Is this next phase of consolidation? Suddenly 2 of largest import mkts in flux (NY metro and Southern Calif). Last week, Heineken became 1st supplier to test NY law which allows supplier to terminate distribs when it implements "national or regional policy of consolidation" if there is "reasonable compensation for damages sustained." Under NY law, Heineken must notify other affected suppliers as well as distribs 90 days in advance to give them time to make their own decisions how to react. On Oct 16, Heineken notified 7 "affected" distribs and 11 "affected" suppliers, including Miller, Molson, Guinness, Beck’s, Boston Beer, etc. It said: Heineken "has delivered notice of regional consolidation of its brands" to 6 distribs, all in NY metro area, 5 who principally sell AB brands (D. Bertoline & Sons, Clare Rose of Staten Island, United Bev Co, Raso Beer and Dana Dist) as well as Oak, 1 of top 2 Heineken wholesalers in US, selling millions of cases of Heineken products in parts of NYC and suburbs. Oak also sells Miller, Guinness, Boston Beer, etc. Interestingly, owners of Oak and Clare Rose did not get this notice on their Long Island operations. Also, AB not on "affected" supplier list and NYS 4th-tier home d’s not on list of "affected" distribs.

Heineken also went to NY state court seeking "declaratory judgment regarding the amount due from Heineken to Oak as ‘reasonable compensation.’" But Heineken went to court against only Oak. According to Heineken, back in Oct 99, Heineken sent Oak owner Hap Boening "a proposal to purchase" both of his distribs "in their entirety." Heineken sez the 2 parties negotiated "for the next year," but negotiations "ended" without an agreement. Heineken also sez the 2 parties "have vastly different views on the value of Oak." And so Heineken sent notice of termination and seeks a declaration from court as to what compensation should be. Oak spokesman told INSIGHTS: "We will contest this action aggressively." Other distribs will reportedly join fight. Heineken USA spokesman said it has "implemented a regional consolidation of its distribution network in New York City and the northern suburbs of metro NY.... This consolidation is part of a nationwide program to maximize efficiency and competitiveness of our distribution network in order to meet the challenges of the beer marketplace as evidenced by the ongoing process of consolidation initiated by the major domestic brewers." Recall too that ex-Heineken prexy Michael Foley testified in 99 affidavit in Willow case in Tex that Heineken had strategic biz plan for distribution in US (sealed) for next 10 yrs: "Dissemination of this plan outside of Heineken could chill or destroy Heineken's existing distribution relationships, leading existing distributors to develop a 'siege' or litigation mentality believing that they might be the next to be terminated." Sounds like prophecy now. Michael also said that Heineken brands usually sold for between 2 to 4x gross profit. Stay tuned.

Meanwhile, Guinness recently gave notice of termination to 4 southern Calif distribs. Three are Coors distribs, 1 is Coors branch in San Bernardino. One, Mission Bev, has already sold its Guinness brands to 3 Miller distribs. In each of these situations, Guinness looks to move its portfolio to local Miller distrib. Other terminations in Guinness network at various stages of development. Some distribs around country also recently got new Guinness contracts and Smirnoff Ice contracts. Calif distrib assn just sent memo to distribs that said new "Guinness Distribution Agreements contain several unique provisions that raise novel legal issues not included in any previous agreements.... CBBD strongly urges you to await our legal analysis." And Smirnoff Ice contract reportedly requires spending of as much as $2.00 per case by distribs among many other demanding provisions.

For 1st time ever in lawsuit against AB, chairman August Busch III testified for over a day in Maris case on Oct 30. August was AB’s very first witness. AB atty Peter Moll questioned him for 2.5 hours on direct, then Maris atty Bernie Dempsey questioned August for more than 2x that. Lotsa fascinating details, tho no big revelations in August’s testimony or cross-examination. Only space for a few this issue; maybe more next time.

August was asked: "Who’s the optimum wholesaler?" "A person with a very small amount of money," August replied, "wanting to get into the beer business with experience at retail selling level.... We would rather see people coming into the business with very little money, wanting to make money," August said. August also pointed out: "We terminated extremely" few distribs over the yrs. "You could probably count them on both your hands." August praised distribs: "Without our wholesalers, we have nothing," and distribs 2d most important factor in AB success behind product quality, ahead of mktg. While August emphasized personal service of local owners, on cross, Bernie got August to acknowledge that AB has "mega-distribs," that is owners who have distribs in different states. Interestingly, August didn’t know AB currently has 12 branches (he said 10) and didn’t know names of branch mgrs or a number of distribs. It's distrib's choice whether to consolidate, said August. "As long as the wholesaler is servicing the marketplace at a standard that is at or above the competition, we hope above, that wholesaler can be as small as that wholesaler wants to be and we are perfectly happy." Judge closed off discussion about a challenge to August’s statement that AB does not "force" distribs out of biz. Best Wishes,

Oak responded to Heineken’s complaint (see last issue). Heineken had sought declaratory judgment as to "amount due" Oak as "reasonable compensation" from Heineken for terminating it under NY law that allows termination for "national or regional policy of consolidation." But Oak contends: "There is no justiciable controversy...because...plaintiff has not implemented a national or regional policy of consolidation." Oak and Heineken "have never even had any discussions as to the amount of damages that Oak would be entitled to" under NY law, if "in fact Heineken appropriately implemented" such a policy. Oak sez too Heineken "failed to state a cause of action," that court doesn’t have "jurisdiction" and Heineken's claims barred by "doctrine of unclean hands." Intriguingly, Oak acknowledges "negotiations in furtherance of a proposed transaction" in which Oak "and its affiliate Boening Bros. Inc would sell all of their assets to a consortium of which Heineken was a member." Not stated in response, but other members of consortium reportedly included another large Heineken distrib and Miller. Those "negotiations ended without the execution of a definitive agreement."

In face of widespread resistance to tuff new Guinness and Smirnoff Ice contracts, Guinness has shown surprising willingness to negotiate. Guinness prexy Tim Kelly told INSIGHTS: "We’re reasonable. We’ll talk to people. There’s some things that we won’t budge on. There’s some things that we’re happy to have an open dialogue on." Most distribs haven’t signed, even tho Guinness initially demanded contract back in 7 days. Guinness still plans launch of Smirnoff Ice Jan 1. Guinness contract didn’t have exclusive territories, was renewable after 1 yr, mandated all legal disputes resolved in Connecticut, no recovery of damages in termination, mandated refrigerated trucks, and about $2.00 per case in mkt spend in 1st yr for Smirnoff Ice. That’s just for starters. Contracts also "eliminate the concepts of ‘equity’ and ‘goodwill,'" legal counsel for Calif distrib assn wrote in lengthy analysis. "Widespread signing of these contracts could result in comparable changes in all supplier contracts," he warned. Distribs in Calif and other states negotiating with Guinness too. At least in some areas of country, Guinness contract itself in flux. Reportedly, Guinness willing to grant territory (wowee!), eliminate 1-yr term, restore concept of equity and not mandate refrigerated trucks. However, $2.00 per case seems not to be negotiable.

AB group veep August Busch IV emphasized AB’s need to "aggressively compete" in high-end beer mkt in talk at recent mtg sponsored by Morgan Stanley. All new product intros will be focused there, he said. Meanwhile, August pointed out, AB informed distribs which have competing import/specialty brands that they gotta spend same amount on AB hi-end brands as on competing brands. (Sales veep Mike Brooks sent Oct memo to distribs which said: "if competitive high-end brands exist" within distrib portfolio "then the aggregate high-end spending" on AB brands "must be equal to or greater than competitive high-end spending." A minimum of 50% of "aggregate spending" must be on AB "trademark" brands; rest could be on AB "equity position" brands.) August gave example of AB distrib in northeast who sells 1 mil cases of Heineken, 5 mil AB. Distrib was investing more on Heineken than on AB total. Now has to match Heineken spending on Michelob, Redhook, Tequiza, etc. In another move, AB will match distrib spending on Michelob "dollar for dollar" throughout US. Asked whether AB looking at other non-beer products like water, August said not in short term; focus will be on just-into’d "180" non-alc energy drink which has "lots of synergies" with beer, and rolls out in next few mos. "Certainly more [hi-end products] to come," said August. While AB wants to see AB distribs get Modelo brands, right now only 67 of 757 have ‘em, he noted. In future, more likely that Modelo rather than AB would "buy back" distrib rights in US, just as Heineken bought Van Munching, August said. But acquisition prices "extremely lucrative," he acknowledged. Noted too that one of Modelo’s contracts with importers is "evergreen," the other isn’t. Tequiza has "leveled off" at 300,000-320,000 bbls. (Sold about 600,000 bbls in 99.)

Other info from August and group veep/CFO Randy Baker: Tho AB volume nearing capacity, it won’t "require" a new brewery over next 5 yrs, Randy said. AB can get needed incremental increases in existing breweries to handle targeted 2-3% annual growth, he added. AB expects capital expenditures to drop over next 5 yrs, added Randy.... AB sees "good acceptance" so far of Oct price increases. Growing number of Miller/Coors distribs likely to add to pricing "stability" since those distribs less likely to pit Miller Lite vs Coors Light.... Dec 2000 trends tuff to predict because of Bud millennium promo last year and New Year’s buy-in. Still, AB expects 2-3% shipments gain, 2.5% rev/bbl gain in 4^th qtr, and has similar "guidance" for 2001.... 1st qtr 2001 price increases expected to be in "slightly greater" portion of volume than 1st qtr 2000.... AB distribs have invested $70 mil over last 3 yrs in people, process and technical improvements.... For years, said Randy, AB targeted 1-1.5 annual mkt share gain. Now has "more balance" between mkt share and profit goals. Lookin’ for 0.5 share gain, 2-3% price increases "above cost-push but below" CPI. Even if aluminum prices were to spike up, Randy said, AB would "be careful about taking price up" above CPI.... August expects continued decline of Pabst over next 5 yrs (it will close last 2 breweries by 2003, he predicted), slower growth at Coors, improved Miller. "I don’t see John Bowlin accepting another year" like 2000, August said.

Imports jumped 922,000 bbls, 19% in peak-selling season Jul-Sep. That's more than imports gained Jan-Jun. Up 1.725 mil bbls, 12.5% for 9 mos. Mexican shipments on fire in 3d qtr. Up 605,000 bbls, 33% Jul-Sep. Mexican shipments up a very solid 783,000 bbls, 14.4% thru Sep; had been up under 5% thru Jun. That’s 45% of total import gain for 9 mos. And strong Dutch shipments gain is steady-as-she-goes: up 496,000 bbls, 15%. That’s almost 30% more of import gain yr-to-date. So top 2 importing countries continue to gain share of imports. Up to 64 share. But imports from some other countries got good growth too, particularly Ireland. Land o’ Guinness up 133,000 bbls, 23% for 9 mos. And even tho they had poor Sep, imports from 3 other leading countries up in mid-single digits yr-to-date: Canadian shipments up 98,000 bbls, 4%, German shipments up 54,000 bbls, 6%, and UK shipments up 52,000 bbls, 7%. Imports from some smaller countries up big % on small bases as big global brewers invest in US on key brands: Belgian imports up 79% (Interbrew), Czech imports up 31% (SAB).

Imports, of course, have much bigger share of $$ than shipments. In supers, for example, imports at 16.4 share of $$, up 1.6 share YTD thru Nov 12, according to IRI. So importers stepped-up efforts in supers appear to be paying off. In fact, each of top 5 import brands growing at double-digit rate there as are 15 of top 20 brands. Corona up 10% and Corona Light up 25% in supers; another Modelo brand caught fire: Pacifico up 106% and vaulted into top 10. At same time, Heineken up 22% in supers, Amstel Light up 24%. For Labatt USA, Tecate up 38%, Labatt Blue up 15% (#3 and 4 imports in supers). And Guinness Pub Draught up 28% (tho Guinness Stout down 2.5%) while Bass up 14.5%. Several other import brands ranked #10-20 in supers growing 25-35%: Labatt Blue Light up 27%, Modelo Especial up 25%, Grolsch and St. Pauli Girl each up 31-32% YTD. Laggards include Molson Ice, Molson Golden, Beck’s all down double-digits in supers. Foster’s up 5%.

Has total import growth accelerated again because price gap narrowed between premiums and imports? Avg price paid for each of top 5 import brands very flat over last 13 weeks in supers (Corona up 9 cents, Heineken up 5 cents) compared to 30-cent-plus price increases for each of top 5 domestic premium brands. Then too, imports lapping easy comparison numbers going against 99 period, when top importers took price increases. In any case, a key question for 2001 becomes what will import pricing strategy be. No Corona price hike expected, according to many sources. Yet Guinness and Labatt have already announced increases in some parts of country. And when Heineken execs from Holland presented to NY financial community, they indicated its pricing would go up in 2001. Might picture change if Corona not going up? Stay tuned.

With domestic taxpaid shipments up 200,000 bbls, 1.4% in Oct and imports rollin? thru Sep, right now looks like industry shipments on track for 1.5%+ gain again this yr. But hold your horses! That could get knocked back with tuff Dec shipments number that?s looming. First, the good news: US shipments, including taxpaids and imports, up 2.8 mil bbls, 1.7% in data available so far. Taxpaid shipments up 1.1 mil bbls, 0.7% Jan-Oct, according to estimates by Matt Hein at Beer Inst. Imports up hefty 1.7 mil bbls, 12% thru Sep. Not likely imports will slow much in 4th qtr. In fact, imports were up only 3.5% in 4^th qtr 99, so a 2-mil-bbl+ import gain for the yr seems like pretty good bet. But end-of-yr domestic brewer shipment picture much dicier for several reasons: 1) Miller just announced it will reduce wholesaler inventories by 5 days "by reducing planned production, resulting in additional order turnbacks" in Dec; 2) there?s two less selling days in Dec 2000; 3) Nov-Dec 99 shipments had gotten extra pop from millennium buy-in and big AB Bud promo. Taxpaid gain Nov-Dec 99 was 900,000 bbls, 3.7%; over 40% of entire 99 taxpaid gain. Miller wholesaler inventory cutback gotta be about a half-mil-bbl hit, and Miller going against good 4th qtr last yr. Meanwhile, Coors is lapping a big 8% gain in 4th qtr 99, and its recent retail sales on slower pace. Keep in mind too that AB execs told Wall St that Dec tuff to predict because of buy-in last year. Latest retail data shows AB slowing a bit too. On top of it, in key Calif mkt, distribs singin? the blues about soft 4th qtr sales. Net-net: a deep Dec drop would reduce total gain to 1% range from 1.5%+.

Lucky me, us! All my life, I’ve been lucky. I was lucky picking my parents, lucky when I was a GI 1-1/2 years in Europe during World War II and no one even shot at me, lucky when my mother introduced me to my lovely wife, and lucky when I had the chance to start Beer Marketer’s INSIGHTS 31 years ago when I was a kid of 45. Wow!!! On top of that, everyone in my family, my wife, my children Benj and Glen and their spouses and my grandchildren, is healthy! That’s luck. Can’t ask for more.

So now in this Holiday Season, I write once again in happy awe. All of us here at Beer Marketer’s INSIGHTS, Benj the boss man who busts his back running the company and leading the editing and writing of our publications, our MVP Eric Shepard who more of you are getting to know and respect, and others on the staff, my wife Irene, Gerry, Jimmy, and Adam, so important in getting our work done, wish you the best for the coming year. While Benj does everything well, I like to joke that you gotta admit that when I ran Insights the publication was better.

We all know that while many of our friends and readers in this industry face a blue sky with some clouds, others face an uncertain future. A time of such change isn’t easy. But whatever happens to their beer industry investments and careers, we all know that new opportunities abound away from all the challenges of the beer biz. I’m reminded that I luckily began Beer Marketer’s INSIGHTS after I got checked out of my major public relations accounts, was essentially out of my p r biz. So guys and gals, daylight is ahead! To those of you who face the coming changes, I wish you as much luck as I had, most of all at home, then too in your business life. Those we’ve gotten to know and enjoy and who leave the industry, we’ll miss you. And for all others, the many friends we have who will stay in this industry, I expect to enjoy conversations with you for another 16 years. Remember, I told Benj my retirement date is Jan 1, 2017. Stay well. Best Wishes ---- Jerry

Soft industry vibes in mid-Dec. One reason is tuff comps with Dec 99, but there's more to it. No one sure what's going on. Follows tuff 3d qtr for Miller, when sales-to-retailers down 6.3%, according to PM. STRs down 1.6% for 9 mos, 3.5% excluding acquired brands.... "Coors Light is growing among key entry level beer drinkers," according to a hi-up Coors exec, who disagreed with Sanford Bernstein’s Bill Pecoriello (see last issue). Bill had based his statement about Coors Light on MRI data, a service that includes general info on 500+ product categories. Coors source sez it uses more precise proprietary research designed for beer category. And analyst Andrew Conway just wrote "demographics and consumer tastes could disproportionately benefit Coors going forward," as consumers "continue to favor premium light beer." Andrew expects Coors net rev per bbl to be up 2.7% next yr, as AB provides "necessary cover." Said too Coors has "sufficient flexibility" at brewing/packaging plants to cut costs and "provide significant operating leverage." Next issue in 2001, either in 3 or 4 weeks.