Bud and Bud Light lost 1.0 share in Q4, ABI said, not in 2017.  So Q4 share loss less than full yr 2018 loss of 1.15. In full yr, 2017, ABI said Bud and Bud Light lost 1.25 share.  

It ain’t just the mainstream media, tho this comment at least more narrowly tailored.  “I guess traditional beer as we know it is officially dying,” wrote one competitor, sending pic of sizable stack of new Naturdays from AB with lotsa cute toy-like pink flamingos for $19.49 per case (several bucks higher than Natty Light) and statement on billboard: “It’s Natty Strawberry Lemonade.” And that quote has us wondering.  Is traditional beer more rapidly changing into something else, like hard seltzer, like Naturdays, just more frequently with flavor?

Here’s another take on that Bloomberg article (see above).  How many exaggerated articles like this Bloomberg piece today will there be, replete with ominous notes of doom and factual errors? And what effect if any will they have on consumers’ perception of beer? Bloomberg article based on total US beer’s slight and ongoing decline. But it barely acknowledges the realities of a big mature biz, with significant pockets of health, not necessarily traditional beer, and record profitability.  Instead, Bloomberg makes it like beer is going away.  

Bloomberg begins with the example of 21-yr old drinking gin-and-tonic at a recent Columbia University (not exactly the heartland) frat party.  While his “friends say they’ll still buy a 30-pack of Natural Light for games like beer pong or the rare tailgate… his crew generally sticks to liquor when they’re out.” Why? “It’s more bang for the buck,” frat boy sez.  This leads to Bloomberg’s overarching conclusion: “Americans drunk with options are turning away from beer at an alarming rate.” Bloomberg adds: “Beer has a lot going against it for today’s consumer, especially carbs and calories.” But chart compares beer to other segments or categories with healthier trends, all typically consumed with at least as many calories as beer (cider, whiskey, craft beer, mixed drinks, etc).  Then quotes Civic Science’s John Dick who says: “They call it a beer belly for a reason. There’s nobody out there who says beer is good for you.” Really? Over $100 bil in retail sales and no one has anything good to say? Not one person? And what about the decades of research that show benefits of moderate alcohol consumption including beer? Finally, article says “beer may not be as immune as wine or whiskey” to cannabis, showing states with legal weed sales declining, but getting Colorado at least wrong (see Feb 22 Express), not to mention confusing correlation with causality.  We could go on and on, but at the same time this type of article is seeming like a new reality, so industry needs to martial and communicate its arguments, because more articles like this will come.
    

“A first step on the path to a better place,” headlined Bernstein’s Trevor Striling, regarding ABI’s Q4 and 2018 results and 2019 guidance. “Decent quarter, strong guidance,” headlined Macquarie’s Caroline Levy as she raised 2019 earnings estimates.  “Strong Q4 growth offers relief despite a miss on EPS,” said Morgan Stanley’s Olivier Nicolai. To get stock to better place, AB needs “to do three interrelated things,” said Trevor. 1) “get the leverage ratio comfortably below 4x” (4.6 at end of 2018); 2) “this needs to be delivered by a combination of debt-paydown and EBITDA growth”;  3) “the components of EBITDA growth need to have a healthier mix, with more volume and mix and less dependent on price.” Trevor cheered that ABI achieved 1.2% beer volume growth in Q4.  

ABI stock up 5% yesterday and up another 5% so far today.  It “made some progress on cutting its leverage and analysts have noticed,” acknowledged Barron’s.  Tho stock still down big compared to a yr ago, “like so many 2018 laggards, AB InBev has gotten fresh legs in 2019.”  That 10% jump in last 2 days, wrote Evercore ISI’s Robert Ottenstein, “suggests increased investor confidence in” ABI “prospects, and perhaps greater appreciation of the important differences among 3G related companies.”  

ABI ceo Brito told Bloomberg this morn that at ABI, “efficiency was never an end in itself. It was a means to an end.”  Comparing to Kraft Heinz, Brito said: “I think we’re in a very different category. It has its challenges, but compared to food and beverage, beer’s an amazing category.”  

An extra weekend day in Jan boosted beer scans, but it really rocked liquor biz, given it was part of New Year’s Eve buy-in.  Add in a few control states whose reporting period included extra week of sales and result was “artificially inflated” volume gain of 10.9% and 13.4% for $$.  Even after adjusting for extra days, volume up 6% in control states in Jan, $$ sales up 8%. That boosted running 12-mo trends to +3.2% and +6.2% respectively, reports NABCA.  Meanwhile, another policy win for distillers as WV Gov signed law ending ban of spirits sales on Sunday.  

Bloomberg: “The Numbers Are Bleak for America’s Biggest Beer Brands”  Can’t argue with that Bloomberg observation in lengthy article today, tho perhaps with other points in it (see below).  The numbers are the numbers, as we’ve published them. Bloomberg joins growing ranks of those who note beer losing share to spirits, other options, adding anecdotal evidence that millennials especially turning away from beer.  Meanwhile, Bloomberg used the “D” word to describe “corngate,” observing that the corn syrup controversy “hinted at the air of desperation that is floating over the US industry,” as sales dip and big brands lose share to other alc bevs and, of course, legal cannabis.  One other observation, from consultant John Dick at polling firm CivicScience: AB ad and MC response “felt like grasping at straws. It wasn’t aspirational – it was marketing about being less bad than the other bad things.”  

Elsewhere, Esquire’s associate lifestyle editor Sarah Rense offered her brutal take on all this: “Bud Light and MillerCoors Were Going to Team Up to Save Beer.  Then Bud Light F*cked It Up.” Brewers had agreed to run national ad campaign to boost beer’s image, she wrote, but “then, AB InBev made a dick move,” with Super Bowl ads.  Net-net, in Rense’s view, any ad to “save” big beer companies would “have to be one hell of a commercial” since “big beer is losing relevance.”

It was over 4 yrs ago, when Massachusetts craft brewer (Pretty Things owner Dan Paquette) tweeted charges of widespread pay-to-play scheme in Boston bars.  Ultimately, Mass distrib Craft Beer Guild (CBG) tagged $2.6 mil for buying tap lines ($1K to $2K per) and providing per-keg rebates ($15-$20 per) to numerous area bars via payments totaling approx $120K over 5 yrs.  Payments made thru 3d-party companies that shared exact same officers/owners as the retailers. CBG allegedly reimbursed “fully or partially” for kickbacks by suppliers. Most of the retailers originally tagged escaped punishment as Mass ABC couldn’t link payments directly to licensees.  After 3+ yr legal challenge, CBG just lost its last appeal in Supreme Judicial Court of Mass.  But, like its competitors, lone retailer that still faced penalty won a reversal of charges that it illegally accepted payoffs.

Lengthy decision provides detailed look at history of Mass alc bev laws and regs.  In the end, judges supported ABCC charges that CBG violated Mass law and ABCC rule that: 1) bars price discrimination, since CBG did not offer rebates to all retailers and; 2) for illegally inducing retailers to purchase particular brands.  CBG argued all along that inducement ban had been repealed yrs ago by the legislature.  But judges rejected that argument, ruling that the ABC rule banning inducement stood. Mass ban of volume discounts was repealed (so long as all retailers get same offer), judges noted repeatedly.  But Mass ABCC rule “continues to prohibit inducements within the context of a three-person scheme,” presumably distrib-3d party-retailer.  Court opinion also sides with ABC’s position that “the repeal unambiguously means that it can no longer prohibit uniform discounts, but the repeal was not intended to ‘permit licensees to secretly pay bribes or kickbacks to bar managers or management companies in an effort to have those people influence…retailers to purchase particular kinds of alcohol.’”     

You Can’t Give It, But He or She Can Take It  At the same time, judges agreed with retailer Rebel Restaurants that “the regulation does not envision enforcement against the party receiving inducements – only those giving them.”  Most “sensible” reading of regulation, judges conclude, is that it bars a licensee from providing an inducement or allowing a “bagman” to do so, but “not that it prohibits a licensee from allowing itself to receive an inducement.”  So, judges reversed lower court’s approval of ABC Comm’s finding vs Rebel.

With federal ban on marijuana still in place, it has made pot biz “a rare industry in which Canada has an edge over its more powerful neighbor,” wrote Wall St Journal.  Marijuana companies in US are already on their “back foot” trying to compete and “the longer the US federal ban on the drug is in place, the harder it will be to catch up.”  Canadian companies have “deep pockets” and US companies are being “taken out by cash-rich Canadian rivals,” added WSJ.  These deep pocketed companies are poised to “dominate CBD products,” which “are of interest to some of the biggest consumer companies, including Coca-Cola,” noted paper.  In 2018, Canadian weed bizzes bought out 57 related bizzes in US, more than double the 20 or so they purchased in 2017.  US companies are handcuffed by stock exchange regulations because of fed ban while NYSE and Nasdaq “allow operators from Canada” oppy to “tap deep US capital markets.”  Biz in US also “more dispersed and burdened by higher costs,” as companies can’t transport across state lines and are paying for multiple facilities. Even if fed ban were to be lifted tomorrow, WSJ points out, “it would take time for the US to develop national standards and supply chains to rival Canada.” And unfortunately for US, “many of the best targets may be gone, or fetch higher valuations, by the time US cannabis businesses can get access to more cash.”  

Tho ABI stock up 4-5% today and investment community generally reacted positively to ABI’s results, two notable exceptions in mainstream financial press.  “Bud Brewer Still Leaves Sour Taste,” headlined Wall St Jnl’s Heard on the Street column. ABI “could face a nasty reckoning with investors,” wrote Bloomberg’s Andrea Felsted, if it doesn’t reduce debt, grow and show it’s “taking a different path” than Kraft Heinz.  “What used to be considered the company’s strengths—acquisition-led, debt-fueled expansion and a big emerging markets footprint—are out of favor,” said Heard on the Street.  Calling ABI results “mixed,” WSJ column noted that it lost share in 2 biggest mkts, US and Brazil, “and as emerging-market currencies weakened against the greenback, it struggled to put a dent in its $103 billion debt pile, which is largely denominated in dollars.”  Shares jumped on “better-than-expected” results and “more upbeat guidance,” but ABI’s “business model is a longer-term problem.” Then too, “link with Kraft Heinz not helpful” as “Kraft’s problems change how investors value companies known for deep cost-cutting.” 

“Investors” who took AB shares up “may be getting ahead of themselves,” wrote Bloomberg columnist, noting that ABI is “still lumbering under a substantial pile of borrowings.”  While ABI is “taking action” to deleverage, “there is still a very long way to go to achieve its goal of driving net debt down” to targeted 2x debt to EBITDA.  “Though it may have dodged a bullet today,” continued Bloomberg, “ABI is still vulnerable to serving up some serious disappointment.” It had $133 bil of goodwill on its balance sheet Dec 31 and $44.8 bil of intangible assets, “which together exceed its market capitalization.  This presents a risk if demand wavers for any of its big brands as they battle niche and local rivals.”  Both columns close by noting that ABI trading at a relatively cheap 17x forward earnings, but “it may still be safer to stump up 19 times for” Heineken, “its less-in-hock Dutch rival,” closes WSJ column.  

Surprisingly few details or questions on US on this morning’s 90-minute conference call.  But ABI ceo Brito did say “we are pleased to see our market share improving” in US during prepared remarks.  And he quantified that a bit more during Q&A, noting that AB mkt share declined 40 basis points for the full yr, but only 20 bps in 4^th qtr and Dec “better than that.” Premiumization a key part of AB push here and globally.  In fact, AB’s High End Co already represented 30% of growth, even tho only 10% of volume globally. 

Beer “has a significant opportunity for premiumization” compared to wine and spirits, because it’s so much less premiumized.  Brito showed stats: in “early maturity markets,” literally zero percent of beer volume is priced at 1.6 index to largest brand in mkt, while 7% of spirits and 18% of wine volume at that 1.6 index.  In “mid maturity markets,” 3% of beer volume at 1.6 index, compared to 17% of spirits and 70% of wine. And in “late maturity markets,” 6% of beer volume at 1.6 index, compared to 30% of spirits volume and fully 85% of wine.

Cutwater Acquisition Akin to Zx Approach; Oxxo A Go-Go  Using idea of Zx Ventures, said Brito, “when we enter established categories other than beer, we try to do it in a disruptive way,” and that’s principle behind Cutwater. AB doesn’t want “big” brand that is “me too.”  Rather, it takes more of a “craft” angle, like AB did with wine too (Babe).  Cutwater “belongs in that framework.” On Oxxo deal, ABI “very happy” as it had “no sales up until this point” in biggest c-store operator, not just in Mexico, but in all of Latin America.  ABI starting with Oxxo in “regions that are very important to us,” like Mexico City, where “we overindex national share, big time.”  Agreement starts “year prior to the contract ending.” But hadda be phased in; there’s “no other way to do it.” To add so much volume requires production, sales personnel, planning etc.