Key message of top execs at natl sales convention, voiced best by chairman August III: while AB and distribs have "an awful lot to celebrate," the "greatest barrier to future success is past success," and distribs gotta be careful not to get complacent, sit back and lose sight of challenges/opportunities ahead. Lotsa emphasis, for example, throughout mtg that AB goin’ after high-end mkt more aggressively, especially "European imports." In fact, that’s AB’s #1 strategic initiative. Execs’ repeated praise of distrib efforts/ successes tempered by frequent cautions like "leadership is not an entitlement" and AB "can’t allow arrogance to cloud our judgment." Group veep August Busch IV summed up AB’s current position and looked ahead: "Today...our trends are solid and our profitability is growing. Today our system is healthy, growing and focused, while others search for focus with multiple suppliers. Today, we have the people capable of leading this partnership to 50, 60, 70% market share. That’s where we’re going."

August III pointed to AB’s increasing emphasis on balancing profits and volume growth: "Keeping our two organizations profitable is clearly our top priority.... Our ability to increase both price and volume will continue to be critical to our combined success." Noted AB distribs had a "record year" in profits in 99 and 2000. "Industry margins," he said, "yours and ours, are improving.... Wholesaler operating profit increased on average by some 10% in 1999, and in the year 2000 we estimate that average wholesaler operating profit will rise to 55 cents per case." August anticipates both AB and distribs "will have another record year in 2001," and that "favorable consumer response" to AB strategy of targeting price increases slightly below inflation rate will continue. August continued: "Your profit, which is measured more in terms of cash flow, provides return on your investment, and money for equipment, manpower and most important, service at the retail level." AB’s profit is measured by earnings per share and stock price. "As a result we have to make very sure that you have continuing and sustaining cash flow, and we have to make sure we have earnings per share increases each year.... In fact, our stock is up over 90% since the mid-1998 time frame when the brewing industry pricing environment began to improve. Our stock total return has outperformed the S&P 500 in the past 1-, 3- and 5- year periods" because of "our strong partnership’s consistent, strong" results. Execs also talked of improved total industry environment; addition of 5 mil 21-27 yr-olds between now and 2010 and "very favorable" pricing conditions.

Diageo is once again pushing the envelope. Terminated several wine and spirits distribs owned by Goldring family (La, Tex and Ariz) effective Sep 15^th. The Goldrings will lose over $400 million of Diageo biz, but make up at least some of it by getting brands of other suppliers (already got Brown Forman in Tex and La). Diageo has vision of 1 distrib in each state for its wine and spirits brands: has such agreements "signed" for about 50% of its North American volume, it said Sep 5. Two distribs alone, Southern Wine and Spirits (Calif, Fla, etc) and Peerless (NY) sell about 30% of Diageo volume. Diageo?s new distrib agreement is tuff: Diageo makes more demands; distrib has virtually no rights. Basically, Diageo seeks to gain more focus in consolidated houses by demanding large BDF payments (Business Development Fund also described by one distrib as "bend down forward"), exclusive sales forces and much, much more. "Diageo appears intent on suffocating the entrepreneurship of one of its greatest assets-- the wholesaler," chairman of since-terminated distrib, Bill Goldring, wrote his other suppliers back in Jul. Bill estimated that "rebate" demanded by Diageo (about $3 mil per mo for his co's) would "cost the wholesaler 50% of his profit." The Goldring family later said it was offered the new contract, but "stringent conditions" would have given Diageo "an unfairly dominant position in our companies as well as our relinquishing total control of our business to them." Diageo had no comment on Goldring situation.

Back in Jul, when Diageo first announced its distribution initiative, North American prexy Paul Clinton had written "these selections do not change the way we bring our beer and flavored malt beverage products to market." Not all will find this comforting. Diageo’s new agreement is for 5 yrs, terminable by either side without cause on 30 days notice after initial term. If Diageo terminates distrib, it pays a paltry 2% of net sales to distributor. By signing agreement, distrib waives virtually any right to recover damages under any circumstances. Diageo’s contract makes "AB, Coors and Miller contractual controls look like a cakewalk," notes consultant Mark Rodman. Diageo’s vision is "to radically restructure drinks wholesalers out of their traditional roles as independent contractors and instantly convert them into mere employees," Mark believes. Mark also fears that Diageo agreement "looks like a template for brewers-beer importers." At least 1 financial analyst, giant bank HSBC, thinks these Diageo distribution moves will result in less "considerable disruption," which will be bad for Diageo. HSBC reiterated "sell" on stock, following news of Goldring termination.

While AB and Maris continue to battle in state court over breach of contract issues (see above), US Appeals Ct just upheld ruling by US Dist Ct that tossed key Maris argument in earlier, 1^st, fed trial, which Maris lost. Net result: AB’s ban of public ownership of distribs upheld. Maris had argued that tho AB only owned 1% of all beer distribs, it also had "market power" in sale and purchase of distribs because of its 48 share of beer biz. That power, Maris argued, resulted in anti-competitive effect. But US Dist Ct separated beer mkt from beer distrib mkt. So did US Appeals Ct. "Maris has not identified a valid economic reason why AB’s alleged market power in the beer market should create market power in the different market for the purchase and sale of equity ownership interests in beer distributorships," US Appeals Ct ruled. And while Ct acknowledged that AB "has some power over Maris and its other distributorships by virtue of the contractual provisions" in the equity agreement, "AB’s exercise of this contract power over Maris did not show that AB had market power in the relevant market." Nor does mere fact that AB had "contract power" show that AB "violated the law," Ct ruled. Maris’ theory that contract power "should automatically be equated with market power," Ct added, "would place significant additional risks on such legitimate business practices as exclusive dealing arrangements, output contracts and franchise tying agreements."

While beer biz up 2.5% in supermkts YTD thru Jul 14 in big 11-county southern Calif mkt (population: 21 mil), according to IRI, look how strong hi-end is there. Grabbed over 30 share of volume YTD (about 10 share higher than US avg). Up fully 3.2 share, as imports and malternatives got most of gain. (Supers are big % of S Calif beer biz, but total mkt there down slightly.) Imports alone had nearly 1/4 of all supermkt beer volume in S Calif, up 11% YTD. That’s 32 share of beer $$$ in supers in region. Corona is #4 with 8 share of volume. Up 7% YTD even after price hike. Tecate and Heineken also in top-10, each up over 20% YTD; but avg price for each brand down about 90 cents/case. (Tecate sold for just a nickel/case more than Bud Light.) Indeed, among top-10 brands, 8 sold at avg lower prices YTD than last yr as scan-backs (discount given at cash register), other price discounts in effect. Prices paid for most premium brands down about .30/case. Even so, avg price paid for all beer up .17/case as consumers traded up.

While hi-end biz goin’ gangbusters, supbremium biz down double-digits (below 9 share), premium biz just flat. So AB and Miller both lost share of mkt in S Calif supers YTD. AB volume up slightly, but less than mkt growth. Avg price paid for AB product dipped a dime/case. Bud/Bud Light prices down .30/case. Miller biz off 4.6% and it lost 1.3 share, but avg price paid for Miller product up slightly. Coors held share as avg price paid for Coors product down a quarter. Barton has 11 share in S Calif supers; Labatt USA has 6 share. Bud family lost 0.1 share YTD as Bud Light gain offset by Bud dropoff. Bud/Bud Light family has 30 share here vs 27 share nationally in supers. But AB total share (35) about 10 share lower in S Calif supers vs US avg as its sub-premium biz not nearly as strong. Miller share in S Calif (18) supers about 5 points lower than its US share; Coors share (15) is 4 points higher than avg in US supers. Better natl trend for Pabst not showin’ up in S Calif. Note: MGD outsells Lite in S Calif supers; Coors Original still a top-10 brand, tho down 5%; Coors Light up 6%. Smirnoff Ice is rockin’: more than doubled biz YTD, just below Nat Light for #11 brand; had 1.4 share YTD.

Interbrew will sell Bass in US after June 30, 2003 as it just bought back US rights from Diageo for $105 mil. The deal was expected. After Interbrew bought Bass in UK in 2000, it seemed only a matter of time and $$ before Interbrew would acquire US rights even tho Guinness Bass Import Co had agreement with Bass thru 2016. This gives Interbrew "operational control" of 7 of top 12 imports, it said. Question now is where will Bass brand go? If Interbrew attempts to integrate Bass into Labatt USA, it would undoubtedly face same challenge from FEMSA as it got on Beck’s (US Court of Appeals decision pending). Even if brands can’t be integrated, option of a standalone Beck’s/Bass combo would be "attractive," according to ceo Hugo Powell, because Interbrew keeps 100% of margin instead of splitting it 70/30 with FEMSA. Hugo also said 80% of Beck’s volume and 70% of Bass volume already in LUSA distrib network. So Interbrew would gain clout in house, whichever entity sells Bass and Beck’s, he said. Yet Interbrew also gets more headaches managing its distribution network, which is already much larger than its competitors.

Interbrew reported figure of 700,000 hectolitres, close to 600,000 bbls in 2001. Up 1%, INSIGHTS estimates. Guinness Bass Import Co shipped lotsa extra Bass to distribs this spring and absorbed much of carrying cost, seemingly so it could make its shipment-based target in its contract with Interbrew. (Indeed total UK beer shipments up 16% in 1^st half.) But part of agreement with Diageo is to "expressly avoid loading," Hugo said; in fact, the 2 agreed to take inventory down by next Jun. Gotta expect big shipments drop for Bass in 1^st half 03. Guinness Bass Import Co will of course change its name (tho it hasn’t yet decided to what), and will change chief exec again. Prexy John Replogle will leave GBIC to be gen mgr for all Diageo products in New Eng. New GBIC prexy is sr spirits exec Dave Eickholt. He is 7^th prexy in last 11 yrs.

Import shipments "slowed" to 567,000-bbl, 5.1% growth in 1^st half, including 78,000-bbl, 3.6% drop in Jun. (In 1^st half 2001, imports up 13%.) But Canadian shipments down 252,000 bbls, 13% as lotsa Smirnoff Ice production shifted to US. Even tho Mexican shipments off May-Jun following price hike, still up 480,000 bbls, 10% in 1^st half. Climbed to 44 share of imports, up 2 points. Dutch shipments up 188,000 bbls, 6.8% and over 25 share. UK and Irish shipments each gained at double-digit pace; up 83,000 bbls, and 38,000 bbls respectively. German shipments down 37,000 bbls, 6%. Beck’s brand depletions down 4%, Interbrew said, as "uncertainty resulting from a delay in the integration process" for Beck’s "has had a negative impact." Total LUSA imports up 7.7%: Tecate up 12%, Labatt Blue Light up 19% and Stella Artois "more than doubled" (on small base), Interbrew said. Diageo reported Guinness volume in US down 1% for 12 mos thru Jun.

Could AB and Maris actually do it all over again? Recall that grueling 3-mo trial last yr ended up in $50-mil verdict to Maris, plus $22.6 mil (and growing) interest. New trial is one possible outcome of AB appeal to Fla state court. AB would prefer that appeals ct "grant a directed verdict" in AB's favor, or dismiss Maris complaint altogether. (Of course, Appeals Court could simply let verdict stand). AB’s 67-page brief details lengthy list of errors (in AB’s view) made by trial ct and "egregious conduct" by Maris attys. AB focused on 3 major points. First, it argued "evidence was undisputed that Maris Dist Co engaged in continuing, widespread fraudulent conduct in dealing with AB and its products," primarily re-packaging overage beer and falsifying records. A dozen former Maris employees "testified at trial that they had intentionally repackaged or altered labels on overage AB products," AB noted, and five supervisors "testified that entries in their" sales call records "were false." Tho Maris attys claimed company owners unaware of conduct and therefore did not breach contract, AB sez that’s no protection under law. Cited previous cases where distribs were found responsible for same practices. AB also claims trial court compounded error by "incorrectly instructing the jury" that corporation not responsible if employees were not part of mgmt and were acting "solely in their own interest." That is "exact opposite of the correct rule," argued AB. Second, the "egregious misconduct" of Maris attys throughout trial "denied AB a fair trial," it claims. Some details: Maris attys were cited for contempt 5 times during trial, and judge kicked out lead atty Willie Gary on last day; "introduction of a fabricated newspaper article" that 2 Maris witnesses claimed to have read; "frequent and blatant defiance of court orders…. Continuing attacks on the integrity and credibility of AB’s lawyers"; repeated references to other AB distrib disputes they weren’t supposed to discuss; claims that Maris "family" injured when plaintiff was corporation, and much more. Misconduct "was so pervasive and egregious," AB sez, "that the cumulative effect was to poison the entire proceeding and deny AB a fair trial, thus requiring reversal." "Countless Florida decisions have reversed for new trials based on conduct that pales in comparison to what happened here," according to AB. Finally, AB sez lower court erred in calculating prejudgment interest.

In response, Maris attys repeated their long-held claim that AB unfairly targeted highly successful Maris Dist for takeover as part of a "re-alignment plan." They also responded point-by-point to AB’s arguments in 106-page reply. First, tho AB sez evidence of fraudulent conduct "undisputed," Maris attys argue the "credibility of the witnesses claiming to have engaged in fraudulent conduct was seriously challenged and there was much conflicting testimony." Those who repackaged overage beer "emphasized" that they did it "to hide it from Maris to avoid having to pay for it," Maris attys claimed. All but one of these employees were hired by, and many advanced to management and supervisory positions, with the replacement distributors after having claimed to have hidden overage beer from Maris," Maris added. In addition, sez Maris, AB’s evaluations of Maris performance were "farces fraught with deceptive manipulations. AB trumped up trivial instances of employee dishonesty into ‘fraudulent conduct’ after Maris filed suit and ambushed Maris with the allegations in its termination letter." Fact that jury found Maris did not breach contract "entails a finding that any overage beer was immaterial," according to Maris. And since jury found AB did breach the contract and acted in bad faith, AB "could not terminate Maris for fraudulent conduct." Judge "properly instructed the jury" on the issue of whether employee’s conduct can be attributed to employer since, in this case, Maris employees acted solely in their own interest, not mgmt’s, Maris sez. "Maris counsel did not engage in misconduct," they insist. What AB calls misconduct was "Maris’ defense to Busch’s improper trial tactics" and a "mischaracterization of the record." While Maris attys cited for contempt 5 times, they acknowledge, "the court never suggested that the matters underlying the citations had been ‘prejudicial’" to jury and that’s necessary to reverse verdict, they say. What’s more, an AB atty was cited for contempt too, and AB attys engaged in their own "hardball" tactics, according to Maris. For example, while AB sez Maris attys incorrectly talked about Maris "family" being injured, Maris attys point to numerous examples of AB attys focusing on how Maris family members were "milking the business" and acted improperly. Jury’s verdict, Maris states, based on "avalanche of evidence" not "isolated" statements by attys. Maris asked court to reject AB requests for reversal/new trial. Added that calculation of interest was correct. But in its cross-appeal, Maris seeks restitution of original $140-mil verdict handed down by jury. Recall that jury figured damages totaled $140 mil, but jury form broke out $50-mil fair mkt value and $89.6 mil in "lost sales." Judge called that award "inconsistent" and allowed only the $50 mil. Maris attys argue that breakout was "surplusage," irrelevant to verdict, that jury "made it clear that it had awarded Maris $139.7 mil" which "is supported by the evidence and must stand."

AB sales-to-retailers up 3.1% Jul-Aug including benefits of way Jul 4 fell this yr, prexy August Busch IV told Prudential conference Sep 4. STRs up 1.9% yr-to-date. (At same time last yr, AB STRs up 0.9% YTD, gained 1.9% Jul-Aug.) Sep STRs expected "strong" as well, added August. AB now "expects slightly more than 3%" rev-per-bbl gain for full yr, including "continuing strong pricing" and 4^th-qtr price hikes, cfo Randy Baker told same meeting. Over 1/4 of rev-per-bbl gain (.8 of 3%+) from Bacardi Silver, which got 0.4 share in supers and has "maintained a price premium" to Smirnoff Ice, said August. Another element of "very favorable" pricing environment: "we see no hints of either competitor [Miller or Coors] departing from their current strategy" on pricing, according to August. Indeed, Morgan Stanley survey of retailers over Labor Day weekend found "only modest promotional activity" in light segment and "robust" total pricing environment. At same Prudential conference, Coors CFO Tim Wolf said "pricing environment has never been better." And yet note of caution sounded a couple of weeks back by Deutsche Bank, which worried that such pricing not sustainable because other consumer goods cos not currently able to raise prices and beer prices up more in recent yrs than historical norm.

Next yr AB will implement other strategies to increase its hi-end focus and continue string of 15 straight qtrs with 2% or more rev-per-bbl gain. It will further "refine" its bonus plan, said August IV, to include "margin objectives" in addition to price and volume: higher bonuses will be paid for getting results on "higher margin brands and higher margin packages." AB also intent on re-inventing Michelob: changing package, ads, and price. AB looks to move Michelob prices "further away" from premiums and towards "lower-end of imports," August said. This yr Michelob Amber Bock up 20%+ for 5^th yr in a row, Michelob Light showing "good" growth and Michelob Ultra test mkts "extremely successful," he added. (Didn’t mention declining regular Michelob.) Total AB volume shipped to distribs should be up 2-2.3% in 2002, reiterated Randy. Meanwhile, AB prices going up 3% or so in 3 of 4 biggest mkts: Tex, Fla and Calif on Sep 30. AB sells over 25% of its volume in those 3 states.

Diageo is once again pushing the envelope. Terminated several wine and spirits distribs owned by Goldring family (La, Tex and Ariz) effective Sep 15^th. The Goldrings will lose over $400 million of Diageo biz, but make up at least some of it by getting brands of other suppliers (already got Brown Forman in Tex and La). Diageo has vision of 1 distrib in each state for its wine and spirits brands: has such agreements "signed" for about 50% of its North American volume, it said Sep 5. Two distribs alone, Southern Wine and Spirits (Calif, Fla, etc) and Peerless (NY) sell about 30% of Diageo volume. Diageo’s new distrib agreement is tuff: Diageo makes more demands; distrib has virtually no rights. Basically, Diageo seeks to gain more focus in consolidated houses by demanding large BDF payments (Business Development Fund also described by one distrib as "bend down forward"), exclusive sales forces and much, much more. "Diageo appears intent on suffocating the entrepreneurship of one of its greatest assets-- the wholesaler," chairman of since-terminated distrib, Bill Goldring, wrote his other suppliers back in Jul. Bill estimated that "rebate" demanded by Diageo (about $3 mil per mo for his co's) would "cost the wholesaler 50% of his profit." The Goldring family later said it was offered the new contract, but "stringent conditions" would have given Diageo "an unfairly dominant position in our companies as well as our relinquishing total control of our business to them." Diageo had no comment on Goldring situation.

Back in Jul, when Diageo first announced its distribution initiative, North American prexy Paul Clinton had written "these selections do not change the way we bring our beer and flavored malt beverage products to market." Not all will find this comforting. Diageo’s new agreement is for 5 yrs, terminable by either side without cause on 30 days notice after initial term. If Diageo terminates distrib, it pays a paltry 2% of net sales to distributor. By signing agreement, distrib waives virtually any right to recover damages under any circumstances. Diageo’s contract makes "AB, Coors and Miller contractual controls look like a cakewalk," notes consultant Mark Rodman. Diageo’s vision is "to radically restructure drinks wholesalers out of their traditional roles as independent contractors and instantly convert them into mere employees," Mark believes. Mark also fears that Diageo agreement "looks like a template for brewers-beer importers." At least 1 financial analyst, giant bank HSBC, thinks these Diageo distribution moves will result in less "considerable disruption," which will be bad for Diageo. HSBC reiterated "sell" on stock, following news of Goldring termination. Best Wishes,

While AB and Maris continue to battle in state court over breach of contract issues (see above), US Appeals Ct just upheld ruling by US Dist Ct that tossed key Maris argument in earlier, 1^st, fed trial, which Maris lost. Net result: AB’s ban of public ownership of distribs upheld. Maris had argued that tho AB only owned 1% of all beer distribs, it also had "market power" in sale and purchase of distribs because of its 48 share of beer biz. That power, Maris argued, resulted in anti-competitive effect. But US Dist Ct separated beer mkt from beer distrib mkt. So did US Appeals Ct. "Maris has not identified a valid economic reason why AB’s alleged market power in the beer market should create market power in the different market for the purchase and sale of equity ownership interests in beer distributorships," US Appeals Ct ruled. And while Ct acknowledged that AB "has some power over Maris and its other distributorships by virtue of the contractual provisions" in the equity agreement, "AB’s exercise of this contract power over Maris did not show that AB had market power in the relevant market." Nor does mere fact that AB had "contract power" show that AB "violated the law," Ct ruled. Maris’ theory that contract power "should automatically be equated with market power," Ct added, "would place significant additional risks on such legitimate business practices as exclusive dealing arrangements, output contracts and franchise tying agreements."