AB rev per bbl up 3.8% in 2d qtr, biggest pop in more than a decade, group veep Randy Baker told Wall St. In 1st half, rev per bbl up 3.2%. AB now expects full yr rev per bbl up 2.8% (previous guidance 2.2-2.7%). While AB will take a fall price hike, it "may be omewhat less" than last yr. Tho AB raised its guidance on rev per bbl, lowered it on shipments to 1.5% for full yr (originally had been 2-3%). Shipments and STRs were "below expectations" in 2d qtr; that’s principal reason for lowered shipments guidance, Randy said. In May, AB had trumpeted 2.7% STR growth in 1st 6 weeks of 2d qtr, but since STRS up just 0.8% in 2d qtr, AB apparently flat at best in last 7 weeks of qtr. Even if you include week of Jul 4th, AB about even since mid-May. AB expects just 1% shipment growth in 3d qtr, with STRs higher than that. Yet, AB still made its double-digit earnings growth targets, on strength of pricing, a 24% jump of Modelo equity income and improved intl profits (China biz up 30% and profitable), and other factors.

Some reasons for slower AB growth discussed on conference call. AB "reduced promotional volumes" while there was "a bit of a step-up" from Coors and Miller. Industry up about 1%, "less than what our model would say." Smirnoff Ice doing "quite well." Tho AB research shows majority of Smirnoff volume taking from other flavored alc bevs, Randy acknowledged "some impact" on high-end beers and light beers since it skews young-adult. "Not a major impact" on AB, said Randy. Slowing economy "may be having some impact," but that’s also not "major." Bud Light up high single digits; Bud/Bud Light combined up 2%. Mich family "down low single digits"; AB subpremiums up "low single digits."

Malt bev shipments growth hangin’ in around 1% this yr, but big US brewers ain’t hittin’ their goals. AB up 1.1% in 2d qtr. Coors up just 0.5%, Miller down 6%. Pabst down double-digits, we estimate. As group, top-4 US brewers down about 800,000 bbls, 1.7% in 2d qtr, down 1.1 mil bbls, 1.2% Jan-Jun. But imports going great. Up 1.1 mil bbls, 14% for 5 mos and we estimate similar Jun gain. Smirnoff Ice shipped almost 800,000 bbls Jan-Jun; some imported from Canada, some made in US. And Mike’s Hard helped boost "Other Domestic" figure in chart below, which also includes specialties, other malternatives.

In 2d qtr, AB shipments up 275,000 bbls, 1.1%. Up 1.6%-1.7% last 6 mos and 12 mos. But AB sales-to-retailers (STRs) up just about 1% for 12 mos. It reported 0.8% STR gain YTD thru 1st week of July (to adjust for odd way Jul 4 fell this yr). Looks like AB gained slight share of shipments YTD, but may not have gained share of STRs. Miller picture a little better in 2d qtr, but not much. Shipments down about 700,000 bbls, 5.7% if you include Molson and discontinued brands it sold in 2d qtr 2000. Down about 3.5% if you exclude that volume in 2000. For 12 mos, Miller down 2.8 mil bbls, 6.3%, and down 1.6 share as it reduced inventories, discontinued brands, sold Molson and lost volume. Coors shipments up slightly in 2d qtr; up 320,000 bbls, 2.9% for 6 mos, but Coors STRs down 1.2% Jan-Jun and off slightly last 9 mos. Shipments still up 929,000 bbls, 4.2% for 12 mos. Pabst dropped to 5 share YTD. All Others up estimated 270,000 bbls, 4% YTD.

In a weird coincidence here’s another case just won by distrib that involves old beer, termination and (tangentially) AB. Panel of 3 hearing officers acting on behalf of Va Dept of Alc Bev Control just ruled that "Kirin lacked good cause to terminate Virginia Imports" (VI) and that "Kirin acted in bad faith." Ordered Kirin to pay VI not only "fair market value of assets and goodwill," but also "reasonable attorneys’ fees and costs." Kirin has appealed. This case involves tiny amount of volume (11,525 cases in 99) but is fascinating. Recall that Kirin partnered with AB in late 96 (AB brews Kirin in US), began "transitioning" brands to AB distribs around US, Va in 99. Virginia Imports had gross profits of approx $65,000 selling Kirin brands in 98. In early 99, Kirin offered $65,000, then $130,000, then $225,000. VI turned down each offer, the last one for about $20 per case. Not long after, Kirin reps started talking to VI a lot about making sure no old beer in mkt. Kirin ultimately adopted a policy of "zero tolerance" for old beer. In Aug 99, sent VI 90-day notice of intent to terminate, citing several reasons, but primarily for having old beer in the mkt. VI had 60 days to cure, and thought it did so. In meantime, Kirin went to state ABC commission to clear termination and appoint AB distribs. Va ABC gave Kirin okay in Feb 2000, in part because of a procedural mix-up, in part because it didn’t have full info, in part because (believe it or not) Kirin execs claimed old beer "poses a genuine health risk to the public."

After a hearing, officers found Kirin "failed to produce a scintilla of evidence" that old beer poses a health hazard, that Kirin has a 9-mo pull date in Japan but a 6-mo pull date in the US, that Kirin "enforced a zero tolerance out-of-code policy" against VI "but did not enforce this same requirement against other wholesalers," including the AB distribs that got brands. In fact, several AB distribs testified that their own old beer policies (progressive discipline of sales reps), were approved by AB. Net-net: "the alleged deficiencies of Virginia Imports and its violation of the zero tolerance out-of-code policy were pretexts to mask an illegal motive," judges wrote, as Kirin sought to "develop a reason to terminate" VI for refusing to sell distrib rights. Another twist: dissenting hearing officer suggested Kirin was forced to act as it did by state law. While he said "the behavior of the parties, without a doubt, was dreadful," he determined Kirin’s actions not bad faith. "Rather," he wrote" "they are the logical and reasonably foreseeable outcomes of a party intent on removing a distributor the law would otherwise require them to retain." It was the Beer Franchise Act that made ‘em do it, in his view. Recommended Kirin and VI "resolve the matter through the use of market-based mechanisms that allow the parties to give expression to their varied business interests."

NY is hotbed of legislative and legal activity these days, right in middle of peak-selling season. An intense, fever-pitched battle took place in Albany over last couple of weeks. At presstime, distribs got shored-up franchise bill passed by both state houses by overwhelming margins. It will go to gov in near future. Efforts to pass bill took place against backdrop of terminations and lawsuits. In fact, just after amended bill intro’d, Heineken gave 90-day notice of termination to 2 Long Island distribs, Boening Bros and Clare Rose. Heineken again utilized contested clause in NY law that allowed for termination for purpose of regional consolidation. Those 2 distribs sell near 1.5 mil cases of Heineken products. That followed earlier Heineken terminations of 6 distribs effective in Jan, totaling about 3.6 mil cases. In fact, Heineken had already terminated sister co of Boening Bros, Oak and Clare Rose’s biz in 1 borough of NYC. And Heineken USA sales veep Peter Dadzis (in affidavit in lawsuit) had talked about consolidating NY metro area from 8 distribs down to 1. So can’t say these moves came as complete shock. Yet they added to a chaotic summer feel, especially since amended NY franchise law retroactive to Jun 15. That’s prior to Heineken’s latest terminations. So if amended NY law signed by gov, these latest terminations will be invalid. Another key date: July 11. That’s when US Dist Court hearing scheduled on Miller’s termination of Oak. Recall Miller used same clause as Heineken in original NY franchise law, but Fed court judge enjoined; will hear arguments about whether Miller properly applied law and whether Oak should get injunction preventing termination. With passage of amended bill, Oak’s lawyers will have another card to play, arguing before Fed judge that legislature intended to prevent such situations.

Amended franchise bill intro’d late Jun 15, close to end of session. Purpose of bill is "to balance the inequities" created by some suppliers’ interpretation of bill "that give them limitless discretion as to what constitutes a bona-fide regional or national plan of consolidation," according to legislator who intro’d it. Bill now requires such a plan to be "reasonable, non-discriminatory and essential. Such policy shall have been previously disclosed in writing" and must also be multi-state, either in "contiguous states" or a "majority" of states where brand sold. Bill also calls for a terminated distrib to be compensated for "fair market value of distribution rights" which means "amount a willing seller, under no compulsion" would accept and "amount a willing buyer, under no compulsion" would pay. In addition, distrib will get "fair and reasonable compensation for other damages sustained." Doesn’t specify what those other damages are. And no supplier can terminate "until compensation has been paid."

Day after bill intro’d, AB group veep August Busch IV met with key NY legislator, with memorandum of opposition in hand. In memorandum, AB principally objected to "one-sided" approach of distribs as opposed to working with suppliers. AB also had problems with specific provisions. Subsequently distribs accommodated some AB objections and AB stepped back from fray. But other suppliers, such as Miller, Heineken and Diageo continued to object vociferously. For a brief period, Albany was crawling with industry lobbyists. Including PM people, Miller had over a half dozen. On Jun 25, dozens of beer distribs also descended on Albany to make their wishes known to legislators. And on Jun 26, bill sailed thru Assembly 132-10. But it ain’t over til the gov signs. Stay tuned.

Striking new analysis of IRI supermkt data thru Jul 22 looks at all high-end biz (includes imports, micros, superpremiums, specialty and lemon brews, all over $16 per case and avg price $21 per case). Shows high-end is over 20% of cases and 30% of $$ in supers. Top 3 brewers got less than 25 share of volume in high-end (compared to 80 share of total beer biz), and lost over 2 share of segment yr-to-date. Meanwhile, all lemon brews (Smirnoff Ice included here) at 8 share of high end volume, up 5 thru Jul 22. Top high-end brand, Corona, got 14.5 share of high-end biz. Michelob Light has 7.5 share, Heineken 7.1. So 3 brands got 29 share of high-end. Michelob, #4, has 3.7 share of segment. And believe it or not, Smirnoff Ice is #5 high-end brand at 3.3 share of volume in segment (it?s at 4 share of high end $$$ YTD and $1.9 share of total beer $$ in supers in last 4 weeks)!! Next 4 brands, Tecate, Corona Light, Rolling Rock and Labatt?s Blue each around 3 share. Mike?s Hard Lemonade is #10 brand, with 2.1% of high-end, up 1.2 share. Top 10 high-end brands over 50% of segment. Miller and Coors don?t even have top-10 high-end brand. Foster?s is #11, Killian?s is #14 and Zima is #16 at 1.5.

But if big brewers severely underrepresented in high-end, their competitive performance is even less impressive. Tho total high-end beers up 6.7% yr-to-date (beer biz up 1.2%), big brewer brands mostly underperforming. Michelob Light down 4%, lost 0.9 share of high end. Michelob off double-digits, lost 0.9 share, Tequiza off 25%, lost 0.5 share. Those 3 brands dropped 2.3 share to 12 share of high-end YTD. AB made up some ground, up 0.6 with smaller brands like Doc Otis, Mich Amber Bock and Killarney’s. Still, AB less than 15 share of high-end and it lost 1.5 share. But it does own 50% of Grupo Modelo, so it participates in profits of #1 high-end supplier, tho most of its distribs don’t. Coors has bigger share of high-end than Miller, but neither has much. At 3.6 with Killian’s, Zima and Zima Citrus, down 0.6 share in segment. Add in Molson brands (down 25% in supers) and Coors sells another 2 share of high-end, down another 0.8. Miller high-end share under 3, but up slightly apples-to-apples as Foster’s share even, Henry Weinhard up. And Pabst doesn’t have a single brand in top 100 high-end brands. Message seems pretty clear: big brewers ain’t participating much or very effectively in fastest growing segments in beer biz.

At presstime, 1st word filtering in about AB’s fall price hikes. AB going up in Mich Oct 1, suggested 35 cents to retailers on premium brands and 40 cents on subpremiums, no increases on draft. In Neb, AB recommended increase to retailer of 30 cents on cans, 45 cents on glass, $3 on draft. Two price letters followed in quick succession in Calif. The first said AB going up in Calif in Oct on "select" brands and packages, with recommended increase of 45 cents to retailers. But 1 week later, 2d letter said AB would "hold" on "key" promo packages. Meanwhile, Guinness rolling back FOBs several $$$ in Oct in Calif too. So pricing in flux in nation’s largest beer mkt. More details next time.

How did jury come up with $50-mil figure for Maris’ "fair mkt value"? Tho jurors considered offers Rudy Maris received from AB and others, several told INSIGHTS they used Rudy’s asking price of $60 mil in 97 as a starting point. "We took into consideration... construction of two new warehouses...and we subtracted that from the 60 million," said one juror. What about additional $90 mil damages? "We actually used charts that Anheuser-Busch" used for its counter-suit, one juror said. Jury used actual sales increases from 98-2001 in Maris area and "used that percentage to figure up to 2007." Several jurors insisted they intended to give Maris the full $139 mil. One said: "We followed exactly to the T what we felt he [judge] told us to do." Said number on jury verdict form "for damages was $139,688,500." Another said jury instructions "were kind of tricky" and "misleading." Juror felt Maris conducted biz "like they were supposed to do." Jury instruction #11 proved to be key. It states: "a corporation is not responsible for the fraudulent conduct of employees who are not members of management and are acting solely in their own interest." Note juror comments: according to instructions "it had to be someone in management who had committed fraud or known about it.... I didn’t see any evidence that they [Maris mgmt] were at fault." In addition, jury not swayed by AB evidence that warehouse/trucks in poor condition. One juror said: "I couldn’t get over the things that they showed us as evidence" of deficient practices. "I couldn’t get over" that "they would show us photographs of the warehouse 3-1/2 years after" termination and "try and pass that off as evidence of a dirty warehouse." Contrary to AB execs' insistence that Maris didn’t act to cure deficiencies, one juror pointed to evidence Maris "was taking steps to do the things they were asking them to do." For AB to go from making recommendations to termination, one juror said, "that pendulum just swung too quick."

While attys highlighted Adkins consolidation plan in opening and closing statements, did it get jurors’ attention or cause much discussion? "No, not really," one told us. "We almost disregarded that. We didn’t think there was any conspiracy theory or anything," said another. "We ended up not even looking at that," said a third. Interestingly, one alternate juror, who heard all the same evidence for 3 mos but could not vote on verdict, disagreed strongly with it. "I think the verdict rendered by my fellow jurors is absurd," this alternate declared. Felt case was "clearly a contract issue with deficiencies" by Maris Dist. Testimony showed Maris Dist was caught "red handed re-packaging beer.... To say that management wasn’t aware of that, I would have never agreed with that."

How does verdict affect others in beer biz? Will distribs become more litigious? Will suppliers ease pressures on distribs? The decision shows that "juries will carefully review evidence and can strongly identify with the perspective of wholesalers," said atty Mike Madigan, who represents beer distribs in the midwest. "It sends a message to suppliers that they need to try to resolve these claims before going to a jury trial. The significant thing is that even though AB spared no expense in defending Maris’ claim, it did not prevail. There’s no way that this verdict can be viewed as anything other than a resounding victory for Maris Distributing." Similarly, consultant Mark Rodman said: "The major players in the American beer industry will, I believe, take a lesson from what the jury...said and rethink how they evaluate the performance of distributors.... Finally, wholesalers will be looked at for the worth they contribute to the industry." Atty Cris Hoel added: "It's tempting to say that this is a big win for wholesalers,... but I don't see a clear victor. Maris dodged a cannonball, but at what cost? It lost its franchise, expended enormous resources, sustained enormous risk. A-B demonstrated that wrestling with that brewery in court is no picnic, but the executives in St. Louis must recognize that the jury was offended and wanted to award a huge amount of money to the wholesaler. That may embolden some other wholesalers thinking about litigation.... None of this changes my view that anyone with sense should avoid courtrooms. To accomplish that, suppliers should get their boots off wholesalers' necks."

Veteran alc bev supplier-side atty Bill Schreiber said: "I don’t think it’s a precedent, because it’s a jury verdict based on a specific set of facts." Bill did acknowledge if other similar verdicts follow it could be "worrisome" to suppliers. Two, 3 or 4 similar decisions could "make suppliers more cautious in how they proceed with their distributors," he added. Atty Marc Sorini (who represents big and not-so-big suppliers) said $50-mil fair mkt value for Maris "in the ballpark, maybe a little high," which you’d expect from jury award. Verdict confirms too, in Marc’s view, why suppliers should be "gun shy" about going to court over terminations. AB exec veep John Jacob pointed out to Gainesville Sun that Maris trial involved earlier version of equity agreement, not the current contract (Editor’s note: which is far more specific about distrib standards). Referring to the incessant courtroom antics, one anonymous beer industry atty had a different take: "Justice can’t be done in a circus setting."

Could this verdict affect pace and price of consolidation? Another industry atty, Charlie Smarr, said "verdict by itself is likely to have little impact on consolidation," since general forces driving consolidation haven’t changed, but he acknowledged that the $50-mil valuation could put some upward pressure on prices. Charlie agreed "brewers may become a little more cautious before termination." Added: while verdict "appears to be significant victory" for distribs, "as a practical matter, it may be a pyrrhic victory in that most distributors don’t have the financial resources nor the desire or will for protracted litigation on the scale of a Maris case." Then too, terminations are rare.

Momentous!! Jury award of $50 mil to ex-AB Fla distrib Maris for 97 termination is biggest verdict ever won by distrib against brewer. Both sides say they’ll appeal, AB for a new trial, Maris for more money. That’s even after epic, hugely expensive 4.5-yr, 2-trial battle that turned into circus atmosphere with attys locked in fierce, sometimes personal combat. Jury unanimously rejected AB’s position that it legally terminated Maris for fraudulent conduct and deficiencies. "The point that we want to be heard loud and clear," jury forewoman told Gainesville Sun, "is that Maris Distributing was not found to be guilty of fraudulent practices nor deficient in their operating practices." Also rejected AB counterclaim for $8.6 mil damages. In fact, jurors voted to award Maris an additional $89.7 mil for "lost sales" on top of the $50 mil. But judge ruled Fla law limits award to $50 mil "fair market value" of Maris Dist as determined by jury, much to chagrin of those jurors. Maris side sez it will appeal to get that $90 mil. Maris also likely to seek interest on $50 mil since Mar 97, and sez it will refile $1-bil defamation claim by Rudy Maris against AB. And Maris atty Willie Gary, not one for understatement, said distribs "knocking on our doors left and right" and AB is in "a whole lot of legal trouble right now." AB didn’t have much to say, except the obvious that verdict was "disappointment," that termination was "proper" and "we are confident we will prevail on appeal." Following verdict, AB Prexy Pat Stokes wrote AB distribs assuring them AB remains "committed to our relationship with you and to our Equity Agreement." Recall that only other time AB lost jury verdict over termination ($6 mil to Gerri Beardslee in 92) it got new trial and ultimately paid zilch. And tho everyone’s talking appeal, settlement also possible.

So where does Maris family stand? Gotta feel vindicated by jury decision that they didn’t breach contract, that AB did. Can claim big victory but still can’t count the moolah. Jury awarded almost $11 per case for "fair market value of the business on the date of the termination," which is over 8x operating profit. That’s far higher than most of actual Fla deal prices that AB revealed to jury (see last issue). Could also end up with $10 mil+ interest. And Maris attys vow to fight for $89.7 mil jury had tacked on. Those dollars gotta be key for the family if it’s to come out ahead after all the battles and legal costs. Why’s that? Maris has admittedly spent "oodles" for two trials: we’ve heard estimates between $6 mil and $15 mil+. Willie Gary’s firm generally works on contingency basis; it will get a large chunk (possibly a third or more), of the $50 mil. Gotta note, AB also spent a big piece of change on attys, experts and exec time.

"Miller entered into an agreement with Pabst" in late Jul that "will result in one-time charges" of $15-20 mil in 3d qtr, wrote PM. This charge (to absorb Lehigh closing costs) is less than it would have cost Miller not to have that volume.