Beer Marketer's Insights
At dramatic US Dist Court hearing on May 23, Fed judge ruled Interbrew breached its agreement with partner FEMSA when it tried to integrate Beck’s into jointly-owned Labatt USA over FEMSA objections (Interbrew owns 70% of LUSA, FEMSA 30%). This violation of FEMSA rights as minority partner enuf for judge to find "irreparable harm" to FEMSA, the basis for granting tuff-to-get preliminary injunction. Interbrew immediately announced it would appeal to US Court of Appeals. But ruling stopped LUSA integration of Beck’s in its tracks. Process put on hold for probably at least 3 months (unless the 2 sides settle earlier). Right in the middle of peak selling-season. So once again global ambitions of Interbrew ran into legal roadblock. Recall that Interbrew had to sell much of Bass in UK (to Coors) after UK regulators put kabosh on that deal as anti-competitive. In this case, Interbrew plans to make Beck’s its "global flagship," but those plans are blocked in US until this legal mess gets untangled. And that matters: Beck’s is currently sluggish in US. Following flattish 2001, German imports (mostly Beck’s) down 3.5% in 1st qtr. Meanwhile, Interbrew ascribed an unbelievable $600 mil (or 38% of $1.6 bil it paid) to value of Beck’s in US (about 11.7 mil cases -- approx $51 per case), according to testimony at this hearing.
The lawsuit is very expensive for both sides of this very unhappy partnership. Each side had at least 5 attorneys from blue-chip firms Sullivan Cromwell (Interbrew) and Boies, Schiller & Flexner (FEMSA) at hearing. Not to mention hundreds of hours of preparations, experts, and appeals process. And the meter is running. The parties have a 99-year agreement, but FEMSA seems to prefer divorce.
Shipments glass looks half-full or half-empty, depending on your point of view. Taxpaid shipments by US brewers in Apr up half-mil bbls, 3.4%, estimates Matt Hein of Beer Inst. That?s 6th-straight mo that shipments up. Hadn?t been such a string of gains since 1986, Matt notes. YTD taxpaid shipments up 1.3 mil bbls, 2.2%. That?s the half-full view. But gotta note Apr 2001 was down 600,000 bbls, 4%, so Apr 2002 was an easy mo to score a gain, especially with 1 more shipping day. Apr 2002 shipments still 100,000 bbls lower than Apr 99 and Apr 2000. What?s more, lotsa malternative volume in pipeline in 2002 for first time; hadda be big chunk of that 1.3-mil-bbl gain. Meanwhile, import shipments up just 67,000 bbls, 3.5% in Mar, for 1st-qtr gain of 300,000 bbls, 6%. That followed 12% import gain in 4th qtr 2002. Still, despite import slowdown and not-so-great beer trend Jan-Apr, malt bev industry?s 12-mo pace improving: up about 2.5 mil bbls, 1.3%.
Mexican shipments continued to roll in advance of Corona price increase: up 386,000 bbls, 19.5% thru Mar. That was 90,000 bbls more than entire import gain. So Mexican brands grabbed fully 45 share of import shipments in 1st qtr, up from 40 share 1st qtr 2001. Dutch shipments up 107,000 bbls, 9% and built a bit of share too, to 25. So 7 of every 10 import beers came from Mexico or Netherlands in 1st qtr. That’s up more than 10 share since 98. Irish shipments up 10,000 bbls, 6%, but that followed big 39% decline last yr. Canadian shipments dropped sharply in 1st qtr: down nearly 200,000 bbls, 20%, in large part as Diageo shifted Smirnoff Ice production to US plants. UK shipments down 41,000 bbls, 14%. German shipments down 8,000 bbls, 3.5%.
Key concern for SABMiller: US game is won and lost on mktg front first and foremost, but that’s not SAB’s key strength and hasn’t been Miller’s in recent yrs either. SAB ceo Graham Mackay summarized its "competencies" at end of recent speech: "operation skills, brand portfolio development, low cost production, M&A track record and integration abilities, margin improvement and strong cash generation." Graham did not emphasize its skill as a marketer. In conference call after deal, Miller ceo John Bowlin said Miller 2002 mktg programs "right on" and pointed to signs of progress tho he did acknowledge: "not every month, not every quarter as bright as the last one." Miller is spending at competitive levels, according to John. "I don’t think we could have said that until this year," he added. Miller has bolstered core brand spending by $100 mil last 3 yrs and will spend "incremental" approx $100 mil on flavored malt bevs too. Graham too said mktg "in the right direction." Miller needs this mktg improvement to reverse longterm declines of Miller brand equities. Compared to 1991, Miller Lite down 2 mil bbls, Gen Draft down 1 mil bbls, High Life down 100,000 bbls (but price repositioned) and Mil Best down 4.3 mil bbls (it was Miller’s 2d biggest brand then). Each of these brands down even more from their respective peaks. While Miller has shown shipments improvement last 2 qtrs it’s a long road back. That was illustrated yet again in recent PM filing: Miller sales-to-retailers actually dropped 2.6% in 1st qtr, tho shipments up 1.6%. Miller Lite and Miller Genuine Draft STRs were both down.
SABMiller apparently has big plans for Pilsner Urquell. Pilsner Urquell "has potential to make significant inroads in import segment," PM ceo Louis Camilleri told analysts. And when asked if greater efforts on Pilsner would cannibalize existing Miller brands, Miller ceo John Bowlin said it "may cannibalize other imports and that’s ok." SAB ceo Graham Mackay pointed out that Pilsner grew 50% in US last yr (of all Czech beers, vast majority is Pilsner Urquell, reached 123,000 bbls in US last yr, up 45%). He also pointed to cross-selling opportunities internationally with Miller brands. SAB is 1 of top 3 brewers in 30 countries around world. Asked about short-term disruption with distribs, PM ceo Louis said: "I would think distributors will be enchanted. I don’t expect any hiccups." Asked if Miller brands will get greater focus in consolidated distribs? "That is clearly the intention." But both Miller and Coors "benefit" in shared houses.
The Big Get Bigger (Mostly); 8 of Top-10 Intl Brewers Up in 2001; 6 Sold Over 50 Mil Bbls
Only 2 top-10 intl brewers failed to build volume in 2001: Miller down and Brazilian brewer Ambev even. Each of others scored gains thru "organic growth" and/or acquisitions. Gotta keep in mind that each brewer reports volume differently. Some include licensed production (beer produced by foreign partners), some include share of volume sold by intl partners, so some bbls can be counted twice. Our figures show that the top-10 brewers each sold over 27 mil bbls in 2001. The biggest, AB, sold over 107 mil bbls. The big gainers, mostly thru new acquisitions/joint ventures: Interbrew, South African Breweries (SAB) and Carlsberg. The Belgian brewer Interbrew included 3 different sets of numbers in its annual report. We?re using a series from Interbrew?s letter to shareholders which excludes Bass UK volume sold to Coors. That figure was 62.3 mil bbls, up 8 mil bbls, 15.5%. SAB gained 7 mil bbls, 13.4% and sold just under 60 mil bbls. That?s before adding 40 mil+ from Miller. About 5 mil bbls of SAB?s gain from acquisitions. Carlsberg?s volume jumped over 70%, from 34 mil to 58 mil bbls, including recent acquisitions in Europe and Russia. Apples-to-apples volume increased 15%, Carlsberg reported. Heineken?s "Group Volume" was up 6.5 mil bbls, 8% to 69 mil bbls. That includes all licensed sales and sales by "consolidated companies" but excludes Heineken?s "affiliated companies" in South America, Kaiser and Quilmes. Most of Heineken?s gain came from its acquisition in Germany. Compared to these gains, AB?s 1.7-mil-bbl, 1.5% gain in worldwide volume (US, licensed, exports and beer it brewed in its plants China and UK, but excluding any piece of Modelo), looks modest. On the other hand, AB?s profits and margins are much more robust than its faster-growing competitors?.
AB?s lead over its nearest competitor, still about 50 mil bbls as recently as 97 (over Miller), dropped to about 38 mil (over Heineken) in 2001. Following closing of
SABMiller deal, gap will be only 5 mil bbls. Another way of looking at it: in 97, AB only brewer that sold over 50 mil bbls. Six brewers did that last year. Since 97, AB expanded its beer biz by about 10 mil bbls. During same period, Heineken, Interbrew and Carlsberg each expanded by about 30 mil bbls, SAB by about 24 mil bbls (before Miller). Miller was only top-10 brewer down in 2001 and only one that sold less in 2001 than in 1997. This could be key insight to why PM did deal. In fact, PM ceo Louis Camilleri told analysts: "Miller needed to increase global share and presence in order to remain competitive." Ambev sold about the same 53 mil bbls in 2001 as in 2000 and was also about same size that Antarctica and Brahma were in 1996 before they joined to create Ambev. Scottish & Newcastle doubled its business since 97 with acquisition of Danone. Modelo gained in mid-high single-digits each of last 5 years and gained 30% since 97. Number 10 Ashai up in 4 of these 5 years. With its December acquisition of Carling in UK, Coors jumped ahead of Asahi to join top-10 at approximately 32.1 mil bbls.
Global brewing consolidation game heated up lots more as PM and SAB struck deal to combine #4 worldwide brewer SAB and #7 brewer Miller and create a new #2 brewer called SABMiller. Deal valued at $5.6 bil and easily eclipsed several recent deals (Interbrew for Beck’s, Coors for Carling, Scottish & Newcastle for Hartwall) in the $1.5-2 bil range. And it’s clearly intended as only the beginning. SAB ceo Graham Mackay said deal "represents a new chapter in our development…positioning us to be a major participant in the ongoing consolidation of the global brewing industry…. We will seek to fill in gaps in our market and will look at larger transactions as they become available." Philip Morris will get 36% stake in combined entity and PM ceo Louis Camilleri said that SABMiller will be at "forefront" of consolidating brewing industry and will have "financial wherewithal" to grow thru acquisition and "potentially become" world’s leading brewer. And contrary to expectations that PM would get out of beer biz, it has option and expressed potential interest in prospect of taking bigger stake in 2.5 yrs. Can go up to 40% under present agreement. Deal expected to close in July.
What will SABMiller look like? SABMiller sold 102 mil bbls in yr thru Mar 31 2002, 5 mil bbls behind AB (including licensed volume for both). Combo had pro-forma revs of $9.3 bil and EBITDA of $1.5 bil. But both Miller and SAB pretax earnings declined in latest year (SAB’s largely because of South African currency weakness). Miller prexy John Bowlin stays on: "responsible for SABMiller’s business in the US and Central America." "I believe John will be there for quite awhile," Louis Camilleri told analysts, tho he didn’t divulge details of any agreement on that front. "We’re certainly not looking at any replacement of the management team," Graham Mackay added. "We think they’ve done a lot of good things and…results will start to show over the next few years." New co will have London hq, with US subsidiary hq in Milwaukee and John reporting to Graham.
What is structure of transaction? PM gets 430 million shares of SABMiller, a 36% stake in combined co (stock currently worth $3.6 bil), have 3 seats on board (out of 13) and voting rights just under 25%. Interestingly, while SAB said it "will acquire 100% of Miller Brewing Company," PM "announced an agreement to merge." PM said deal will be neutral to its earnings for next 2 yrs, but it will have 1-time gain in 3d qtr of a mere $3 bil pre-tax, $2 bil after-tax. Because of way transaction structured, PM minimizes taxes, and SAB minimizes cash outlay. SAB sez it expects deal to add to earnings in yr 1 and brings cost savings of $50 mil per yr starting in yr 3. PM has agreed not to sell any shares for 3 yrs and not to buy any more for at least 2.5 yrs, "subject to certain exceptions." Meanwhile, SABMiller has plans to float about 170 mil more shares (worth $1.4 bil) to fund future acquisitions.
PM ceo Louis Camilleri emphasized PM has "flexibility" to either buy more of SABMiller and "form a 3d leg" (to go with food and tobacco) if it likes where SABMiller headed in global beer game, or reduce its stake. SAB chairman Graham Mackay said talks with PM about future "had nothing to do with withdrawal [of stake], but much more with keeping their position and supporting it, in fact even improving it in the longer term." Deal "gives us scale and the benefits of a hard currency, large profit pool in which we will now operate without having to pay a high price for it," added Graham.
Intl brewer data we ran last issue raised some questions, and needs some fixing. While SABMiller cited a "pro-forma" figure of 102 mil bbls for 12 mos thru Mar 2002, included about 12 mil bbls of volume in China of which SAB has just 49% ownership. If you include that in SABMiller, gotta include all of Modelo with AB. But we prefer not to double-count or count minority stakes when we can determine them. Net-net: apples-to-apples, AB still has big lead over SABMiller, more like 20-25 mil bbls than 5 mil bbls, depending how you count. In same vein, when Carlsberg reported big jump to 57.8 mil bbls in 2001, looks like that included all of volume in Russia sold by BBH, tho Carlsberg owns just 50%. Note too: Scottish & Newcastle number/trend wrong: 2001 shipments more like 28.1 mil bbls, and it wasn’t up (don’t have actual trend for calendar year). Guaranteed: counting intl volume will get more complicated in future, not less.
font FACE="Arial" SIZE="2">Important Final Note: May was some lousy mo for beer. AB sales-to-retailers flat, while Coors off slightly and Miller down 5+%. Big brewers tryin’ to figure it all out.Sure it was an Olympics qtr, but still a surprise to see AB jumped media spending on major brands by $45 mil, nearly 50% in 1st qtr. (All data comes from CMR, which tracks spending in 10 different media. Several sources have said this data does not capture all local spending.) Coors nearly tripled its traditionally low 1st-qtr spending on Coors Light and more than doubled spending overall. Only Miller didn’t keep pace among major brewers; its spending down 20%. Meanwhile, hi-end brands over 1/3 of total.
AB pumped up this spending on all major brands in 1st qtr. Bud got $17 mil, 44% hike
and Bud Light up $7 mil, 20%. But total Bud family spending not that different from 1st
qtr 98. Meanwhile, Michelob spending jacked up to major brand levels. Up $10 mil, 73%
to $24 mil, mostly Michelob Light. And AB added another $8 mil on Bacardi Silver
intro and $2 mil on Doc Otis. So AB spent $34 mil or 25% of its qtr total on its
hi-end brands that account for 5-6% of volume. Miller cut back to 2000 levels in 1st
qtr of 2002; it reduced spending on each major Miller brand. Chopped Gen Draft spending
$9.4 mil, 80%. And High Life spending down $2.4 mil,44%. Even Miller Lite spending
down modestly, $2.6 mil, 8%. But Miller put $2.4 mil into its 1st malternative
entry, SKYY Blue, and nearly doubled Foster’s spending to $2.4 mil. Even tho new
campaign hadn't begun, Coors spent an additional $15 mil on Coors Light in 1st qtr. Cut
Coors Original spending in half. But spent $3 mil on Killian’s, way up.
Guinness #1 spender among import/ specialty players in 1st qtr. Jumped spending $6
mil, 62% to pass Heineken (at least for one qtr) which cut spending $3.3 mil, 20%.
Meanwhile, importers spent almost nothing on Corona brands as they've traditionally done
in 1st qtr. Boston Beer spent $4 mil compared to zilch last yr and Labatt $7.7 mil up from
just $1 mil last yr. These suppliers below top 3 spent $41 mil, up 50%. Spent more than
Miller. They were about 18% of spending in 1st qtr; add big brewers’
above-premium spending (over $40 mil), and total hi-end spending over 1/3 of $$.
Is 3-Tier System "Flexible" Enough to Handle Consolidation? Industry Vets Express Concern
Pressures put on 3-tier system by "steady consolidation" of distribs, "alarming" rate of supplier consolidation and rapid growth of "power retailers" sparked insightful discussion among expert attys/consultants at recent mtg of state liquor admins (NCSLA). Adding note of urgency: Diageo's goal to consolidate its spirits/wine biz with one distrib per state. That's widely expected to start taking shape over next 30 days or so. Atty Bill Schreiber pointed to "unprecedented demands" suppliers now make on distribs to "invest up front" or in "marketing dollars," and "behemoth" retailers pressuring distribs to cut prices. Both reduce margins, weaken 2d tier. He asked: if purpose of 3-tier system was to "insure the maintenance of competition" in alc bev industry, is current system "adequate or are new legislative and/or administrative initiatives needed?"
Atty Mort Siegel picked up Bill's line. Asked bluntly: do current distrib agreements "violate the stated purpose of the 3-tier system" because of the "enormous amount of control" and "revenue expectation" suppliers build into them? Another "major problem" in Mort's view: inability of small suppliers to get distribution. Small vintners have especially tuff time getting distribution, insisted David Sloane, prexy of American Vinters Assn (many small brewers say same). In 1975 when there were 579 vintners, Wine & Spirits Wholesalers Assn (WSWA) had 450 members, David pointed out. Now there are over 2100 vinters, but WSWA down to 170 members. Distrib consolidation "may invite scrutiny" of DC regulators, David suggested. He also called on state regulators and industry to reach "negotiated settlement" of direct shipping cases now in courts. Back to Mort, who also asked: does consolidation hurt service at retail, especially small accounts?
Atty Vince O'Brien honed in on how franchise laws affect brand-switching after supplier deals like Diageo/Seagram. Suppliers and distribs each have "very, very strong equities," he said. As suppliers seek to improve distrib network and reward faithful distribs with new brands, other 2d- and 3d-generation distribs stand to lose brands after investing time and $$$ to build 'em. What's fair? Best way to recognize equities, in Vince's view, are laws like Delaware's which provide for compensation to prior distrib, either thru payment by supplier, or new distrib, or brand swaps. But "fairness is in the eyes of the advocate," responded consultant Mark Rodman, who criticized Del law for providing just 1-yr's gross profit as payment. In contrast, NY law that Mark instrumental in developing for NY beer distribs allows suppliers to consolidate/move brands, but requires distribs who lose brands receive "fair market value." In Mark's view, globalization of alc bev industry by Europe-based suppliers (and retailers) more used to 2-tier system, together with growing power of huge retailers, are key differences between now and when 3-tier system created. State borders are "meaningless" to mass merchandisers, sez Mark, and this "major component" of retail tier "more aligned with suppliers than ever before." While 3-tier laws generally ban suppliers from owning distribs, "in reality, suppliers have been able to integrate by contract" and effectively control distribs' day-to-day operations and "essential economics." In recent years, added Mark, regulators have given "2d shrift" to goal of keeping "buffer" between suppliers and retailers/ consumers, and focused instead on "other policy goals": regulating "time, place and manner" of sales. That may be all they regulate down road, Mark believes, not 3-tier structure.
Meanwhile, state alc bev commissions gotta regulate fast-moving industry with outdated laws and unresponsive legislators, said atty for Ill Liq Control Commission. "What the heck are we supposed to do?" he asked. Another state regulator said it's up to industry to convince legislators that alc bev regulation/enforcement/3-tier issues should be budget priorities. (Virtually every state ABC faces budget crunch.) Final reminder from Bill: alc bev issues, whether competition, 3-tier structure or temperance matters--are "public interest" issues. If public interest not being served, sez Bill, up to public policy makers to resolve these issues. To get legislators' attention may take concerted effort by both industry and regulators. In any case, each speaker endorsed a renewed debate among industry, regulators and legislators to re-examine 3-tier viability.
In 40 states where data available, striking share shift to hi-end, including malternatives, accelerated in 2001. (Data not available in Conn, NY, NJ, Pennsy, Del, Md, DC, Va, NC, plus Ky and Alas. In some states, where data available, All Others share skewed slightly because Molson now included in All-Others rather than Miller). Just like in 2000, All Others (brewers and importers below top 4) gained share in 36 of these 40 states. But gained bigger chunks of it in 2001 (as Smirnoff Ice intro'd). Up 2 or more share in 10 states (compared to 6 in 2000) and 1 or more in another 12 (7 in 2000). All-Others now have over 20 share in 9 states, including 25 share in biggest state Calif (up 1.6 share) and 29 in Mass (up 2 share). Of the 9 states where All Others over 20 share, AB lost share in 7 in 2001. All Others had 20 or more in every state in New England. Reached 1/3 of tiny Vt. AB lost share in every New Eng state in 01. AB still managed to gain share in 24 states, but that compares to 37 in 2000. It also gained far less share in most states. AB up 1 or more share in 11 states; had gained 1 or more in 23 states in 2000. Most of AB?s sizable share gains in western half of US, including 1.5 share gain in big Tex. Also gained 1 or more in Ia, Kans, Neb, Minn and Okla. AB on roll in each of those states for a number of yrs. But AB trends softened in East North Central: down 0.7 share in Ill, down 0.5 in Ind and flat in Mich, but continued gains in Oh and Wisc. AB share also down 0.4 in Calif and didn?t gain share in Fla. AB had over 65 share in 5 states and gained share in each. Those states: Miss, SC, Tenn, WV and home state Mo. Had over 60 in another 6 states, mostly in midwest including Ia, Neb, Ark Okla. Gained share in each of those too. AB also over 55 in another 9 states. AB under 35 share in only 3 of these 40 states: Wisc at 31.5, Ill 33.8 and Oreg at 34.2.
Miller over 35 share in only 2 states, Wisc and Ill; it lost 0.6 share in each. For 2d straight yr, Miller lost share in almost every state. Down in 34 states, including drops of 1 or more in 15. In a number of states where Miller lost most share (often 2 or more), sale of Molson brand accounted for significant part of share loss, especially New Eng, Mich and Fla. But Miller lost significant share in most of biggest states, including 1.3 share in Tex, 0.5 in Calif, 1.7 in Ga, 3.2 in Fla, etc. The few states where Miller gained share were mostly smaller states: Miss, ND, HI and 0.2 in mid-sized La. Miller over 25 share in just 5 states, over 20 in 18. Miller now under 15 share in 13 states, including just 11 share in Mass and Colo. In fact, Miller share under 15 in each New Eng state and in half of Mountain states. Down to 16 in big Calif. Coors over 15 share in just 7 mostly Western states and it lost share in 6 of them. In fact, Coors lost share in 20 of 40 states in 2001. Had lost share in only 9 in 2001. Coors off 0.2 in Calif, down 0.5 in Tex, but gained 0.2 in Fla. Coors lost share in 7 of 8 Mtn states. Lost over 0.5 share in Oreg (where it had gained for many yrs), Wyo, Mt and ND. Gained 0.5 share or more in 7 states, including 0.9 gain in Ind, 0.5 in La, 0.5 in Mass. Coors still has under 4 share in Mich, Ill and Wisc, but gained share in each. Didn?t hit 10 share in any southeastern state either. Meanwhile, Pabst didn?t have 10 share in any state for 1st time. Had high of 9 in Mont and 8.6 in Ill. Pabst lost share in 34 of 40 states, including drops of 1 or more in 10.
Miller?s action of "simply changing its FOB price in close conformity with" distrib?s price to retailer "is lawful and neither fixes nor maintains the price" when distrib resells beer. So concluded fed ct judge in Tex recently as he dismissed most charges brought by Lubbock Bev vs Miller. In effect that means that what lotsa distribs call "reachback" by brewers ain?t a price-fixing violation, at least not to this fed judge. Recall that Lubbock Bev had charged Miller unreasonably withheld approval of deal in 2000. Charged too that Miller practice of raising FOBs when distrib adopted higher-than-suggested price-to-retail violated state and fed laws. But judge disagreed. In addition, fed judge ruled Miller did not violate Tex Fair Dealing Law when it disapproved deal. Miller?s refusal to approve was reasonable, he wrote, "because Miller enumerated several legitimate business reasons" for disapproval, "any one of which was sufficient." Lubbock added price discrimination claims that judge refused to dismiss. It will appeal judge's order. Meanwhile, Miller countersued Lubbock charging fraud related to "overpaid FOB reimbursements." Miller seeks right to terminate immediately, plus damages and atty fees. Trial slated to start Jul 8. More on judge?s reachback logic next issue.