Some recent consolidation trends: 1)divide and conquer 2) swap. Hey, there’s even a new AB-Miller distrib. In Tex, 2 approx 1-mil-case Bud guys just sold to 4 other AB distribs. In each, 2 big guys divvied smaller guy up. Two giant AB distribs, Ben E. Keith of Dallas and Budco of San Antonio split purchase of Hill Country Budweiser in Ingram. Ben E. Keith, AB’s largest distrib, on track for over 30 mil cases in 2001 and over $1 bil total corporate sales including its food services co. Budco on acquisition trail. This is its 3d deal in last 3 yrs; it will be near 13 mil cases next yr. Meanwhile, two other large Tex distribs, Desert Eagle of El Paso and Standard of Odessa split Rio Pecos Sales Co in Fort Stockton. In Calif, another variation. Two Coors and 2 Bud guys will buy 5-mil-case Miller distrib Burke Bev in Bay area!! What?!?! You guessed it, Bud guys, Markstein Bevs and Horizon Bev Co, are buying its Modelo brands, almost 1.5 mil cases. But at only about half the $23.50 prices you hear about in Fla. The 2 Coors guys are Bay Area Bev Co (acquiring the biggest piece of Burke volume) and Coors of Contra Costa. In fact, recent sale of Coors branch in Anaheim to Reyes family appears to have opened floodgates for more Miller/Coors distribs in Calif. Several deals in works. More Miller/Coors cookin’ in Fla too. Gold Coast (imports, Coors) just bought Miller distrib JJ Taylor in Miami. It will also swap volume with Wm Thies & Sons (Miller) to eliminate "footprint" issues. The 2 cos will sell same Miller/Coors/import portfolios but without overlaps in territory. When it’s all done, Gold Coast will sell over 19 mil cases and Thies will sell 8 mil cases or so, depending whether it swaps for Corona or AB distribs acquire Corona (still unclear at presstime). And finally, believe it or not, there’s new AB/Miller/Coors distrib in southern Oh as Muxie Dist Co Inc (AB, Coors, etc) bought tiny Valley Dist (Miller). Deal puts it over 1 mil cases.

Lotsa litigation in wake of Miller’s attempts to move Olde English in NY metro and Chicago. After Miller terminated several NY distribs on 8/31 to consolidate brand, 2 sued claiming terminations not legit under NY law. One of ‘em: big AB wholesaler Union in Brooklyn owned by Sheehan family. Union had Olde English, had signed Miller’s Acquired Brands Contract when Miller bought brands from Pabst in 99. Miller sez it signed agreement with Union in Oct to purchase OE distrib right for 1X gross, $509,000 for 177,000 cases. (By the way, Miller profit on OE is $2.30/case, it sez.) Union claims Miller "fraudulently induced" it to enter a deal that was never actually finalized, and that it’s protected by NY law. But Miller sez Union now has "seller’s remorse" and just wants to up price using NY state law. Miller sued first to get fed ct in Wisc to enforce settlement agreement. Then Union sued in fed ct in NY, which deferred to Wisc for now.

Beyond fate of this brand, gotta note Miller’s arguments challenging revised NY franchise law (signed in mid-Sep). This "special interest legislation," Miller wrote: 1) should not be used to "invalidate" settlements like the one Miller reached with Union; 2) can’t be applied retroactively; 3) makes brewers’ right to consolidate brands "substantially more difficult." Why’s that? New requirements about notice, payments to distribs, definition of "consolidation" (gotta involve more than one state) now force brewers to face "the delay, expense, disruption and uncertainty of a trial on the issue of whether the consolidation can ever occur," Miller sez. Revisions not only "impair Miller contract rights with Union," Miller argues, "but also impair Miller’s ability to make decisions regarding its wholesaler network" in other states, which Miller sez violates Commerce Clause. Check out Miller’s sarcasm in NY papers: "This is a classic case of ‘sellers remorse’: big sophisticated AB distributor strikes deal to sell rights... signs comprehensive written agreement... distributor bumps into lawyer weeks later who says he can squeeze more money from Miller; distributor’s lawyer’s flimsy arguments don’t get Miller to cough-up more money; lawsuit follows." Union’s motion for injunction, Miller continued, "filed in the wrong court, is being made at the wrong time and is based on the wrong law."

Meanwhile, smaller NY distrib Garal also sued, calling Miller’s action "an ‘end run’ around" NY law. At presstime, Garal got TRO in state court, but Miller trying to move case to fed court. Garal sez its 274,000 cases of Olde English was 28% of its volume on Long Island, but over 40%--$809,000-- of gross profit for 9 mos thru Sep 30. Losing OE "will be fatal" to Garal’s biz, according to its prexy. Garal had bought rights for Pabst brands for $1.5 mil in 98. When Miller bought Pabst brands in 99, told Garal relationship would "be governed" by Pabst contract and NY law. When Miller sent termination to Garal, offered choice: Pabst’s formula of 2X net earnings or 1X gross. Ironic detail: Miller wants to move OE brands from Garal to Boening Bros on Long Island. Recall that Miller had previously terminated Oak Bevs (Boening family’s other distrib in NY metro) and eventually agreed to interim arrangement with Boening. Similar moves in Chicago also led to lawsuits, but INSIGHTS didn’t have ‘em at presstime.

This new distribution wrinkle in key metro mkt creates thorny questions and tuff choices for Phoenix’s many other suppliers. Long-anticipated creation of Windmill Dist Co with Heineken as 15% owner in NY metro ready to become reality Jan 1, 2002. Phoenix Bev (and affiliates Beehive/Lobo, owned by CEO Rod Brayman and family), which sells Heineken, Miller, lotsa other brands in most of metro NYC, retains "at least 80% of limited partnership interest." Rod keeps "authority and control" over operations, according to letter by Phoenix atty notifying suppliers of other brands Phoenix carries in accordance with NY law. While Heineken will have 15% interest, letter doesn’t say what it contributed. Nor does it say who would have other 5% if Phoenix has 80%. "Windmill will be run in substantially the same manner as [it] is presently," atty asserts, and seeks suppliers’ approval of transfer to Windmill of distrib rights.

Some key suppliers will undoubtedly stay with Phoenix, but suppose you’re a brewer or importer that doesn’t want to stick with a distrib who will be part-owned by a large, powerful competitor. What are your options under revised NY franchise law? According to several sources familiar with NY situation, including atty Bill Schreiber and consultant Mark H Rodman, a wary supplier could: 1) simply disapprove brand transfer as matter of policy and risk paying fair market value under NY law; 2) stick with Phoenix, but ask for an equity stake like Heineken’s to "assure" fair treatment. Gotta suspect Phoenix’s other big suppliers—Miller and Guinness—are thinking along those lines. Indeed, Miller at one time had option and may still be invited to loan money and be part-owner of Phoenix; 3) Write back to Phoenix expressing "concern" and asking for lots of detail about how new co will be run, specific authority of Heineken, etc, then attempt to argue that the info shows supplier has sound biz basis to disapprove transfer to Windmill. Supplier can also approve transfer, then under NY law "flee" limited partnership within 120 days if it can show "there is a reasonable likelihood that competition between brands of the competing brewers has been or may be significantly reduced in a relevant geographic area or market," and pays (undefined, but likely less than fair mkt value) "compensation" to partnership. But that process is difficult and could be very risky: Phoenix/Heineken could challenge supplier’s argument and win expensive battle of experts. These are the "agonizingly difficult and risky choices," suppliers have, according to Mark. More plausible outcome here: a business solution that divides the brands and possibly some cash among Phoenix/Windmill and other NY-metro distribs. Among options: huge Manhattan Beer (Coors, Corona, etc), which already has big portfolio, and Boening/Oak, with a cash stash (from Heineken and Miller!) needing a home. (AB has branch in much of NY metro.) This situation may also create oppty for a new player (perhaps a supplier lookin’ to copy Heineken move, a wine & spirits distrib, grocery distrib, secondary wholesaler, chain retailer etc) to enter NY fray. In any case, all this won't be resolved by Jan 1, 2002. Stay tuned.

Top brewers’ retail sales trends improved lots in Nov: AB up 5-6%; Coors running up about 5% for several weeks; Miller very close to even. Thru Sep, AB's STRs had been up only 0.8%. On much better pace in 4th qtr. Much improved recent Coors Light trends have pushed it into positive territory (barely), even while Coors total still down slightly. Just as brewers were mystified by flatness for most of 2001, there’s an "x factor" in recent improvement too. Sure, better weather explains part of it. Nov 2001 was "2d warmest on record," wrote Morgan Stanley’s Bill Pecoriello, compared to 2d coldest last yr, citing climate data service. Avg temperatures nationwide were almost 10 degrees higher. On top of it, big brewer sales were soft late last yr. So comparisons are easy. And yes, with some seasonality, it appears malternatives taking less biz from big brewers late in yr. Some recent articles even suggest that post-Sep 11, people are actually drinking more. Whatever the reasons, numerous distribs reported a gangbuster Nov. Singled out for especially strong growth: Corona. Looking ahead: AB reducing inventories in 4th qtr, and will replenish them in 1st qtr 2002, while also rolling out Bacardi Silver and building towards peak-selling season. So AB expects a strong 1st qtr.

AB will increase frontline prices or reduce discounts in much of northeast in Feb. NY retailers will get suggested discount reductions of 30-45 cents on most key Bud and Bud Light packages; single-serve packages will get frontline increase. And NJ getting modest price hike too with no increase on 30 or 18-packs. AB taking more aggressive price increases in much of New Eng. It's pushing the envelope some. In Conn, AB distribs will increase price 70 cents to retailers on most Bud and Michelob packages, but not going up on Busch. And 30-packs getting price increase of 90 cents. In Oct, prices had gone up $4.00 per half to retailers on draft. This is 1st full price increase in Conn in 2 years. In Mass, AB going up for 2d yr in row. Distribs will go up suggested 55 cents to retailers on most 12-oz packages of Bud and Michelob, 30-packs will get 80-cent discount reduction. And AB taking up price aggressively in NH, 80 cents on Bud & Mich family, 90-cent discount reduction on 30-packs. Going up in Me too. Interestingly, AB not taking price hike in Tex this Feb (had gone up there last couple of yrs), had taken only small increase in Fla in Oct, but took 2 increases in Calif last yr. In all, AB expected to go up on 25% of its volume in 1st qtr 2002. Overall, AB price increases are "tracking more to CPI than they ever have," said 1 industry exec. AB "more consistent" as price leader, he added, noting AB used to increase price most dependably where it had big share, but that "share-driven strategy has diminished" over time. Where Miller is #1, it will increase price in Feb too: up 35-40 cents suggested price to retailer in key Chi mkt and 30-45 cents to retailers on many premium packages in Wisc. Chi remains a key mkt to watch whether and how competitors will follow. Recall that last yr Miller led but AB followed with slightly different increase; then Miller rescinded. Meanwhile, Calif Corona distribs expect price increase; Fla Corona distribs will get discount reductions in 1st qtr 2002.

In 2001, AB share price slipped 1% to 45.21, not bad considering Dow Jones avg down 7% and the S&P dropped 13%. In 2000, AB stock had gained 30%. Miller parent-co, Philip Morris up 4.2% in 2001 after 88% gain in 2000. Interestingly, AB stock price doubled since 97 while PM barely budged as tobacco battles waxed and waned. Coors stock hardest hit among domestic brewers in 2001: down 33.5% to $53.40. Coors had finished 2000 up 53% and had been up double-digits 3 of previous 5 yrs. In 2001, Coors share price was as low as 43.59 back in Sep but rallied in 4th qtr too, until it announced Carling purchase. Heineken shares lost all of 2000 gain and then some in 2001. Dropped 34% to $42.59. That’s lowest yr-end level for Heineken since 97, but still up 44% since then. Boston Beer share price shot up 95% to 17.15 at end of 2001. That followed solid 22.5% gain in 2000. Now at highest level since Oct 96. Boston did buy back about 1/3 of co shares in 2001.

Alfred H. Heineken, known as Freddy, was a man of great ambition, drive and intelligence. Tho he was 3d generation of family that founded Heineken back in 1864, when he started working there at age 17, his family no longer controlled brewery. As a young guy, Freddy spent several yrs in US in 1940s working with importer Van Munching, where he formed a lot of his future thinking about power of brands and "beer as a prestige item." Freddy went on to build Heineken brand into global powerhouse it is today, far ahead of other major brewing cos in globalization. But first Freddy had to regain control of what was then still a comparatively small co. A gambling guy, he did it in early 50s by sticking his neck out, with borrowed money while he was almost broke.

Freddy said he would have been an "advertising man" if not in beer biz. Many of his early changes demonstrated a keen mktg sense, including designing now-famous label. Gained control in 1954, was CEO from 1971 to 1989. In 1983, Freddy was kidnapped and held for ransom for 3 weeks but police found him, freed him and captured most of gang. He stepped down as chairman of Heineken back in 1989, but he still chaired and controlled 50% of the holding co that owns 50% of Heineken. Heineken’s current $13 bil market cap (and his own $3.3 bil stake which made him richest man in the Netherlands on that alone) are just one measure of his long-running success. Freddy was also extremely active philanthropically and in cultural affairs. He is survived by his wife (whom he met in the US back in 1940s), 1 daughter, son-in-law and 5 grandchildren. His daughter will now become chair of holding co. Freddy’s death, Reuters wrote, "likely to trigger intense speculation on the future of" Heineken. Back in 1940s, Freddy had written his father prophetic words when he was in US: "I have my mind set on restoring the majority of shares in Heineken into the hands of the family.... It is a matter of pride that any children I might have can inherit a stake in Heineken, like I did from my father and you inherited from your father." The beer industry, the Netherlands and the world lost a unique man.

While Miller upped media spending on major brands by over $66 mil, 50% Jan-Sep 2001, and importers GBIC and Heineken also poured on more media bucks, AB and Coors each spent less on media compared to same period 2000, according to CMR which tracks ad spending in 10 media. As result, while AB was about 40% of all $$$ spent on major beer brands Jan-Sep 99 and 2000, that dropped to 32% same period 2001. Miller jumped from 19-20% of major brand $$$ for 9 mos 99/00 to 27%. Key reason for AB’s $32-mil, 13% media spending cut Jan-Sep 2001: AB had spent very heavily on Summer Olympics 3d qtr 2000. So AB’s measured spending in 3d qtr 2001 spending was down over 40%, according to CMR. AB spent only 3% more Jan-Sep 2001 on major brands than Jan-Sep 1999, up less than inflation. Coors’ spending down 1.8% for 9 mos, but its 3d qtr 2001 spending on major brands down nearly 12%. Miller was only top-3 brewer to spend more in 3d qtr 2001 than previous yr, but even Miller upped 3d-qtr spending just 4%. (Note: our chart below includes for 1st time unspecified CMR figures for spending by top 2 on "various brands.") Meanwhile, Heineken media spending up 24% to $48 mil for 9 mos. Barton/ Gambrinus spending up 10% for 9 mos; LUSA spending flat. Third-qtr spending by each of those top importers down or flat. Only one supplier really jumped media spending in 3d qtr and 9 mos: GBIC, which increased spending about 6-fold both periods. In fact, GBIC spent more on Smirnoff Ice in 3d qtr ($12.6 mil) than AB spent on Bud Light ($9.3 mil), according to CMR, and nearly as much as Miller spent on Lite ($14.3 mil). In toto, GBIC jumped 9-mo spending from $5.5 mil to $30.4 mil. It spent about the same as Barton/ Gambrinus, and nearly double what Labatt USA spent. Boston cut media spending sharply. Mike’s spent heavily on its Hard Lemonade--$13.7 mil for 9 mos.

Nine-month spending trends are all over the map for top-brewer brands. AB reduced Bud/Bud Light spending by $42 mil, 21%, with about 3/4 of that cut in 3d qtr. AB also reduced spending on Michelob and Busch brands Jan-Sep tho it spent lots more (percentage-wise) on Doc Otis, Tequiza and "various" brands. Miller’s 9-mo spending for Lite, MGD and High Life up 45%, 78% and 135% respectively. It spent same $11 mil for Foster’s Jan-Sep as it spent for all Molson USA brands Jan-Sep 2000. For 1st time ever, Coors spent more on Coors Light for 9 mos than AB spent on Bud. In fact, Coors Light was #1 brand in total media spending Jan-Sep, tho Bud and Lite close behind. Coors slashed spending on Original Coors, but it still spent nearly $30 mil Jan-Sep on less than 1.5 mil bbls of Original.

This highly significant deal, widely written about over holidays, brings on major changes to Coors’ biz model: 1) it's no longer as reliant on Coors Light or US mkt for earnings; 2) traditionally risk-averse Coors takes on pile of debt (about $1.5 bil); 3) Coors now better-positioned for other potential deals down road. Coors big move in effect sez that as worldwide brewing game changes, it wants to stick around. Also underscores "value of diversification" sez sr veep Rob Klugman; Coors will be less vulnerable to what happens in 1 mkt at any given time. What’s more, Coors gets much bigger. Deal to acquire Interbrew’s Carling in UK for $1.7 bil puts it in top 10 brewers worldwide. Jumps volume 9 mil bbls, 40% to 32 mil bbls, nearly same size as Modelo and Scottish & Newcastle and only about 20% smaller than Miller. Compare: as recently as 1999, Miller was twice Coors size. Wall St in general skeptical or "cautious" about deal. Analysts cited as concerns: absence of synergies, down UK mkt, potential loss of exec focus in US. While Wall St fretted that Coors would lose US focus, Coors CEO Leo Kiely and other execs repeatedly said Coors will not take "eye off the ball." But stock down more than 10% since deal announced. Coors paid 8.5x 2001 EBITDA; acquired cash flow of about $200 mil in growing biz. Carling deal came about as Interbrew wheelin’ and dealin’. Recall it had paid about $3.3 bil for Bass and Whitbread in 2000, before UK regulators put kabosh on Bass. Following appeal, UK allowed Interbrew to sell off part (Carling), keep part. In 2001, Interbrew also bought Beck’s for $1.6 bil, about 13x EBITDA. As recently as days before deal, articles anticipated Heineken as Carling purchasor; it would have gotten most synergies from deal.

Only early Jan, but 2002 malternative mkt already shaping up to be action-packed, more crowded and hugely advertised. In face of competitive onslaught, GBIC (owned by Diageo) is upping ante. It expects to sell 100 mil cases in 2002, GBIC prexy John Replogle told INSIGHTS. If so, GBIC would double for 2d straight yr, including lots more Smirnoff Ice, other new ready-to-drink brands and its beer biz. Smirnoff Ice reportedly getting big boost in ad budget and personnel. It will be advertised in 35 top local mkts on Super Bowl. Meanwhile, Diageo will launch at least 2 new ready-to-drink brands in 02, say distribs; they expect Captain Morgan announcement shortly. AB expects to intro Bacardi Silver next mo; plans $50 mil of media (about $20 mil paid for by distribs at $2 per case). AB expects to sell 800,000 bbls, and most distribs think it can sell more. AB in tricky position; wants to play in segment, but doesn’t want to hurt its beer volume. What’s more, its Silver margin may be less than Bud and Bud Light as it splits profits with Bacardi. Silver is not 1 of AB’s top 2 high-end priorities; those would be Michelob Light and Michelob Amber. AB puttin’ pressure on many of its distribs that carry Smirnoff Ice to give it up, and giving higher Silver volume objectives to those distribs that carry Smirnoff Ice too. At presstime, INSIGHTS knows of no AB distrib that has relinquished brand. Meanwhile, Miller intro SKYY Blue, a joint venture with SKYY, will get $40 mil of total mktg support, according to a Miller spokesman. This is Miller’s most significant new product foray since new Miller beer in 96. And Mike’s ain’t resting on laurels either; it recently committed to upping total mktg by 50% in 02 and expects more growth.

In 2001, the malternative segment sold over 5 mil bbls, up about 2 mil bbls (including coolers and Zima). Smirnoff Ice and Mike’s totaled almost 2.5 mil bbls, up about 1.9 mil bbls: Smirnoff at around 1.65 mil bbls, Mike’s 800,000 bbls. Now even more big guns aimed at fledgling segment. Key questions for malternatives in 02: How high is up? Who wins, who loses? How much of these new products’ biz will be incremental, and which brands (beer or malternative) will take hit? A lot riding on answers to these questions.