Here’s interesting AB deal: Klopcic family from Grand Rapids, Mich just formed partnership with Carlos Rivera of Hudson Eagle in northern NJ. Then they bought another northern NJ distrib Quality Beverage Systems and closed its warehouse. And formed new co called Jersey Eagle Sales. Both these Jersey distribs, totaling about 3.8 mil cases, were created when AB broke up its Newark branch about 9 years ago. They faced tuff battle as Coors, then imports grew dramatically in area while AB lost share, and these guys had to pay off debt against larger, more established competitor. AB share only in low-to-mid 30s in northern Jersey. Including its Mich distrib, Klopcics now sell over 8.5 mil cases. Klopcic family high profile: Don Jr is former chairman of NBWA and his brother Keith former chairman of AB wholesale panel. The principal of distrib they bought out, Curtis Greer, also on AB panel. Don Klopcic Sr started as a driver, had small distrib with 5,000 sq ft warehouse in mid-60s, built big biz, was a leader of Mich distrib assn when it passed strong franchise law. While 1 former AB panel chairman bought, another 1 sold. In Tex, Mid Coast Dist (owned by ex-panel chairman Jay Kennedy) and Kennedy Dist Co totaling about 1 mil cases sold to Del Papa Dist, which will now be about 8 mil cases. That’s 2d recent panel chairman to sell in last 6 mos or so (the other, Robert McCullough of Ala). And tho Fuhrer Dist in Pitt hasn’t yet closed purchase of AB distrib Westmoreland (see INSIGHTS vol 32, #21), Fuhrer also has deal to buy 1/2 mil cases from Mark Thompson Inc. Once AB approves deals, Frank Fuhrer told Pitt Post Gazette, his Bud volume will be about 5 mil cases, total volume about 13 mil cases.

Ever-busy Interbrew on move again. Had quite a week! Closed on purchase of Beck’s and sale of British Carling within 24 hours. Paid Beck’s $1.6 bil, 13.5x EBITDA; got paid $1.7 bil, 8.5x EBITDA by Coors for Carling. Now Interbrew looks to integrate Labatt USA and Beck’s North America in US by peak-selling season, which ain’t gonna be easy. Expect 1 co. Distrib consolidation will be less daunting than during some other brand transitions. Why? Because 75-80% of Beck’s volume already in Labatt houses. Beck’s brand will get a lot of money and attention in US, especially since Interbrew considers Beck’s a "global priority" brand. That puts Mexican brewer FEMSA (which owns stake in LUSA) in less prominent position in LUSA as it will be smaller % of LUSA biz. While FEMSA has grown in US, not as rapidly or at as high prices as Modelo. Interbrew also named new coo Jerry Fowden, who had been ceo of Bass for most of last yr. Jerry already briefly visited Labatt USA to talk about integration of Beck’s and other topics. Jerry will lead Interbrew "operating" committee that focuses on "organic" growth, while ceo Hugo Powell heads "corporate" committee in charge of "external" growth (i.e. deals).

Some state regulators are taking a 2d or 3d look at the malternative/ready-to-drink/ flavored malt bevs market. So is fed govt. In Texas, where over 200,000 bbls of Smirnoff Ice alone sold in 2001, state alc bev commission is asking suppliers for formulations of top-selling malternatives to determine source of alcohol in each, ABC asst admin Randy Yarbrough told INSIGHTS. Tex ABC could even decide some aren’t really beer after all. Suppliers can’t simply add liquor to a malt base and call it a malt bev, but they can add spirits "flavors" that include alcohol, which end up in the final malt-based product. (That’s perfectly legit under fed and most state rules; Texas has stricter definition of "beer.") Question is, how much. In Randy’s view, if any more than a tiny percentage of alcohol comes from the spirits "flavor" that’s added to malt base, it ain’t beer. If regulators in Tex or elsewhere determine these products aren’t malt bevs, opens door to higher taxes, more restrictions on where they can be sold. Some regulators are also looking at whether "vodka" can be labeled as a "flavor" since part of BATF’s definition of vodka is a substance with "no flavor," tho "flavoring" material may contain vodka. Miller has reportedly gotten fed approval of Skyy Blue label that has language "malt beverage with natural flavors containing vodka." And ATF has previously cleared similar language. (Tex has approved a Bacardi Silver label with statement it includes "natural flavors of Bacardi Rum and citrus"; it hasn’t received latest Skyy Blue label.) If all this seems confusing to industry folks, Randy suggests, how can consumers sort it all out? At least a few other states, including Ga, Kans and NY are also looking into malternative issues. Control states have concerns too, according to atty familiar with them. Their issue: one product with spirits name sold only in state stores, another with spirits name sold in open mkt. Does that mislead/confuse consumers (or deprive state stores of revenue)?

Meanwhile, the feds are getting (back) into the act as well. BATF just announced it is "conducting a study of the flavored malt beverage product category," which "may" affect "tax consequences of the classification of these products" and could turn into full-blown "rule-making" process. (BATF had adopted some predictably cloudy preliminary rules in 96 about flavored malt bevs, then dropped its rule-making process.) Brewers may not want to open that Pandora’s Box again since more questions about definition of beer, taxation, availability, advertising, etc could arise. They certainly don’t want their malternatives taxed at a spirits level or subject to same availability restrictions placed on liquor. Nor do they want every state adopting its own labeling rules. Gotta figure all this will be sorted out in mktplace, as with various "cooler" products in past. Still, looks like "blurring the lines" between beer and spirits creating some new challenges.

PM has undergone a seachange, notably in its public stance. It’s increasingly apparent that Philip Morris is shopping Miller, tho still possible no deal will get done. Key statement by Philip Morris ceo-to-be Louis Camilleri already widely reported but so significant that we include it here. "We’re not oblivious to the consolidation within the brewing industry," Louis told Wall St analysts, "and we will explore any options that are in the best interests of shareholders and beyond that I can’t comment." So he didn’t exactly dampen already rampant media rumblings that PM working on deals for some or all of Miller. In fairness, he prefaced his remarks by saying that PM "focus" still on "turnaround plan" at Miller. He was responding to question about slew of media reports that a 3-way deal with Scottish & Newcastle, SAB and Miller is in works. In that deal, PM would retain a minority stake of 20%, according to article in Mil Jnl Sentinel. In 2 separate articles, Wall St Jnl acknowledged such a deal had been explored, and that "informal contact continues at lower levels of the companies," but it said deal "dormant" and no deal "imminent." INSIGHTS hears a team of Miller execs has worked for mos on these possibilities. Compare Louis’ comments to outgoing chairman Geoff Bible. In Mar 2000, chairman Geoff Bible (who steps down in August) said: "I cannot say this strongly enough. Miller belongs in Philip Morris." In Jul 2000: "We bought it to keep it." Looks like times have changed.

"Regional weakness" in US beer biz and "category distractions from new products" made it tuff for Coors to build volume first 9 mos of 2001, said chairman Pete Coors. So Coors reported tiny dropoff (-0.1%) in calendar 2001 to 22.7 mil bbls, not a tiny gain INSIGHTS had estimated. (See below.) Tho volume soft for full yr--2001 is first yr Coors failed to gain volume since 95--Coors had better 4th qtr and pretty good financial yr. Excluding extra week in 2000, Coors shipments up 3.3% in 4th qtr, sales to retailers up 0.6%. What’s more, Coors’ 4th qtr STRs in US up 2%, prexy Leo Kiely said in conference call. Coors’ 4th qtr biz in Puerto Rico and Japan "real soft," he added. Nov-Dec, Coors US biz and Coors Light, Keystone Light STRs up "mid-single digits... and this retail momentum has continued into the first few weeks of 2002," said Leo. Other brand trends in 4th qtr: Zima and Killians continued "soft," Original Coors "firmed somewhat" but still down. Looking at $$$, Coors rev per bbl up about 2% to $107 in 2001, as prices up, less discounting and a "mix shift" away from higher price brands. Cost of goods sold/bbl up 2%, and per-bbl mktg, gen admin expenses up only about 0.5%, so Coors oper inc (before special charges) increased about half a buck/bbl nearly 7%. Net income/bbl up even healthier 13.6% as Coors profited $28 mil from sale of 3 branches. (Back to volume question: based on Coors report we also gotta reduce our volume estimate of Coors shipments in calendar 2000 about 100,000 bbls. Recall that Coors had reported 53-week yr in 2000; turns out the 53d week was bigger than we figured. Confused yet?)

"Job 1" at Coors: "growth momentum on Coors Light," Leo stressed. While Tim and Leo "cautiously optimistic" about volume, Tim acknowledged early 2002 numbers are "easy comparisons" vs same time last yr. Pricing environment "continues to look positive" early on, Tim added. And outlook for reducing cost of goods "more encouraging than we’ve seen in past few years," said Tim. Coors expects flat can, paper and agriculture costs, modest glass increases, and fuel costs to be "about even" this yr. To help reduce debt load taken on by Carling purchase, Coors plans to reduce cap ex spending "sharply" from 2001 for "at least" 5 yrs, said Tim. Pointed out Coors had $237 mil cash outlays in 2001 (on "capacity work," share buy-backs and Molson investment) that it won’t have in 2002. Asked about malternative potential in US, sr veep Rob Klugman said "for this summer season" Coors focused on Coors Light and defending Zima. Rob cited "a lot of short-lived phenomena" in beer biz past (including ice beers, red beers, craft beers). Fact that some "very strong brand names" playing in malternative category, said Rob, "may or may not" make a difference. Lots more detail on Carling purchase coming later in Feb, execs said.

Just as PM went public that Miller deal possible (see below), Miller reported its best qtr in a couple of yrs. Domestic "underlying" shipments (excluding Molson and discontinued brands from 2000 figures) up about 275,000 bbls, 3.2% to 8.7 mil bbls in 4th qtr as Miller core brands up 5.7% for qtr. That’s even tho inventories reduced by a day and a half, sez PM. A big improvement, partly "flattered" by comparatively weak 4th qtr 2000 in words of incoming PM ceo Louis Camilleri. (Miller volume had been down 9.5% in 4th qtr 2000.) 4th

EDITORIAL ADDRESS:PO Box 264, West Nyack, NY 10994 Phone (845) 624-2337 Fax (845) 624-2340 Email:This email address is being protected from spambots. You need JavaScript enabled to view it. ISSN #0300-7480. Copyright 2002 by Beer Marketer's INSIGHTS, Inc. All Rights Reserved. Warning: It is illegal under Federal Copyright Law to make copies of any kind of this newsletter without our permission. Copyright violations will be prosecuted. Beer Marketer's INSIGHTS shares 50% of net settlements or jury awards with persons who provide essential evidence of illegal photocopying. INSIGHTS guarantees confidentiality. To report illegal photocopying, contact Betsy Koch, with the law firm Levine, Pierson, Sullivan and Koch: Confidential phone: (202) 508-1128. qtr "performance continues to confirm that a recovery is under way," said Louis. Miller prexy John Bowlin "and his team have done a terrific job," he added. Miller oper income also up $18 mil, 31% in 4th qtr. Miller’s full yr results show some possible reasons why PM considering sale, like that volume and profits were down again and it became smaller piece of PM pie. Miller oper income fell $50 mil, 9% to $500 mil in 2001. So its oper income per bbl down about 5% in 2001, back almost to 99 levels on per bbl basis. That was yr Miller did deal with Pabst and expanded its oper income by $100 mil. In 2001, Miller’s oper income fell to less than 3% of PM’s total oper income of $17.5 bil. PM blamed "lower volume and higher marketing expenses." At same time, Miller rev per bbl up 2.3% in 2001. While Miller’s domestic "underlying" volume steadily improved as 2001 went on, for full yr down 2.4% to 39.6 mil bbls. (Add in exports and you get 40.5 mil bbl total which BMI estimated.) About 70% of Miller’s volume decline "incurred by below premium brands," wrote PM. Subpremiums down 7.7%, while premium brands off only 1%.

In tuff economic times, AB told Wall St it expects 10-12% earnings per share growth in 2002, up slightly from its previous expectation of 10%. Still looks for 2% shipments growth and 2-2.5% rev per bbl growth in 2002, including "positive mix effect" of Bacardi Silver, which rolls Feb 18. With modest cost increases expected, AB needs less of a price hike in 2002 to get double-digit EPS growth. AB expects only a 1% cost of goods sold increase and 3-3.5% mktg, gen, distrib and admin hike overall, tho Bud Light spending will be up in mid-teens. In 2001, AB rev exceeded $100 per bbl for 1st time. Up 3%, including 2.6% in 4th qtr when AB implemented latest round of price hikes in 40% of its volume. Rev per bbl increases "exceeded expectations throughout 2001," AB said. Up at least 2% for 13 straight qtrs, and over 2.5% for each of last 6 qtrs. That’s largely because "reductions in discounts exceeded plan," group veep Randy Baker said in conference call. Yet there’s not as much "in potential further upside surprises" on discount reductions, he noted. AB just increased price again in 25% of volume; that’s smaller % of volume than early last yr. With solid pricing, volume growth and costs hikes below inflation (1.5-2.0% per bbl in 2001), AB got strong profit growth again in 2001. Domestic beer income before income taxes totaled a whopping $2.7 bil in 2001 (more than 5x Miller). Up $186 mil, 7.5%. Per bbl that was up about 6% to $27. AB’s intl biz clicked too as profits jumped $25 mil, 76% to $58 mil and equity income from Modelo and CCU investment jumped $40 mil to $240 mil. Intl volume -- exports, licensed beer and volume AB brews in its own foreign plants -- up 400,000 bbls, 5.5%; got best gain since 97.

Bud and Bud Light together were up 2.3% in 2001, Randy told analysts. Bud Light "returned" to double-digit growth in 4th qtr. Michelob family dropped 1% for yr, tho Michelob Light and Michelob Amber were up. AB subpremiums were up 2% for yr. Randy got peppered with questions about Bacardi Silver, obvious hot topic. Yet he divulged few details about its expected effect on rev per bbl or profits, and wouldn’t give volume guidance either, tho AB has previously told distribs it expects 800,000 bbls. He did note that operating profits on Bacardi Silver would be "less than our portfolio average," including AB payments to Bacardi, which will be recorded as mktg expense. The "nearly $60 million" in Bacardi Silver mktg includes "wholesaler marketing funding" which is $2.00 per case. AB expects "significant growth" for malternative segment in 2002 and "probably growth" into 2003; AB figures Smirnoff Ice sourced half its volume from beer.

After years of mindlessly parroting neo claims about a so-called youth drinking "epidemic," major news organizations finally said WHOA! this week when Joe Califano’s Center on Addiction and Substance Abuse (CASA) put out a wildly exaggerated figure that underage drinkers consume 25% of all alc bevs. Turned out that the govt study CASA used had indicated actual figure more like 11%. Califano kept spinning, but damage was done. Tho study and "epidemic" language ran all over the media, NY Times article headlined: "Disturbing Finding on Young Drinkers Proves to be Wrong." That wasn’t all: MSNBC headline was "Teen drinking report flawed" and AP ran a headline "Group’s teen drink stats disputed." What’s more, virtually every story we saw quoted DISCUS or distiller execs who came out blazing against the study. Best line from DISCUS exec called Califano "a serial abuser of statistics for sensational purposes." Unfortunately, few stories noted the sharp decline in teen drinking over the last 20 years. Tho CASA and its allies continue to pound the "e" word (epidemic), looks like more folks are figuring out the real "e" word when it comes to underage drinking is "exaggerated."

Lotsa action in the states. Ten state legislatures already lookin’ at beer tax increases, according to recent AB report. Includes nickel-a-drink proposal in Oreg supported by gov, a dime-a-drink (!) in Alaska, 3 separate bills in Neb, and proposals in Mass, SC, Tenn, Kans, Mo, Ut and HI. In Calif, no specific tax proposal yet, but there’s a very dangerous bill in state Senate that would "state intent" of legislature to impose a new "fee" tied to "the social and economic burdens generated by the retail sale" of alc bevs. That’s invitation to open-ended tax based on wildly exaggerated estimate of "social costs." Stay tuned on that one. In NYC, incoming mayor wants to turn deposit into straight tax. He proposes to keep the nickel deposit paid on all soda/beer sold in NYC-only. NY Times front-paged proposal as blow to homeless who pick up empties, but neglected to mention that it confiscates float and unredeemed deposit income from NYC distribs, and stimulates transshipping. Downplayed fact that proposal still forces distribs to redeem any containers that might "travel" outside NYC-metro. No wonder NBWA/Brewers plan special presentation on fighting excise taxes at "all levels" at upcoming legislative conference.

One key reason recent beer trends not as strong as some expected is that "in recent years, the consumer has moved back toward distilled spirits at the expense of beer," consultant-economist Bob Weinberg told mtg of Illinois-Michigan distribs. And Bob had some hard numbers to back up his point. As beer lost share of total alc bev drinks consumed in US "malt beverage consumption in the year 2000 was about 3.5 mil bbls below the level that would have been achieved had malt beverages’ share of total alcohol beverage servings been at their peak level." As recently as 99, Bob’s data shows, beer had over 60 share of total alc bevs consumed, but that dipped below 60 in 2000, while spirits picked up a point since 98 to over 27 share. Look at some history: beer had over 60 share of alc bevs consumed just after WWII. That fell to 51 share by 1972, then grew back to 60+ by 93. Meanwhile, spirits had built from 32 share in the 40s to 41 by early 70s, then dropped all the way to 26 share in mid-90s. Bob’s analysis supported statement by AB group veep August Busch IV at same meeting that "today we must not only keep an eye on competitive brewers but also on those spirits companies that seek to increase their share of the total ethanol market at our expense." Beer also competes "against every other beverage company for our share of the consumer’s beverage product set." Bob didn’t predict whether this "dramatic reversal of trend" will continue, but 3.5 mil bbls is real volume.

Bob summed up current competitive dynamic: AB and imports only "two significant winners," Coors a "modest winner," but is still small, and Miller is moving "sideways in a box." Specialty brewers, in Bob’s view, created more interest in beer, but it was importers that really "capitalized" on that increased interest. Bob expects import growth to continue tho at "slower rate." How about malternatives? If you look at segment "purely historically," gotta expect phenomenon to last "about a year or two" before something else "comes along and moves it aside." But Bob’s "uncomfortable" lookin’ at malternatives that way, leaving open possibility that something different is going on with these products. Bob’s not convinced brewers gotta go global with big intl deals, or get into other alc bevs. Media and investment bankers like to stir up rumors, he said. Told story about two investment bankers paying each other $100,000 to swallow a very unsavory substance, then congratulating each other on doing a $200,000 deal. While major players gotta "reconsider" their strategies in light of consolidation, he said, "I don’t see why a brewer has to be international" or why it needs to be #1 brewery in the world. "It would be better," Bob continued, "to be the most profitable brewer in the world." And brewers can ask: "why not do something else?" like get into a different biz. Bob specifically rejected suggestion that AB erred by not buying strong import brand earlier, said AB still has options.