Each of top 4 suppliers (AB, MC, Constellation and HUSA) suffered double digit declines in California in Feb, according to several sources. Largely weather-related, and thankfully in a smaller mo, but these tuff trends dig a hole for top suppliers.  And it will take a while to get out.  Only hard seltzers and some craft bucked the trend, we hear. 

While beer volume and $$ sales slowed to -2.1% and -0.2% respectively for 4 wks thru Feb 23 in Nielsen all-outlet scans (see yesterday’s Express), spirits accelerated to volume gain of +4.1% and $$ gain of +6.8% in Nielsen’s off-premise universe, several analysts reported.  Meanwhile, Distilled Spirits Council celebrated last week’s decision by the PGA Tour to become “the last major professional league to modernize its sponsorship policies to include distilled spirits.”  As Council ceo Chris Swonger observes, this move “equalizes the treatment of marketing and promotions with beer.”  Under new policy, spirits companies can run ads during PGA broadcasts, get additional “in-program exposure” during telecasts and players can wear liquor logos.  Gettin’ into pro golf yet another sign that distillers “playing the long game,” reminds Consumer Edge analyst Brett Cooper.  “Our view continues to be that the distilled spirits players in the US have more opportunity to continue to play the long game to work towards location equalization (ability to sell in the same channel) and tax equalization.”  Brewers’ continued efforts to explore beyond beer and blur lines between bevs, i.e. hard seltzer phenom and AB and Boulevard recently adding canned cocktails, are also moves in that direction.          

Crook and Marker continues to add high profile talent to its fledgling outfit amidst its ambitious natl launch this spring.  Just hired Ken Kurtz as prexy.  Ken spent last nine yrs at Bai (co that Crook and Marker founder Ben Weiss founded and ultimately sold for $1.7 bil), including last 5 yrs as prexy, sez release.  Ken also spent time earlier in his career at Boston Beer and Gallo.  Ken joins other senior execs, including chief sales officer Ray Faust, formerly chief sales officer at Heineken USA and chief strategy officer Karyn Miller, who led JP Morgan’s beverage banking practice for yrs before joining Crook and Marker.  That’s a lot of high priced talent for a co that’s just getting outta the gate.  In recent conversations, several distribs say it’s not off to such a fast start, perhaps because of the lack of name recognition.  But in release, Ken sounds the same kind of brash notes that have characterized Crook and Marker since its inception:  “Crook and Marker beverages are like nothing else on the market—certainly not another hard seltzer—because they deliver the combination of flavor, variety and transparency that today’s consumers demand…. Crook and Marker is extremely well positioned to have a major impact on the alcohol beverage space.”

Craft Brew Alliance unable to return to volume growth (down 4 straight yrs), but shipments off just 11K bbls, 1.5% in 2018.  Depletions dipped 2%.  Kona, closing on 2/3 of CBA volume, up 8% to 456K bbls, one of best performances among established craft brand families last yr.  CBA also got 4K-bbl volume pop from newly acquired partners in 2018.  But double-digit declines in Widmer (-20%) and Redhook families (-24%) offset all of the growth and then some. 

Revs dipped modestly to $206 mil (2017 boosted by contract brew shortfall fees it got from Pabst that yr).  Gross profit up $3 mil to $68.3 mil and gross margin widened 160 basis pts to 33.1%.  CBA also kept increase in selling, gen admin costs in modest range.  So operating income expanded by almost $1 mil to $5.8 mil (operating margin still under 3%).  CBA cited cost savings linked to “enhanced agreement with AB,” contract production of Goose Island and Virtue cider, inclusion in key AB distrib incentives and “successful test pilot with Kona in Brazil.”

Looking to 2019, CBA expects volume gains of 5-8%, “reflecting a significant increase in commercial investments and insights from our consumer research.”  Also: avg price increase of 1-2%, bump in gross margin to 34.5-36.5%, cap ex of $15-$19 mil with “new Kona brewery going online in 2019.”

Soft Q4 for US beer biz experienced by imports too.  Dec imports slipped 76K bbls, -2.9%, reports Beer Inst economist Michael Uhrich, based on Commerce Dept data.  That put Q4 imports down 108K bbls, -1.3% a rare quarterly loss for segment in recent yrs.  So, import trend, which was still +5% thru 9 mos, dipped back to +1.2 mil bbls, +3.6% for full yr.  Even so, imports picked up another 0.8 share of US biz for the yr, growing to 17.4.

Mexican beers increased dominance of segment, tacking on another nearly 2 mil bbls, +8.6% in 2018 and coming in just below 25 mil bbls in toto.  That’s also just below 70 share of entire segment, and 23 share of segment higher than 10 yrs ago.  Meanwhile, shipments from most other major source countries declined in 2018.  Dutch shipments down 311K bbls, -6.6% and slipped to 12 share of segment, down 10 share in 10 yrs.  Belgian and German shipments combined (to smooth out impact of Stella Artois, shipped from both countries) dipped similar 300K bbls, -10%.  Canadian and Irish biz each down 1-2%.  But UK volume cut in half to just 125K bbls.  (That’s down from a half-mil bbls as recently as 2014.)  Italian and Polish shipments managed slight gains.  Jamaican shipments off 2.6%.  Those are all of the countries that ship 100K bbls or more to US and represent fully 98% of total imports. 

Exports End Yr +130K Bbls, +2.2%  After tanking in Oct-Nov, exports rebounded with 11% gain in Dec, but still way off for Q4.  For the yr, exports up 130K bbls, 2.2% to just over 6 mil bbls.  So, almost 30 mil more bbls shipped into US than out of US last yr.  Of that 6 mil bbls in exports, over 2 mil bbl shipped to Mexico, +6%.  No other country imports over 1 mil bbls, tho Chile close at 903K bbls, down 3% last yr.  Shipments to Canada plummeted by almost 1/3.  But shipments to Korea soared by 157K bbls, 82%.  And weirdly, Paraguay became a top-5 export mkt with shipments there jumping by over half to 230K bbls. 

Lookin’ at latest batch of IRI data, three numbers jumped out.  Mike’s Hard Lemonade Co $$ sales up $37.5 mil, 47.5% yr-to-date thru Feb 24 in IRI multioutlet + convenience.  Jumped 0.7 share of $$ to 2.5.  In FMB segment, only one where Mike’s plays, it grabbed just below 1/3 of volume yr-to-date and just over 1/3 of $$, up 5-6 share of each.  Meanwhile, Constellation $$ sales up $73.2 mil, 14.5% YTD.  It gained 1.15 share of $$ to 12.3.  Constellation dominated Mexican imports, which are still up $72.6 mil, 12.6% YTD and up 2.6 share to 71.6 share of import $$ (78 in c-stores).  Finally, IPAs still more than all the growth of craft segment.  IPAs up $27.9 mil, 14.4% YTD, while total craft $$ +$20.6 mil, 3.8%.  And IPAs up 3.7 share of segment to 39.7 share of craft $$. Yup, IPA now 4 in 10 craft $$.   And that share even higher of indie craft if you tease out Blue Moon, Shock Top, Leinie.  

Declaring that Constellation’s “not your mother’s CPG,” Credit Suisse analyst team, led by Kaumil Gajrawala, initiated coverage with outperform rating, put $230 target price on stock (trading at $166 today) and really accentuated the positive.  Why?  In a word, growth.  Constellation will achieve 6% topline growth CAGR for next 3 yrs, free cash flow growth of 58% (16% CAGR).  That includes beer volumes growing 9-10% for next 3 yrs, driven by “arsenal of innovations and regional Mexican brands across the categories and new regions, which should collectively offset the expected fade of the core portfolio,” Kaumil wrote.  These growth oppys and Constellation’s superior margins separate it from its CPG peers. 

Other differences distinguish Constellation.  It’s a “controlled company with a greater appetite for risk” than others.  That’s not likely to change, and will “perennially complicate the business’ valuation.  Risk appetite, which led to investments in Ballast Point and Canopy, created “volatility” around the valuation in past, Kaumil notes, and “leads to valuation disconnects at times – we think now is one of those times.”  That conclusion cues up Kaumil’s comments on Canopy.  Constellation’s cannabis partner “has real assets and could be rapidly successful, or may require additional capital.”  It’s got “first mover advantage,” but still lotsa uncertainties around cannabis, capital needs may be “underestimated” and “success is further out than estimated.”  As result, “we therefore assign no value to Canopy,” and while Credit Suisse includes debt for Canopy in valuation of Constellation, it does not include “contributed equity income… it would be imprudent to do so at this time.”

The Four Phases of STZ  So, it’s really the beer growth potential that drives Kaumil’s optimism.  He offers thumbnail history of Constellation, from “Acquisition Phase” (1999-2000s) building co, through “Returns Phase” improving margins (2007-2011), then “Infrastructure and Alignment Phase” (2013-2018), as it got control of Modelo portfolio, built breweries and aligned portfolio to growth segments in bev alc via M&A.  Now, Constellation entering “Marketing Phase,” naming new ceo with mktg background in Bill Newlands.  “Future marketing, innovations, line extensions and acquisitions are expected to align with these new intentions” and drive 5% volume CAGR, Kaumil observes. 

A final, key point.  Constellation’s equity story, in his view, will “shift from margin expansion to cash flow.”  Kaumil does not expect Constellation to expand margins further; they’re already top-quartile.  Indeed, margins could contract, Kaumil suggests.  But, after spending nearly $3 bil to build 3 breweries, cap ex will decline and boost cash flow.  “This step up in free cash flow ($2B run rate by calendar ’21) drives our positive view,” Kaumil concludes. 

Never deterred by negative court decisions, Total Wine seeks review by full 2d Circuit Ct of Appeals of recent decision by panel of judges that upheld Connecticut’s post-and-hold law, minimum bottle price and quantity discount ban (see Feb 21 Express). “Much of the brief reads like a cert petition to the US Supreme Court,” notes NBWA’s Alc Law Review. That could well be next move, given Total’s approach, if this step fails to toss CT’s “pricing scheme.”  That scheme, Total charges, “among the most anti-competitive in the country and is largely indistinguishable from a New York regime that the Supreme Court invalidated 31 years ago,” Total reminds. It results in CT prices as much as 24% higher than “for identical products in neighboring states,” studies show, Total argues again in bid for full court review. 

Key aspects of CT laws that allow producers and distribs to “operate like cartels” with near-exclusive control over retail prices, in Total’s view: 1) distribs set both case and minimum bottle prices for retail sales; 2) retailers pay same price whether they buy “1 case or over 1,000 cases”; 3) due to lack of price competition that results, “retailers like Total Wine have no ability to pass on to consumers…cost savings achieved through operational or other facilities”; 4) distribs control both retail prices and margins.  Panel of Appeals Ct judges that upheld scheme erred by addressing “challenged statutes individually, rather than as a unified scheme that was intentionally anticompetitive,” Total argues.  Panel decision’s other errors include that it “entrenches circuit court splits” on whether post and hold/quantity discount bans are preempted by antitrust law, conflicts with “at least one” US Sup Ct decision and relies on earlier 2d Circuit ct decision that is “no longer good law.”  

Tho scans and anecdotal reports indicate soft Feb, NBWA’s Beer Purchasers’ Index offers glimmer of possibly better things to come.  Overall index of distrib purchasing plans hit highest level since Jul 18, NBWA economist Lester Jones points out. At 60.7 (index over 50 indicates expansion, under 50 indicates contraction), Feb BPI 11.3 pts higher than Feb 2018 and 6 pts higher than Jan 19.  Index for every high-end segment came in over 50: imports (61.5), craft (55.3), FMBs (71.2!) and cider (52.1), tho import and craft indexes lower than in Feb 2018. Lester signaled big pop in premium light and premium regular indexes, +9.2 pts and +10.6 pts vs Feb 2018, but each still well below 40, not to mention 50.  Less positive sign: “at risk” inventory measure snuck up a point vs Feb ’18 and 3 pts higher than Jan ’19, at 54.

“We don’t expect incremental margin growth,” wrote RBC’s James Edwardes Jones re ABI as he cut rating to mkt perform this morn (stock down 2% today), noting that ABI “margins were so high so early in its career,” but that was all M&A and synergies. “Excluding M&A and synergies,” he added, ABI margins “declined by 275 bps [basis points] over the last decade.”  But “further M&A unlikely… owing to a combination of high indebtedness and antitrust concerns” so “we think ABI is on its way to becoming a high margin utility company.” At least James is “relatively sanguine about AB InBev’s ability to service its debt from operating cash flows at least as long as currencies behave themselves to a moderate extent.” But S&P Global Ratings said it “may cut AB InBev’s A minus rating,” wrote Bloomberg columnist Andrea Felsted yesterday, “after its assessment of leverage proved ‘significantly worse’ than expected.”