Beer Inst hired Dr. Joy Dubost to “lead the development, evaluation and advocacy of the beer industry’s regulatory policies and positions,” in somewhat new role of Sr Director, Science and Regulatory Affairs (slightly different position than previously was held by Christina Hartman).  Joy has a doctorate in food science from Penn State.  She comes to BI from the Natl Restaurant Assn, where she was sr director of nutrition for about 5 yrs.  She’s also a homebrewer and a “beer steward” for Master Brewers Assn of America. Joy “frequently speaks to the public and the media on nutrition and healthy living,” according to BI. “You’ll see her commenting in the future on beer issues,” BI prexy Jim McGreevy told INSIGHTS.  An intriguing hire. 

Separately, House Agriculture Committee passed amendment that a source characterized as “very significant step toward beefing up oversight” of the London Metal Exchange.  Recall, brewers and others have basically claimed that this lack of oversight led to overcharging on aluminum.  So if this continues to progress thru Congress, could be meaningful to brewers. 

Doll Dist of Des Moines and Council Bluff,s just bought small distrib Hagen Bev Dist, under 400,000 cases, near IA border in Minn.  Closed last Friday, according to multiple sources.   Another example in AB network of a large distrib from an adjoining state crossing state lines to make a purchase.  That’s 3d AB distrib sale we’ve reported on this yr, 2 in Minn.

This Crown is one of Constellation’s distribs; it does not refer to prior name of Constellation Brands’ import arm.  Crown Dist shares something in common tho with other Constellation terminations earlier this yr.  That is, AB owns significant stake, believed to be just under half.  Giant Columbia Dist will once again be the beneficiary.

Columbia adds 500K cases in Everett mkt north of Seattle, beginning Jun 12, after picking up approx 1 mil cases of Constellation brands earlier this yr from AB branch in Seattle.  Columbia will now sell about 2.2 mil cases of Constellation Brands in Wash.  That’s about half of Constellation’s biz in state.  Constellation was up double digits last yr to 305,000 bbls (4.4 mil cases).  Columbia also sells another 1.3 mil cases or so of Constellation Brands in neighboring Oreg.  Columbia chairman/ceo Gregg Christiansen wrote employees that oppy “came about as part of Constellation Brands’ strategic decision to discontinue their distribution agreement with wholesalers in which…ABI has a majority or near majority ownership stake.”   

Cleveland was surprising city where craft had highest share of on-premise beer $$ nationwide in GuestMetrics data, vp Peter Reidhead said on BA’s Power Hour this afternoon (using BA definition of craft in this set of data). Yup, that’s right Cleveland.  Each of San Fran (41) and Boston (40) also 40 or over and Austin, Tex, very close at 39.  Obvious choices like Portland and Seattle not on list, presumably because they’re not robustly represented in GuestMetrics extensive database of on-premise accounts, which skews to on-premise chains.  While Austin among cities with highest share, 2 other cities in Tex were lowest: craft in Houston only 15 share of $$ and craft in San Antonio at 17 share of $$ in GuestMetrics data.  Meanwhile, premium light share varied from high of around 30 in Dallas, Houston, San Antonio and Phoenix to just 4 in San Francisco.  That’s right, 4.  More details in next Craft Brew News. 

While cider category grew 54% to 25.6 mil cases in calendar yr, C&C cider volume in North America (primarily US) declined 17.6% to 323K hectoliters (~275K Bbls), revs down 20% to €47.5 mil ($53.67 mil), co reported in FY2015 review thru Feb 2015.  This marks 2d consecutive year that C&C declined in US after purchasing VT Hard Cider Co for a whopping $305 mil in late 2012.  “The year was defined by severe market disruption as global and domestic brewers invested heavily to build a distribution footprint for their new brands,” and “at the same time, a small but growing local craft cider movement has become a market feature,” noted co.   As a result “our share of the category has come under pressure” as Woodchuck depletions “were down 15%” and Hornsby brands “continued to decline in the year as we focus on other brands in the portfolio.”  C&C did manage to turn around Magners shipments, +2%, in part from expanding its distribution in US, and Blackthorn shipments were up 29% off smaller base.  Gotta note, globally C&C grew net revs 10% to €683.9 mil ($772.8 mil) from co’s strong sales in Scotland with addition of Wallace’s Express acquisition and continued growth of recent brand launches.  However, looking at only C&C brands, global sales were down 14%, volume down 11%.  

Even as C&C volume and sales markedly declined in US, it’s “continued” to up investments here as total investments “now 27% of sales.”  Indeed, co recently (in Aug 2014) completed building and began operating a new $34.5 mil cidery in Vermont, added new packaging and new mktg campaign in “selected states,” and launched new brands under Woodchuck line, including Hopstation and Gumption.  Then too, “factory utilization deteriorated” after losing a “major packaging contract toward the end of FY2014.”  So operating profit was way down (-86%) and operating margin dropped from 19.2% to 3.3% in FY2015.   But all together, C&C feels “assets are well invested and positioned to return to growth in a market anticipated to grow dynamically but with a more stable competitive landscape in FY2016.”  In last 6 mos, C&C “has seen Woodchuck share of the key off-trade channel begin to improve in the month on month retail data,” according to co, likely getting a nudge from its new intros.  However total C&C volume and $$ down 15% thru Apr 19 in IRI multi-outlet + c-stores.         

US biz is about 13-15% of SABMiller’s global EBITA/beer volume these days, slighter higher share of rev, so it doesn’t really move needle for co’s volume or financial performance.  Africa remains biggest revenue/volume contributor, Latin America biggest earnings provider, but no single geography dominates, which SABMiller (and others) views as a strength/benefit.   For fiscal yr thru Mar 2015, US underperformed in volume and revs compared to overall (on organic basis), as SABMiller’s organic revs up 6% (US was even) and volume flat (US was -2.4%).  But US earnings growth pretty much in line with SABMiller’s 6% organic EBITA growth for the period.  All in, SABMiller global lager beer volume flat in fiscal yr at approx 209 mil bbls (AB InBev reported global own-beer volume +0.6% to 348 mil bbls).  But soft drink volume up 8% as SABMiller “strengthened” its alliance with Coke.  While organic rev/earnings up mid-single digits, “reported” results for each down slightly as “strengthening dollar against many of our operating currencies had a negative transactional impact on reported results,” per chief exec Alan Clark.      

Not much more color on MillerCoors than what was reported last week, tho SABMiller did say that while MC’s premium light volume down low-singles for 12 mos, Coors Light and Miller Lite had “similar declines.”  Even so, Lite grew share of segment, SABMiller claimed too, suggesting again that any share shifts in premium light over last 12 mos very slight.  Meanwhile, SABMiller’s EBITA margin in North America, including modest non-US and small soft drink volume, expanded 1.1 pts to 18.3 for 12-mo period.  

Deal environment in craft – whether it’s acquisitions, private equity investments, ESOPs, roll-ups, you name it – will be “frothy” for another 2-3 yrs, predicted First Beverage founder Bill Anderson at Beer INSIGHTS Spring Conference yesterday.  (First Bev was advisor on several craft deals.)  May become even more intense over next 18-24 mos.  Indeed, Bill expects there could “easily” be 25 transactions in next 12-15 mos and ultimately upwards of 40-50 craft brewers may sell or take an investment.  Why so much activity?  Lotsa reasons, but “there’s a ton of money on the sidelines that wants to come in,” combined with increased interest among craft brewers to take that money.  While craft beer phenomenon on consumer level unlikely to change much, in Bill’s view, all this money and all these deals will “radically change” nature of the craft business. 

He likened earlier craft atmosphere to “a great little neighborhood” created by craft founders which held “friendly street barbecues” and they could pretty much predict how other people in the industry would react.  But lotsa new players with that “ton of new money,” have “different motivations.”  Like “building McMansions.”  They want to come to the barbecue, “but they’re not bringing anything.  They just want to eat your food.”  So there’s now “a ‘there goes the neighborhood’ moment.”  Again, while consumers may not notice all this change, biz of craft likely to become “less collegial, less predictable” going forward, Bill believes.

Lotsa reasons why craft biz so attractive to different investors right now. Those investors include “domestic strategic buyers” like AB, MC and Pabst, foreign strategic buyers (think Spain’s Mahou and its Founders deal), private equity, family offices and more.  What’s not happened much yet: a lot of “craft on craft” deals.  That’s in part because most craft brewers “don’t have a lot of M&A DNA on their team” and they’re busy trying to manage/ build their own bizzes.  First Bev’s deals usually take 7-10 mos, said Bill.  Since for many craft brewers it’s their first transaction, it takes time and a lot of work “getting them comfortable around the process.”  Key reasons for current flurry of activity:

• “Nothing like the craft beer space” out there.  It’s not only “hottest category” in bevs, but possibly hottest in CPG land, Bill suggested.

• A “wide deep pool of potential buyers that’s increased markedly in the last 6 months” (see above).

• Younger craft brewers found success more quickly than early pioneers, know they can make a lot of money and are not as attached to “the legacy piece” of the movement.  Then too, younger owners “not as concerned about the optics of selling out and selling out fast.” 

• “Smart strategic” buyers can find “smaller niche brands that don’t have complicated distributor networks,” avoid footprint issues and “layer” them into current systems.  (Think AB’s purchases, even while it’s in legal dispute with NJ distrib over its refusal to give up/sell brands AB acquired.)

• Craft is “huge attraction” for private equity, even tho most PE firms don’t like bizzes with high cap ex requirements.  But they see growth rates not available elsewhere, a “leaky bucket” of mainstream beer (“dollars spilling out” of AB and MC) that will feed that growth, plus it’s a fun biz.  “Not many other categories are this attractive.”  Then too, earlier perception that craft brewers would not take PE money “has broken.”  And “family office” models of PE offer attraction of longer term investment approach.  The numbers are good.  Craft brewers are “very profitable businesses” with very attractive margins, and smart PE players see they can create even stronger results with a mix of the craft brewer’s talent and “big company expertise.” 

• Global brewers want “diversification,” a US “beachhead” and US brands to sell in their mkts.  And foreign brewers have their own legacies in their own countries to build on.

Even while Bill sees frothy near term for craft deals, he does think “the music will stop” eventually.  And there are some pitfalls and risks in deal landscape.  While this “first cycle” of craft brewers starting to sell and trade will drive lotsa action over next 24-36 mos, music will eventually stop as “the most aggressive buyer will have its number met” (AB).  Also, PE firms won’t buy 10 brewers because they can’t concentrate their money so much in a single industry, so more like 2-3 and “they will be done.”  What about the “roll up” strategy reportedly contemplated by Fireman Capital/Oskar Blues and Rich Doyle’s Enjoy Beer LLC, plus a handful of others?  Some of those roll up programs view an IPO as “potential exit strategy,” Bill suggests.  Some will work, some will fail, as some may “pay high multiples to get in” that won’t really pay out.  Finally, there is risk that acquired craft brewers will “lose authenticity,” and new players will do “unpredictable things” (i.e. discounting), that can change nature of biz.  Indeed, elsewhere at INSIGHTS Seminar and in lotsa conversations in recent mos, this deal activity – along with recent AB pricing actions – has spread concern about threatening craft’s current healthy pricing architecture.

While a number of craft brewers have gone ESOP route, Bill pointed to pluses and minuses.  Some of the ESOPs may have used growth projections that are “hopeful,” he suggested, and resulting debt loads could be a burden.  ESOP trustees tend not to “accelerate new ideas” that PE firms might bring and the structure “complicates decision-making.”  On other hand, ESOPs allow founders to retain more control, they’re “more in sync” with craft legacy of a founder like NBB’s Kim Jordan, “democratize ownership” and have tax advantages.  Debt isn’t only an issue for ESOPs.  No craft brewers wants to be “laden down with debt” now, which makes it tuffer to expand geographically or invest in current brands, even as competitors are getting “fresh capital.”  

Net-net: right now is a “unique window of very high multiples and very able, willing, hungry buyers.”  Such an environment may not happen for another 8-10 yrs, Bill thinks.  Ladies and gentlemen, take your meetings….

Monster Beverage shares took 9% drop on May 8, its biggest decline in over 2 yrs as shareholders were disappointed costly switchover to Coca-Cola system took bite out of profits.  On domestic side, transition has “gone relatively smoothly,” so far, said ceo Rodney Sacks, but at hefty price of around $206 mil in termination fees to AB distribs in Q1.  MNST partially offset those charges by taking in $39.8 mil in deferred revs in connection with those distribs.  So far Monster has moved 84% of volume over to KO and expects to be near 90% by end of May. Monster deal with Coca-Cola is expected to close early Jun.  

In very wide-ranging discussion among leaders in high end this morn at our INSIGHTS Spring Conference, Constellation’s Bill Hackett, HUSA’s Dolf van den Brink and Boston Beer’s Jim Koch shared thoughts and insights about continued growth and oppys in industry’s strongest segment, slipping into sharp disagreement on only 1 topic: BEER vs BREW bills before Congress..  Here are some highlights:

How High Is Up?  “Bullish.”  That’s how each of these execs characterized future growth oppys for high end.  Dolf noted high end beer shares of 40% in other countries and other bevs (whiskey, coffee) and sees “another 10% [share of US malt bevs] to go before we see a major slowdown.”  No argument from Bill or Jim.  Bill bullish on beer and Constellation, given current momentum of portfolio, demographic and other tailwinds (cans/draft) and very confident Constellation can reach its goal of doubling biz in decade, possibly sooner. Can Corona pass its previous peak volume?  “Dramatically,” assured Bill; Corona has to surpass previous high of 115 mil cases for Constellation to reach its volume goal.  Meanwhile, HUSA’s goal to significantly increase volume includes Heineken, Mexican portfolio and big bet on cider, which he thinks can reach a 3 share (overall) of US mkt.  That would be 6 mil bbls.  Jim figures half of cider volume comes from wine/spirits.  Jim talked modestly again about getting “thimbles” and “teacups” from “leaky bucket” that is mainstream beer.  Acknowledged it’s hard to get huge hits like last yr’s Rebel IPA every year, but he plans to grow his biz too and sees blue sky for better beer. One driver for craft, in Jim’s view:  increasing affordability, as sixer of Sam now takes same share of disposable income as sixer of Bud when he started.    

Success from Failures/Challenges  Both Dolf and Jim talked about how their current successes followed significant failures and/or challenges.  When Dolf came to HUSA 9 of 10 brands down, he said.  But HUSA “doubled down” and focused on key brands.  Heineken now in black for full yr, Dos Equis preparing to “double” again,” Tecate family growing and Strongbow outpacing hot cider mkt.  Jim said much of Boston’s current success “began as failures.”  That includes Hard Core Cider (started in 1995), early seasonal beers (Double Bock, “not exactly an auspicious beginning”) and Tea (Bodeans).  Jim also picked up point often made by Dolf, that wine/spirits have benefitted from leaky bucket of mainstream beer and noted if beer had held per capita consumption rates since 2000, industry would have sold 50 mil more bbls than it did subsequently and “everyone would be 25% bigger.”  Getting back to that per capita level, Jim said, won’t come from mainstream beer, but from all of the “alternatives” to mainstream: craft, imports, FMBs, cider, etc.  Nor will per caps grow, added Dolf, until beer biz “finds a way to engage female consumers.” Part of Dolf’s optimism:  he sees “turning point” coming with growing strength of innovation.  Similarly, Jim sez “sweet and fruity” alternatives will be “a real driver” in beer going forward, including in craft.  Craft’s focus on higher ABV and heavier flavors have dinged volume tho, Bill reminded, especially on premise.  That creates “excitement” in category, but “results in less per capita consumption.  Period.  End of story.  You can’t deny it.”  That’s one reason, he believes, craft brewers working on more sessionable beers. On other hand, consumers are buying higher ABV, higher priced Rebel Rouser at twice rate of session-play Rebel Rider, said Jim.

BEER vs BREW; A Passionate Disagreement  While these execs very much on same page about oppy for high end, they expressed sharp disagreement over dueling tax bills, Beer Inst-supported BEER, which gives tax breaks to all suppliers, and Brewers Assn-supported BREW, which limits tax breaks to US brewers under 6 mil bbls.  Bill insisted beer biz “has to get its act together” on compromise bill or nothing will pass.  BI thought “common ground” had been reached, said Bill, but that “fell apart” when BA balked at importers getting tax break.  “I didn’t realize we were not part of the industry.”  It’s a “damn shame we can’t get together.”  Bill believes inability to compromise risks state laws, tax equalization, more.

Jim lamented that each side “bad mouthing” the other on the Hill.  Brewers should “not be pissing on each other,” but should tell Congress to support both bills and have legislators sort out compromise.  Bill and BI’s position is that that won’t happen, that “one bill” is necessary and legislators “will not split the baby” for the industry.  Dolf noted that one place where spirits biz “gets it right” is in “unity addressing legislative issues.”  His fear: tax fight threatens “level playing field” in US that gives small suppliers such great access to market.  Also, HUSA has “never asked or pushed for exemptions” from state laws, he reminded. 

While Bill “very bullish on our portfolio” and beer biz, “we are ones that can screw this up,” he warned, referring in part to tax fight.  “Let’s take counsel and not do that.”  Jim reminded that big and small brewers shouldn’t let 5% disagreement get in way of 95% agreement on key issues, including maintaining a 3-tier system with  independent wholesalers.  Reminded that with all of the churn and change since 2008, with “hard times” for some, “everybody has either grown profit, volume or both.”  

Beer biz ridin’ same roller track so far this yr.  After strong Mar-Apr scans, volume slowed to 0.6% gain for 4 wks thru May 2 in Nielsen all outlet + convenience data.  But $$ sales still up a healthy 3%.  Craft volume up 10.5%, cider gain slowed to 18%, imports +9% and FMBs up 4.6%.  So above premium volume trend +6.8% while $$ +8.6%, so high end share +2.1.  Premium light volume -0.8% and $$ flat.  C-store volume held up, +1.4% for 4 wks.  But supermkt volume -0.2%.