Beer Marketer's Insights
B clearly won summer of 08, on both shipments and sales-to-retailer bases. But 9 and 12-mo trends show AB and MillerCoors each up 1-2%, well over 1 mil bbls for 12 mos thru Sep 08, our estimates in table below suggest. Meanwhile, industry data shows overall shipments runnin' up close to 1%, a slight slowdown from 06-07 trends, but really resilient considering broad economic trends. Q4 remains a wild card given economy, comps (domestic a tuffie, imports a softie) and unknown impact of widespread Oct 1 price increase. As expected, given strong Sep and price increases, early reports indicate beer biz took a hit in Oct, with some evidence of trade-down. Indeed, AB reported Oct STRs down 1.8%; MillerCoors "off marginally." Then too, distribs have 2 less selling days in Nov.
AB's 3d qtr shipments not as strong as STR gain (+3.6%), but 2.3% increase Jul-Sep was pickup from Jan-Jun, up just 0.4%. So AB up 1%+ for 9 mos; mkt share ticked up 0.1-0.2. MillerCoors reported STRs up 0.7% for its 1st qtr as JV, but shipments down 0.5%, as MC reduced inventories slightly. Legacy Coors brands up, legacy Miller down. Adding up Miller and Coors for previous qtrs -- we do that, MC doesn't -- suggests MC up 1%+ yr-to-date, 2%+ for 12 mos. So it's also been a slight share gainer these periods. (Note: MillerCoors figures below include estimate of exports, tho those bbls actually being sold by SABMiller and Molson Coors, not JV.) Pabst had its best qtr in yrs: down just slightly Jul-Sep, we estimate. Brought 9-mo and 12-mo dropoff rates under 5%.
Crown revs down $37 mil, 1.9% for 9 mos, tho up slightly in 3d qtr. Since no price hike this yr, likely that its shipments trend similar. (STRs down slightly too.) Heineken USA a tuff read. FEMSA reported exports up 10% in 3d qtr, +8.5% for 9 mos. Most of that comes to US. But Dutch shipments down 5.8% thru Jun; didn't have great 3d qtr either. So call total HUSA shipments down slightly for 3d qtr and 9 mos. Overall, craft biz slowin' but still up mid-single digits, we figure. Boston qtrly shipments figures skewed by recall, but core shipments up 10% for 9 mos, it reported.
| Bbls (000) | Chg | Bbls (000) | Chg | Bbls (000) | Chg | ||||||
| 3d 08 | 3d 07 | bbls | % | 9mos08 | 9mos07 | bbls | % | 12mos08 | bbls | % | |
| AB | 28,825 | 28,175 | 650 | 2.3 | 82,775 | 81,900 | 875 | 1.1 | 106,025 | 1,665 | 1.6 |
| MillerCoors | 17,040 | 17,120 | -80 | -0.5 | 49,675 | 49,055 | 620 | 1.3 | 65,075 | 1,380 | 2.2 |
| Pabst | 1,625 | 1,640 | -15 | -0.9 | 4,675 | 4,890 | -215 | -4.4 | 5,885 | -305 | -4.9 |
| Others | 10,882 | 10,942 | -60 | -0.5 | 33,159 | 32,963 | 196 | 0.6 | 42,385 | -896 | -2.1 |
| Total | 58,372 | 57,877 | 495 | 0.9 | 170,284 | 168,808 | 1,476 | 0.9 | 219,370 | 1,844 | 0.8 |
| (Taxfree) | 1,175 | 1,125 | 50 | 4.4 | 3,525 | 3,350 | 175 | 5.2 | 4,525 | 230 | 5.4 |
| US Total | 57,197 | 56,752 | 445 | 0.8 | 166,759 | 165,458 | 1,301 | 0.8 | 214,845 | 1,614 | 0.8 |
| All brewer figures are BMI estimates of shipments, including tax-free. | |||||||||||
MillerCoors distrib agreement -- well over 1/2 of MC distribs haven't signed including some of biggest -- still on minds of many. That was clear from chat and presentations at NBWA's CAP mtg. MC contract (and other suppliers' agreements) provided backdrop for Minn assn prexy Mike Madigan's briefing on beer franchise laws. A number of provisions likely to be "vigorously litigated" over next 5-10 yrs, in Mike's view, including deal approvals based on sellers' brand mix, consolidation policies, requirements to sign contracts/ amendments, brewers' exclusive negotiating rights, rights of first refusal and more. Mike, like many others, believes contracts violate many state franchise laws and even tied-house laws. What about MillerCoors' insistence state laws will prevail? Issue there, said prof Steve Diamond, is that distribs have to "put all their chips" on table. If distrib bets that some specific issue or protection vs. termination is covered by state law, but MC disagrees, disputes and wins a "close call," distrib loses. Question came up whether any state AGs or ABCs are "thinking of getting involved." (Word is Calif regulators not happy with extent of control MC agreement gives supplier.) "A number" of ABCs/AGs have expressed "concerns" about implications of contract, Mike said, but so far a "battle of letters," and no indication or clear threats of lawsuit or enforcement actions if MC gets "overly aggressive." Option for distribs, depending on state law: petition for "declaratory action" to clarify specific issues and implications of signing.
NBWA-sponsored Center for Alcohol Policy's first mtg was another new direction for assn. Dallas mtg focused heavily on legal/regulatory issues. Not that long ago, NBWA didn't even have genl counsel. But decision to embrace state regulation prompted creation of CAP, an effort to "support research and outreach" on regulatory issues, responsible drinking, health issues and more, as chairman Phil Terry put it. Not much specific alcohol policy on tap at 1st CAP. More attention to broad issues and review of current direct shipping lawsuits, franchise laws, Costco and 21st Amendment. Retailer attempts to ship across state lines was hottest legal topic (see last issue on NY, Mich Tex lawsuits). Another attention-getting talk, and another sign of big change at NBWA: comments from Marin Inst atty Michele Simon. Marin has taken lead role, especially in Calif, as chief critic of industry products and practices. So suppliers ain't happy NBWA gave Michele an industry forum, but NBWA has repeatedly expressed willingness to dialog with public health advocates where interests align, like support of state regulation.
Michele claimed Marin and her colleagues neither Neo-Prohibitionist nor anti-biz, simply in favor of reasonable regulation that will reduce alcohol problems. Still, she: 1) hammered suppliers' "drink responsibly" messages as "ineffective" and "self-serving"; 2) claimed there was "no longer a scientific question" over link between industry mktg and underage consumption; 3) insisted self-regulation "not working"; 4) ripped Sparks as "incredibly dangerous." Asked industry to stop efforts to target youth, stop using sex to sell, stop "deceiving" regulators about "alcopops," and more. Michele and another advocate called for higher prices, reduced mktg and less access to alc bevs. Asked whether NBWA supported any of these proposals or Michele's new "STOP Act," NBWA leadership wouldn't endorse specifics, noting these are early days in seeking common ground.
Two hi-profile Calif deals moving forward in Sacramento and Stockton, but big twist in Sac has lotsa folks reading tea leaves. Crown didn't go with MC's anointed consolidator megadistrib DBI. Went with 6 AB distribs, led by Sacramento's Markstein Bev. That's for nearly 1.8 mil cases of Crown, likely over 1/3 of deal GP. AB distribs paid handsomely, reportedly over $25 per case (or about 5X GP), even tho Crown biz down in Calif in 08. That's big shift in balance of power since Crown such a player in Calif. It's also largest transition ever by Crown/Barton to AB network. Crown has mkt-by-mkt policy on consolidation and has sometimes gone with AB distribs (tho not AB branches). But it has previously shown preference for staying with party that brought deal. Making this even more unusual: DBI already sells Crown portfolio. No comment from Crown at presstime.
Just when it looked like distrib consolidation had become runaway freight train, things changed. Combo of economic crisis, ever-higher asking prices, tighter credit, MC's changed stance, continued unwillingness to sign MC contract and lawsuits has put brakes on some deals, slowed pace, tho still plenty in works. But some sellers' asking prices are "too high" and "not bankable," said 1 supplier source. And 1 would-be buyer predicted some deals in works don't have loans lined up and those deals will dry up. Some hi-profile deals expected to happen but didn't: a 14-mil-case distrib for sale in southeast, another near 10-mil case transaction. In one case would-be buyer unwilling to sign MC agreement. MC makes that a precondition of approval.
For 2d time in less than a mo, MC backed off key early strategic initiative. Announced Oct 20 it will no longer name preferred buyers' in each market by end of 08. That came just 3 weeks after revising contract. MC cited tuffer lending environment as one reason for not pushing consolidation as aggressively. Makes sense. Why anger so many if a lot of deals wouldn't even get done? But also said move "will allow all of us to increase our focus on selling more beer now." That's same thing it said as it changed contract. MC seemingly realized initial priorities needed rejiggering. MC still big believer in consolidation, albeit at slower pace and without "forcing it" by end of yr, 1 exec said.
MillerCoors did take action to consolidate brands under single distrib "in markets where state laws allow us to do so as a successor supplier." That's Oh, Ind, Colo, Calif. How's that goin'? Oh terminations on hold as lawsuits wind thru court. In Ind, Monarch has deals to buy 2 small distribs and workin' on 3d. If all slated deals happen in Ind, will be only 2 MC distribs going against 23 AB. In Calif/Colo, over a dozen arbitrations filed with MC/distribs seeking ruling on fair market value to move brands. How these play out is anybody's guess. In 2 Calif deals, distrib missed deadline to file for arbitration, which may or may not close legal windows for brand transfers under Calif law.
AB InBev already busily preparing for new tomorrow amidst mgt ranks. Named Dave Peacock, AB's star exec in recent yrs, as AB prexy "effective upon the closing" of AB InBev. Made sense InBev would want to keep Dave in key role, but InBev will also predictably place its own exec over Dave in St Lou: Luiz Fernando Edmond, newly named zone prexy North America. Luiz had previously been Zone Prexy for Latin America North, InBev's Ambev unit, which he's run since Jan 05. Gonna be very interesting to see how these 2 cultures mesh. Tho some AB execs have spoken of lotsa similarities, differences at least as notable. InBev culture "non-negotiable" and "will happen", interim Labatt USA prexy Jim Pendegraft said revealingly during q&a at NY distrib assn meeting, following question about how cultures will mesh. InBev's culture includes tight cost controls, sharp focus on results, no entitlements, "zero complacency" and, of course, zero-based-budgeting. Employees are "on the bus or off the bus." Added "a lot of good people" decide not to be aligned with InBev culture, and don't stay. But benefits of culture are "fantastic," he said. Meanwhile, AB's early retirement program reportedly significantly undersubscribed at presstime with 10/31 deadline. And there is sharp divide between those AB execs who will get big payouts if AB InBev closes and rank-and-file worrying about their future.
Journey to AB InBev has had many twists and turns amidst global economic crisis. Include big spread between AB stock price/offer price, InBev stock collapse, postponement of rights offering and more. At presstime, some deal risk clearly remains as Reuters headlined: "Credit crisis may lead InBev to revisit Anheuser Deal." Article said: "Possibilities include offering a stock component in return for" AB shares (current deal all cash) as well as trying to get AB to "accept a lower price." Another possibility: delaying deal. AB stock price closed at $58.13 on 10/23, 17% below offering price. A few days earlier, Reuters said AB InBev on "track," but "final funding cost could be higher than initially estimated" and 2d "round of loan syndication has been going more slowly in recent weeks due to the financial crisis." Still, InBev has frequently said it has "fully committed financing in place" and remains publicly steadfast deal will close by yr-end.
Meanwhile, InBev stock has collapsed even more than mkts, down almost 50% since Sep 1. At 27 Euros at presstime, down from peak of 69 in Oct 07. Mkt cap just $21 bil. And it's paying $52 bil for AB. That's almost 2.5x its current worth to swallow AB. Locked into paying pre-mkt collapse price in post-collapse world, as 1 source noted (several say AB stock would be 35 or so without deal). That's 1 reason why InBev stock under so much pressure, tho devaluation of Brazilian currency is another. This no longer looks like good deal for InBev shareholders. But remains to be seen what if anything InBev can do about that, under changed conditions. InBev postponed stock offering but can issue stock up to 6 mos after closing to pay off $10 bil bridge loan. But the lower the price of its stock the more equity it would have to issue. One analyst even raised prospect that controlling families could have to sacrifice control. Then too, trying to raise $7 bil in asset sales in current environment very challenging, to say the least. These and other factors will put more pressure on AB InBev to meet or exceed synergy targets. "The lower InBev's stock falls, the more risky its planned takeover" of AB becomes, wrote FT.
Two other unresolved issues. First, Modelo filed for arbitration, citing "Investment Agreement" between AB and Modelo, "governed by Mexican law," which it sez "prohibits AB from taking actions that would result in a transfer or disposition of its interests in Grupo Modelo and [holding co] Diblo to a competitor" in beer biz. AB and InBev each say its claims "are entirely without merit" and won't prevent closing. Modelo simply seeking leverage, according to several sources, in ongoing negotiations with AB InBev and potentially others. Modelo's "erratic changes of position reflect its eroding leverage," argued Credit Suisse's Carlos Laboy in sharply worded note titled: "Modelo Arbitration: What Rights?" Finally, some suggest DOJ takin' long look at AB & Labatt USA combo, especially in NY, where LUSA does 60% of its biz. Issue on folks' minds at AB and LUSA, LUSA prexy acknowledged at recent NY distrib mtg. So 3 scenarios possible, he said: 1) DoJ approves and LUSA gets rolled into AB; 2) LUSA continues as stand-alone like today, with "iron curtain" between bizzes; 3) a "wild card" that's "not either."
Total MillerCoors sales-to-retailers +0.7% in 1st qtr as JV. Coors Light +6.8% and Miller Lite -3.6%. Even with Lite down (lapping 4% growth last yr), MC said it gained share of premium light in every channel except liquor stores. Five of its 6 biggest priority brands growing share. Blue Moon over 1 mil bbls in latest 52 wks, up 0.3 share in Nielsen and bigger than Sam Adams Boston Lager. Coors Banquet +12%, its first double-digit gain since 1983. High Life +2% and 09 media spending will be up 45%. Keystone Light "continues its impressive rise" on top of double-digit gain in 07. Big oppy in increased distribution in c-stores: Keystone Light only at 50% simple distribution compared to 85% for Natty Light and 71% for Busch. New study showed 3 main reasons for Coors Light growth: current drinkers choosing Coors Light more often; "base expanded significantly" especially among Hispanics and African Americans and "growth coming at expense of Bud Light." Even Gen Draft franchise improving recently with strength of natl rollout of MGD Light 64 (which may have hurt Lite). In most recent period, got 0.6 share, equal to Heineken Premium Light. Trial rate comparable to Bud Light Lime and repeat purchase higher than BLL or HPL. After "15 years of declines," MGD franchise "starting to tick up." MGD Light 64 will get $20 mil of media support in 09. Also: Peroni up 35% and Sparks up 15%.
"We have to be more than sum of parts," said Eastern prexy Tom Cardella, and "create new ways" of doing biz, including "cracking code" of local mktg. Tho Miller and Coors traditionally each had "distinctly different approaches" on cost-sharing with distribs, MillerCoors looks to form "single equitable cost model" and make it "much easier to do business with us," said prexy West Ed McBrien. Starting Jan 09, MC will present "single aligned" model on "freight and fuel" that's "cost neutral to entire system." Other big "buckets" not until 2010; include price promos, POS and local media.
Here we go again. Differing fed ct decisions in Mich and NY could end up in US Sup Ct over direct shipping of wine to consumers by retailers. Just as fed cts in those states disagreed over whether states could treat in-state vintners differently than out-of-state vintners -- leading to Appeals Ct splits ultimately resolved in Granholm -- similar split developing over whether states can treat retailers differently. Fed cts in Mich and Tex have ruled in last yr that under Granholm, all retailers gotta be treated the same. In most recent decision, fed ct in Mich ruled state illegally discriminated against out-of-state retailers who sought to sell to Mich consumers just like in-state retailers do. Judge squarely rejected arguments made by state and Mich beer and wine distribs to defend law. Tax collection, keeping alcohol from minors and regulation of sales are legit state interests, she acknowledged. But state failed to show alternatives to the ban are "unworkable," she concluded. Mich now licenses out-of-state vintners to ship direct to Mich consumers, she pointed out. State can figure out similar system for retailers. "A discriminatory law cannot be upheld simply because the State speculates that it may have trouble regulating wine from out-of-state retailers without setting forth concrete proof that this will be the case," she wrote. Recall: inability of NY and Mich to prove their direct shipping laws were necessary or effective led to their demise in Sup Ct.
Similarly, fed ct in Tex ruled earlier this yr that Granholm applied to out-of-state retailers as well (tho Tex ct also said all retailers could be required to buy from Tex distribs). In this regard, Mich and Tex cts conflict directly with US Dist Ct in NY which a year ago upheld NY law that barred out-of-state retailers from getting a license to sell direct to NY consumers. NY case was slam dunk win for distribs with great language. NY judge called bid by out-of-state retailers "clearly an attack" on 3-tier system and called direct shipments laws "integral to maintaining centralized control over alcohol sales because they ensure that every drop of alcohol flows through the 3-tier system." While Mich judge ignored NY case, Tex judge had "respectfully disagreed" with it. Called it "misreading" of Granholm because it "elevates a state's rights under 21st Amendment to a level that supersedes" Commerce Clause. NY judge's logic is exactly what distrib advocates have argued for yrs. Tex and NY cases are on appeal. Mich is assessing whether it will appeal. Way things goin', Appeals Ct split seems increasingly likely.
While AB outperformed in summer 08, Crown continued to struggle: depletions down slightly Jun-Aug. Crown could be "exhibit A" in effects of tuff economy on beer biz. Its sales-to-retailers down 2% yr-to-date thru Aug, compared to expectations for at least mid-single digit growth. "Things are upside down," Crown prexy Bill Hackett acknowledged to INSIGHTS, and it's "more than just bumps in the road." Bill cited several factors contributing to less-good-than-expected results: price increase at wrong time, overhaul of its org, weakened economy especially in Corona strongholds and domestic/import price and brand competition. Domestic brewers "broke the code," said Bill, following last Corona price hike. With "expanded price gap, they can win." Corona's interaction mostly with domestic beers, sez Bill. When gap gets "close to 2 for 1" (case of domestics for nearly same price as Corona 12-pack) "we lose." And that's especially so with the "very real dynamic" that disposable income down. There's been no loss of image or brand equity for Corona, Bill insisted, but many consumers "can't access us" with less money in their pocket. Note: Crown still does not do scanback in Calif and has stuck with its price increase. Then too, Bud Light Lime "got into our knickers a bit," even tho Crown "saw it coming. We did not do a good job of managing what we can manage," said Bill. In sum, "we've had our challenges," but "absolutely" are "better off having been through it."
Crown expects sales to recover in nearterm and come in flat-to-slightly up for full yr. Why? Easy comps, competitor price increases, and seasonality of competitive product intros, according to Constellation ceo Robert Sands during conference call (Constellation owns 50% of Crown). Revised goal implies 4-5% growth the rest of 08, which could be tuff considering economy still deteriorating. Bright spots: Modelo Especial up "just shy of 9%" thru Aug, Bill told INSIGHTS, and expected to be up at double digit pace in 08. Tho "timing isn't right" to intro some of Modelo's other brands that are successful in Mexico (Victoria, Modelo Light), Bill points to "new opportunities" in upcoming rollout of packages, including 18-packs, plus expansion of draft test on Negra Modelo and Modelo Especial "based on availability of cooperage" in 09. Finally, Crown not yet producing kinds of income gains that Modelo and Constellation anticipated. Revs up 2% to $1.4 bil for 6 mos thru Aug, Constellation reported, but oper income down $16.2 mil, 5% to $287 mil.