Lotsa articles about beer these days full of snark about "outdated Prohibition-era laws" and how they straitjacket various biz models, from craft brewing to product/promo innovation. But at NBWA-sponsored CAP mtg Sep 10, several attys suggested these keystones of alc bev regulation from 1930's -- 21st Amendment and Fed Alc Admin Act (FAA Act) -- are in fact "fertile octogenarians" that remain relevant.

That colorful descriptive provided by Rob Tobiassen, who was long-tme general counsel for TTB. He insisted FAA Act designed to be a "flexible" regulatory tool. And tho statute itself only amended a few times, there are "night and day differences" between now and 1935-36, following numerous "rulemaking" procedures that kept statute "relevant in many ways." Among major changes over the yrs: basic permits (now, one needed for each location); trade practices rules now more extensive and detailed, labeling (from COLA regs to info permitted); FMB rulemaking to deal with "blurring of categories"; enforcement/sanctions (adding consent decrees); and more. Overall, Rob believes FAA Act established a "level playing field" for an industry that is "generally not corrupt" and a system that reins in "extreme promotional practices." System prevents fake alcohol, enables consumers to understand what they're buying and creates an orderly market place that offers a "wide range of brands."

At the same time, Rob acknowledged FAA Act has gaps and "problems." Among them: no basic permit for brewers, even tho importers and wholesalers need them; penultimate clause that limits what feds can do in beer unless a state has same law; different definitions of "malt beverage" and "beer"; trade practice rules "give retailers a pass." Interestingly, both NBWA genl counsel Paul Pisano and Vicky McDowell (ex-hi-up at TTB, now prexy of Presidents Forum, an assn that represents distillers/importers) concurred with much of what Rob said, especially about the problem areas, and especially about the lack of federal authority over retailers. Vicky said her members want to see more enforcement and more "clarity" of trade practice laws, a common theme among many industry participants. She also mentioned "pay-to-play" and TTB's review of Category Management (crickets so far), but no further discussion of those topics. And while Rob reminded that regs be revised, Vicky reminded that when John Manfreda(TTB's top official) raised notion of reopening FAA Act for significant revision, industry responded with "resounding no" for fear of changes that might actually emerge. There wasn't even a serious debate, she said.

What about that other grey lady of alc bev law: the 21st Amendment, which ended Prohibition and established states as critical regulators? An earlier panel of attys reminded that many thought key Granholm decision by US Sup Ct that tossed preferential Mich/NY laws and opened up direct shipping of wine would create very slippery slope down which all state regulation would slide. But turns out that subsequent courts mostly interpreted decision to bar discrimination against producers/products, but continued to afford states vast authority over the distrib/retail tiers, even if they treated in-state and out of state interests differently. Same attys pointed out that high courts have upheld state laws that: 1) distinguish between in-state and out-of-state retail rights; 2) require in-state residency for wholesaler principals; 3) put a cap on producers for direct shipping; 4) put a production cap on which brewers can self-distribute and more. Net-net: despite their advanced age and admitted limitations, these critical "Prohibition-era laws" are still very much alive and accommodate a very robust alc bev biz in the US.  

AB will add 2 more significant urban branch territories, Oakland and San Jose, with deals to acquire "a portion" of Horizon Bev Co and AB "distribution rights" of M.E. Fox, expected to close in Nov. These 2 distribs will reportedly trade for a total over $150 mil (well over $90 mil for Horizon and $50-60 mil for Fox). Core value and attractiveness of both deals reside in non-AB brands. AB will likely spend only about 30% of that to acquire about 3.5 mil cases of its brands. Other brands trading, totaling near 4 mil cases, including non-alcs, will trade for around 2.5x as much in total $$ as the AB brands. In a new twist, Horizon will keep its name and culture, sez ceo Ces Butner, who will stay on as consultant after selling. That was "overriding theme" for Ces, that deal be "as much about carrying on Horizon as me getting out." He called it a "paradigm shift" for distrib deals and likened it to some of AB's craft purchases. Tho Constellation, Boston and Sierra will leave, Horizon also looks to keep many of its remaining craft brands.

These are part of an AB mini-buying spree of branches this summer. AB bought 5 mostly smaller distribs (2 in Colo, 1 in NY, 2 in Calif. Since 2008, AB added about a dozen dibranches. That means 35-40% of branch acquisitions since ABI happened this summer alone (far smaller % of volume). AB raced in effort to take advantage of tax benefits available during 1031 exchange time window (if it purchased like assets). Clock started ticking in early Apr, following near $200 mil it got for Constellation brands, after Constellation terminated branches. AB now sells vast majority of its volume in Oreg, Colo and Okla and has branch strongholds in metro NY (including northern NJ) and Calif and Seattle as well. Those are all areas that could see even bigger concentration of branches down the road.

While AB hasn't added greatly to % of volume sold through branches, its branch acquisitions continue to be lightning rods for criticism and concern from indy distribs and their advocates, wary of AB intentions. Yet AB communications on branch deals continued to emphasize that these transactions were voluntary, not coerced. Indeed, each of Horizon and Fox reportedly have their reasons (lack of succession or family considerations as well as strong offers) for deciding to sell. But in the background, one trigger hadda be that for each Constellation had become at least as significant a supplier to Horizon and Fox as AB. And for AB, that's an untenable situation.

That's especially true considering Modelo Especial continues as a runaway freight train, up nearly 25% for 13 weeks in SoCal thru Aug 29 in Nielsen, while Bud Light is down almost 10%. At this rate, Modelo Especial will be #1 brand in SoCal scans next yr. Earlier this summer, AB put pressure on distribs, to get separate sales forces, to improve performance, to sell/merge, all directly related to Constellation's outsized growth. More recently, AB has reportedly backed off from pressure, with sources speculating that DoJ and Calif AG interest (tho not action) had intended effect from distribs' perspective. However, also gotta note, AB got one of its desired results too; if not improved trends, at least the beginnings of consolidation in Northern Calif. In fact these 2 deals give AB a beachhead in Northern Calif. It has long sought consolidation in Northern Calif. But these deals could be problematic, many say. "Scale is an absolute necessity in beer distribution," noted one longtime observer, and AB is "walking away from scale with declining brands. That's a formula for failure," he added. These deals could make AB brands less competitive in those mkts as branches compete against strengthened distribs with higher share and far broader portfolio, including red-hot Constellation. That's not AB's view. But in late 90s, Miller consolidated in San Jose and top hi-end brands went to AB distribs, leading to weakened Miller distrib. Ownership changed 5x in next 10 yrs. Now AB is doing same thing in reverse, as local MC distribs get hot hi-end brands.

Tho industry volume has easier "comp" in 2d half, -1% volume decline for 1st 7 mos not likely to be overcome, according to Beer Inst economist Michael Uhrich. So despite anticipated improvement over next few mos, full yr shipments now expected to be down about 0.5%, projects Michael. That would basically undo 2014 gain. Better news: current tailwinds, especially growing young male employment, expected to improve 2016 trend.

For first time in awhile, Beer Inst also provided peek into industry depletion trends, based on supplier input and projections. Overall depletions down 1.1% yr-to-date thru Jun with on-premise -3.4%, off-premise off 0.6%. Running 12-mo trend about the same, with total biz -1%, on-premise -3.2% and off-premise -0.5%. While BI probably doesn't have great visibility into smaller craft brewers' growth, the negative sales-to-retailer trends for 6 and 12-mos suggest it's still a slugfest out there, for a pie not growing.

In calendar 2014, overall beer retail sales up $2.1 bil to $107.7 bil, Michael showed. Biz continues to shift to off-premise, despite expansion of brewpubs/taprooms in recent yrs. On-premise still majority of dollars (52.8) tho down to 17.5 share of volume. Restaurants grabbed near 23 share of total $$, Bars another 17.1 share, tho their respective shares of volume down to 7.3 and 6.9. Off-premise biz last yr passed $50 bil for 1st time and share of total dollars edged up a few tenths to 47.2. C-stores still biggest off-premise channel, with 31 share of total industry volume, 17 share of dollars. Grocery and liquor store channels are about same size. About 13 share of beer dollars goes thru each. Grocery gets 24 share of volume, liquor stores 20 share.

Finally, package trends show domestic brewers losing bottle biz (-4.2% in 1st half), can biz (-0.8%) and draft (-1.5%). But import growth across the board: bottle biz up 3.8%, cans jumped 19.5% (Corona a big part of that) and import draft up near 10%. Longer term, cans building share over last 5 yrs, while bottle share slipped and draft stuck at about 10 share, as we've noted before again despite huge growth in brewpubs/ taprooms. That's another sign of just how hard mainstream brewers have gotten hit in on-premise.  

While US craft movement took domestic beer biz by storm in recent years, now it's going global. And that's changing craft's complexion rapidly. More deals at escalating valuations, stepped-up interest from strategics and private equity, and finally a kind of feeding frenzy with big global implications. It's no coincidence that several of most significant craft transactions in last yr at least in part fueled by international ambitions/concerns, including Founders sale of stake to Mahou and Firestone Walker's purchase by Duvel Moortgat. Heineken/Lagunitas deal is absolute capper to this chapter. It's much more about global oppy than diversification away from difficult European mkts (more of a consideration for Mahou and Duvel). Heineken and Lagunitas deal had an implied valuation that approached $1 bil for the total enterprise or about 23-24x EBITDA, what Nomura called "nosebleed" multiples. What could justify it? A changing world, where craft "metastasizing" all over the world as founder Tony Magee told INSIGHTS in interview, published in our Express and Craft Brew News.

Lagunitas valuation dwarfed that of previous largest craft deals, which also had strong intl components. Recall, Duvel Moortgat USA purchased Firestone Walker for around $250 mil earlier this summer. And Spanish brewer Mahou bought a 30% stake in Founders for $90-100 mil, implying valuation north of $300 mil. Those 3 brewers alone are slated to sell about 1.3 mil bbls in 2015, up well over 300,000 bbls. And they have a collective value approaching $1.5 bil. Wow! These are some hi-fliers. They will be 6-7% of craft volume, but likely 10%+ of growth.

All 3 transactions done by foreign-based brewers, tho only Heineken is a global giant. Common thread: international oppy. That just kicked into a much higher gear. Heineken/Lagunitas is all about global. In near term it's significantly about Mexico. ABI and Heineken control 98-99% of biz and distribution there. So Lagunitas found a way in. In US, Lagunitas and Heineken will remain separate; Lagunitas will do its own thing and it will be business as usual. At presstime, MillerCoors struck deal to buy vast majority of hot Saint Archer in San Diego, only 2 yrs old and expected to reach 35,000 bbls this yr in Calif alone. MC plans to focus on Calif first and gradually expand St. Archer.  

After nearly yr long search for replacement for Tom Long, Molson Coors and SABMiller finally found their man, right under their noses. Molson Coors cfo Gavin Hattersley began job as MillerCoors interim ceo on Jul 1; he was named Tom Long's successor as ceo Sep 8 (and will remain as Molson Coors cfo until Nov). Gavin hit the ground running, with a bias for action, clearly endorsed by MC owners. He changed top sales and mktg execs, fired lead ad agency and bought a majority stake in a hot craft brewer. That's within first couple of mos. Just as important, he began to (re)fuel a corporate culture that many felt had become sluggish and fearful. MC distrib council wrote SABMiller ceo Alan Clark and Molson Coors ceo Mark Hunter endorsing Gavin for MC ceo. Clearly, parent cos impressed, but they also did not find right outside candidate. So Gavin deservedly gets his shot. Perhaps MC backed into exactly the right decision. Surely, no outside candidate could possibly know MillerCoors as well as Gavin; he served as Miller and MC cfo for 10 yrs. He's well-regarded inside and outside MC. "There's a great amount of energy and focus" and "very strong support" for Gavin "with the team we have now," said sr veep Pete Marino. "There are many difficult decisions ahead," Pete added, but MC "fit to fight."

"We got the right guy for the job, that's for sure," Molson Coors ceo Mark Hunter reiterated Sep 10 at Barclay's investor conference. Gavin has been "filling in very ably" since taking over in Jul, said Mark, calling him "an outstanding" leader. "He has quickly taken action against a number of areas," and has "shown a deep understanding of the strategic issues," said SABMiller ceo Alan Clark. Gavin's prior experience with both Molson Coors and SABMiller helps give him "a chance to bridge the divide" between the two cos, noted Wall St Jnl. "We view this as a positive for" MC "as we…believe in his ability to lead" MC, wrote Cowen and Company's Vivien Azer, citing his extensive experience with MC.  

Three, count 'em 3 deals in a 1 week period. That's gotta be a record. On top of it, they involve each of the top 3 global brewers, buying stakes in craft brewers or artisanal cider cos here in US. The beer world is changing fast, rendering definitions and boundaries somewhat meaningless. One of deals was groundbreaking transaction that is both biggest and most far reaching craft deal yet: Lagunitas will sell 50% stake to Heineken and form JV for implied valuation near $1 bil. Then MillerCoors JV bought (vast) majority of San Diego's fast-growing Saint Archer, thru its Tenth and Blake unit. That squarely got MC in game of craft brewer transactions at last. Finally, AB's Goose Island bought a majority of small cider co, Virtue, formed by former Goose Island brewmaster Greg Hall. While AB's deal probably least significant of 3, AB shopping on several fronts; at least one more craft deal coming soon. Meanwhile, these latest 3 deals made 16 craft/cider transactions tracked by INSIGHTS in just 8 mos, including some of hottest brewers like Lagunitas, Firestone Walker, Oskar Blues. Deals also came in many different shapes and sizes: strategic buyers, private equity, ESOPs, you name it. The 16 deals in 8 mos already a higher total than for all of 2014.

But it's not just craft deals. Distrib deal pace picking up too. Thanks to AB again in part. As expected, AB struck deals to acquire its brands from 2 more distribs in Northern Calif. That makes 5 branch additions this summer (tho it also sold off 2 in KY because of law change there). We've already reported on 12 AB (mostly smaller) distrib transactions this yr, compared to 8 in all of last yr. There are many more in works. INSIGHTS has tracked 21 distrib deals in all, for part or (usually) all of a distrib. Again, that's more than for all of 2014. So between craft and distrib deals, INSIGHTS has already tracked 37 transactions thru early Sep. And there are lots more comin'.  

Getting tuffer to figure out what public thinks is appropriate in TV ads, AB prexy August Busch IV told mtg of ad agency execs today, reports Ad Age.  Tolerance for edgy ads like some of the ones AB ran during Super Bowl has clearly lessened and will be “even tighter come November” as election nears, August expects.  Net-net: horse flatulence and biting dog ads will air no more, despite their popularity in post-Super Bowl polls. “We have to get the mood,” said August, noting that “people are drawing boundaries” and “nobody has a good feel” for what is appropriate these days.  AB workin’ to  determine good taste/bad taste boundaries for ads.  AB also lookin’ more closely at product placements, Ad Age reported, specifically success wine/spirits had with presence in (explicit) “Sex and City” HBO show.    

It’s getting nasty out there.  AB unleashed its spring offensive against Miller today with a multi-pronged initiative called “Unleash the Dawgs—Take a Bite Out of Lite” available to distribs on Busch Satellite Network.  “Dawgs” involves separate efforts targeting Miller Lite with 4 different brands, including Natty Light as a better value, plus the radio return of Frank and Louie attacking Miller prexy campaign ads.   AB also took out full-page ad in USA Today that played the patriotism card (as anticipated by Ad Age in front-page article titled “Bitter Beer Brawl” earlier this week).  AB pitted a small picture of Miller Lite dubbed “The Queen of Carbs” and in smaller type “South African Owned” against a much larger picture of Bud called “The King of Beers” and “American Brewed since 1876."   “We’ll let Miller Lite spend all their time talking about carbs,” wrote AB, “At Budweiser, we’ll continue to spend all our effort making great beer.”

Not to be outdone, Miller took out full-page ad practically draped in American flag.  The heading: “Thank you America for choosing on Taste.”  Showed Miller Lite up 13% vs Bud Light down 1%.  (In small type at bottom, turned out to be Nielsen for 26 weeks thru 5/8.)  Then “American Born—American Brewed.”   

About-to-bubble-over AB-Miller tensions kept under wraps earlier this week at Beer Inst mtg.  After BI prexy Jeff Becker joked that AB prexy August Busch IV ought to run for office like Pete Coors, August got laugh at board mtg noting Miller already “running for President.”  Norman welcomed AB as “new Chinese business partners,” complimented “first-class efforts from first-class organizations.”  He even took AB brewery tour.  Both talked unity talk, but at dinner at Grant’s Farm, August notable by his absence.