Score another legal victory for direct shippers. (For now, direct shipments primarily a wine-only issue, but these cases involve important questions for all state alc bev regulation.) Using some tuff language, US Dist Ct judge in NY refused to dismiss case brought by direct shippers/consumers who had challenged NY direct shipments ban. They had charged that ban violated Commerce Clause and was simple "economic protectionism" on behalf of NY wine/spirit distribs and vintners. Defenders of ban (NY alc bev commission, several distribs and interestingly enough, an anti-alcohol NYC minister) had argued that ban is legit under 21st amendment grant of power to states to regulate alc bev sales. But judge, as in similar Tex and Ind cases (see BMI, Mar 20), didn't buy defenders? argument, at least not for purposes of motion to dismiss. So both sides will get a chance to further develop arguments and facts as case proceeds. Appeals of Tex and Ind decisions pending.

Key points made by fed judge: "There has been considerable change and evolution in 21st Amendment jurisprudence" since NY direct shipping ban was last challenged (and upheld) in 1970. Indeed, this judge wrote "the force" of the earlier decision "has been diminished by subsequent rulings." Further, he quoted lotsa language from prior cases that weaken states? power to regulate alc bevs broadly. For example: 1) "State laws that constitute mere economic protectionism are therefore not entitled to the same deference as laws enacted to combat the perceived evils of an unrestricted traffic in liquor"; 2) "Clearly, recent 21st Amendment cases have emphasized federal interests to a greater degree than had earlier cases"; 3) "Only those state restrictions which directly promote temperance may now be said to be permissible" under 21st Amendment; 4) The Supreme Ct "no longer considers the power of the states under the 21st Amendment to be ?unfettered by the Commerce Clause.?" It?s a brave new world out there, and it?s looking increasingly hostile to states? rights to regulate alc bevs. As judge pointed out: "Technological advancements facilitate?as never before?the commerce between and among the states" as the internet "increasingly is responsible for direct sale and shipment of goods to consumers." Can defenders of direct shipments bans show that these bans promote temperance? Fed judge in Tex stated flatly that they didn?t. If states don?t have right to ban direct shipments to consumers, what can they do? Stay tuned.

Two beer issues are among unfinished biz in Congress as this year?s session winds down: 1) will Congress mandate that states either pass .08 BAC limits or lose part of fed transportation funds beginning 2004? 2) will Congress eliminate Special Occupation Tax (SOT) on alc bev suppliers, distribs and retailers? As INSIGHTS goes to press, hotly debated .08 mandate (which may be included in transportation spending bill that has to be passed by end of Sep) still hadn?t been taken up by House-Senate conference committee. Recall that House bill did not include .08 mandate; Senate bill did. Clinton Admin supports .08. And MADD just put out a release that said recent Gallup poll found 72% of drivers support .08. In crunch to finish final session, controversial issue like .08 could simply be dropped from bill. So industry lobbyists, states? rights supporters still workin? it hard. Other possibilities: .08 mandate could resurface as part of big Continuing Resolution or during lame-duck session after elections.

Meanwhile, several news sources reported that House Speaker Dennis Hastert?s compromise tax package (to increase minimum wage) included "repealing excise taxes on producers and marketers" of alc bevs. Whoa! At $18 per bbl on beer alone, that would be $3.6 bil per yr. Turned out tho that Hastert proposed only to rescind small Special Occupational Tax on suppliers, distribs and retailers. Comes out to about $100 mil per yr, according to GAO. Small potatoes, but still a tax cut. Better yet, gotta read note of support from Boston Globe which editorialized after Hastert plan announced: "A neo-Prohibitionist tax on makers and sellers of alcoholic beverages ought to be abolished." All right!

Numbers beginning to back up big talk about hard lemonades and lemon brews. These mostly new products grabbed 0.9 share of beer $$$ sales in supermkts YTD thru Aug 20, according to IRI, up from 0.2 last yr. Got 0.5 share of volume, up from 0.1, and avg price of nearly $25 per case. So far this yr, Mike?s Hard Lemonade grabbed 35 share of lemon-brew volume in supers, Doc Otis 22 share, Hoopers Hooch 13, Rick?s 11. Miller, which recently announced Henry?s Hard Lemonade, projects $350 mil hard lemon retail sales this yr. Some suppliers? projections for 2000 volume: Mike?s (350-400,000 bbls); Doc Otis (150,000 bbls); Hooper?s Hooch (175,000 bbls -- all brands). So INSIGHTS? guesstimate for 2000 lemon-brew volume: 800,000-1 mil bbls. Keep in mind too that most of these brands not even available in many mkts until at least spring 2000. Interestingly, hard lemons haven?t hurt Zima, which is up 22% YTD in supers. Lotsa buzz too about other new products, including alternative malt-bevs, so-called "energy" drinks (with/without alcohol).

Outside of IRI data and supplier projections, national figures for hard lemonades and other non-beer malt bevs tuff to track. They?re part of "domestic taxpaid shipments," estimated by Beer Inst. Tho US govt is supposed to report that figure monthly, most recent govt number is for Aug 98. That?s right, feds are 2 yrs behind in counting bbls. Lemon brews just a fraction of Beer Inst?s monthly estimate, and BI not getting specific input about non-beer malt bevs from smaller suppliers, vintners or distillers which sell these products. Makes entire non-beer malt bev mkt a bit of a mystery. INSIGHTS estimates that volume of entire segment?including Zima, old wine/spirit coolers now made with malt, hard lemonades etc?was in neighborhood of 2.6 mil bbls in 99, about 1.3 share of total malt bev shipments in US. That would put retail sales in ballpark of $1 bil+. Growing rapidly in 2000 too.

Newly available numbers show Miller?s sales-to-retailers (excluding acquired brands) were down 4.3% in 2d qtr, according to PM. With acquired brands, Miller STRs down 3.6% in 2d qtr. Recall that Miller shipments down 2.8% in 2d qtr. That followed 6.6% STR gain in 1st qtr, when all acquired brand volume was incremental. Means 1st half Miller STRs (including acquired brands) still up 1.1%, tho down 1.8% without them. Then in July, a really tuff mo: Miller STRs dropped 11.4%. While August much better, September also expected to be soft partly because of way Labor Day fell in 2000 and there?s 1 less selling day in Sep. So Miller trends in 3d qtr don?t appear much better than in 2d qtr.

Miller Lite actually doing pretty well, especially when you consider that Lite prices are up more in supers than Bud Light or Coors Light. Miller Lite STRs up slightly YTD. Up 6% in supers, according to IRI. Why is Miller Lite relatively healthy? Some possibilities: mktg spending is up from last yr and ads arguably better than last yr, wholesalers executing well on brand, or perhaps a "rising tide lifts all ships." Since premium light beer segment is growing so rapidly, Miller Lite benefits too; but it?s still losing share in segment. Meanwhile Miller?s lower-priced brands (sometimes called "the tail") are dragging Miller?s total results down. In supers, Miller share down 1.1 YTD but Lite share up 0.1 and Gen Draft even. Most of Miller?s share loss in its lower-priced or smaller brands: Mil Best family down 0.3, Plank Road brands down 0.2, Henry Weinhard?s down 0.2 and Molson family down 0.2 in supers. Miller?s soft trends on smaller and budget brands may well continue since it is discontinuing 30% of SKUs over next 18 mos. In sum, "although Miller seems to have the right strategy, it could take some time for the company to actually stabilize its share performance," according to Marc Cohen at Goldman Sachs.

Another plus for Miller: up slightly in its 2 biggest share states (the only 2 states where it?s #1). Shipments up 8,000 bbls, 0.7% in Wisc thru Jun and up 29,000 bbls, 2.6% in Ill thru Apr. But interestingly Miller not taking pricing up in either of those 2 big states. In fact, Miller recently became more aggressive on pricing in Wisc.

Beer price trends continue to be positive, even while prices in many other bizzes "just keep plunging," as Biz Week headlined Oct 21. As AB implemented approx 3% increase on Sep 30 in about 40% of its biz, Miller and Coors followed right on its heels. Corona prices also went up about 4% in 2002, and Heineken prices up about 2.5% except in Calif where it held. Even Boston Beer rev per bbl up 5% for 9 mos. At Labatt USA's natl sales conference, it restated strategy to raise prices 2x as much as general industry increase starting in 2003 (didn?t stick last time). While "huge swaths of the economy are facing ever-weakening pricing power," according to Biz Week, beer biz has had 4 yrs in a row of healthy pricing. Some indications that it?s headed for a 5^th too. In Calif, Fla and Tex, Coors and Miller "followed BUD?s increases pretty much all the way," according to survey of retailers conducted by Morgan Stanley. On key 12-can package, Bud Light prices up in 3.5% range, while Coors Light and Miller Lite already up 1.5-2%, it wrote. This should "solidify a positive pricing environment well into 2003," continued Morgan Stanley's Bill Pecoriello. Yet there are more cautionary notes on beer pricing than in last several yrs. In supers, avg price paid for many leading import brands is down YTD. This narrows gap with domestic premium light brands. And there?s more pressure on pricing recently: avg price paid for all Coors brands flat for 13 weeks, up 0.3% for Miller Lite, down 0.2% for Heineken USA, down 1% for Labatt USA, down 2% for Guinness Bass Import Co. Pricing of flavored malt bevs generally declining too as GBIC now trying to move unsold Captain Morgan Gold at significant discounts. In any case, 2003 pricing may not be as robust as last several yrs: UBS Warburg cautioned that rev-per-bbl gains should slow in 2003 because "of a declining FAB category" and a slowdown in promotion reductions.

Darrin Campbell, until 9/6 Chief Operating Officer of Pabst, and a key guy who negotiated deal with Miller and Stroh in 99, left Pabst "effective immediately," and "with much regret," according to his Sep 6 letter to Pabst employees. Darrin wrote: "Given the recent change in leadership and direction of the companies, it became increasingly difficult for me to perform my duties. Given the circumstances, I had no choice but to resign." His departure comes after weeks of tension between Darrin and recently named Pabst chairman Ron Malone. Who?s Ron? Virtually unknown in beer biz, he?s atty who beat back challenges to estate of former Pabst owner Paul Kalmanovitz. Those finally ended after 6.5 yrs in July. Ron also serves as chairman and trustee of Kalmanovitz Charitable Foundation, which now owns Pabst 100%. When Ron named chairman of Pabst, he put out Jul 26 letter to Pabst employees, somewhat ironic in view of Darrin?s departure. Pabst "led by one of the best management teams in the industry," he then wrote. Even now, Ron told INSIGHTS that "Darrin has done a terrific job. He engineered the Stroh acquisition which is a success. He was instrumental in the development of the current business plan which really makes sense." But there was "disagreement on the strategic direction between management and the board. It didn?t relate to the basic business plan." Rather the disagreements were about "how aggressive" Pabst should be and about how much risk it should take. A foundation by its nature is "more conservative," he said. Pabst will hire someone with "good strong financial background" to replace Darrin. In meantime, veep Jim Walter will continue to head operating team and Pabst will quickly hire a consultant as a "rent-a-cfo" until "a permanent replacement can be found." Meanwhile, Pabst "making dough and cranking right on schedule," Ron said.

Other trustees of Foundation include Pabst CEO Bill Bitting and longtime S&P exec Bernie Orsi (S&P is holding co that controls Pabst). Both Bill and Bernie go back to Kalmanovitz days and don?t always see eye-to-eye. In late Jul, Bernie was named chairman and prexy of S&P Holding Cos. Bernie mostly involved in S&P?s real estate holdings. Ron sez Pabst is currently "not for sale," but foundation "can?t be owner" long range. Perhaps this is "change of direction" Darrin talked about in his letter. But Ron?s Jul letter to employees said: "I have every confidence that we can... continue Pabst as a profitable business enterprise for another 156 years." He also wrote that transfer of ownership from estate to foundation "does carry with it a renewed responsibility...to redouble our efforts to make the Company as financially successful as humanly possible."

For time being, Darrin's departure "is clearly a disruption," said Ron, but same biz plan still in place and "change of one or two faces shouldn't cause people to panic." Darrin was also key contact for banks and Miller, among his other responsibilities, and well-liked by employees. While distribs ain't thrilled with Pabst performance, and Pabst volume down double-digits, so far it has made its financial plan. Pabst volume in supers has declined steadily at 15% rate in supers in 2000, according to IRI, tho Old Milwaukee brands down single digits. Meanwhile, Sep orders reportedly weak. At same time, Pabst has attempted to price up some brands more than competitors in at least 2 big states, Tex and Fla. But it had to rescind in Tex, after AB didn?t take a price increase there and it only went up as much as competitors in Fla.

That’s right. Coors spent $86 mil on major brands in 2d qtr compared to $71 mil spent by AB, $38 mil spent by Miller. Coors upped measured media spending on major brands by 30%+ for 3d straight qtr, according to Competitive Media Reporting, which measures spending in 11 media. AB and Miller both reduced 2d qtr spending slightly. For 6 mos, AB spent about same on major brands as Jan-Jun 99, and still $60 mil more than Coors spent. Miller spending up 17% YTD following big hike in 1st qtr, but $22 mil lower than Coors’ 1st half spending. Most major importers and Boston Beer hiked 2d-qtr spending; 6-mo trends varied.

AB continued double-digit spending increases on Bud, but cut Bud Light spending for 2d straight qtr. So AB spent $133 mil Bud/Bud Light for 6 mos 2000, up slightly. (Expect spending hike in 3d qtr with AB Olympics ads.) AB upped spending on Busch in 2d qtr, but slashed Michelob support by 1/3; YTD spending up 10% on Busch/Light, down 7% on Michelob brands. AB also wiped out O’Doul’s spending. Add it up and AB spent virtually same $161-162 mil on major brands in 1st half as in 99. AB also spent about $1.3 mil on Doc Otis/Tequiza total YTD, next-to-nuthin’ on Natty Light. After jumping Miller Lite support in 1st qtr, Miller cut it by 11% in 2d qtr. Lite spending still up $7 mil, 18% YTD. Miller continued increases on Gen Draft tho; up 29% in 2d qtr, 85% for 6 mos to almost $20 mil. Miller slashed High Life spending, cut Icehouse and Molson USA spending YTD, but zoomed Mil’s Best spending on tiny base. All in all, Miller cut major brand spending 2% in 2d qtr. Miller media spending still up $11.7 mil, 17% YTD, but that was $50 mil, nearly 40% lower than 1st half 98. Coors really diggin’ deep for Original Coors. Zoomed spending $15.5 mil, 260% Jan-Jun. And after cutting Coors Light spending slightly in 1st qtr, jumped it by $13 mil, 1/3 in 2d qtr. So Coors Light media support up 25% YTD. Coors spent $15 mil more on Coors Light than Miller spent on Miller Lite in 1st half, $12 mil more than AB spent on Bud Light. For 6 mos, Coors spent $102 mil on major brands, up 35%.

Barton/Gambrinus hiked support for Corona/Light 19% in 2d qtr, 34% for 6 mos. Heineken raised bar again in 2d qtr, jumping support over 50%. Spent $4.5 mil, 23% more in 1st half. Boston more than doubled spending YTD. Labatt slashed ad spending 44% YTD.

While several fed courts have recently taken some very tuff shots at states’ rights to regulate alc bevs under 21st Amendment (see last issue), US Ct of Appeals for 7th Circuit just went the other way. Affirmed Indiana’s right to ban direct shipments to consumers. In the case, judge reversed US Dist Ct which had ruled Indiana’s direct shipment ban illegally discriminated against interstate commerce. He pointed out that "if the product were cheese rather than wine, Indiana would not be able either to close its borders to imports or to insist that the shippers collects it taxes." But wine ain’t cheese, he ruled. In fact, Indiana’s goal--to "collect its excise tax equally from in-state and out-of-state sellers"--is "precisely" what section 2 of 21st Amendment is for. Interestingly, judge dismissed analysis of "core powers," "temperance" and "motives" behind 21^st Amendment. Instead, he went directly to "text and history" of Constitution, and cited late-19th century cases and pre-Prohibition laws. Lotsa great language in decision, but not all of it pro-3-tier. In fact, judge wrote 3-tier systems "facilitate" what state regulators "call ‘orderly market conditions’—a euphemism for reducing competition and facilitating tax collection." Ouch.

On its face, decision looks like big win for 21st amendment and states' rights. And most alc bev attys and experts we spoke to took special note of judge’s "text and history" approach. Stephen Diamond, who teaches the only courses on alc bev law taught in American law schools, told INSIGHTS: "The Indiana trial court’s dismissive treatment of the 21st Amendment was dismissively rejected by Judge Easterbrook, who reminds us that the 21st Amendment is still in the Constitution, that it gives broad protection to state import controls, and that the Supreme Court, in ‘dormant Commerce Clause’ cases, has not limited these controls to the pursuit of core powers in general or temperance in particular."

Several other attys cautioned that decision doesn’t give states carte blanche, especially if they discriminate against some suppliers. "Most state laws discriminate against out-of-state wineries in that they only allow in-state wineries to sell directly to consumers," veteran alc bev atty Ray Williams pointed out. "This decision does not countenance this or any other form of discrimination against out-of-state wineries." Ind suit filed by consumers only, he added. Had out-of-state shippers sued, Ray suggests, "decision may have gone the other way." How did direct shippers respond? Atty John Hinman, a strong advocate of direct shipments, summed it all up. "Eureka! We finally get to the Supreme Court." See you there, John.

Pabst ceo Bill Bitting resigned last week, following power struggle on board of holding co S&P and Kalmanovitz Charitable Foundation. His departure follows that of coo Darrin Campbell (see last issue). Bill and Darrin were responsible for the deal to acquire Stroh and contract-brew at Miller. Bill had been integral to Pabst since mid-1980s. He won important lawsuit for Pabst at US Court of Appeals overturning $45 mil judgment against it in late 80s. In 99, Bill was most visible public face of Pabst in many years, giving speeches at NBWA, etc. Pabst now run by its chairman Ron Malone and S&P chairman Bernie Orsi. Ron has no beer experience and Bernie has always preferred real estate side of S&P. Pabst has already hired a consulting firm, which placed a temporary cfo inside Pabst. Pabst also implementing some hefty price increases in northwest. Surprisingly, even after Bill’s resignation, planned golf outing for distribs at Bill’s country club in LA taking place at presstime; about 50 distribs there. Bill scheduled to be there too.

AB got tuff with 6 AB distribs who are a long way from complying with standards of AB’s equity agreement. Those 6 small distribs just got deficiency termination notices. Teams of AB employees showed up almost simultaneously with the notice, at least at most of these distribs. Many AB distribs were abuzz about this development at NBWA convention. Turns out each of the 6 is a smaller rural distrib. Each carries other brands too. This is all about AB's equity agreement, not necessarily biz trends. Three of these distribs do biz in sunny Calif, where AB trends on a roll in 2000, another in Colo, where AB up double-digits, another in northwest. Sources say 6th distrib is in Pennsy, where there's lots of pressure to consolidate AB distribs, not just smaller ones. Speaking of pressure, however willingly AB distribs signed AB’s amended equity agreement, a growing number are now complaining about how it is enforced. And not just non-compliant distribs. As well as AB is doing, we hear from many distribs that some of its field sales people often use a heavy hand. Distributors increasingly vocal about what an unpleasant experience this can be.