And so caps another wild and wooly year in the beer biz, tougher and more challenging than most for all too many.  We sincerely hope next year will be better for more folks. While 2019 already looks to have its own set of challenges, we remain incredibly grateful to be part of what’s still a wonderful biz.  At this time of year, we like to reflect on our good fortune and express our gratitude to our readers. As always, it’s great to be part of such a vibrant, dynamic industry.  Thanks also to all of you for great conversations, feedback and info.  We literally couldn’t do it without you.   

Hard to believe, but next year will be our 50^th year of publishing Beer Marketer’s INSIGHTS. My parents started this as a 4-page 2x monthly print newsletter when I was barely a teenager (I grew up with a postage meter in my bedroom.  My fate was sealed). I’ve spent my entire professional career here, almost 40 years.  But we’ve changed and evolved over time. Now we have 5 newsletters going to press 650x in a yr, mostly online, 2 conferences, 1 annual publication and a webinar. And we are well into the 3d generation as our son David contributes more and more to BMI after 5+ years. We’re still running hard just to keep up, but luckily Beer Marketer’s INSIGHTS turned out to have legs.  

Founder Jerry will be 95 in Feb. He’s doing well and sends his regards. Our staff continues to do exceptional work, including longtime friend and colleague Eric Shepard, his son Chris, Gerry C, Gerry K, Jim, Nadia and Angie as well as my wife Robin. At BMI, we are grateful and proud to have served this industry for nearly half a century.  From all of us to all of you take a break, relax, open a cold one and enjoy the holidays. Here’s wishing you and yours a very Merry Christmas and a Happy New Year.

Next issue in 4 weeks.     

                                                                                             Best Wishes,    

With oral hearing on tap for Jan 16, US Sup Ct will review legitimacy of state alc bev regs for first time since 2005 Granholm case.  Balance between states’ rights to regulate alcohol under 21^st Amendment and fed interest in level economic playing fields across states once again before the court.  Decision could have broad impact on state laws far beyond Tennessee’s 2-yr residency requirement for liquor retailers.  Then again, Justices could fashion a narrow decision with modest impact.  Here’s a primer.          

Players & History: TN liquor store assn (TWSRA) and Tenn ABC defend TN’s 2-yr residency requirement for retail liquor licenses vs mega-retailer Total Wine.  TN law claims it’s in TN’s interest “to maintain a higher degree of oversight, control and accountability” for retailers of higher-alc bevs.  When Total sought liquor license in 2016, state sought judgment whether 21^st Amendment allowed TN to enforce residency requirement.  US Dist Ct tossed law; TN Retailers Assn appealed.  US Appeals Ct for 6^th Circuit affirmed lower ct.  Tenn Retailers appealed to US Sup Ct.  Decision expected in spring. US Dist Ct determined residency requirement not an “inherent aspect” of TN’s 3-tier system saved by 21^st Amendment.  US Appeals Ct agreed, interpreting Granholm to bar discrimination vs out of state “economic interests” generally, not just producers.  Appeals Ct also said TN could meet public safety goals via “less discriminatory means,” i.e. require mgrs be residents.      

What’s At Stake Possibly only residency laws, or solely TN’s law.  Potentially much more, if Sup Ct rules that while states cannot discriminate vs out-of-state producers, they can (or cannot) discriminate vs out-of-state retailers/distribs, via residency, brick-and-mortar requirements, etc.  Most of law’s supporters don’t actually say states can discriminate in other tiers, but argue states have “unfettered” rights to “structure” distrib system.  One veteran alc beverage atty (Richard Blau) suggests that, given changes on Court, Granholm itself could fall and Sup Ct could return to stricter states’ rights position under 21^st Amendment vs the “amorphous” dormant Commerce Clause doctrine.

What Retailers’ Assn/Defenders of State Regulation Say “Alcohol is not an ordinary article of commerce – it is both widely enjoyed and dangerously misused.”  Because of different attitudes about alcohol, “it makes sense to leave the regulation of alcohol to state and local officials.... This is precisely what our Constitution does” in 21^st Amendment.  States are “unfettered by the dormant Commerce Clause when they exercise their ‘core power’ to regulate the sale or use of liquor within their borders.”  NBWA argues residency requirement just 1 part of comprehensive 3-tier system; tossing it could mean “pulling a thread that threatens to unravel the entire regulatory fabric.”  Also: TN law allows state to determine an applicant’s fitness, increases odds retailers will sell responsibly because local citizens more tied to communities.  Besides, barriers to opening stores reduce supply; that helps prevent alcohol abuse/problems (i.e. the temperance argument).  Another common point: state legislatures, not courts, should decide appropriate regulation. 

What Total, Free Market Allies Argue  Total and its allies haven’t filed briefs yet.  But, as Total argued when it advised Sup Ct not to take case: 1) US Dist/Appeals Courts got it right; 2) Dist Ct judge concluded TN “blatantly discriminated” vs out-of-state interests; 3) no one offered evidence of legit “non-protectionist purpose” advanced by residency law; 4) state itself did not appeal lower ct decision; 5) TN’s own AG “twice opined” that TN law “violated the dormant commerce clause and could not be enforced.”

It was clear when MC first floated a 10.5-cent fuel and freight surcharge back in Aug that it wasn’t gonna fly, at least as far as distribs eating it. Many of MC’s larger distribs quickly made plans to either reduce local mktg spend and/or take price hikes, saying they just couldn’t absorb hit. Heading into 2019, clear that many, many millions less will be spent by lotsa larger distribs on local level, monies previously matched by MC. That is not likely to help MC trends. Yet MC sez it will maintain spending. Here’s MC chief communications officer Pete Marino: “We understand the impact of the freight and fuel increase is larger in 2019, but cutting local marketing at a time when we collectively need to get many of our brands back towards growth seems short-sighted.  Overall, we will maintain our spending commitment and re-allocate any of those local dollars to national tools and to local markets” where distribs “recognize” need for local spend.  On Dec 6, MC told distribs that as it saw fuel and freight prices “begin to moderate,” it knocked 2 cents off planned increase, bringing it to 8.5 cents. MC said it was simply following formula, but some saw it differently. “I’m guessing it’s a last-ditch effort to save face and save our marketing commitments,” one mid-sized distrib said. “All across the board, at least from what I’m hearing (and doing) ... distribs are not only spending less on marketing overall due to volume decreases, but spending less per ce because of the F&F, 70/30 to 50/50 etc.  The double hit has gotten their attention.”  INSIGHTS talked to large distrib that intended to apply 2-cent reduction back to mktg. 

Meanwhile, AB also on verge of applying fuel/freight surcharge, INSIGHTS hears from multiple sources. It was topic of animated discussion at late-Nov AB wholesaler panel meeting. AB suddenly wanted to implement fuel/freight surcharge of 6 cents for more efficient distribs, as much as 16 cents if not.  After listening to distribs, AB agreed to delay implementation. But Mar 1 increase expected, announcement soon.  Just like with MC, distribs say they can’t absorb increase.  So stay tuned for how these fuel/freight surcharges play out and what effect either higher prices or lower mktg have on market trends.

AB bringing dizzying array of new brands, plans and initiatives for 2019. In 2018, it had top-2 new beer brands with Bud Light Orange at $66 mil in sales and Mich Ultra Pure Gold at $54 mil in IRI MULC YTD thru Dec 2.  They added nearly a point to AB total $$ sales.  But AB $$ sales still down $149 mil, 1.1% YTD.  Innovation a point of strength, but top 2 innovations plus ultra-hot Mich Ultra (+$242 mil, 15.6%) didn’t quite make up $375 mil decline of Bud Light/Bud (-5.6% and 4.3% respectively), not to mention other brands. 

AB’s answer for 2019: push further faster on innovation, in multiple directions at once. Lotsa innovation will arrive thru Beyond Beer program as AB aims to build $1 bil biz in Seltzers, FMBs, NAs, plus now wine and spirits too. (AB total sales about $14 bil.)  There will be national pushes on brands like Bon & Viv Spiked Seltzer, Aguas Frescas, Teavana and organic energy brand Hiball.  Expect most or all to show big growth, at least initially, but represent tiny % of sales. What’s more, AB also expanding Drinkworks devices from its JV with Keurig Dr Pepper which make various cocktails in Keurig-like pods. It entered canned wine biz with Swish; AB distribs selling Cupcake brands in c-stores in pilot program in FL and CA.  But that’s just for starters.

AB will be selling Stella Spritzers, Hard Tea and Hard Coconut Waters in test, Bud NA and Rita Spritzers, plus low-end brands like Naturday (reminiscent of Two Hats) and Lucky Streak (in PA only). Also Michelob Ultra Infusions. Surely there are and will be more as AB now intends to test fast, fail fast or scale up if warranted.  Then too, AB will try to build on yr 1 success of Bud Light Orange, Mich Ultra Pure Gold and Bud Reserve. “Distributors welcome innovation,” said one distrib, especially if they help AB “stay relevant.”  But they are a “drop in the bucket compared to the loss of Bud Light.”  So “innovation is great,” but “fix Bud Light,” he implored. 

AB’s Beyond Beer org built out to 55 people, just in NA, veep Randy Ornstein revealed in recent speeches.  Up from scratch in 6 mos.  Meanwhile, AB laid off about 36 people on Dec 7, including 16 brewery workers in St Lou. This is indicative of how AB is changing; away from beer.  Yet in non-alcs, shoe is on other foot. AB going against soft drink giants that control the mouse, as Randy noted. Not to mention they can pay for shelf space, legal in NAs. Beyond Beer is “huge focus,” said Randy in recent speech.  

Will these investments pay out or even give AB a better growth algorithm in near term?  These questions matter because AB earnings under pressure. Recall, US EBITDA down 5% for 9 mos.  Like MC, AB faces massive cost increases on fuel and freight. And like MC, it seeks to pass that on to distribs (see below). Meanwhile, its global parent ABI has too much debt. In fact, ratings agency Moody’s downgraded ABI debt to Baa1, saying “Leverage will remain high for the next several years.”  Bloomberg headline blared: “Megabrew’s Megadebt is a MegaProblem” following Moody’s action.  But is ABI at risk? With its still massive profits (EBITDA at $22 bil last yr) and cost-cutting skills, that would still shock. On other hand, ABI won’t be engaging in transformational M&A anytime soon.

Perhaps biggest question for AB still remains what to do about its biggest brand.  For about a year, “Dilly Dilly” refrain heard throughout the land.  But Bud Light trends got slightly worse.  Latest ads take place in medieval world without slogan.  And if Bud Light down 6-7%, as scans suggest, that’s a 2-mil-bbl hole AB must dig out of. Altering trajectory by 2-3 pts could be just as important, if not more so, than AB’s increased innovation emphasis. Yet Bud Light seems to be a diminished emphasis, distribs say.

Remarkable evolution of beer biz over last 25 years featured in stats presented at our 25^th Beer Insights Seminar last mo. You can sum up the trend in 2 words: trading up.  Go back 25 years ago (all stats 1992-2017), Modelo portfolio and craft each less than 1% of the biz. Total imports about 4%. In 2017, imports at 16.5 share while craft at 12.4. Imports gained 26.2 mil bbls and craft gained 23.4 mil bbls.  So those 2 growth segments gained 50 mil bbls and 25 share in 25 yrs, averaging a gain of 2 mil bbls per yr and 1 share point. Even that’s not full extent of trading up.  Superpremiums gained 8.6 mil bbls, FMBs gained 7.6 mil bbls, even cider gained 1.7 mil bbls in 25 yrs. Above premium all.  High end gained total of 68 mil bbls, capturing over 1/3 of the industry in 25 yrs. Back at our first Seminar, then-Guinness prexy Bill Olson nailed it, talking about “Riding the Wave” to high end beers. 

Extraordinary growth of high end came in an industry that’s not up much.  Total beer biz gained just 16.6 mil bbls, 9% in 25 yrs.  Even AB barely ahead of where it was 25 yrs ago.  Shipped 89.55 mil bbls in 2017, compared to 87.45 mil bbls in 1992. After this yr’s loss, AB will be below where it was a quarter century ago.  Think about that.  Meanwhile, if you aggregate Miller and Coors, they’re down 11 mil bbls, 18% from 25 yrs ago. But biggest bbls loser of any supplier is Pabst, which was #3 at time.  Brands now contained within Pabst dropped 25 mil bbls in last qtr century.  And down at steeper pace in 2018.  If you look at segments, premium regular bore biggest brunt of this sea change.  Dropped 49 mil bbls, almost 3/4 over last 25 yrs.  And most of that drop is Budweiser. Bud was 1 of every 4 beers in America in 1988. Crazy.  Subpremiums also way down.  Even light beers started to decline in last decade or so.  What will happen in next 25 years?

Ain’t over yet, and there could always be a Dec surprise or two.  But current trends suggest 2018 likely to look a lot like 2017, at least for overall US beer and top 3.  US biz running down about 1% thru Oct, with AB and MC lookin’ to be down around 3% each (MC STRs down closer to 4% for 9 mos), Constellation +8-10%.  That’s 3/4 of the biz and just the way 2017 shaped up.  One possibility for pleasant surprise: Dec taxpaid shipments tanked 8.5% in 2017; that’s an easy comp.  But scan data stubbornly soft in Q4 so far.  Down about 1% YTD thru Nov in Nielsen and IRI off-premise.  Pretty clear too that beer continued to lose share of absolute alcohol to spirits in 2018, possibly to wine as well.  Will growth of seltzers, other FMBs/beyond beers, new products, plus continued trade-up trend blunt that loss in 2019?  Beer hasn’t even held share of absolute alcohol since 2001. 

Early read suggests next yr could again be volume challenged.  MC reportedly forecasts total biz down 1.5-2%.  Several large AB and MC distribs accustomed to volume growth, recently told INSIGHTS growth will be tuff to come by in 2019. AB and MC already increased prices in most mkts, need to maintain prices with cost pressures, plus select additional hikes likely following freight/fuel increases (see below). Mktg $$ likely to be reduced, especially by MC distribs, for same reason. With volume already declining, higher prices and lower mktg can’t help. Meanwhile, landscape could be even more disruptive. Competition heating up from multiple directions, especially with more emphasis on innovation.

With all that comes increased uncertainty and unpredictability, plus increased costs.  Very hard to pick winners in recent yrs except Constellation and Mike’s. Virtually no one saw size and strength of seltzers. Leading seltzer cos expect segment to grow near 2 mil bbls next yr. If so, seltzers likely to hit premium lights even harder. What’s next shock wave for these beleaguered brands?  Meanwhile, macro environment includes mounting cost, profit and economic pressures.  Sobering note: 82% of cfos in a recent Duke U study see recession by 2020.  Unsurprisingly, with all these changes and more, relations between brewers and distribs are more tense. In short, this is not the best biz environment heading into 2019, but as they say, with change comes opportunity.

Boston Beer pulled off remarkable turnaround in 2018.  Down 6% in each of 2016-2017, Boston shipments +16% thru Sep.  And it expects to be up high singles digits to low doubles again next yr. If it hits target, will almost certainly pass Pabst as #5 US beer supplier by volume in 2019.  For 9 mos 2018, Boston shipments just 217K bbls behind Pabst. Boston up 459K bbls, 16%, while Pabst down estimated 335K bbls, 8.6%. An almost 800K-bbl swing in 9 mos.  But Boston’s rapid growth came at a considerable cost, founder Jim Koch emphasized at Beer Insights Seminar. Growth this yr will get it back to previous peak: 2015 volume of 4.256 mil bbls, Jim noted. But it expects to 1/3 less profit.  Boston Beer oper income hit $156 mil in 2015, likely to be around $110 mil in 2018.  Boston a public co, but Jim controls voting stock, so “that gives us the ability to...invest for the future and be willing to tank earnings in a way that no public company could do,” Jim said.

Boston $$ sales hit $811 mil, +19%, in IRI multioutlet + convenience thru Nov 4. Beer just a qtr of that.  FMBs at $389 mil.  Up 44.7%!  That’s almost half its biz in scan, sez data provided by Bump Williams Consulting. Twisted Tea #1 FMB, still +19%.  Truly Spiked & Sparkling hard seltzers up 200%+.  Meanwhile, Angry Orchard over 60 share of cider; has each of top 4 brands.  A-O cider biz +14% to $209 mil. That’s neck-and-neck with its beer biz, $213.5 mil, -7%. Boston got shot-in-arm from Sam 76 and Seasonals up 6%, but Boston Lager -14%.  Boston hit “home runs” on new products this yr, ceo Dave Burwick said on Q3 conference call. “Dave is something we’ve never really had before, which is a world class marketer,” Jim said at Seminar.  Both Jim and Dave paying attention to more bleeding-edge trends in bevs; we spotted ’em exploring Fancy Foods conference, featuring many new NAs. “We need to get out of our little boxes,” Jim told Seminar. Indeed, next yr’s innovation platform pushes further out on emerging trends, focuses on “health and wellness,” Dave said on call. Boston will go natl with a gose-style fitness beer called 26.2, sold in Boston for yrs, tied to Boston marathon; test a shelf-stable alcoholic kombucha called Tura and intro a lower-cal, lower-sugar, lower-ABV tea called Wild Leaf. Give Boston credit for changing with times. Still, “craft beer is always going to be the heart and soul” of Boston Beer, Jim told Seminar.  Boston Beer is “overinvesting to turn around Sam Adams.”  It “may take 5-10 years,” said Jim, but co still seeks to turn Lager.

                                     Best Wishes,         

This fall beer distrib consolidation went thru burst of big deals, including just-announced Jeffreys deal in NC.  That’s biggest AB distrib deal ever.  Deal splits largest NC distrib, 17-mil-cases, 3 ways between R.H. Barringer, Adams Bevs and Carolina Eagle.  Jeffreys transaction expected to close in early 2019, pending supplier approval. It will easily top deal to sell BudCo’s 12 mil cases in San Antonio for $280 mil way back in 2007. Yup, biggest previous AB deal occurred before ABI-era. Meanwhile, Reyes bought Gold Coast for over $1 bil in 2015 and Meritage bought Columbia for over $600 mil in 2012. Jeffreys deal reportedly between $350-400 mil. Earlier this fall came Reyes deals for Constellation in CA totaling 11 mil cases and 4.5 mil cases in Richmond, VA. Those deals traded for between $500-600 mil.  That’s some 32-33 mil cases, just a little more than 1% of US beer biz at wholesale level traded for $900 mil or more.

Of course, not all cases worth the same. Can’t just extrapolate those 7x GP STZ cases out west to entire biz.  In fact, many say beer distrib values actually going down, yet these specific distribs clearly realized tremendous value.  What’s more, there are lots more deals in works, including some BIG ones.  INSIGHTS hears of deal discussions which may or may not come to fruition, that total another 90-100 mil cases. Before this burst, this seemed like a normal yr in beer distrib consolidation. In normal yr, each of AB and MC systems have 10-12 deals. But now something bigger seems to be afoot.

In Jeffreys deal, Adams Bevs (Adams family) will get biggest piece, 10 mil cases or so, including much of rural NC to go along with its urban mkt Charlotte.  Adams will total 21 mil cases between NC and AL.  Meanwhile, R.H. Barringer (Craig family) will get 5 mil cases, including urban mkt of Raleigh. It will be about 18 mil cases after deal done (Barringer also a sizable wine distrib). And Carolina Eagle (Joe and Russ Saputo) will get around 2 mil cases and be 3 mil cases.  In all, AB does about 40 mil cases in NC.  Recall, R.A. Jeffreys bought 5 AB NC distribs between 2007 and 2010.  Now no one buyer makes sense to purchase whole shebang. Jeffreys part of a planned merger with 2 other AB distribs in SC and GA that would have created 35-mil-case behemoth, without adding debt. AB fought that merger, including in court and ultimately put kibosh on it.  Then earlier this yr, NC passed law which prevents AB from “match and redirect.”  New law paved way for present deal, and almost certainly designed in part to make current deal possible.

“It’s been quite a party. Now comes the hangover,” wrote one leading financial author William Cohan in NY Times on Nov 26 in disconcerting op-ed on debt.  In past decade, “debt issuance exploded” because it was “historically inexpensive” to borrow. “Well established companies” like GE, AT&T etc “went on acquisition binges fueled largely by cheap borrowing,” wrote Cohan.  “As interest rates rise and the economy appears to be slowing, they are in not insignificant danger of defaulting on the debt.”  That “fear has started to cause disturbing ripples in the debt and equity markets,” he added.  “There’s a lot at risk here.” Two days later, Fed issued first ever report on banking system and debt; warned of “generally elevated” asset prices; “particularly large” potential drop if things go wrong that make it harder to borrow; already “near-record” levels of lower-rated corp debt, “historically linked” to “elevated financial distress...in downturns.” 

“Exhibit A of brewing trouble is G.E,” wrote Cohan in NYT column. “Once the world’s most valuable company and a paragon of debt virtue, it had a AAA credit rating until 2015.  Those days are gone.” GE has $115 bil of debt, recently downgraded to BBB.  Also, AT&T at a whopping $183 bil of debt, “one of the most indebted companies on the planet,” said Cohan.  Funny use of words “brewing trouble” and “hangover.” Or maybe not.  GE’s $115 bil very similar debt level to ABI (tho ABI debt has better rating).  “After GE, Investors Are Watching These Debt Laden Companies,” Bloomberg wrote 2 wks earlier.  It singled out ABI as one of cos on “on money managers’ radars as the market weakens.”  In Oct, ratings service Moody’s put ABI debt “on review for downgrade” because it calculated debt to EBITDA at 5.4x as of Jun 30, “high for the rating” (others calculate ABI’s debt to EBITDA under 5x). Moody’s expected ABI debt to EBITDA to be 4x by now. “To hit that target, the company would possibly have to fully suspend its dividend and reduce debt by $26 billion by the end of next year,” Bloomberg wrote, citing Oct 5 Barclay’s report. ABI already cut dividend in half, which will bring in $4 bil and just bought back $2.5 bil of bonds in efforts to reduce debt.  ABI EBITDA “expected to approach $25 billion 12-month run rate in the next year or so,” yet “free cash flow available for debt repayment has been more limited,” sez Moody’s. Given that, any major acquisition clearly off-the-table. If global economic, currency or cost conditions worsen, ABI may have to do more to pay down debt.

They ain’t alone. Molson Coors also has high debt, 4.7x debt to EBITDA, after $12-bil purchase of SABMiller stake in MC in 2016. It’s committed to deleveraging as quickly as possible. But STRs down about 4% yr-to-date and you can only cut so much. So it’s a fair bet that TAP too won’t be making major acquisitions such as $2 bil “Utah” (Yuengling) deal contemplated in 2015 (see above).  Even Constellation, the growth co in the biz, relatively hamstrung.  Why?  Its debt-to-EBITDA ratio over 5x after $4-bil investment to buy 30% of Canadian cannabis co Canopy.  Constellation said that priority is to get back to targeted 3.5x debt to EBITDA; any major M&A ain’t happening ’til then. 

Meanwhile, M&A exploded in non-alc bevs this yr, including several $1 bil+ deals. The biggest deal, the merger of Dr Pepper Snapple Group and Keurig Green Mountain, created an entity with debt “nearly six times its cash flow,” wrote Cohan in NYT. Most likely, no deal like that on horizon for top 3 brewers. Only Heineken at low debt levels (just over 2x). Hmmm. What might it be considering as its next M&A target? One final kicker: some beer distribs also have high debt levels these days and for others the prospect of big debt is inhibiting their desires to do deals. And yet there are outliers. Read on.

You needed a scorecard to tell the players in Milwaukee courtroom in Pabst-MC dispute.  Handful of beer bigwigs, current and former, took stand.  Like who?  Like MC ceo Gavin Hattersley, Pabst ceo Eugene Kashper, ex-MC ceo Tom Long, other past/current Pabst/MC execs and ex-AB prexy Dave Peacock and ex-intl veep Steve Burrows.  Beyond contract dispute, their testimony included talk of growth plans, potential M&A, brewery closures, competitive strategy and more.  All of which shows how much industry changed just since 2015.  

Eugene’s Ambitions, Gavin’s Very Full Plate; Best-Laid Plans  2015 a wild ride for both Pabst and MC.  Recall, Eugene bought Pabst in late 2014, was riding Not Your Father’s Root Beer rocket ship (521K bbls in 2015).  As reported, he had visions of doubling Pabst volume, tripling EBITDA to $274 mil annually, buying City Brewing’s 3 breweries and shifting production away from MC.  Then too, Gavin took over for Tom Long on Jul 1, 2015 after initially turning down job, he said on stand.  On Gavin’s plate day 1: preparing long-range plan for board to be presented in Aug, getting ready to close Eden brewery (decided, but not yet announced) while SABMiller pushed MC to close 2 more breweries (Irwindale and ??), breaking in new mktg and sales chiefs, considering at least one very large acquisition (“Utah,” presumably Yuengling, see below) and preparing for MC’s fall distrib mtg.  And, oh yeah, making determination about Pabst contract, which Gavin and other execs insisted MC not really making money on, despite the $75-80 mil in GP it provided. Incidentally, came out at trial that MC’s brewing contract with McKenzie River provided even lower fees than Pabst deal: “a dreadful agreement,” Gavin said.  Boston Consulting Group delivered “Triple Play” report which included numerous scenarios of closing breweries and M&A, including several top craft brewers, i.e. Boston, Sierra, Lagunitas and New Belgium.  Important to MC’s determination it would not have sufficient capacity for Pabst was MC’s intent to grow via its own portfolio and M&A.  As it turned out, MC bought a handful of small craft brewers, but organic growth continued to elude it.  Meanwhile, at Pabst, no City Brewing deal, Not Your Father’s tanked, and far from growing, Pabst down half-mil bbls, 10% since 2015 and on track to drop another half-mil bbls this yr.  At current trajectories, MC could close 2 more breweries and still have enough capacity for Pabst.

“You Need to Go After ‘Utah,’” Reyes Bros Told Tom; “Yellow Cheap Beer” Not the Future Ex-MC ceo Tom Long appeared on tape (deposition) and on stand with lotsa candid comments.  Talking about MC’s full plate at time he left, Tom mentioned “our biggest distributors were losing volume” from MC and “soaking” it up with new craft brands.  Jude and Chris Reyes met with Tom in Chicago and said “you need to go after a company called ‘Utah’” as part of M&A strategy.  “Utah” was code name in BCG report that can only be Yuengling.  Tom repeated point later in testimony, noting MC’s biggest distribs “pressuring us to make an acquisition of a growing mainstream beer, a big brand,” i.e. “Utah,” which would “give us a lot more power in the marketplace with big customers and distributors.”  Tom also noted Utah a much bigger deal than Pabst contract, “Utah was a $2 billion deal,” he said. MC also seriously considered buying “Lime,” which Tom said would give it ability to produce FMBs, with “clear malt.... You can make it taste like anything.”  (Even Hard Lemonade.)

Tom also especially open about challenged state of mainstream beer.  Every brewer at time, including MC and Pabst, “trying to premiumize and expand their portfolio” in high end “because yellow cheap beer wasn’t the way America was going anymore.  All you had to do was walk down the street to figure that out.”  Responding to Pabst argument that MC “feared” Pabst as competitor, Tom acknowledged that every beverage consumers drink to “become refreshed” was competitor.  But MC’s focus was AB.  “I was afraid of AB, I was not afraid of Pabst, I can assure you.”  Finally, Tom talked several times about pressure from SABMiller to close 3 breweries.  But Tom reluctant to close any breweries, one reason why MC sought acquisitions.  Also, closing a brewery is “big deal,” he said.  It “communicates to all your customers and competitors” that “you’re not successful.... In a dogfight with AB, closing a brewery is like blinking.  I didn’t want to blink.” 

AB Exec Vs AB Exec in Pabst vs MC  Pabst and MC battle each hired ex-AB exec as “expert” to opine, tho neither had much experience with contract brewing, as attys noted to raise doubts.  Pabst called Steve Burrows, who headed AB Intl.  But his only US contract: tiny Kirin Ice.  Steve testified “the data I reviewed didn’t support the claim that Miller had insufficient capacity through” 2025.  But he focused on MC’s “core” brand scenario (no organic growth/M&A).  That indicated to him shortfalls could easily be handled via inventory adjustments.  MC’s growth scenario, which MC board adopted, would lead to different numbers, he said.  Dave Peacock testified as MC expert.  His contract brew experience limited to Bacardi/Margaritaville licensing deals and Kirin Ice.  Dave supported key MC points: 1) it would be “rational” for MC to close “one or possibly more” breweries if “economically it made sense”; 2) “Sole discretion” language in contract gave MC “great leeway... a lot of influence” in determining sufficient capacity and ultimately “the default position.”  

Pabst Takes One Suit Off the Table, Another Looms  Amid Pabst-MC lawsuit, we came across another.  Anchor Glass sued Pabst in Mar 2017 over, you guessed it, a Supply Agreement.  In midst of explosive NYFRB growth, Pabst signed contract with Anchor for tons of bottles for 3 yrs out.  Needless to say, most of ’em not needed.  Anchor sued, seeking $15 mil+ in damages.  Pabst countersued seeking $150 mil+, claiming defective glass “crippled” natl rollout.  Details in INSIGHTS Express.