Beer Marketer's Insights
Ex-Tex AB Distrib Sued AB in Fed Court for Rejecting Deal Price Tho It Sold for $51.5 Mil
Wow! This one's wild. Remember that AB deal in South Tex last yr where longtime Corpus Christi AB distrib Williams Dist sold its 3.3-mil-case AB distrib to L&F Dist for unusually high price? Actual price was $51.5 mil, over $15 per case, including trucks, land, warehouse. Turns out former owners recently sued AB in US Dist Court. Why? They originally had deal with L&F for $57 mil. And AB, they allege, "unreasonably" rejected that deal, violating Tex law and AB equity agreement. But here?s kicker: plaintiffs argue that under Tex law they are entitled to full "fair market value" or $57 mil. Not just $5.5 mil differential between original deal and purchase price. But an additional $57 mil, plus attorneys fees and damages. And their co-counsel is another high profile plaintiffs atty. Sound familiar? Trial scheduled for next Feb.
Owners Bill Durrill and Derrest Williams are 2 guys in their 70s who had owned Williams Dist since 1960. As distrib, they "exceeded every performance standard applicable," according to their complaint. On Oct 19, 2000, they entered into agreement with L&F to sell for $57 mil, contingent on AB approval (L&F territory is contiguous). L&F "obtained a $123 million line of credit from the Bank of America" to "complete the purchase." In Jan 2001, AB began to suggest orally and in writing that parties "alter their agreement?to provide for a lower purchase price and a contingent payment structure." On Jan 30, Williams asked AB to "formally approve or reject" deal for $57 mil. AB rejected 2 days later, giving "only one reason?that L&F would receive a low return on its investment." On Feb 6, parties entered into a 2d deal for $51.5 mil up front with the other $5.5 mil paid out over 13 years "if and only if, L&F meets revenue targets dictated by Anheuser Busch." On Feb 8, AB approved deal.
As a prospective buyer, L&F "met all reasonable standards imposed by Anheuser Busch on other distributors of the same general class," they wrote. Deal "would not have left L&F undercapitalized, led to a low return?or otherwise rendered L&F?unable to fulfill the terms of any agreement with" AB, Williams argues. So rejection of deal "unlawful, unreasonable, and without good cause" as defined by Tex Law. "Fair market value was at least the value of" 1st deal "and may during the course of this action be established to have been higher." Violation of Tex law entitles plaintiffs to "fair market value as of the date" AB "violated the law." Charge too that AB violated its own equity agreement by "unreasonably withholding approval" and tortiously interfered with contract. This case potentially has broad implications: a number of distrib deals in recent yrs rejected by AB and other suppliers on basis of price. No AB response at presstime.
Both Interbrew and FEMSA filed lengthy appeal briefs that underscore unhappy and sometimes nasty nature of the 2 companies? fractious partnership in Labatt USA (70% owned by Interbrew and 30% by FEMSA). Whichever side prevails in lawsuit over attempted integration of Beck?s (recall that so far FEMSA got injunction to stop it), gotta wonder how well they can live together going forward. In appeal briefs, each side questioned the other?s motives and actions with some scathing language. FEMSA?s "real motivation for bringing suit," in Labatt?s view, "was not any imminent danger to its brands," but FEMSA?s "desire to withdraw entirely from the deal it made a few years ago," a 99-year agreement to distribute its brands through LUSA. FEMSA, Labatt charges, suffers from "Corona envy" and "will not be satisfied until LUSA produces growth rates for FEMSA?s Cerveza brands of 20-25% per year." Those, Labatt sez, "are not realistic" and in any case have nothing to do with whether LUSA adds Beck?s to its portfolio. But while Interbrew suggested it didn?t see lawsuit coming, FEMSA replies with details. Lists its execs? many communications with Interbrew about its rights to negotiate concerning integration of Beck?s. It also alleged a key LUSA exec?s statements in testimony "established a complete lack of credibility." So this is not exactly a harmonious situation for these 2 partners. In meantime, appeal will be heard in August and Beck?s stays separate. Interbrew now sez it?s "not necessary" to integrate Beck?s if it loses.
"There was no breach of contract here," Interbrew insists to US Court of Appeals in attempt to reverse US Dist Court judge?s decision that stopped Labatt USA from adding Beck?s to its portfolio. Tho judge figured there "had to be" an agreement between LUSA and Beck?s to add brands "the undisputed evidence is that no such agreement is proposed, contemplated or required," Interbrew insisted. FEMSA/LUSA agreement requires a "super majority" of LUSA?s board approve agreement on a "fundamental" matter, but addition of Beck?s to existing agreement does not trigger this clause, Interbrew argues. Other brands already added in same manner without complaint. But FEMSA argues that previous brands added were much smaller. "Labatt Distribution Agreement itself expressly contemplates a new agreement any time a major brand like Beck?s is to be added?. Beck?s brands cannot be distributed by LUSA without negotiations and, ultimately, an agreement." FEMSA also liberally quoted district court judge?s ruling: "When you have two companies, one of which is going to take over the entire operation of the other, and one is going to disappear, that is usually not the result of a genie going poof, it?s the result of an agreement between two parties." FEMSA added: "Defendants cannot bypass Wisdom?s [FEMSA?s] minority rights simply by failing to memorialize their agreement and then claiming not to have made one." FEMSA cited statements by several LUSA execs that indicated there had to be negotiations and ultimately agreements about many aspects of integrating.
When John Murphy took over as Miller prexy in 1971, Miller was in 8th place, facing many bigger, stronger competitors (mostly long since gone), like Schlitz, Falstaff, Schaefer & Carling. But John had vision, leadership ability and Philip Morris bucks behind him. The numbers tell the tale: Miller sold 5.2 mil bbls in 1972; that jumped to 6.9 mil bbls in 73, 9.07 in 74, 12.86 in 75, 18.4 in 76 and 40.3 in 81. In that decade Miller grew 35 mil bbls, even more than AB?s 28-mil-bbl gain. John led Miller all thru its explosive growth. He was driving force behind Miller Time, "getting Miller High Life out of the champagne bucket and into the lunch bucket" as he said. He also had foresight to buy Meisterbrau brewery with a little brand called Lite and to see its potential. "He was one of the great marketing geniuses," legendary adman Carl Spielvogel, whose agency created Miller Lite campaigns, told Ad Age: "He understood the beer drinker and consumer without reading the research," Carl added. John went on to bigger titles, became vice-chairman of Philip Morris, but his 13 yrs running Miller "were probably the best of his life," his son John Jr told Mil Jnl Sentinel. Miller has gone sideways since 1981 and it was never the same after his departure. Several of John?s cadre of key execs were at his funeral, including 3 who became Miller prexies: Lennie Goldstein, Bill Howell and Warren Dunn, plus former mktg honcho Larry Williams. But no current sr execs were at funeral, tho prexy John Bowlin at wake day before. And only 1 beer distrib attended, Hap Boening. It is ironic that John, the single individual most responsible for building Miller from an also-ran into #2 brewer, passed away as Miller about to pass from PM control.
As promised, here?s Tex fed judge?s rationale for throwin? out distrib charge that Miller?s reachback was illegal. Lubbock Bev had charged Miller?s practice of raising FOB when it charged higher-than-recommended PTR "is coercive and both ?fixes?" distrib?s "PTR and ?controls?" his profit margin. Such reachback goes "beyond the boundaries" of both Tex law and fed antitrust law, claimed distrib. But fed ct judge "unpersuaded." Why? First, "Lubbock has offered no evidence that a combination, conspiracy or agreement existed between or among Miller" and anyone else to further a price-fixing scheme. Gotta have conspiracy to fix prices, and Miller "cannot be guilty" of conspiracy "merely because it indicates a suggested PTR and then independently and unilaterally adjusts its FOB price in response to Lubbock?s equally independent and unilateral choice whether to deviate or not" from Miller?s suggested PTR. (Suppliers could not have asked for a friendlier analysis of reachback. Judge devoted 9 pages of 40-page decision to explain why practice legal.) Those words "unilateral" and "independent" are key because that means no "coercion" by Miller to "suggest an implied combination or agreement to unlawfully induce avoidance of price competition." No evidence either, judge wrote, that Miller threatened to terminate or "otherwise threatened," Lubbock if it didn?t follow Miller?s suggested PTR. Without conspiracy or coercion, no violation under fed law.
Turns out Tex law doesn?t require conspiracy. And Tex Alc Bev Commission had in past ruled reachback illegal. But judge ruled Miller didn?t violate Tex law either. Tex law "promotes fair efficient and competitive distribution of beer by assuring?that a beer distributor is free to manage its business enterprise, including the right to independently establish its selling prices." Lubbock?s "profit margin might fluctuate in proportion to the FOB price" by Miller vis-?-vis Lubbock?s PTR, judge acknowledged, but "this Court is unconvinced" that Lubbock?s "varying profit margin had any illegal effect on the competitive distribution of beer" in Tex. Lubbock "continued to be free" to set its own PTR, judge wrote. Miller?s FOB "did not motivate Lubbock?s choice of PTR because Lubbock remained vulnerable to the efforts of interbrand competitors." Tho Lubbock?s "dissatisfaction" with Miller?s reachback was "clear," judge reminded that "antitrust laws were enacted for ?the protection of competition, not competitors.?" He kept going: "While Miller?s policy of increasing and decreasing the FOB price might be classified as arbitrary," he wrote "Miller?s conduct is not itself violative of the antitrust laws." Here?s another comment distribs won?t like, but suppliers will: "Even were this Court to entertain Lubbock?s argument that Miller?s motive in increasing and decreasing its FOB price was to put Lubbock out of business, the Supreme Court has warned ?that decisions to put a victim out of business are not always the stuff of antitrust liability.?" Ouch!
Interestingly, judge declined to toss Lubbock?s separate price discrimination claims. Lubbock claimed Miller discriminated against it by charging lower prices to one of Lubbock?s competitors. Turns out no other distrib sells same Miller brands as Lubbock in its territory, but another distrib sells brands Miller acquired from Stroh. Lubbock charged too that Miller gave that competitor "margin enhancements on proportionally unequal terms." Not enough info to rule on "merits" of that claim, judge wrote, but enough there to stop him from dismissing it. Obviously, distribs can?t be happy with this ruling. In fact, Tex distrib assn memo disagreed with judge?s analysis and stated his decision has no "precedent-setting effect." Tex ABC?s earlier rulings are still proper interpretation of Tex law, according to Tex distrib assn.
Two other parts of Miller biz, contract and international, amounted to 15-20% of Miller revs. Miller contract-brewed 8.327 mil bbls in 2001, and its international biz, including licensed beer, was 2.764 mil bbls. Miller had revs of $548 mil from contract brewing in 2001 for Pabst and other suppliers, down slightly from $556 mil in 2000 as it picked up more of Pabst?s declining biz. It got avg of $4.79 per case from Pabst and others. Profits not broken out for contract biz. In 1st qtr 2002, Miller?s contract revs up $40 mil, 33% to $162 mil as it now brews all Pabst volume. Miller?s contract brewing agreement with Pabst is for 10 yrs. Miller exported $97 mil of beer, plus had $27 mil in revs in "rest of the world" (mostly licensed). Miller?s intl biz grew EBITA (earnings before interest, taxes and amortization) from $3.6 mil in 96 to $24 mil in 2001 with "a business presence in over 65 countries." Gen Draft is in 53 countries. Meanwhile, Miller cuttin? Pabst lotsa slack. Recall Miller took $19 mil charge "to fund certain Pabst expenses" in 2001. Back in 2000, "amounts receivable from Pabst became overdue." So agreement restructured "which resulted in the conversion of overdue trade debtors into a $23 million promissory note, bearing interest at 8 percent," maturing at end of 2003. As Pabst "continued to experience financial difficulties? Miller established a $15 million provision in respect of notes receivable" from Pabst. And finally, when Miller bought acquired brands plus Tumwater brewery in 1999 for $193 mil, part of purchase price was assuming $11 mil in liability. Ninety Miller employees elected to take early retirement in Feb 2002 and Miller took an $8 mil charge. Miller also took a $5 mil pretax loss on "equipment that was no longer used in the business."
Fascinating 280-pg shareholder circular issued by South African Breweries on eve of deal gives lotsa insight into Miller?s biz, including detailed brand breakout. Shows about 69% or 27.5 mil bbls of Miller?s US biz in 2001 in "core-brands": mostly Miller Lite at 15.688 mil bbls (slightly lower than INSIGHTS had estimated), High Life "franchise" (including Light and Ice) at 5.628 mil bbls, Gen Draft (including Light) at 5.518 mil bbls and Foster?s at 685,000 bbls. "Miller plans to continue to invest in and grow its core brand families through increased marketing and improved packaging initiatives," wrote SAB. About 70% of Miller?s direct mktg budget in 2001 "was allocated to media-related projects." Ad, mktg and promo $$ at $608 mil in 2001, up from $512 in 99. But in 1st qtr 2002, Miller ad, mktg and promo $$ declined $13 mil, 9% from $143 mil to $130 mil.
"Budget brands and other" volume at 8.1 mil bbls, 20% of biz. By far biggest piece is Mil Best franchise (including Light, Ice) at 5.855 mil bbls followed by Red Dog at 834,000 bbls, Magnum 493,000 bbls, and Hamm?s brands at 296,000 bbls. In budget segment, "Miller plans to remain competitive and manage these brands to optimize profitability." Smaller "other" brands: Southpaw Light 192,000 bbls, Sharp?s 151,000 bbls, Presidente 89,000 bbls. Remaining 10% of biz in "regional" brands: Icehouse about half of that at 1.98 mil bbls, Olde English at 1.025 mil bbls, Mickey?s at 379,000 bbls, Leinenkugel at 333,000 bbls and Henry?s at 291,000 bbls.
Miller distribs reduced from 631 in 94 to 485 by end of 2001, document sez. That?s a 23% drop in 7 yrs. But Miller also "services" 54 Foster?s distribs and 167 distribs of acquired brands. Miller?s highest volume states: Tex, Calif, Fla, Wisc and Ill; about 40% of Miller volume. Miller?s top 12 retail accounts "accounted for 15% of total" US volume. At end of 2001, Miller had "approximately 600 full-time salaried sales personnel." Miller had approx 6408 employees at end of 2001, compared to 6462 in 2000. Over 60% of employees represented by 11 unions. Miller has capacity of 54.7 mil bbls, and avg "utilization rate" for 2001 was 88%.
Six-mo streak of taxpaid shipments gains ended in May: taxpaids down 100,000 bbls, 0.6%, estimates Matt Hein of Beer Inst. That?s a slow-mo especially given new round of malternative rollouts, plus May 2001 was flat. Yr-to-date, taxpaids still up 1.1 mil bbls, 1.5%. But for 12 mos, taxpaids up 1 mil bbls, 0.6%. Meanwhile, imports followed 1st qtr slowdown (+6%) with 16% jump in Apr. Brought YTD trend back up to +600,000 bbls, +9%. Leading the charge still: Mexican imports. Up 584,000 bbls, 21% for 4 mos. Corona price increase went into effect beginning Mar-Apr in most of US. But while Barton Beers, mostly Corona, revs up 14% Mar thru May, its depletions down slightly, cfo told analysts. Only other double-digit import gain YTD from major source: Irish shipments up 16% following big drop last year. Dutch shipments and UK shipments each ahead 6%, but German shipments off 6%, and Canadian shipments off 15% as lots less Smirnoff Ice being made in Canada this year. Two numbers to watch: Czech imports (mostly Pilsner Urquell) up 15% on small base; Belgian imports (mostly Stella Artois) doubled on even smaller base.
Once again, no big step up in discounting during key holiday period, even following softer sales earlier in May. Avg price paid for a case of beer up 46 cents, 2.9% for 4 weeks, about same as it was yr-to-date. Interestingly, Miller prices up most. Avg prices up 3.8% for 4 weeks, tho Miller Lite's price only up 1.2%. It?s that malternative mix shift. Coors prices up least among top 3 brewers, less than 1%, as its hi-end brands declined and avg Coors Light prices up 1%. Avg prices paid for AB brands up 2.3% for 4 weeks, slightly less than YTD, but avg Bud and Bud Light prices up about 1.5%.
Tho all eyes on malternatives, #1 brand Bud Light was biggest share gainer in supers; volume up 11% and it gained 0.9 share for 4 weeks and YTD. But Bud biggest share loser in supers; down 0.5 yr-to-date and volume flat. Corona had very strong Memorial Day in supers; up 15% and 0.3 share for 4 weeks (that's triple Corona's gain pace last 13 weeks) with avg prices up 2%. Heineken rocked too during holiday period; up 17% for 4 weeks and gained 0.2 share, but avg price paid actually 7 cents lower than last yr. Coors Light held share over Memorial Day; Miller Lite down 0.1. Coors Light share passed Miller Lite in supers YTD, 7.4 to 7.3, as its share up 0.2 and Miller Lite down 0.1. Fastest-growing domestic light is Busch Light; up 15% and gained 0.3 share YTD. Each of leading import light beers (Corona, Amstel and Labatt Blue) continue up 18-24% YTD.
Other brands that gained 0.2 share or more during Memorial Day period were malternatives. But looks like segment beginning to mature. Here?s how it shakes out so far: Smirnoff Ice up 35% and 0.2 share to 1.1 for 4 weeks; avg prices paid down about 4% as it shifted biz to 12-packs. It?s up 89% YTD and got 1 share, about same as it had last summer. SKYY Blue and Bacardi Silver are pretty much in a dead heat at 0.4 each. They?re puttin? pressure on Mike?s Hard Lemonade, down 7% for 4 weeks. Mike?s line-extendin tho, so its total biz up. Meanwhile, other malternatives collapsing; Zima down 22%, Tequiza down 26%, Doc Otis down 35%, Rick?s Spiked down 58%, Hooper?s Lemon down 46%, etc. Seven of top 15 malternatives down 20% or more YTD. Branded-spirits names increasingly control segment: Smirnoff Ice, Bacardi Silver and SKYY Blue are 56 share; too soon to say much about other new spirits-branded entries.
Legal Flash
Largely on strength of Sam Light expansion, Boston Beer shipments surged 61,000 bbls, 21% in 2d qtr and 75,000 bbls, 13.6% in 1st half. Sam Light still in less than half of country, rollin? national by yrend. But shipments way ahead of depletions in 1st half, 63,000 bbls, according to prexy Martin Roper in conference call. And Boston Beer oper income flat in qtr, down by 1/3 in 1st half to $9 mil. Boston ad, promo and selling expenses up $13 mil to $46.3 mil and the co expects similar spending jumps in 2d half. Its stock dropped nearly 10% day after earnings announced. So far Boston Beer makin' big bet, but getting best volume growth since craft heyday. Orders-on-hand suggest Boston Beer up about 8% in 3d qtr too. In New Eng, where Boston does over 20% of its biz and is over 3 share, "we?re clearly getting repeat but we don?t know how stable it is," Jim Koch said. In Me and RI where it was intro?d last summer, "numbers appear to be holding up pretty well?. The 12 month number makes me feel pretty confident that we do have repeat drinkers that are going to become long-term Sam Light drinkers." Thru May, Boston Beer up 42% in RI, 39% in NH, and 3% in ME. In Mass, Boston Beer up 42% thru Apr including 10,000-bbl gain in Apr. Jim said distribs and retailers see Sam Light as brand with "long-term potential" while "they?re increasingly skeptical about all the malternatives that are coming in that beginning to look to them like the wine cooler phenomenon of the 80s."