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.

B's puttin' up good numbers (see above) but its hands full with other important matters. Amidst spiraling world economic turmoil, InBev continues to insist deal will get done, releasing some new info about equity rights it will issue and cost of debt. But at presstime InBev stock down to 36 Euros, about half its peak, with mkt cap down to $30 bil (AB deal for $52 bil). AB stock at $62, well below $70 bid price. Suggests financial community sees some measure of deal risk. Yet "InBev has fully committed financing in place with signed credit facilities from a group of leading financial institutions and has already successfully completed the first syndication phase of the committed financing," InBev veep Marianne Amssoms told INSIGHTS Oct 8. "We are confident in our financing and are on track to close the transaction by" yrend, she reiterated.

Meanwhile, Modelo notified AB it plans to go to arbitration over its "previously disclosed claims that consummation" of AB InBev "would violate provisions" of AB/Modelo agreement "unless consented to" by Modelo. AB responded that Modelo claim "without merit" and would not affect closing of InBev deal. Analysts at Credit Suisse said move "confirmed" view that Modelo's "negotiating position is weak," that it has "no recourse in Mexican courts," that arbitration "may force Modelo" to sell rest of its stake "at a discount." Arbitration could take 1-2 yrs, sez Credit Suisse, which would give time for AB InBev to divest assets and improve debt position before it made offer to buy Modelo. A few days later, AB announced it reached tentative agreement with Teamsters that covers over 5,000 employees at 12 plants. Five-yr deal includes annual wage increases (15% over 5 yrs), health/life insurance benefits and guarantee all plants stay open for life of agreement, if contract ratified on 1st vote, on tap for Nov.

Speaking to Ill distribs, consultant Mike Mazzoni revisited "wake up call" speech he gave to same group 5 yrs earlier, which forecasted accelerated consolidation and created big stir then. Since then almost 30 distribs sold in Ill alone, said Mike. Tho "consolidation is creating a more competitive playing field," according to Mike, "there are still too many beer distributors in the system." While there are still about 1900 distribs in all, 1250 sell in AB or Miller/Coors systems. Those 1250 about 95% of volume. "Threshold for competitive effectiveness and maximizing profitability is between 2.5 mil and 3 mil cases," said Mike. (Note: that doesn't mean distribs can't survive at lower levels, Mike adds, just that they will be less profitable and effective.) Over half of 1250 distribs in AB/MillerCoors systems sell less than 2 mil cases/yr, he estimates, with majority of smaller operations in AB system. These folks are "prime consolidation candidates," in Mike's view. Both MillerCoors and AB InBev will pressure their systems for additional consolidation, sez Mike. MC already has. Mike acknowledged one big wild card: credit crisis already slowing down deal pace.

Meanwhile, MillerCoors system has an "important jumpstart" on AB in consolidation. Mike detailed development of MillerCoors megadistribs. Following successful consolidations, with their big size and strong portfolios, some MillerCoors shared houses have over 50 share of margin pool, bigger territories than their AB competitors and competitive advantage. Indeed, a dozen MillerCoors mega-distribs now control over 300 mil cases, 10% of industry volume. Outside of Tex, where 3 distribs sell 100 mil cases, nothing like that in AB system (tho AB branches sell approx 87 mil cases).

So AB InBev "needs to react and respond" to "regain competitive balance or advantage" and "should take the initiative" where MC mega-distribs not yet formed. Mike expects AB InBev will "aggressively push" consolidation. In 3-5 yrs AB InBev "should reduce the number of distribs… by approximately one third" and MillerCoors "should have consolidated at least 90% of its volume" up from about 70% now. As AB InBev consolidates, it will make money doing so, Mike predicted in another recent talk for Credit Suisse. There's estimated $1 per case incremental operating income in contiguous consolidations, Mike figures. So if AB InBev consolidates 1/3 of its network, that's 462 mil case equivalents and potentially $462 mil that AB InBev could split with its distribs, garnering a couple hundred mil in revs while distribution system still gains more than $200 mil incremental profit. There's "another plum": AB InBev should get rid of AB exclusivity incentives, which costs AB 3-5 cents/case "blended rate." That's another $40-70 mil, sez Mike, and is a "proverbial no brainer" since AB network "aggressively pursuing other suppliers."

Faced with potential distrib revolt, MillerCoors felt the heat, feared continued distraction and also potential retribution from distribs/advocates. And so it did what no major supplier had ever done. It backed off from key provisions in its new agreement, including mandatory arbitration, requirements for approval of deal and/or biz plan on distrib acquisitions of 20%+ and 5%+ of volume respectively. MC also clarified that its new sales standards not intended "to establish new rights" for MillerCoors and would be developed in conjunction with distribs. Tho at end of day, MC will still have lots of say/control over who owns and runs distribs, it did give significantly. Distribs/advocates can count that as major victory. At least one big assn, Calif, welcomed changes, but advised distribs not to sign yet as there are still "major problems" with agreement. "We have had one major development; please allow time for other possible improvements," Calif assn prexy Victoria Horton wrote distribs. But MillerCoors "listened and acted quickly," prexy east Tom Cardella said in talk to Ill distribs after changes announced. "Please sign" agreement, he added: "Let's get back to selling more beer and making more money."

NBWA and state execs played lead role for distribs, presenting unified front against MillerCoors' agreement. NBWA prexy Craig Purser wrote MillerCoors leadership that "it is apparent that the arbitration requirement appears to be most objectionable" to "countless" distribs who made their views known at NBWA convention. State execs from several states, including Calif, Tex, and Oh, wrote tuff letters to MillerCoors, detailing their objections as well as "overwhelming negative feedback" as Tex assn prexy Mike McKinney put it. NBWA, state execs, attys and advocates had joint meeting in Chi on Sep 29 (the very day MillerCoors announced changes) to discuss legal/legislative options and next steps. Just 2 days before that meeting, an obscure Oh Congressman intro'd a bill carving out exception to Fed Arbitration Act for alc bev distribs. Ohio of course the hotbed where MillerCoors terminated numerous distribs and a number sued. MillerCoors put those terminations on hold until lawsuits resolved. While House bill stood little chance of passage in current session, it was a powerful symbol. It amounted to a demonstration by distrib forces that there were other ways to respond to MC.

But one of biggest reasons for changes had to be "our desire to get everyone's focus back on selling beer," as MillerCoors chief commercial officer Tom Long put it in letter announcing changes. With combo of continued distractions, strength of pushback and potential retribution, Miller probably went further than it intended when it said there would be amendments. It originally wasn't going to give on arbitration, sources told INSIGHTS. But ultimately, battle wasn't worth it. Recall too, "Legacy" Miller had no special tie to arbitration since it wasn't in Miller's contract. And arbitration still preferred by MC, but will now only happen by mutual consent of the parties. Any litigation, according to amendment, would be "trial by judge," waiving right to trial by jury.

While industry slowed down, #1 player picked up steam. AB sales-to-retailers gained at fastest pace in any qtr in yrs, an outsized 3.6% gain on back of big Bud Light Lime intro and as AB got Sep benefit from retailer buy-in before more widespread Oct 1 price increase. Recall AB taking prices up in 85% of country this fall, compared to just 1/3 last yr. While both factors boosted AB's results, no question AB turned its yr around. That's even amidst ongoing noise surrounding takeover. In Q1, AB STRs still -1%. But AB STRs up 1.3% for 9 mos, mktg veep Dave Peacock told Wall St Jnl, following strong summer. A 1%+ gain for full yr within reach. AB hasn't grown STRs by 1% since 03.

AB will grow its consolidated pretax earnings double digits in 3d qtr too. But as AB reminds, it will take as much as $525 mil in 1-time charges in 3d and 4th qtr related to early retirement and severance. And equity income, mainly from Modelo, will be down in 08. AB's pre-tax earnings solid because shipments up 2.3% in qtr and rev per bbl expected "to increase nearly 4%." Cost of goods sold per bbl will be up "slightly less than revenue per bbl," while consolidated mktg, distrib and admin will be up mid-single digits. With summer behind it, AB still keeping foot on gas. Broke new Bud Light campaign and spending heavily, $50 mil on BL ads in 4th qtr. That's "biggest push we've had in a while," brand mgt veep Keith Levy told INSIGHTS and "great time" to do it, as AB currently has momentum and MillerCoors "a bit distracted."

Brewer shipments really slowed during peak selling season and industry not much better than flat yr-to-date. After putting up 1.6-mil-bbl, 2.1% gain Jan-May, domestic brewers' taxpaid shipments down 428,000 bbls, 0.8% Jun-Aug, estimates Beer Inst's Lester Jones. That pulled YTD taxpaid shipments gain below 1%. Meanwhile, imports stayed sluggish: down 3% Jan-Jul. Add 'em together and US shipments up just 626,000 bbls, 0.4% YTD. And that's goin' into widespread Q4 price increase, struggling economy and not-so-easy comp of +2.6% in Q4 07 taxpaids. Imports have very easy comp tho, -9.6% Sep-Dec 07.

Recent slowdown reflected in c-stores, where case volume up just 0.1% for 12 wks thru Sep 6, reports Nielsen, well below +0.8% 52-wk trend. Another not-so-hot sign in c-stores: lowest-price "budget" beers gained 0.4 share over the summer, while imports lost 0.3, premiums -1.1 and craft share flat. But biz got better in supers over summer. Volume +2.1% for 13 wks thru Sep 7, IRI reports. That's while 52-wk trend +1.3%, following flat 07, -1% in 06. No signs of trade-down to subpremiums in supers either. Summer volume of sub-premiums up just 0.2% and they continued to lose share. Most higher-priced categories outperformed subs: super-premium biz jumped 24% riding Bud Light Lime.

What's ahead? Tho beer has so-far weathered worst of economic trends, gotta figure we're in for rougher ride too. Slowdown in consumer spending -- 3d qtr expected to be 1st time since 1990 that consumer spending down - rising unemployment, constant forecasts of "deeper recession" than many expected, together with new round of price increases, will undoubtedly take toll. Interesting deep dive into US alc bev mkt in late-Sep by UK analyst Chris Pitcher (Redburn Partners) tried to measure impact of economy on biz. Some key takeaways: "accelerating shift" from on-premise to off-premise, off-premise getting "more competitive," retailers reducing inventory and consumers becoming more "value-oriented," tho "no clear evidence" consumers trading down in beer, wrote Chris.

For 1st time in a coupla yrs, you can compare apples-to-apples shipments trends by big suppliers across 42 “reporting” states (where data available) with no acquired brands skewing numbers. Table below shows Jan-Jun 08 trends for top 5 suppliers in 7 big states and 7 regions. Figures show AB especially strong in 2 biggest US beer mkts: Calif (+2.5%) and Tex (+3.2%). AB picked up 300,000 bbls in those 2 states alone Jan-Jun, while its total shipments up just 225,000 bbls in US. AB down 116,000 bbls, nearly 3% in Fla tho. Also off 1% each in Ill, Oh and Pennsy, a 56,000-bbl hit between ‘em. Region-wise, Calif and Tex gains drove AB increases in WS Cent and Pac regions. But AB flat or down elsewhere. Miller continued strong in Pennsy +71,000 bbls, 8.4% for 6 mos. Up slightly in Oh and Tex. But down nearly 4% in Calif and Fla, 6% in Ill. Miller lost 206,000 bbls in those 3 states. Pennsy gain pulled Miller into plus territory in northeast, but Miller down in every other region for 6 mos. Down 3%+ in southeast and Pac states. While AB trend in 42 states matched natl trend for 6 mos (+0.4%), Miller off more in 42 states (-1.7%) than overall (-0.7%).

Coors up almost everywhere. Tho Pennsy and Oh gains just 0.6%, Coors posted 7%+ gains in Calif, Tex, Fla, Ill and Ariz. Similarly, region trends broadly positive. Coors up at least 5.7% in every region, including double-digit increases in southeast and Pac states. Whew! Lookin’ at MillerCoors pre-JV, combo gained about a half-mil bbls in 42 states Jan-Jun, +1.9%, up about 0.4 share. Crown state trends all over map. Up big (20%) in Tex and Pennsy (+13%). But took big hit in key Calif (-9%) mkt and -6% in Ariz. Regionally, Crown pretty soft across board, posting increase only in WS Cent region. Heineken down in most regions too: off 4-6% in northeast, southeast, Midwest and Mtn regions. Up in Calif and Tex (lotsa FEMSA there), but down in Fla, Ill, Oh, Pennsy and AZ.

AB $$ sales jumped 8.3% and it gained 1.4 share of $$ for 13 weeks thru Sep 7, according to IRI. That's AB's best competitive performance in at least 5 yrs. Bud Light Lime at fully 2 share of $$ for 13 wks. So it was all of gain and more. Meanwhile, MillerCoors eked out 1.7% $$ sales gain, but lost 0.7 share. In last mo, MC $$ flat and it lost 0.9 share. What's more, AB avg prices up 69 cents, almost 4% for 13 wks, while MillerCoors up 37 cents, 2.2%. Top importers also lost share during peak selling season. Crown $$ sales down 0.6% and it lost 0.4 share. HUSA $$ sales up 2% and it lost 0.2 share. Comparatively sluggish results occurred even as Crown avg prices down 07 cents; HUSA avg prices off 35 cents. Crown $$ down 2% and HUSA down 1% last 4 wks. Meanwhile, Diageo Guinness USA $$ fell 8% for 13 wks (all FMBs, beer healthy) and it lost 0.4 share. So AB gained 1.4 share of $$, but next 4 biggest competitors down 1.5 share in summer of 08.

Four of top 5 megabrands lost share of $$ last 13 weeks. Only Coors Light gained. Bud Light, Miller Lite, Bud and Corona lost 1.4 share of $$ between 'em. While Bud Light Lime got 2 share, Bud Light $$ up 3.5% and lost 0.1 share, Bud $$ down 2.4% and lost 0.5 share, shrinking Bud Select down 13% and lost 0.2 share. So other Bud brands lost 0.8 share, still a big net plus for Bud family. Meanwhile, Miller Lite $$ down 1% and lost 0.4 share, even as its avg prices up less than 1%. Continued Coors Light growth, up 7%, couldn't quite offset. It gained 0.2 share. Each of Heineken and Corona $$ down 2-3%, very similar trend to Bud's for last 13 weeks. Avg Heineken prices down 43 cents, 1.5% but seemingly didn't help in face of tuffening economic conditions, other factors. Gotta make you wonder about its upcoming Nov 1 price increase.

Total beer $$ sales up 4.5% and volume up 2.1% for 13 weeks thru Sep 7, according to IRI. Some shoppers seemingly switched to lower priced supermkt channel. Trading up broadly still occurring, but at lower price points, such as Bud Light Lime and Blue Moon. Import $$ sales up 0.9% and lost 0.7 share. Craft $$$ got double digit gain (barely), up 9.9% and 0.3 share. But domestic superpremiums up 31% and gained 2 share. Even with 0.4 drop for FMBs, above premium segments collectively gained 1.2 share of $$ to 41.9, while premiums dropped 0.9, subpremiums down 0.2.

Suits flyin' fast and furious in Oh. Since last issue, 1 more suit in fed court and 3 in local courts. Second fed ct suit filed by Heidelberg, big AB house that also has Coors operation near Toledo that includes brands Miller acquired from Pabst. In twist, preferred buyer not local Miller house, but B&B in Grand Rapids, MI. Like others, Heidelberg charges MC didn't follow Oh law. Unlike earlier fed ct suit, Heidelberg also charges distrib B&B with tortious interference and conspiracy. In another situation, involving Dennert Dist in Cinnci, distrib got termination letter, contemplated lawsuit, but hasn't filed and "termination is not imminent," Dennert's atty Phil Morgeson told INSIGHTS. Elsewhere, Esber Bev in Canton sued Miller, MillerCoors and designated buyer Superior Bev. Like Heidelberg, Esber charged illegal termination, conspiracy and tortious interference. Also claims Miller "made promises… regarding its intention to continue" relationship, including "inducement" of Esber to buy another distrib's Miller brands in Jan 08. Esber relied on those promises, it sez, to invest in Miller brands. Seeks injunctions, compensatory damages "in excess of $250,000" and punitive damages. Late-Sep Ohio closed distrib assn mtg oughta be a doozy.

Several different distrib/supplier constituencies (not AB) sounded off against Miller- Coors agreement at recent NBWA convention. Not sure how much effect these critiques had, but that MillerCoors is promising any change at all in response to uproar is a departure from past. Since mid-90s, multiple suppliers have imposed revised contracts that distribs/advocates viewed as one-sided at best. Yet distribs inevitably signed them in vast majority of cases. For example, last Miller contract generated lotsa noise in late 98/early 99, yet all but 1 distrib ultimately signed (and that 1 distrib a seller). Intensity this time greater than in past, in part because NBWA convention convened just 1 mo after MillerCoors intro'd agreement and as it simultaneously attempted to force 30-40 distribs to sell. State execs assn (WBAE) took more activist stance than it had in many yrs. Unanimously resolved it has "grave concerns" about "potential public policy impact" of proposed agreement on 3-tier system and "on the effective control by states of beer distribution, and on the independence of beer distributors." Distrib independence emerged as key convention theme. In heated NBWA board/distrib-only meetings, many distribs pushed for tuff stance against agreement.

In convention speech, NBWA prexy Craig Purser made some provocative statements, tho he never named MillerCoors. "If suppliers use proposed distribution agreements as weapons to erode distributor independence, NBWA has an obligation to oppose those efforts using all of the resources at our disposal." Unclear what exactly NBWA/WBAE can/will do, but Craig also pushed theme further. He suggested transformation of beer distrib model with a question: "Are we shifting from being brand-dependent beer wholesalers to a new model… that of being independent, brand-building distribution companies?" On hi-end panel, Crown prexy Bill Hackett, Heineken USA prexy Don Blaustein, Sierra Nevada's Ken Grossman and Dogfish Head's Sam Calagione all sounded theme of distrib independence. Don noted that distribs "independent-minded, tough" and "will not stand for being pushed around." Bill approvingly cited essay by BA prexy Charlie Papazian about "pressure" on distribs "to give up independence." And Ken called recent developments "eerily similar" to AB's 100% share of mind. In past, distribs have often vacillated between independent decision-making at local level and accepting whatever suppliers imposed. Are distribs really now more independent than they have been? Stay tuned.