Consultant Andy Christon took oppy of recent industry “realignments” (Monster moving out of AB houses, Constellation pulling Modelo portfolio from AB branches) plus chatter about coming AB incentives and “suppliers’ hardball tactics” to get distribs more “aligned” with them, to revisit some familiar ground and add new thoughts.  Familiar ground in new note to clients is Andy’s “golden cases” theory.  He again argues that loss of “power brand” that represents say 15% of volume, (i.e. Constellation/Yuengling) could whack EBITDA by as much as double the volume hit or more (percentage-wise), given profit/case loss and operating cost/case increase.  That’s “not a good recipe” unless distrib finds “viable replacement.”  Not only do seller’s overhead costs/case increase and profit/case decline, but seller’s return on capital declines (offset by cash it gets from buyer) and there could be tax hit unless the brand can be replaced in 6 mos thru 1031 exchange “as AB aggressively is endeavoring to do” to replace lost Modelo volume.  Then too, most of cash gained from “power brand” sale more likely to be distributed to owners or used to retire debt, Andy believes, than reinvested to compete vs that lost brand. 

As distribs add brands to offset lost mainstream volume and suppliers make their own brand moves and push wholesalers to be more aligned (by selling off non-aligned brands), Andy takes alignment/realignment thoughts a bit further to suggest:  

• AB distribs that lose (or divest) Constellation/Monster/Others “may overpay to obtain hot craft brands in trying to replace that volume. Adding more small brands also leads to SKU proliferation which reduces profitability.”

• AB’s Equity Agreement “assessments” may not accomplish anything more than additional “anxiety and tension,” without helping sales. 

• “In the long-run, forced realignment could reduce the quality of investors and managers in the distributor system. The value of mainstream distributorship rights may begin to erode, as lower quality investors enter the industry.”

• More distribs may “disobey” principal supplier, create “disharmony” in system.  “The less united the system becomes the less power it has to confront the big issues of taxes, franchise laws, and self-distribution.”

Andy concludes that environment remains “seller friendly” (others disagree).  But with more supplier realignment “transaction prices will be impacted and we will likely see an increase in supplier terminations and related legal disputes.”  Net-net: “the value of your brand rights have endured, and they are about to be tested - yet again.”

That’s stinging headline in Chi Biz Jnl column by Lewis Lazare (whom MC worked well with in past), reporting on blog post by former longtime top ad exec on Coors account Dan Fox after MillerCoors pulled Coors Light and other brands from Cavalry last week.  “The newly promoted top executives at MillerCoors just struck a blow for …ignorance,” wrote Dan on his Hey Beer Dan blog. Ouch.  One big caveat with Dan’s statements should probably have been mentioned:  Dan worked with/mentored Cavalry ceo Marty Stock for many years. Dan also out of biz for a number of yrs. That doesn’t invalidate Dan’s view, but does mean he’s likely not unbiased.  Still, he’s not only one wondering about latest MC moves.  “Add advertising veteran Dan Fox to the list of observers who think” MC and new cmo David Kroll “might have made a big mistake in severing the relationship last week with Cavalry,” began Lewis’s column.

In blog post, Dan cautions that switching agencies “is go-to-move when new people take reins,” but “the ugly side” of agency switches “can be the sudden and complete loss of institutional memory for a brand.”  MC basically has performed “a lobotomy on itself,” in Dan’s view. While clients argue they retain the institutional memory, not the agency, Dan scoffs, given “today’s Big Beer marking departments rarely have any ‘old hands’ in their ranks,” these days.  He acknowledges tho that ad folks “are not all good brand historians” and “pursue their own agenda rather than serve the brand’s best interests.”  Such blunt comments “could only have come from someone no longer actively working in the ad business,” wrote Lewis. Today, “bottom line trumps everything,” and mktg execs “are often forced to make changes suddenly, and then cross fingers and hope it all works for the sake of the brand’s bottom line, as well as the brand image,” he added.  

IPAs continue to eat up share in craft segment.  “IPAs accounted for less than 8% of the craft category in 2008,” Brewers Assn economist Bart Watson wrote of top craft style in IRI data for BA blog. “Today they are 27.4%,” he added in post asking “What’s the Next IPA?”  But of course, IPA is the next IPA, as he answers right off the bat.  That’s been clear for a while. IPAs could be half of a craft category that’s twice as big, Sierra’s Joe Whitney said at its sales conference last yr.  This yr, the style’s still up 45% by $$ in IRI multi-outlet + convenience data thru Jul 12. That’s near half of craft’s total $$ growth, +4.5 share of both $$ and volume. “That type of share growth would be incredible in a static category,” Bart says (his emphasis). But craft far from static. Craft volume headed toward tripling since 2008, he says, so IPA volume could grow 10X in that time, “more than 6 million barrels in absolute growth,” taking IPAs to about 7 mil bbls this yr.  Whoa.

We’ve heard countless remarks about added focus on growing Hispanic population in US from large beer cos, and it looks like they’re putting their money where their mouths are.  Three of the top-25 largest spenders (and four of the top-50) in Hispanic media last yr were beer cos, according to just-released AdAge “Hispanic Fact Pack.”  MillerCoors and ABI were #17 and #18, followed by #23 Constellation (including spirits biz) and #44 Heineken.  Cos combined spent $241 mil.  MC and AB each over $70 mil, Constellation nearly $60 mil and HUSA just under $40 mil.  Total US ad spend on Hispanic media grew 12% to $9.5 bil in 2014, according to AdAge.  Look at these trends: ABI +29%, Constellation +44% and HUSA +15%.  Each ramped up Hispanic media spend well above natl average in 2014.  However MC Hispanic spend actually declined 9% in 2014 vs yr prior.  Interestingly, it still (as of last yr) had highest Hispanic media spend among all brewing cos, yet MC notably remains the only one of top 4 without a Hispanic brand portfolio in US.  

Less than half price.  Someone sent picture of a $25 mail-in rebate for Bud ½ bbls in Calif that’s available in stores like Total Wine, BevMo etc.  And that’s on top of 2-week promotional price of $70 per half bbl. That means you can get Bud kegs for just $45.  That’s lowest we can recall in recent yrs.  Comes at a time when Bud off-premise trends have improved. Down 0.6% for 4 weeks and 1.6% yr-to-date in Nielsen all-outlet.  

Beer up 1.5% for 4 weeks thru Aug 1 in Nielsen all-outlet, shaking off the Memorial Day and 4^th of July funk at last.  AB and MC each almost even; down 0.3% and 0.5% respectively.  Big improvement in volume but still lost same amount of share, 1.5 and 0.6 share of $$ respectively.  But in better environment, Constellation Brands Beer Division is just pouring on the gas.  Volume up 17.4% for 4 weeks, $$ sales up 18.8%.  It gained 1.2 share of $$ during 4 week period.  Sure, Modelo Especial flying.  Up 26% for 4 weeks.  But Corona growth rate accelerated to mid-teens; up 14% for 4 weeks.  Now up almost 10% yr-to-date in Nielsen all-outlet.   Each of Modelo Especial and Corona gained a half share of $$ in last 4 weeks. Corona Light up double digits too. 

Meanwhile Michelob Ultra and Stella also turned in stellar performances; each up over 20% for 4 weeks.  Miller Lite accelerated to a 4.5% gain with flat pricing.  And Coors Light returned to growth in the 4 week period (up 1%) just prior to letting ad agency go.  Having got thru worst of World Cup comps apparently, Bud Light trends also improved markedly.  It’s down 0.8% in last 4 weeks. Down 1.4% yr-to-date.  

While AB seeks fed court declaration that it followed NJ law in paying $563K to Hunterdon distrib for Elysian brands earlier this yr (see May 8 Express), Hunterdon fired back that instead, AB violated state law and more.  Hunterdon, part of Sheehan family’s Craft Beer Guild and a statewide craft distrib in NJ (Hunterdon does not sell AB in NJ, tho Sheehan operations do elsewhere), just responded to AB’s lawsuit.  AB claimed NJ law allows “successor brewer” to move brands as long as distrib who loses them gets fair mkt value.  It calculated value of Elysian brands at 5.5X estimated $12/case GP on approx 8,528 cases sold in previous yr.  In 2014, AB transitioned Blue Point brands for 4.75X GP, so it claimed to be giving Hunterdon a “15% premium.”  Lawsuit cited discussions with Hunterdon over value of brands, but no deal reached.  Anticipating lawsuit from Hunterdon, AB sent termination letter and check on May 4 (yes, the letter actually sez: “Enclosed please find a check…”).  AB also filed suit for declaration that AB in compliance with NJ law. 

Hunterdon, of course, has a different take on this series of events.  It disputes most of AB’s claims about how early 2015 negotiations (and non-negotiations) went over Elysian.  Also made counterclaims against both AB and Elysian.  Those include charges that: 1) AB and Elysian failed to comply with NJ law; 2) Elysian violated distrib contract; 3) AB interfered with that contract; 4) AB did not act in a “commercially reasonable manner,” and more.  Hunterdon seeks judgment in its favor, plus damages, costs and atty fees. 

Hunterdon’s Side of the Story; It Proposed Brand Swap  Hunterdon “specifically denied” AB claim that it tried to reach “mutually satisfactory arrangement” to avoid termination and that AB’s efforts to do so were “rebuffed.”  Also denies that: 1) AB’s $563K figure constitutes fair mkt value for Elysian; 2) Blue Point was “reasonable or appropriate comparable” and; 3) AB’s multiple of 5.5X was “consistent with” or “higher than” other brand moves in NJ.   Since getting Elysian in 2008, it grew the biz 70-150% each yr, Hunterdon sez, “made substantial investments…beyond what it would otherwise expend on similarly situated brands” based on growth rate and expectation of keeping it.  Hunterdon heard from AB in Jan that it wanted to move brands to AB distribs, who would contact Hunterdon.  But “no AB New Jersey wholesaler contacted Hunterdon,” it claims.  In late-Feb, Hunterdon’s Michael Short told AB that “rather than accept payment” for Elysian brands, Hunterdon wanted to do swap (presumably with AB’s NJ distribs) and “Hunterdon would pay 12 times the gross profit for any difference in volume between the Elysian brands and” brands that went to Hunterdon.  Michael thought that multiple “fair” given “prominence, national recognition and potential of the Elysian brands and the craft brands in discussion.”  AB lawsuit didn’t say anything about swap, but only that Short “asserted” Elysian brands worth 12X GP.  After that discussion, AB exec told Michael that NJ “precedent” set after 2007 trial over transition of AB InBev brands was 3.3X GP and offered 4X for Elysian. 

During same time period (late Feb/early Mar) Hunterdon ordered new Elysian brand, but Elysian never shipped it.  In early Apr, Elysian told Hunterdon it would not ship any more beer due to legal issues and that Hunterdon was “on hold per AB-InBev.”  Elysian gave no other indication that it was terminating Hunterdon, latter claims.  But Hunterdon viewed this as a “de facto termination of Hunterdon’s distribution agreement with Elysian.”  Subsequently AB’s (about to depart) Randy Jozwiakowsi spoke with one of Hunterdon’s owners, Tim Sheehan.  (Turns out Craft Beer Guild held in trust by “eight individual member trusts, each owning a 12.5% share of its stock,” counterclaim reveals.)  Tim told Randy 4X GP wasn’t fair mkt value.  Then Hunterdon’s atty sent letter to Elysian’s atty stating that Elysian’s failure to ship beer violated the contract and NJ law.  But AB atty responded (not Elysian atty).  She pointed to lower multiples paid for other brands and claimed the 5.5X GP offer was a “premium.”  And while Hunterdon’s atty suggested AB, its distribs and Elysian were “seeking to undermine” value of Elysian, AB atty wrote that “makes little sense” since not in their interest to do so.  Three days later, AB sent termination letter, check and filed lawsuit.  Three mos later we’re in early stage of another AB/distrib battle with potentially broader implications for brand value and AB-distrib relations.  

Monster Energy’s lower than expected sales growth of 1% to $693.7 mil last wk led to some hand wringing as execs admitted transition from Bud system to Coca-Cola network has led to some disruptions.  Transition in US and Europe have not gone smoothly so far, but ceo Rodney Sacks reminded that co weathered similar issues 6 yrs ago when if first moved to KO system in half of US. “They got up to speed relatively quickly,” said Rodney.  In Wells Fargo Securities July “Beverage Buzz” survey of c-store retailers, there were reports of “out of stocks,” low inventory levels,” “frustrated drivers,” noted Bonnie Herzog. Yet following MNST shareholder meeting on Fri, she came away “more confident that its runway for growth is vast.”  Disruption issues “are moderating although some issues still remain,” in US and abroad, with MNST “likely” to transfer to several intl bottlers next qtr, she noted.  Positives ahead that bode well for co: 1) entering China mkt perhaps “as early as next year,” 2) co’s announcement it will use $3 bil to buyback its stock, 3) MNST’s previously announced 6% price hike on core brands, which “could boost Q3 results since the lead-time given to retailers is longer than what is typical, potentially leading to some inventory build,” said Bonnie.  

Colo officials havin’ lotsa trouble deciding how much to assess value of AB’s 10.5-mil-bbl Ft Collins brewery, reports the Coloradoan.  AB sez it’s worth modest $28 mil.  Larimer County sez $115 mil.  A state Assessment Appeals board came up with $82 mil. Everyone’s seeking another review, natch, since at AB’s valuation it would pay about $730K in taxes, the mid-level would require $2.2 mil and the upper level $3 mil.  AB “committed” to paying its fair share, is already a “strong contributor” to local economy and pays “$7.7 million annually in real estate and personal property taxes,” spokesman told the paper.  Dispute revolves in part around how to value the property: via open-market worth (limited), cost of facility or how much beer can be made and what it sells for (much higher).        

Cost-cutting track record of 3G Capital Partners has led to “impressive increases in profit margins” for companies receiving investment. “But mixed performances on sales growth” also part of that picture, Wall St Journal wrote this weekend. Looks into results of Burger King, Heinz and AB InBev since investment from 3G (or its founders, in ABI’s case) all showed similar expansion of margins or operating income alongside slipping market share. Heinz brands shed share “in 65% of the food categories in which it has brands,” WSJ wrote. First qtr sales dipped 11.5% for Heinz, while operating income jumped 17%. It’s not “done anything revolutionary or groundbreaking that worked,” a Mintel analyst said of 3G’s investment in Heinz. A 3G spokesperson noted focus on long-term growth and a Heinz spokesperson pointed to “fewer, bigger, better investments.” Share stabilization remains ABI focus, a spokesperson told the paper. But outside observers suggest that immediate focus on “reducing spending through cutting staff and increasing efficiency,” for example, or growth largely thru acquisition challenge long-term growth potential for key brands. This kind of scrutiny on 3G and its investments from press seems to be increasing recently; NY Times also asked about share performance.