Add another surprising piece to current beer biz puzzle: volume stayed strong in supers in Sep, even after Sep 11. Since total beer biz sluggish at best, supers clearly taking from other channels. Up 2.7% for 4 weeks and 4% for 13 weeks thru Sep 30. Up 1.5% yr-to-date now. While top 3 brewers each up in supers last 3 mos, each lost share. Grupo Modelo brands growth accelerated to 14% for last 13 weeks. Gained 0.4 share of volume during that period. And Guinness gained 1.1 share in same period, all of that Smirnoff Ice. Smirnoff Ice even more impressive as share of $$. Got 1.9 share for last 13 weeks and #12 brand. The other brand that gained most volume share: #1 brand Bud Light up 0.7 share Jul-Sep. Busch Light and Mike’s Hard Lemonade each gained 0.3 share for 13 weeks. No other brand gained more than 0.2. Biggest share losses last 3 mos: Bud brand down 0.4 share of volume and Nat Light down 0.3.

At same time as volume grew in supers, trading up continued and pricing held. Avg price paid for a case of beer in supers was $15.85, up 65 cents, 4.3% in 4 weeks ended Sep 30, according to IRI. Avg price paid for most big brewers/importers’ brands up nearly as much or more for 4 weeks than yr-to-date. For example, avg price paid for AB brands up 44 cents per case, 3.1% for 4 weeks compared to same period in 2000, almost as much as 48 cents YTD. And Coors prices up 47 cents, 3.1%, slightly more than YTD. Brands of Grupo Modelo up 48 cents, 2%, much more than avg 31-cent increase for 9 mos. A coupla departures: Miller and Guinness Bass Import Co. Miller brands up only 33 cents on avg last 4 weeks, compared to 44 cents YTD and Miller Lite up only avg 25 cents in Sep. Avg price paid for GBIC products down $1.47 for 4 weeks and down more than a buck yr-to-date. That’s because Smirnoff Ice sold at avg $27.59 per case, significantly lower than Guinness or Bass. Then too avg price for Bass down 49 cents, 1.7% last 13 weeks. Avg prices paid for all GBIC products at $28.69 YTD, almost twice what major domestic brands sell for.

Miller’s 3d-qtr number a "marginal improvement" and strategies "are showing early signs they are beginning to work," PM cfo Louis Camilleri told Wall St. Sales-to-retailers down 2.5% in 3d qtr as Miller increased mktg weights and improved distribution (see last issue). Core brands down 0.9%, which Louis called a "significant improvement" over previous qtrs. Miller’s "domestic underlying shipment" trend down 300,000 bbls, 3% to 10.3 mil bbls in 3d qtr. (Underlying means PM not including Molson or discontinued brands in 2000 number that Miller sold last yr.) Total Miller shipments about 5% below what Miller actually sold in 3d qtr last yr. For 9 mos, Miller total shipments about 2 mil bbls, 6% lower than last yr. Miller’s "underlying" oper income down $11 mil, 8% in 3d qtr, which PM attributed to "lower volume" and "higher marketing spending for its core brands." PM also took a $19 mil "contract brewing" charge as it absorbed much of Pabst’s closing costs for its Lehigh Valley brewery. Including that hit, Miller oper income down to $404 mil for 9 mos. That’s 18% below last yr’s reported number of $491 mil, which included about $7 mil of income on Molson brands. Miller about 3.1% of PM’s total oper income. Total Miller revs at $3.3 bil for 9 mos. That’s almost $150 mil, 4.3% below last yr, but "underlying" revs down $48 mil, 1.4% for 9 mos.

Despite industry softness, for 2d straight mo a modest upside shipments surprise. Sep domestic brewers’ taxpaid shipments (including malternatives) up 100,000 bbls, 0.7%, estimates Matt Hein of Beer Inst. Follows better-than-expected Aug estimate, which was a slight dropoff. But including tuff Jul drop, taxpaids down 550,000 bbls, 1.2% in 3d qtr. Off 600,000 bbls, 0.4% for 9 mos and down 1.7 mil bbls, 1% for 12 mos. Aug import data not available as INSIGHTS went to press, so tuff to say how 3d-qtr total shipments will shape up. Some top beer execs and Wall St analysts see total biz softening. Miller prexy John Bowlin said recently that 2001 total biz less than Miller expected. AB group veeps Randy Baker and August Busch IV acknowledged (pre-Sep 11) that 2001 total volume not what AB expected, but they forecast 4th-qtr pickup. Mixed Wall St views. Caroline Levy of UBS Warburg recently expressed skepticism that increased number of young drinkers will necessarily fuel "acceleration in industry growth." She suggested "lower consumption rate among young adults," stronger liquor trends, "softer" economy might put damper on beer growth. On the other side, Bill Peccoriello of Morgan Stanley just wrote "on-going impact to on-premise" beer sales after Sep 11 "not as bad as investors fear," and market has "unrealistically negative" view of volume trend. Caroline downgraded AB stock; Bill didn’t. Wild cards going forward: 1) lingering effect, if any, of Sep 11, especially on imports and on-premise; 2) how shipments will fare vs easy comparison with 4th qtr taxpaid shipments last yr, which were down 1.1 mil bbls, 2.7%.

Even industry leaders scratchin’ their heads these days at unexpected softness of beer mkt, several speeches to recent BAA (small brewers assn) meeting showed. If you take out malternatives/coolers etc, domestic beer biz down 2% thru Aug, Miller prexy John Bowlin said. If you include those products-- which Miller figures will be about 5 mil bbls in 2001-- and strong import growth, total US malt bev biz still only up 0.4% thru Aug, added John. So 2001 an "OK" yr for total beer biz, John said. But "we thought we’d have a better year." Industry "got off to a slow start" with "cold wet spring," then "economic slowdown" and now after Sep 11 "our industry took it hard," especially "on-premise." That’s "going to put a damper" on industry results. On top of all that, some young adults "not drinking our product as much," John added. "We’re trying to sort it all out," said John. "How much" of shift "is permanent?" he wondered.

Longtime industry consultant Bob Weinberg also puzzled by industry slowdown. Bob pointed to "extraordinary uncertainties" in beer biz. Called these "scary times," but besides unexpected slowdown, gave no other reason. For 3 yrs now, Bob’s economic model predicted better growth. "Didn’t happen," acknowledged Bob, adding that total "demand somewhat less than I expected." Asked if improved distilled spirits growth affecting beer trends, Bob said "beer declining in share of total servings" recently; while that might be significant, Bob "needs more data." "Only growth" in beer is in high-end (which Bob calls "prestige brands") "pure and simple." Yet big brewers’ "image brands" (what Bob used to call "superpremium" and "niche," mostly Michelob family) lost lotsa share of high-end, Bob showed. Had 47 share of high-end in 1991, while specialty had 5 and imports had 47.5. By 2000, imports had climbed to 60.5 share of a much bigger high end, while big brewers’ "image" brands declined to 22.5 and specialty jumped to 17 share.

Meanwhile some traditional lines between beer and distilled spirits "have blurred" recently, noted Beer Inst prexy Jeff Becker. Gave several examples: products like Smirnoff Ice and upcoming AB/Bacardi venture; distilled spirits cos advertising more on tube "and public doesn’t seem to mind it that much; "liquor cos also stepping up lobbying efforts, want more freedom to do tastings, sponsorships and become more mainstream. But "are they the enemy?" Jeff asked. Pointed to issues that beer and spirits cos can work together on, like reducing drunk driving. When asked if spirits cos blurring line as "wedge to push equivalence," Jeff said only "if we allow it," but "lines will blur regardless."

Maris’ $1-bil defamation suit vs AB should be dismissed "with prejudice," AB argues, because: 1) none of allegedly defamatory statements made by AB execs and attys (about Maris engaging in fraudulent conduct, serving retailers poorly), were made with "actual malice"; 2) "gist" of AB statements is "true" since repackaging of old beer "admitted by dozens of Maris Dist employees"; 3) any statements by AB "absolutely privileged" by court since made in connection with court case; 4) statements "nothing more than legitimate business statements" and AB "has every right to reasonably challenge the performance of its wholesalers"; 5) Maris motion too late; anything said before Aug 31 1999 is "time barred"; 6) since Maris Dist out of biz since Mar 97, "incapable of being injured by defamatory statements and has already been awarded the value of its business." AB also reminded that judge declared mistrial on Maris defamation claims during state trial because Maris attys made "active misrepresentations" to court. By filing new claim "far broader" than claim judge already tossed, with brand new charges, Maris has "flouted" court’s order. Court should dismiss claim, AB concludes, award AB atty fees and costs.

Better late than never. Took over 2 mos, but NBWA?s June 5 NYC press conference that focused on benefits of moderate drinking finally got some play in natl media. Lengthy, mostly positive article ran in WSJ this week and Today show interview followed. Writer pointed out moderate drinking reduces risk of hypertension, coronary artery disease, stroke and dementia, and noted other benefits from NYC presentations by Texas doc Norman Kaplan and Harvard researcher Eric Rimm. (Alcohol Issues INSIGHTS, our sister publication, detailed the press conference in June.) WSJ played up beer vs wine angle, leading with suggestion that beer is "even better for you than red wine" and closing with defense by wine rep. But beer vs wine claim was only marginal part of presentation. Indeed, CNN follow-up story stressed that studies WSJ cited actually indicate "alcohol is alcohol is alcohol," that beer, wine and liquor in moderation all provide benefits.

Meanwhile, evidence continues to roll in to support moderation?s benefits. AP recently reported potentially key story that "will change everything we do about heart disease." Turns out that inflammation may be more important cause of heart attacks than cholesterol problems. And just as moderate drinking improves "good" cholesterol, it?s also one way to lower inflammation. USA Today and others highlighted recent studies which show that moderate wine drinking assists lung function, and reduces risk for cardiovascular disease among the obese. Is publicity about benefits of moderation changing the public?s habits? Together with current article, WSJ asked readers: "have studies about the benefits of beer and wine affected your drinking habits?" Tally of 800 readers at end of day 8/13 showed 36% checked off "they lead me to drink a bit more," and 18% checked "they are a great excuse for drinking a lot more," but fully 46% skeptical. They checked "I never believe those studies." Still, any exposure of mounting evidence that moderate drinking has health benefits is a good thing. And ya gotta love WSJ headline: "Healthy Brew: Studies Show Beer May Be Good For You." ????Next issue in 3 weeks. Best Wishes,

A US Appeals Court hearing showed that messy legal wrangle between FEMSA and Interbrew revolves around what is proper grounds to grant hard-to-get preliminary injunction. That may sound like a technical legal issue, but judges’ decision on whether to uphold injunction granted at district court will have far-reaching consequences. These judges will likely determine whether Interbrew has legal right to go ahead with Beck’s integration or not. (While case could be appealed to US Supreme Court, experts INSIGHTS talked to thought it unlikely that highest court would take case). At hearing, judges tuff on both sides and difficult-to-read; expect decision over next couple of mos. Earlier, Interbrew said it would not integrate Beck’s until early 2003 even if it won. If it loses appeal, and Beck's stands alone, clearly it paid too much for Beck’s since its consultant McKinsey ascribed over $100 mil of Beck’s value to synergies from integrating Beck’s into LUSA, according to court documents. Then too, if Labatt wins, injunction reversed and integration goes forward, FEMSA would likely continue its legal case. In other words, this is not a marriage made in heaven.

In meantime, mountains of court documents provide lotsa insight into Beck’s and LUSA biz, plus how Interbrew planned to integrate them and how it valued Beck’s. While Interbrew paid $1.6 bil for Beck’s and planned to make it a "global flagship" brand, numbers show Beck’s equity struggled in US in recent yrs. In particular 2000 was a rough yr, (yr before Interbrew made deal), when Beck’s brand down 66,000 bbls, 10% to 571,000 bbls and total Beck’s North America dropped 5% even while BNA rolled out Beck’s Light. (2000 total lower than INSIGHTS and others led to believe.) In 2001, flagship brand bounced back some, up 4%, but Beck’s Light off 43%. Total BNA biz up 4,000 bbls, 0.5% to 743,000 bbls in 2001. In court testimony, BNA prexy John Lennon said Beck’s depletions down 4% thru 1^st qtr 2002. Beck’s 5-yr CAGR (compound annual growth rate) 95-2000 was 4% or less than half of import growth rate. Yet going forward Interbrew "conservatively" projected growth of 5-6%, at same rate as it figured import segment will grow. McKinsey originally ascribed fully $600 mil value to Beck’s in US. Then scaled that back to $375-430 mil. Over 1/4 of that value McKinsey anticipated would come from combining cos and reducing headcount by almost 100 people, which it suggested would save about $10 mil per yr. If Beck’s integrated, Labatt USA also planned to reduce number of distribs by 30-40% from 775 combined BNA and LUSA distribs to 470-540, court papers say.

Beck’s North America wasn’t only entity to which consultant McKinsey ascribed high value: it valued LUSA at $1.3 bil, with almost half that value in Mexican brands. That's $317 per bbl!! In 1 document, LUSA actual volume in 2001 given at 4.1 mil bbls (INSIGHTS #s on LUSA total and brands very close). But traditionally grandiose LUSA growth projections not evident for 2002: LUSA only expected to grow 4%, including 6% gain for Tecate and Labatt Blue, 5% drop in Rolling Rock (those 3 brands were about 3/4 of LUSA biz). Projected EBITDA per brand for 2002 also given in another document: Tecate and Labatt Blue each estimated to generate $13 mil EBITDA in 2002, while Rolling Rock only marginally profitable, accounting for only $2 mil EBITDA on about 900,000 bbls. LUSA expected to lose $4 mil on Carlsberg and Lowenbrau in 2002. Total projected EBITDA at $42 mil.

Annual oppty for distribs to rate suppliers on 9 "key competencies," Tamarron Consulting’s survey of 500 wholesalers, once again has good news/bad news. Most suppliers are getting better in distribs’ eyes: 8 of 11 suppliers in survey since 2000 "scored their highest average scores in 2002," Tamarron wrote. But when asked for an overall letter grade measuring supplier performance and supplier-distrib relationship, wholesalers not so positive. On performance, "the majority of suppliers were graded between B and C with an average of C+." Only 1 supplier (AB) scored a B+ in performance. Wholesalers scored supplier relationship a little higher: "all suppliers received at least a C, with an average of B-." Again, only AB scored better than B.

Recall Tamarron asks distribs to rate suppliers on 9 competencies using 1-5 scale. Most important competencies to distribs in order: mktg mgmt, portfolio mgmt, retail execution, leadership/planning, communications, operations. Since 2000, portfolio mgmt and retail execution gained importance, leadership and communication dipped. When asked for general rating, nearly 90% of distribs said relationships with suppliers met or exceeded expectations, but when distribs took closer look "average competency score totaled 2.86 – indicating supplier performance was short of having met expectations." What’s more, for last 3 yrs suppliers came up "short of having met expectations" in 7 of 9 competencies and most important issue--mktg mgmt--"has consistently been scored the lowest of all 9." Where do suppliers generally meet expectations? Only on portfolio mgmt and operations/logistics. Gotta note general improvement tho: in 2002 survey "scores for 8 of the 9 competencies improved." Network mgmt score was only one lower; retail execution showed most improvement. "Immediate opportunities" for supplier improvement, according to Tamarron, in areas distribs deem important but scores low: mktg mgmt, retail execution and leadership/planning. "Long-term opportunities": network mgmt, communications, technology, human resources. Only a single "existing strength," an important area where suppliers meet expectations: portfolio mgmt. And one "overkill," a competency of low importance to distribs yet expectations met: operations/logistics.

In 2002, 500 distribs participated, down from 587 in 2001, up from 460 in 2000. Tho number down, same 40% of total volume represented as in 2001. Avg distrib in survey sold less than 1.5 mil cases, annual rev under $20 mil, but more distribs over both thresholds than in previous yrs. Look at big differences between AB and non-AB wholesalers: majority of AB distribs sold brands of 3 or fewer suppliers, avg AB distrib had 101-249 SKUs. But nearly 3/4 of non-AB distribs sold brands of 10 or more suppliers and avg non-AB distrib "carried more than 250 SKUs." Wholesalers "more optimistic about the industry" in 2002 than in previous yrs, fewer "indicated that they were contemplating divesting in 2002" and "in general, wholesalers who were optimistic…anticipated no change in their portfolios." Pessimistic distribs more likely to be anticipating a deal.

Ain’t pretty for big brewers in nation’s largest beer mkt Calif (10% of US biz) where economy tuff, tourism down and consumers movin’ to imports. AB shipments off 59,000 bbls, 1% thru Jun in Calif even as it intro’d Bacardi Silver. Down 49,000 bbls, 0.5% for 12 mos too. (Thru Jul, AB sales-to-retailers up 0.5% in Calif, following double-digit Jul gain.) Miller shipments down 103,000 bbls, 6% for 6 mos, including 3 new malternative intros. Down 3% for 12 mos. Coors off 38,000 bbls, 3% for 6 mos and 88,000 bbls, 3.4% for 12 mos. Coors also down in 2d biggest beer mkt Tex, 9% of US biz, where it’s off 100,000 bbls, 4% for 12 mos. So Coors has lost almost 200,000 bbls in 2 states in last yr thru Jun 2002. For 6 mos, Coors off 30,000 bbls, 2% in Tex. Miller's Tex trend same as in Calif: -3%. But it shipped 60,000 bbls of malternatives there so its beer brands down 6%. Miller volume down 3% for 12 mos too. But much different story for AB in Tex: even with 106,000-bbl, 11% drop in Jun, AB still up 240,000 bbls, 5% in 1^st half and 369,000 bbls, 4% for last 12 mos.

SAB dove right in and imprint of new ownership already being widely felt in Milwaukee just 1 mo after deal closed. SABMiller appointed Barry Smith as Miller's senior veep of corporate strategy and Bevco (SABMiller’s Honduras co). Barry had previously run Pilsner Urquell USA which he will continue to oversee "until such time as it is integrated" with Miller, according to message Miller sent to distribs. Miller also just announced that veep finance Paul Napieralski will leave Oct 1, replaced by Gavin Hattersley, formerly cfo of SAB Ltd in Johannesburg. This is familiar scenario in takeovers: just about first guy you bring in is one that watches the $$$. As Paul said in statement: "Miller is moving into a whole new financial system as a significant part of an international company based in London." Meanwhile, a team of McKinsey consultants taking in-depth look at many aspects of Miller. And Barry Smith took over strategy role from sr veep Dick Strup who is now sr veep integration/intl, which is a "virtually" full-time responsibility working "with SAB and "representatives of McKinsey & Co to combine two great beer companies" according to prexy John Bowlin in statement. (Correction: After integration process, Dick’s future at Miller unknown.) In early Jul in London, SABMiller appointed Mark Sherrington as worldwide mktg director. Mark reports directly to ceo Graham Mackay, who said at time: "The addition of the Miller`Brewing Company to SAB and the importance of the US market underlines how key this role will be in the future development of SAB." Already some significant changes in ad approach reported in Ad Age, tho unknown if these triggered by change in ownership. SABMiller "planning a mammoth corporate branding effort" wrote Ad Age, with theme: "If you make the time, we’ll make the beer." Distribs "will vet" new ads at NBWA meeting, wrote Ad Age. But corporate branding effort "may not break until next year." Miller also shifted Gen Draft ad spending to Miller Lite (see last issue). Meanwhile, SABMiller got a feather in mktg cap as Miller Lite ads scored very well in USA Today Ad Track which surveys consumers (33% liked them a lot compared to 22% avg for survey).