"One of the most significant challenges is coming from non-beer beverages. Today, spirits companies represent a major challenge to brewers worldwide." That’s one key point that Bob Lachky, AB brand mgmt veep, made at Beer INSIGHTS Seminar. Top 4 global spirits cos have almost 50% of worldwide liquor volume, Bob said, and consolidation has made those co’s more efficient and given ‘em more mktg $$$. "It’s clear from their introduction of FABs (flavored alc bevs) that they are targeting the contemporary beer drinker. They want to expand their share of total ethanol volume and they see the beer category as an opportunity to do just that." How have spirits cos built sales in recent years? Spirits ads are on tv (cable/local, not network) and radio more than some people think, Bob pointed out. Said too: "A lot of the strength of the Smirnoff Ice brand has been due to image.... It’s being driven" by about $40 mil spending, including lotsa tv. Attributed much of Heineken’s success to increased use of media too. AB "believes in media, in good times and bad," Bob stressed. "Spirits industry [also] believes in media, and that’s what’s going to drive growth in an image business." Flavored alcohol beverages have been around for years, Bob pointed out, from wine coolers to some microbrewer products. There’s "always going to be that periphery, pretty much driven in the last couple of years by women and 21-27 yr-old guys that are just triers," who are "not terribly brand loyal." But "beer not going away, not at 200 million bbls, compared to 5 million, let’s be realistic about what we have in front of us." FAB biz may, may not grow, said Bob, but "you’re going to see a lot more people playing in it. The real measure of success will be brand image, continued, sustained investment and people who are good at marketing."

"The international market is the next logical and necessary step for every major beer company," Bob said, despite endless challenges and lotsa complexity. "For AB, it’s the path we must follow to maintain our position as the world’s largest brewer." As global beer biz consolidates, top 4 brewers have about 27% of 900-mil-bbl global beer volume, said Bob, far less concentrated than liquor. While lotsa volume oppty abroad, Bob pointed out US mkt still biggest and US "profit pool" 3.5X larger than next most profitable beer mkt, Japan. AB figures worldwide beer profit pool is approx $8 bil, but half in US. Tho US beer biz will be up 0.6% this yr, according to Bob, he and other AB execs still optimistic better demographics, positive profit trends will drive US growth for next 5-10 yrs as AB sees 1-1.5% industry gains and "continuation of favorable pricing environment."

Bob chafed at one questioner’s suggestion that AB "doesn’t do well" with new, high-end brands. "I take a little offense at that comment. If you look at it with the AB model, you think everybody’s got to have a brand that’s kicking in 5-10 mil bbls, but over the last couple years I think we’ve developed some good brands.... We’re up there with Tequiza with a couple hundred thousand bbls, we’re up there with Doc Otis at a couple hundred thousand bbls. It takes time to build brands.... These brands have been in the market for a couple years and they need to grow.... So give us some time. We’re going to...continue to put new brands in the market.... Are we learning some lessons? Quite frankly, maybe we pull the plug too early on some of these brands.... We’re trying to build brands a little more slowly, build some critical mass" and go from there.

Said fact that Bud Light passed Bud in US "hasn’t changed anything," but simply a result of consumer shift to light beer. Bud is "absolutely the linchpin to our international strategy." AB will continue investment, focus, and selling efforts behind Bud. How has contemporary adult consumer changed? Men and women "are treating each other on a much more equal basis," said Bob, "that’s got to be reflected in the way you market. Also, we’ve seen that people have more affluence and discretionary income. They believe in quality and they’re willing to pay for it." They are also "willing to try new brands.... Until September 11 they didn’t have a whole lot of fear in their lives." But they "still want to have fun, are still social."

Malternative/"ready-to-drink" segment "not a flash in the pan," promised Guinness Bass Import Co prexy John Replogle, on topical panel at Beer INSIGHTS seminar. Added "there is plenty of room for growth here." Smirnoff Ice will finish 2001 at about 23 mil cases, GBIC later told INSIGHTS. And it will hit about $1 bil in retail sales in fiscal yr. Tho some in beer biz expect these brands to fade next yr, all panelists agreed category will continue to grow in 2002. John Replogle is "convinced" Smirnoff Ice will be up again next yr. Meanwhile, Mike’s Hard Lemonade gen mgr John Fawcett noted "as a company we have got to grow significantly in 2002." "This category is going to continue to grow," agreed AB’s new products director Marlene Coulis as AB gets ready to intro new alliance with Bacardi. "We also anticipate other companies getting into the category," she added.

The 21-27 year old drinkers are "key market" for these brands, panelists agreed. That’s same as for beer. "We’re pulling [consumers] from across all the segments," said John Replogle. Beer is "primary source of volume," but Smirnoff Ice volume coming out of wine and spirits too, added John. "No doubt there has got to be some cannibalization" of beer, said John Fawcett, "but there are also an awful lot of new consumers." While "there is a lot of interaction between beer and this category," acknowledged Marlene, "it is not becoming the most-often" consumed brand for most consumers. "There certainly appears to be a lot of trial" among beer, wine and wine cooler drinkers," added Marlene. "We are definitely seeing great trial," but that is "first step on a journey," said John Replogle. Asked if these products feed off absence of excitement about beer, panelists differed. "I think there is little bit of that," ventured John Fawcett. But Marlene pointed to continued strong Bud Light growth as something that "creates a lot of excitement within our company and with our shareholders." "There is a lot of excitement about the beer occasion and these brands play within beer occasions," said John Replogle.

Several key differences between these products and other past faddish segments like wine coolers, pointed out panelists. There’s "prestige nature of the positioning," said John Fawcett. "Wine coolers got too fruity and lost a lot of their image," said Marlene. "We’re hitting a... consumer need," said John Replogle, with more brand "heritage" to "build on" in Smirnoff name. These brands are more "male-positioned," said John Fawcett. Asked if Zima an example of what not to do, panelists pointed to it as innovative, but said Zima became too female-oriented and taste profile not right. Do consumers care that malternatives have more than 2x calories of a light beer? Panelists disagreed. AB found "consumers were surprised at the level of calories," said Marlene. But research shows consumers don’t care, said John Replogle and John Fawcett. Asked about seasonality, John Replogle asserted Smirnoff Ice will be "brand for all seasons," and with over 2 mil cases sold in Oct, "that doesn’t smell of seasonality." But seasonality for Mike’s is "more than we would like," said John Fawcett, "with lemonade on the label, it’s a challenge for us." Marlene couldn’t say much about upcoming alliance with Bacardi, but did say new product will be "malt-based," that AB will have responsibility for mktg and AB will report shipments of new brand (AB will produce and its distribs will sell it too). Is Diageo using Smirnoff Ice to blur lines between beer and spirits and thereby push equivalence? "It is not our intent to go out and blur the lines. That may be a by-product of what ultimately happens, but it is consumer-driven," John Replogle said. Neo-prohibitionist attacks on these products are "baseless," all agreed. Guinness Bass Import Co only buys Smirnoff Ice ads where 70% or more of audience is of legal drinking age and 25% of its mktg $$ are for social responsibility ads.

"Every time there is one of your products (beer/ale) in the market basket," supermkts "get a tremendous dollar ring," IRI sr veep Dave Williams told Beer INSIGHTS Seminar. Avg supermarket purchase is $36.18. But when beer’s in the basket, jumps nearly 50% to $53.72. When that beer’s an import, ring goes to $64.16. And get this: when no beer in basket, avg purchase slips to $21.92. That’s right. Consumers spend nearly 3X as much on avg in supermkt when they buy an import than when they buy no beer at all. When that beer’s a domestic premium brand, avg purchase is nearly-as-healthy $59.68. (It’s about the same $59 when wine’s in the basket, by the way.) Beer’s basket-building effect is a "huge thing," to supers, Dave stressed, since they’re getting fewer customers than they used to. Dave showed too how imports build that mkt basket bigger than some other shelf-hogging, heavy-display products like soft drinks, candy, bottled water, salty snacks, etc. More positive messages to bring to supermkt mgrs: beer is 5th largest-selling category in supers; 3 cents of every dollar spent in supermkts is for beer; beer sales growing consistently while total dollar sales in supers basically flat. Over last 18 mos thru Sep, beer was 2d biggest $$ sales gainer in supers of all growth categories: up $1.3 billion, 16%. Driving that good $$ growth: light beers, imports and IRI’s domestic specialty category (Smirnoff Ice, Mike’s Hard Lemonade, etc.) In last 52 weeks thru Oct 7, total beer $$ sales in supers up 5.9%. Light beer sales up 7%, imports up 9.2%, domestic specialties up 47.3%. Where is Smirnoff Ice getting its volume? According to IRI consumer surveys, 65% of Smirnoff Ice volume sold in supers comes from consumers switching from competing beer brands, 6% from "category expansion" (folks buying same amount of beer but adding Smirnoff Ice), and fully 29% is from shoppers new to beer category. "That’s a healthy number retailers love to see," said Dave. Note too, among those switching from competing beers, about 52% switch from domestic premium brands, 23% from imports.

While beer biz very healthy in supermkts, drug stores and supercenters, it’s soft in convenience stores and on-premise, said Dave.... Since beer is 3 cents of every dollar spent in supers, AB alone is well over a penny per buck.... Ain’t just supers where beer really contributes to growth: #1 growth category in drug stores is beer.... As imports grow, fewer import brands on shelves, now 390, said Dave, down from 500 5 yrs ago.... #1 IRI market for import $$ sales in supers is Los Angeles.... Dave estimates beer more profitable for supers than products that pay slotting fees (since distribs absorb service/ merchandising costs).... While AB’s Bob Lachky said at same seminar that liquor cos going after beer drinkers, Dave pointed out "the person buying beer is also the person who’s buying wine. They’re not two different distinct buyer groups." ..... A final key point from Dave: "I’m telling you. I’m advising you. I’m asking you. Don’t turn the beer and ale category... into carbonated soft drinks. Don’t turn your category into a deep-discount, cherry-pickin’, deal-to-deal buying category.... Price increases have been accepted by the consumer. Please don’t accustom the consumers into looking for" their favorite brands "at a discounted price." Retailers still use features to bring valued beer consumers into their stores, said Dave, but "you don’t need to discount as deep, you don’t need to do it as long and you don’t need to do it as often." Getting store mgrs to focus on dollar sales and not boxes a matter of "training and education," said Dave.

Beer Inst Themes: State Tax Fights Looming, More Local Focus, Beer’s "Special Acceptance"

As state govts could face "unprecedented" estimated $15 bil budget shortfalls in fiscal 2002, some will inevitably seek to raise beer excise taxes, according to govt affairs execs at Beer Institute’s annual mtg. States that face "most serious tax threats" next year: Me, Vt, NJ, Ind, Ala, Fla, Tenn, Neb, Kans, Wyo, Alas and Wash. Of 16 states that proposed beer tax hikes in 2001, only Ark passed one. Brewers will also continue efforts to roll back fed excise tax, speakers noted. Goal: get 218 co-sponsors of rollback bill in House. There are 194 co-sponsors now; earlier efforts never got more than 113. This progress made in the fed rollback effort, said BI veep Joe Stanton, provides a "great defensive measure" against any attempts to raise fed beer tax, but industry also "needs to develop a strategy" to use that progress to fight state battles.

Outgoing BI chairman Miller prexy John Bowlin praised "unprecedented level of unity" among brewers which makes BI a "more effective and credible" player "than ever before." Beer Inst now represents over 90% of all beer sold in US as Heineken and Labatt came aboard; 9 of top-10 suppliers are members (Pabst is not). Beer Inst aims to increase govt affairs, communications and charitable efforts in coming year. Already gettin’ more involved in local and state affairs. In last yr, Beer Inst reps testified in Mass, Ind, Wash and Md on tax, territory, product ban and 3-tier issues. Another area Beer Inst will "follow closely," according to incoming chairman AB prexy Pat Stokes: "our position relative to distilled spirits. Make no mistake about it. In the brewing industry we enjoy an acceptance by the American public that is a clear competitive advantage for our business. Maybe it’s because we put our money where our mouth is when it comes to addressing the social responsibility aspects of the products we make. Maybe it’s because our products fit into a broad range of social and recreational occasions that consumers can relate to. Maybe it’s because we have 2300 wholesalers involved in the local communities, who contribute to the community and support local activities. Maybe it’s because we make a low-alcohol product that is more accepted as part of normal American life. Maybe it’s all of these things. But there is no maybe about our objectives. We will insure the special acceptance of beer by the American public is maintained." Given that both Guinness and Barton (both owned by cos that sell more spirits and/or wine than beer) are Beer Inst members, that ought to make for some interesting strategy sessions down the road.

Tho beer shipments’ glass may be lookin’ half-empty (see above), sales in at least one key channel--supers—lookin’ half-full. Case volume continued up 3-4% last 4 and 13 wks thru Nov 11. Dollar sales up very healthy 7-8% same periods, according to IRI. Seven of top-8 suppliers improved volume trend over last 13 weeks. So did 18 of top-20 brands. AB up 3.2% last 13 wks vs 2.2% gain YTD. Miller and Coors each up 1%+ for 13 wks; Miller still off 1.1% YTD, Coors up 0.9%. Modelo and Heineken brands tracking up 13-14% for 13 wks, 10-11% YTD. Labatt USA up 0.3% since mid-Aug, up 2% YTD. Guinness still flying on wings of Smirnoff Ice; up 133% YTD. Pabst doin’ a little better: off 8% for 13 wks, 11% YTD.

As fall price hikes kicked in, consumers paid avg $15.86 for a case of beer last 13 wks, up 65 cents, 4.3%. Similar increase over last mo. With solid pricing, improved volume trends, YTD $$$ sales up for 18 of top-20 brands. Double-digit dollar sales gainers: Bud Light, Corona, Heineken, Busch Light, Corona Light and Smirnoff Ice. Bud $$ sales up 2%, tho it lost 0.5 share of $$ YTD. Only losers in $$ sales YTD among top-20 brands: Mil’s Best and Miller Icehouse. While most big brands building volume/$$$, only a handful buildin’ share. Only top brands that gained 0.3 share or more of volume YTD: Bud Light and Smirnoff Ice each up 0.8 share, Busch Light up 0.3. Corona up 0.2. Lookin’ at $$ share, only 2 brands built 0.3 or more YTD: Bud Light (+0.7) and Smirnoff Ice (+1.4).

Imports actually declined 71,000 bbls, 1.3% in 3d qtr, and that’s 1st qtrly drop for imports since 92. Is it coincidence that this slowdown comes at same time as 1st recession in 10 years? Some of import dropoff related to bringing shipments more into line with depletions, especially Mexican shipments. Mexican shipments actually declined 177,000 bbls, 7% in 3d qtr. They’re still gaining share of imports though, up 712,000 bbls, 11.4% YTD. (Gambrinus Modelo depletions up 18% thru Oct—-see last issue. Barton depletions up double-digits too.) Dutch shipments also slowed in 3d qtr, but still up 387,000 bbls, 10% YTD. (Heineken has said that its US shipments will only be up 5% in 2001, as it reduces inventories, so expect a slow 4th qtr for Dutch shipments.) And Canadian shipments also slowed to 370,000-bbl, 15% growth YTD. But that includes several hundred thousand barrels of Smirnoff Ice and Mike’s Hard Lemonade made in Canada. Factor that out, and imported beers only up mid-single digits.

It’s basically a wash. Domestic taxpaid shipments down about as much as imports are up so far in 2001. So US beer biz remains very, very flat. Oct taxpaid shipments dropped another 373,000 bbls, 2.6%, estimated Matt Hein at Beer Inst. That steepened 10-mo decline to 1 mil bbls; 12-mo dropoff now 2.3 mil bbls, 1.3%. That includes Miller inventory reduction and 8% Dec taxpaid dropoff last yr. But even tho Nov-Dec 2001 have easy comparisons with last yr, great growth not likely. AB sales-to-retailers strong in recent weeks, but AB has already said it doesn’t expect much shipments growth in 4th qtr 2001 and it’s half the biz; Miller, Pabst, Coors each doing better, but none setting world on fire. Imports up just 1.8% in Sep. That put them up 1.2 mil bbls, 8% for 9 mos but....

Imports actually declined 71,000 bbls, 1.3% in 3d qtr, and that’s 1st qtrly drop for imports since 92. Is it coincidence that this slowdown comes at same time as 1st recession in 10 years? Some of import dropoff related to bringing shipments more into line with depletions, especially Mexican shipments. Mexican shipments actually declined 177,000 bbls, 7% in 3d qtr. They’re still gaining share of imports though, up 712,000 bbls, 11.4% YTD. (Gambrinus Modelo depletions up 18% thru Oct—-see last issue. Barton depletions up double-digits too.) Dutch shipments also slowed in 3d qtr, but still up 387,000 bbls, 10% YTD. (Heineken has said that its US shipments will only be up 5% in 2001, as it reduces inventories, so expect a slow 4th qtr for Dutch shipments.) And Canadian shipments also slowed to 370,000-bbl, 15% growth YTD. But that includes several hundred thousand barrels of Smirnoff Ice and Mike’s Hard Lemonade made in Canada. Factor that out, and imported beers only up mid-single digits.

Striking development breaks new ground in several ways. As Guinness UDV North America (a subsidiary of Diageo) buys 3+ mil-bbl Lehigh Valley brewery in Pa, this becomes most significant foray by any international supplier into US beer biz since Alan Bond bought Heileman for over $1 bil in 1987. Makin’ it even more important: buyer is not only big brewer, but #1 world spirits co with over $2 bil in alc bev oper income. And it’s pushin’ branded spirits names in malt-based products. In fact, Guinness actually needs capacity to brew Smirnoff Ice and other malternative/"ready-to-drink" brands to come. Parent co Diageo is bettin’ big bucks that Smirnoff Ice and whatever else follows are not merely passing fancies. It paid $30 mil for this brewery and will spend about $15 mil to retrofit it. Also paying $30 mil to expand Chi production facility that can make Smirnoff Ice. Could Guinness UDV NA become contract-packing force for other suppliers too, or brew its own beer brands in US? No answers to these questions at presstime. But this move suggests game is changin’ and points to further blurring of lines between beer and spirits. Deal also immediately improves Pabst finances. Pabst got $30 mil from UDV and $19 mil from Miller (mostly related to plant closing costs). Recall that earlier this yr, Pabst was out-of-compliance with debt covenants.

Wow! Spy games in beer biz: leaked documents, code names, murky motives and race to become world?s largest brewer thru consolidation. With most parties not commenting and no deal announced, unclear how far along any of these contemplated transactions are, or even if they?ll ever happen. But there?s lots of drama and stakes are high. Two possible rival deals outlined in document leaked to British press would form a brewer large enuf to challenge AB for #1 worldwide. One of deals involves Miller too. How?s that grab ya? Interbrew wants to buy or merge with South African Breweries, wrote several British papers based on leaked document, which was prepared by advisers Goldman Sachs and Lazards in Nov for presentation to Interbrew board. Interbrew?s response certainly didn?t rule it out but bid not imminent either. Interbrew acknowledged it did analysis of possible bid as part of annual review of leading international brewers, but insisted analysis at "very preliminary stage, may or may not lead to an offer for SAB." But "no approach has been made" to SAB "on the matter," Interbrew stated.

Document outlined benefits of Interbrew & SAB combo (code names "Ice" and "Zulu") to prevent rival combo codenamed "Scar." "Scar" described in papers as "merger between SAB and Scottish Newcastle Plc with the simultaneous acquisition of Miller," reported Reuters. A separate sheet talked of making offer for SAB after Dec 3 Interbrew board meeting. Only 1 problem: Interbrew had no board meeting scheduled for Dec 3, according to Reuters. At presstime, SAB refused to comment on deal, but announced $537 mil purchase of Honduras brewer. And Interbrew still hasn?t closed on buying Beck?s or selling Carling. What?s significance of Miller?s part in all this? While PM has said for yrs that Miller not for sale, PM has begun more serious discussions with international players in recent months about various options. Miller had no comment at presstime. At the least, these leaks bring into open a new level of possible deals discussed and desired in boardrooms around world in drive towards global brewer consolidation. Interestingly, the 44-page document was mailed anonymously to several British news orgs from Paris, according to the British paper Independent which asked: "Who leaked them and what was their motive?"

Interbrew agreed to pay a startling 13x EBITDA, $1.6 bil for Beck?s 5 mil bbls of beer (plus about 2.5 mil bbls of soft-drinks). That?s several hundred mil more than other brewers thought it was worth. Deal scheduled to close in Feb 2002, but must overcome regulatory hurdles (see below). What will deal mean in US? Last yr, Interbrew?s Labatt USA sold 2.85 mil bbls of imports, got 14 share of segment. Add Beck?s 840,000 bbls, 4.2 share of segment and LUSA would have sold more imports than anyone but Heineken in 2000. Next yr, with Beck?s in portfolio, Labatt USA will sell well over 4 mil bbls of imports and over 5 mil bbls total. Could be neck-and-neck with Heineken as #5 supplier in US. Acquisition of Beck?s 840,000 bbls in US finally makes Interbrew a player in European lager segment in US mkt, where Heineken has long held dominant position. As Labatt USA adds Beck?s to European portfolio of Stella Artois (fast-growing but tiny in US), Carlsberg and Lowenbrau, gets more scale. While Beck?s volume grew a bit in 90s, it dropped from 8.8 share of imports in 90 to 4.2 in 2000. Another interesting point: when deal complete, almost 10% of import biz will have changed hands in 1 yr period, including Beck?s, Molson/Coors joint venture, and US Bevs getting Grolsch.

Acquisition of Beck?s will also affect race between Interbrew and Heineken for #2 position worldwide, Depends on which Bass assets British govt will force Interbrew to sell and to whom. That?s 1 of fascinating angles of Interbrew deal to buy Beck?s. Recall Interbrew bought Bass last yr, but UK regulators put kibosh on deal. Interbrew might just have to divest part of Bass, according to latest rumblings in UK press. Decision expected soon. But Beck?s has 10-yr UK deal with Interbrew?s chief UK competitor Scottish & Newcastle. UK regulators will likely take a close look since Interbrew and S&N will be partners and top 2 competitors in same mkt. Beck?s deal also subject to regulatory approval by European Union and Germany. Interbrew recently bought another 1-mil-bbl brewery in Germany and seems intent on leading consolidation of fragmented industry there. However it all plays out, Interbrew again demonstrated its ambition as global brewing consolidator.