didn't push much in 2015 (hence the surprise).

NBWA's Craig Purser more measured, but NBWA also had specific asks. Principally: no terminations as result of merger. Questionable whether ABI even could terminate anyone following formation of "newco" after ABI-SABMiller deal (US entity would remain same). Asked several times about terminations by Connecticut Senator Blumenthal, ABI ceo Brito committed to no terminations as result of deal. But when pressed to include this in consent decree with Justice, he demurred. "That's for the Department of Justice to decide." Molson Coors could conceivably terminate in some states, given change-of-control clauses. But MillerCoors tried that back in 2008. Given how tumultuous that was, Molson Coors would probably think long and hard before going down that road. Unlike Bob, Craig did not ask for branch divestitures when he spoke, tho written remarks came close, suggesting "exiting ownership of distribution should be considered as a remedy in the US." Craig also asked for no more branches, limits on ABI ability to own more retailers and no exclusivity mandates. With incentive programs, there's a "very fine line," said Craig between "a carrot and a stick" and gotta pay attention to "when the incentive can become a stick."

ABI ceo Brito and Molson Coors ceo Mark Hunter strenuously stuck to their talking points, especially that deal not about US, in fact there would be "no impact" on US biz (Brito) and that it will be "business as usual" at MillerCoors (Hunter). Panelists leveled many broad-ranging accusations against the cos ("tacit coordination" on pricing, controlling supply of raw materials, closing out competition, etc). Brito dismissed concerns about AB InBev monopolizing supply materials in US (hops, barley, packaging) with some solid stats, i.e. AB buys just 8% of US hops. On craft access concerns, Brito insisted US biz has "never been more open to new entrants." Nearly impossible for ABI and Molson Coors to win at hearing, but they had no major gaffes and Senators/other witnesses never visibly got under their skin. So from an ABI or Molson Coors perspective, hearing coulda been a lot worse. Senator Al Franken (Minn) called into question credibility of Brito answer on further US job losses. "Is anyone here skeptical about that answer?" Yet any job cuts as result of ABI-SABMiller will likely not be US ABI personnel. Perhaps Molson Coors, but that question never even got asked. In one exchange about branches, Brito said AB at 7-8% of its volume in branches now, but could get to 11-12%, and still be "around" 10%. That's "quite a difference," noted Senator Blumenthal. But again, very unclear how much, if at all, any of these concerns about branches, market access and distribution had to do with the deal at hand. Following the hearing, Lee's office issued statement that hearing "helped answer some of the questions we had about the merger and mitigated many of our concerns about the transaction." We'll see.  

Beer Inst economist Michael Uhrich's expectation a few mos back that US shipments likely to be down about 0.5% this yr looking pretty good, with 2 mos of data still to go. Taxpaid shipments by domestic brewers down 2 mil bbls, 1.3% Jan-Oct. Imports up 940,000 bbls, 3.7% same period. And cider up 166,000 bbls, 12% for 9 mos. Add 'em up and US biz down 850,000 bbls, 0.5%. Taxpaids last yr in Nov-Dec were a wash. But recall MC will reduce yr-end inventories. That won't help. And AB going against an even Q4 in 2014, much tuffer comp than Q2 and Q3 this yr. Mexican imports are an anomaly. Tho Constellation flyin' (up 1.2 mil bbls Jan-Sep), Dos Equis/Tecate families up, Mexican imports up just 443,000 bbls for 10 mos, Commerce Dept sez. We keep waiting for those numbers to align; it keeps not happening. Finally, domestic cider shipments turned negative in Q3 (-5%), tho imports flew (+240%). Tuff to tell how yr will end and note TTB often adds bbls to current and previous yr. So final-final still pretty far off. One other number affects total shipments: tax-free shipments (mostly exports) way up. Total taxfrees up nearly 500K bbls, 12% thru Sep; shipments to foreign countries even stronger, +600K bbls, 16% for 10 mos. Throw that volume on top of US numbers and overall shipments closer to even.  

"The Long View: The US Beer Industry 1980-2014" is now available. This new special report from Beer Marketer's INSIGHTS details just how dramatically the beer biz has changed over the last 35 years. In 100 pages of text, charts and graphs, you'll get the long view of the US beer biz: top brewers, top brands, and top segments as well as total industry, package/ draft figures, price data and more. The Long View is an invaluable tool to aid your understanding of the ever-changing beer biz. You can't know where you're going if you don't know where you've been. And all that knowledge about the last 35 years can only be obtained through one source, Beer Marketer's INSIGHTS. All for $249. Click here for more info, here to order "The Long View."

Next issue in 2.5 wks, a bonus issue in this crazy year.  

Pabst only brews Not Your Father's Root Beer in 3 City Brewing locations. It uses other breweries for other brands. Then too, NYFRB won't sell 11-13 mil cases in 2015 as INSIGHTS estimated. That was number Pabst shared with distribs/others, but circumstances changed as NYFRB more seasonal than expected, cans and draft didn't reach targets. NYFRB will come in more like 6-7 mil cases, we understand.  

In yet another provocative presentation to a Beer Insights Seminar, consultant Mike Mazzoni challenged status quo of current brewer-distrib relationship. While beer biz has "evolved at warp speed," the "operational model between the tiers" and the "current protocols of the brewer and wholesaler working relationship" remain "virtually unchanged." To create a "better, more efficient and more profitable industry for all players," they need to change. Mike's talk intended to "start dialogue" and challenge status quo on: brewers controlling buy-sell negotiations, approval process for brand transfers and mgrs/ successors, termination without cause, fair mkt value and more.

Mike embedded in these challenges several important but oft-ignored "rhetorical questions" or key points that also reflect changing times. Most important and "least talked about": "leverage in the industry has shifted from suppliers to distributors." Howzzat? Going back, AB, Miller and Coors "delivered profitable growth." That's changed as they've lost share. In fact, AB and MC "legacy brands" have become "a drain on many distributorships right now" and that's "biggest single contributing factor" to shifting leverage. While top 2 still about 70 share of industry, "that's volume. Let's talk about margin. Incrementality. Huge, huge difference in what it was just a few years ago." And Mike doesn't see that trend changing. "So, if they can't bring the legacy brands back, and they can't create profitable growth, then the pendulum is going to shift even further.... They're going to be less and less important to their wholesalers. The wholesalers are going to be more and more independent." But despite this growing leverage, and fact that brewer reps don't even really understand distribs' operations, in Mike's view, distribs don't use "leverage" and brewers, especially top 2, still control negotiations noted above. And that's 2d rhetorical question: "just because supplier management religiously enforces the status quo, does that mean distributors should accept it without challenge?"

Spotlight on Brewer "Approvals" "Single-most outdated trade practice between tiers," in Mike's view: approval process for sale of distribs. Tho suppliers "should have the right to decide who sells their products," that's in free mkt, with qualified buyers and approval "should not be unreasonably withheld." But currently, there's "no open market... reasonableness is a moving target and the transaction process is abused at many levels." Among the "abuses": 1) ABI and MC insistence on advance notification of intent to sell, "so they can dictate who the seller should negotiate with"; 2) AB "can pull the rug on the buyer" after he or she has spent "considerable money, time and emotion" and "redirect the deal" to AB itself or another buyer; 3) MC gets two 180-day periods to "assign an exclusive buyer." What if all suppliers had same rights, Mike asked, along with 3d rhetorical question: "Why don't the other suppliers challenge this practice?" These processes "impair the value for the seller."> So does "the dance," which starts after "preferred buyer" negotiates deal. Steps include "painful delays with petty information requests, theoretical clocks and process requirements" that complicate deals and push what should be a 90-day process to 9 mos or a yr. Then too, non-ABI or MC suppliers affect value by withholding approval for incremental, strategic brands and/or via "approval extortion." That's what Mike calls practice of "using approval rights to leverage buyers to pony up huge pots of money," via mktg plans or support which "punishes both buyers and sellers." So, question #4: "why should marketing spend...be jacked up from existing acceptable levels...to artificially high levels for buyers as a condition of approval?" Especially since brewer reps demanding commitments don't understand the impact on distribs' P&L statements.

Mike also strongly objects to AB and MC demands to approve "who runs the distributorship" or in AB case, successor mgrs. While large suppliers need "champions on the ground... what I don't understand is why competent businessmen," successful distribs who have run bizzes for generations, "have allowed this long-outdated, indeed, probably ill-conceived" practice to go "unchallenged." What's more, "how is that fair to other suppliers" especially as many of them provide "significant margin contribution?"

Out with Carve Outs and Termination Without Cause; FMV as "Silly Speak" Another "embedded supplier wholesaler protocol," questioned by Mike: states with successor manufacturer statutes that allow suppliers to terminate without cause, some via "carve outs" for small suppliers. These laws can be "unfair to suppliers" stuck in "financially or competitively impaired wholesaler," have "arbitrary thresholds," and/or involve unwieldy, expensive arbitration, litigation processes to determine fair mkt value. FMV in these cases often "silly speak" as "usually neither side is happy with the result except, of course, the attorneys who often make more money than the brands are worth." Yet "we do it again and again, market after market." So not only "out with carve outs," Mike advises, but "out with" termination without cause. He believes that if a distrib is "performing according to industry standards," the successors should live with that distrib given the time/money/ resources already invested, or they should buy him out.

Audiences' Qs, Mike's As Tho Mike's talk dense and detailed, he can be very direct responding to questions. Here are a coupla examples from Seminar Q&A. About "outside capital" coming in to beer distrib biz, especially AB system: That's "one of the areas where MillerCoors has done a much better job." Tho we "haven't seen it in the AB system, I think it would be a welcome change." If SABMiller can demand a "break-up fee" if deal with AB InBev falls thru, why can't distribs put 'em in their deals? "Arrogance." Why can AB tout keeping craft brands in Calif branches but wholesalers cannot? "That question answers itself and I think we all ask ourselves that." Tho Mike not opposed to AB branch system, "I think that the bigger issue is access to market for other suppliers, not necessarily for the other suppliers but for the benefit of the AB wholesalers. Because in my view the biggest issue we deal with on the AB side of the equation is that [AB distribs] have not been able to build their portfolios the way the MC side has. I think if we had more of that then I think we'd have more competition, better competition." Does Mike believe ABI will stick to its stated 10% ceiling volume in branches? Mike reluctant at first to answer, but ultimately said: "No. If I were AB, I wouldn't, if they continue with the model that they have. A lot of us don't agree with that model, but if they perpetuate that model, why would you want to have an artificial ceiling?"

Why not let free market run the whole distrib brewer relationship, eliminate franchise laws and exclusive territories and let suppliers and wholesalers simply engage in contracts? "It wouldn't work. Because if you did that, you'd have to have under-scaled distributors. What makes the business work right now is distributors have scale....If you fragment the system, the element of profitability is just going to go right out the window." What are 3 high-impact things AB mgmt can to "inspire confidence" among distribs and win-win-win? "If AB would recognize their distributors need to be competitive with other brands, that's probably #1, 2 and 3." On AB's alignment initiative: "If you can convince AB distributors to jettison brands to become [more] exclusive, and you're going to give them economic incentives, that's great. But the other side of it is if you're that distributor and you have a choice of taking on Yuengling, which is going to give you 4 or 5 or 6X more income, then those incentives that are given, why would you want to do that?" In spirit of Mike's talk, intended to spark debate, we welcome countering views.