Beer Marketer's Insights
Recall: Wash defended its laws as “unilateral restraints” that did not allow agreements among competitors about prices. That means they’re not “hybrid” restraints that do allow such agreements and therefore run afoul of fed antitrust laws. But Costco sez defendants “ignore the most pertinent decision in addressing the hybrid element... contradict the pleadings and are foreclosed by the Supreme Court and 9th Circuit.” Costco also points to similar challenge to Md’s laws by retailer David Trone, recently upheld by 4th-Circuit (TFWS case). Fed Ct ruled: “Statutes and regulations that require liquor wholesalers to post-and-hold their prices and that prohibit them from offering volume discounts [two of the restrictions at issue here] constitute a per se violation of Section 1 of the Sherman Act.” Ain’t just Sherman Act that Wash laws violate, in Costco’s view. Costco “entitled to prove... restrictions are so irrational and discriminatory that they also violate substantive due process, equal protection, and the Privileges and Immunities Clause.” Even tho “some important pricing elements" set by Wash regs, Costco sez, distribs still have power to "determine their overall prices and terms and condition of sale.” That makes ‘em hybrid restraints, subject to antitrust review, sez Costco. Finally, Costco argues that since state allowed distribs to intervene and invoked state law to make some claims, it waived "immunity" from being sued in fed ct over state law issues. Judge could simply rule up or down on state’s/distribs’ 3 motions and/or hint at court’s thinking about any of these critical issues, especially direct shipping to retailers.
Costco countered each key argument made by Wash regulators and distrib assn who sought to persuade US Dist Ct judge to toss Costco’s broad challenge to the state’s 3-tier laws (see Aug 16 INSIGHTS). Its response packed plenty of anti-distrib punch. Costco’s main comments lead off with quote from anti-3-tier book (new to us) that asserts alc bev wholesalers “now claim a substantial share of profits and raise prices to consumers in the process.” Costco also claims state and distribs tried to get quick dismissal because they “know that the Court’s review of the facts would show...that the challenged practices, rife with contradictions and protectionism, do not bear a rational relationship to controlling abusive vertical integration, much less alcohol abuse itself.” Contradictions of Wash system, Costco slams, “explainable only by the economic favoritism for alcohol distributors.” Costco insists state’s laws and regs violate fed/state laws, state/ distrib motions misread Costco’s complaint and ignored pertinent fed ct precedents. Therefore, Costco concludes, judge should not dismiss case.
Costco’s comments on direct shipping are highly provocative. Recall: state/distribs claimed Costco has no “standing” to sue over states ban of direct shipments since all retailers bound by rule, and ban only hurts suppliers. At the least, they asked court to hold off until Sup Ct rules on direct shipments. Costco responded: its claim is “very different” from what Sup Ct will decide, because “Costco is a licensed retailer. It will continue to" sell to consumers "fully subject ... to the jurisdiction” of state liquor control. It is “not a would-be underage drinker,” and its situation therefore “unlike that which the states rely upon in their arguments in the direct–to-consumer cases.” Then Costco drops the big one: “What possible harm to the public interest could come from allowing Costco to purchase out of state? The answer, none, is clear from the State’s other simultaneous motions, in which the identified state interest for the challenged regulatory regime is assisting small retailers.” (Elsewhere, Costco sez: “Much of the current regulatory scheme was put forth and maintained by distributors to serve their own ends.”) That position not only differs from what states plead in direct shipping cases, Costco points out, but small retailers might benefit “even more than Costco” from buying direct. In addition, Sup Ct has ruled that protecting small retailers “is not a state interest protected by the 21st Amendment.” As a “reciprocal” state, Wash already allows consumers to buy direct from many out-of-state vintners. “What possible state interest could justify denying retailers licensed by Washington from having the same purchasing rights as Washington’s unlicensed consumers?” Costco asks. Because of consumer-retailer difference, Sup Ct decision “will not control this case,” Costco concludes.
Final irony: state itself is a retailer and already buys direct from out-of-state suppliers, Costco argues. That’s one reason Costco has standing to sue, it sez. Wash had argued that only the potential shippers are harmed, not Costco or other retailers. But Costco asserts it is “directly harmed by the law prohibiting Costco – but not the Washington State Liquor Control Board defendants when operating their proprietary state liquor stores – from purchasing wine and beer from outside the state. Costco would directly benefit by relief from the prohibition.” Costco’s inability to buy direct results in “less interbrand competition, fewer choices and higher prices.”
Following last yr’s supply chain nightmares for Coors late in yr (much, much better in 04), you wouldn’t think another big bone of contention with distribs would crop up so soon. But lotsa distribs upset about how Coors handled pickup of out-of-code Aspen Edge. Instead of picking up 100% of costs like Guinness USA did on Captain Morgan, Coors is splitting costs with distribs. Moreover, it’s cutting different deals with different distribs; we’ve heard everything from less than 1/3 to 100%. For some distribs this means a mid-to-high 5-figure cost. Coors told distribs it’s basing % on blended off-premise and on-premise distribution but most distribs INSIGHTS talked to regard process as unfair. Next time Coors comes with new product, “people will be very conservative” and less likely to go to bat, one told INSIGHTS. Recall distribs ordered too much Aspen Edge initially and a lot of it had same code dates. Coors source sez it let distribs over-order rather than repeat last yr's supply shortages, but many distribs say Coors pushed distribs to order more than they needed.
Meanwhile, Coors has several new Aspen Edge initiatives: new tv spots that debuted on Monday Night Football Hall of Fame game in early Aug and will have a strong NFL component: new pkgs including draft, 20-pack bottles and 24 loose. Plus, Coors got Sterling Marlin to race in Aspen Edge car for 1 race (not a total switch as we had reported in INSIGHTS Express). Tho Aspen Edge peaked at 0.3 share in supers so far, it was only new beer in top-20 new products in all categories in supers in 04, reported Supermkt News.
Annual distrib survey by folks at Tamarron Consulting showed avg performance by suppliers improved for each of 9 key "competency" measures in 2004 vs 2003. (Distribs grade supplier on each competency on 1-5 scale, with "meets expectations" at #3, "exceeds expectations" at #4, etc.) Despite this improvement across board, overall supplier grade still slightly below "meets expectations" at 2.94, up from 2.88 in 2003 survey. Once again, suppliers exceeded expectations in only 2 of 9 key areas: portfolio mgmt and operations/logistics. But they came up slightly short of expectations on the 2 most important areas for distribs: mktg mgmt and retail execution (both at 2.9), as well as 5 others. Per usual, AB scored highest in overall performance in 2004 survey with grade of 3.57. But Miller swapped places with Coors: Miller rose from #6 to #2; Coors slipped from #2 to #6. (Boston and Barton tied for 3d, Heineken was 4th.) While AB has consistently scored high in survey, Boston, Barton, Gambrinus and Pabst showed improvement in each of last 3 yrs, Tamarron notes. Other than Coors, only 2 suppliers didn’t score higher in 04 than in 03: AB and Labatt, but their dropoffs negligible. Even while distribs see lotsa room for improvement by suppliers on performance, over 90% say "overall supplier relationship" meets or exceeds expectations, with little deviation over last 3 yrs.
Distribs also give letter grades to supplier performance and relationship. Who gets the A's? AB most likely to get highest marks, but it’s only supplier that gets higher % of A's for performance (44%), than for overall relationship (38%). Miller and Coors higher grades very similar: 32-35% of their distribs give ‘em an A for relationship, but just 11-12% give ‘em an A for performance (Coors much more likely to get low performance grade). Barton/Heineken numbers fairly close: they get A’s for relationship from 31-32% of distribs, A’s for performance from 19/13% respectively. Tamarron’s 2004 survey represented views from distribs of about 40% of total volume. Respondents sold avg of 2.5 mil cases. Tho Coors has criticized survey methodology in past, another supplier points out its value as a way for distribs to get message to suppliers.
So far in 04, Miller turned things up several notches in a number of midwest states where it suffered losses for yrs. Most notably, Miller up 40,000 bbls, 10% in AB’s home state Missouri, while AB down 37,000 bbls, 2.5% for 6 mos. Miller up in each state where data available thru Jun (Tex, Mo, Ia and Oh; 17% of industry volume). Miller up 40,000 bbls, 4% in Oh, 18,000 bbls, 7.6% in Ia and 17,000 bbls, 1% in big Tex. In 3 of these states (except Tex), Miller gained more than half a point of share in last 12 mos. In fact, Miller up 1.2 share to 18.9 for 12 mos thru Jun 04 in Mo, while AB dipped 1.8 share to a still-dominant 64.7. Wow! Can’t recall any period like that in all yrs we’ve watched data. Miller also up 0.8 share in Ia last 12 mos and 0.7 share in Oh. But Miller still down 0.3 share for 12 mos in Tex, while AB up 0.4. AB pretty much flat in Tex, Oh and Ia. After yrs of big gains there, AB up just 3,000 bbls, 0.1% in Tex in 1st half. But Coors down 104,000 bbls, 8%. Up slightly in Mo and Oh, but down 4,000 bbls, 5% in Ia.
Recall that AB total shipments up 725,000 bbls, 1.4% in 1st half. So where did AB rack up gains? AB sales-to-retailers up 5.2% in Calif and 3.5% in Fla thru 6 mos. Tho shipments trend not yet available in those states, if similar to STRs then those 2 states alone were good chunk of AB gain. Brand notes: Bud Light down 3-4% in each of Tex and Ia in 1st half. Miller Lite up 51,000 bbls, 5% in Tex and 22,000 bbls, 18% in Ia. Mich Ultra more than doubled in Tex, up 88,000 bbls. But Coors Light down 111,000 bbls, 13%.
It is a measure of how much tuffer growth is to come by in beer biz that a 3.5% import gain in 1st half seems pretty good. In 2001, imports were up 9%, then 6% in 02, before slowing to 2% last yr. So far in 04, import shipments up 399,000 bbls, 3.5% thru Jun. But imports were down 2.2% in 1st half 03, so comparisons easy. True test comes in 4th qtr 04 when imports bump up against big 10% gain last yr.
Thru Jun, imports led by Mexican shipments up 294,000 bbls, 5.8%. That’s about 3/4 of import gain and pretty strong considering hefty price hike on Modelo brands implemented in 1st half. But higher prices may be takin’ toll as summer goes on. Recall Modelo volume down 7% for 13 weeks in supers as avg price per case up $1.79, 7%. Believe it or not, both FEMSA and Modelo had reported 1st-half export trends even stronger than govt figures: Modelo said its exports up 8% and FEMSA up 23%. So there’s a little bit of disconnect in numbers so far.
Meanwhile, shipments from most major European countries gained too. Dutch shipments up 75,000 bbls, 2.6%. Belgian shipments racked up impressive 43,000-bbl, 54% gain led by Stella. But Belgians still just 1% of imports. German shipments rebounded, up 38,000 bbls, 7.6% for 6 mos. UK/Irish shipments basically a wash: UK shipments up 80%, Irish down 41%. The laggard among major countries: Canada. Canadian shipments down 36,000 bbls, 2.2%. Most leading brands brewed in Canada down big YTD in supers: Labatt Blue down 9%, Foster’s down 15%, Bass Ale down 13% and Molson Ice down 16%.
It’s happening again. Just like in Fla way back in 1987, Ky passed a franchise law that AB opposed (see INSIGHTS, vol 35, #10). And just like in Fla, AB put in motion effort to form assn of its own distribs, which it’s calling the Kentucky Malt Beverage Council. By now, there are franchise laws in over 40 states. But AB execs from August Busch IV on down have made it very clear they don’t want any more. In early 2004 meeting with state execs, some state assn execs were surprised at AB’s vehemence on this point.
Shortly after Ky law passed, AB’s Louisville branch (the largest distrib in state at about 5.5 mil cases) pulled out of assn and 2d-largest distrib (Lexington) also pulled out. That left just 9 AB distribs and 4 All-Other distribs in assn. AB has about 2/3 share in state. Following Brand Exchange meetings for all AB distribs in Vegas a couple of weeks back, Ky distribs were asked to stay behind and presented with full-blown plan for Kentucky Malt Beverage Council. A subsequent letter from region veep Evan Athanas asked them to decide by Aug 30 whether they were going to join. “The Kentucky Malt Beverage Council is your organization and will not be managed by Anheuser Busch,” he wrote. The letter had a number of pleases and thank yous, but distribs felt intense pressure from AB. AB pushing to have its Malt Bev Council up and running for 2005. Meanwhile, still unclear who will run assn, what dues will be, who will be on board, or even if it will come into being. AB acknowledged in statement that “some” AB distribs, including branch “have withdrawn or are considering withdrawing...to form a new association that would better serve the interests of” AB distribs in state. "AB wholesalers in each state should ensure their wholesaler associations are properly aligned with their overall best interests and the long-term success of the industry,” AB added.
Here’s more background: a number of yrs back, Ky assn set up structure whereby if board didn’t unanimously approve action, it took no position. That’s what happened when franchise law came up a yr ago. But a couple of non-AB distribs took matters into their own hands, hired a lobbyist and got a bill passed. If AB succeeds in splitting off assn, it’s part of general long-term trend towards weakening of state distrib assns, which have been front-line of defense for 3-tier system for decades. Ironically, this battle occurs in yr when Ky distrib assn played big role in defeating a thorny excise tax proposal.
At presstime, details still filling in on AB’s fall price hike, which it had told analysts would cover more than 40% of volume. About half of it in just 3 big states: Calif, Fla and Mich (21% of AB volume). In Fla, AB suggests taking premiums up just 30 cents per case to retailer (standard 70/30 split), like last yr. But real news is big 80-cent hike on Busch and Natural families, narrowing spread with premiums. While this could throw more of AB biz into premium segment, it comes just when Miller has renewed emphasis on subpremiums nationally. Fla is #1 or 2 subpremium mkt (subpremiums have low share in Calif). Indeed, Miller just intro’d a hot quantity discount price for Mil’s Best in much of state. So it will be interesting to see whether AB’s bold subpremium bump sticks or if AB/distribs forced to deal it back. AB also suggests Michelob prices up another 45-50 cents to retailers. AB has good volume increase in Fla so far in 2004 (see below).
AB prices also going up this fall in biggest beer mkt, Calif. It suggests a 45-cent increase on Bud and Bud Light with typical 70/30 split, but a big Michelob price hike of $1.50 will be split 50/50 with distribs (as in several other states last yr). And there will be a $3.50 increase on draft. AB distribs going up suggested 43-45 cents to retailers on most brands in Mich, but up 34-35 cents in Tenn on premiums and subpremiums (about 60 cents on Michelob). AB prices going up all through West Coast: premiums and subpremiums up 45-50 cents to retailers in Oreg and Wash, while Michelob family going up suggested 90 cents. No fall price hikes in several other big states like Tex, NY, Oh and Ariz, tho distribs in each expect Feb increase. Other smaller states that got increases include Neb where AB suggests going up 30 cents on premiums and subpremiums and NM where AB only taking increase on Bud family 30 packs in premium segment, but going up 65 cents on subpremiums. In general, it appears that AB taking larger % increase on subpremium brands, but plan varies perhaps even more than usual.
Constellation made unsolicited $1.3 bil all-cash bid for troubled Robert Mondavi Corp yesterday. Stock down 8% today. Last week, Barton Beers sales veep Marty Birkel promoted to prexy of Barton Spirits. He was head of Barton Beer sales for 7 yrs. New sr sales veep (beer) is Bruce Jacobson; with Barton since early 03, formerly with Miller.