"There seem to be signs" malternatives "are peaking," AB CFO Randy Baker said in conference call Jul 24. AB sees "nothing there that supports further significant growth," Randy added. YTD thru Jul 14, malternatives had 3.1 share of supermarket volume, according to IRI, up 0.8. Several Wall St analysts echo Randy. "We continue to expect malternatives to peak in the 3Q and forecast a 3.5% share for this segment, basically a niche segment similar in size to the craft or microbrewers," Morgan Stanley’s Bill Pecoriello wrote recently. (In 2001, micros had 3 share, malternatives had 2.5 share.) "We believe that the FAB category is going through a period of accelerated brand rationalization (akin to that of the wine cooler, ice beer, craftbrew, etc) as a result of recent disappointing FAB introductions such as Captain Morgan Gold and Sauza Diablo. We believe the lack of traction by these products have made wholesalers and retailers hesitant to stock up their shelves with new brands," Caroline Levy at UBS Warburg wrote. Biggest disappointment so far: Captain Morgan Gold, which Diageo supported heavily during 2d-qtr launch. The brand just did not sell. In fact, Diageo already pulling some excess inventory from distribs. At presstime, Diageo announced Smirnoff Black Ice intro in UK "to lure men" to RTDs, wrote Dow Jones. Black Ice coming to US in 4^th qtr too, we hear.

Malternatives are still big talk of the biz, tho buzz less positive lately. One reason: BATF recently laid out agency’s new thinking about malternatives that could radically change way these products are sold/marketed in a year or so. Key: BATF may require that spirits "flavoring" can contribute at-most 0.5% of final alcohol volume. Turns out BATF found 90%+ of alcohol comes from flavorings in some of these products. Brands that don’t meet new standard would be considered spirits products and be taxed, regulated as such. That immediately would make ‘em more expensive/less profitable, far less available to consumers and take ‘em off network tv. In effect, BATF doing an about face after years of clearing labels/brands that don’t have much resemblance to beer. Per usual, BATF ain’t exactly barreling down this road tho. First step is "notice of proposed rule-making" by end of 2002. Then a 60-90 day comment period to give everyone from suppliers to CSPI chance to weigh in. Then BATF adopts final rule; it’s talking about Jan 2004. If suppliers don’t like new rules, they can go to court or legislature.

The supplier with most at stake, Diageo, is already trying to head off any BATF move to reclassify malternatives. It sent 6-page, single-spaced letter detailing why BATF shouldn’t change status quo. Diageo’s major points: it has already spent millions based on BATF’s current policy of allowing flavors without limit if alc content under 6%; consumers don’t care if alcohol comes from flavors; there’s no compelling public interest to make change; history and current definitions of beer/malt bevs under FAA Act and internal revenue code give brewers needed flexibility to use flavors. BATF also already received letter signed by 9 Congressmen asking it not to reclassify malternatives. They’re "concerned that ATF’s proposal…will effectively end this category of product, disappointing consumers, destroying jobs, harming the brewing industry and reducing excise tax revenues." Gotta note asst director Art Libertucci’s response to comment that new rules would kill category in Jul 25 conference call. Producers could continue malternative products, Art told industry execs, just not as cheaply or easily. Why is BATF changing its mind? Industry complaints, taxation issues and calls from the states, said Art. Indeed, Tennessee’s alc bev commission not waiting for feds to act. It’s very close to final ruling that malternatives with sprits flavoring are spirits products (urged on by wine & spirits distribs there who want to sell ‘em). Tenn ABC holds hearing Aug 19.

As Coors struggles to return to US volume growth, its earnings growth picking up steam. For 2d qtr in a row, Coors beat Wall St consensus earnings estimates by a wide margin even as US volume remained stalled. Fueled by its UK acquisition and progress reducing US costs, Coors oper income jumped about $48 mil, 66% in 2d qtr to $121 mil, excluding special charges. In Americas, oper income jumped $4.8 mil, 7% to $79 mil even tho volume down 0.7% and rev per bbl down 1.5%. (That?s $12.37 per bbl oper income, up 82 cents per bbl from a yr ago.) Coors? cost reduction efforts "gained momentum" in 2d qtr, said prexy Leo Kiely, with a 2% reduction per bbl after factoring out branches it sold last yr. Coors mktg, gen and admin costs up 2.5% in 2d qtr, but mktg up mid-single digits, while overhead flat. Rev per bbl up 1% apples-to-apples in US. (The branches Coors sold last yr had higher rev per bbl because they sold imports so Coors reported rev bbl down 1.5%.) That 1% far less than AB?s 3%. Why? Negative mix shift away from higher priced brands and no malternative intro. Coors got 2% rev per bbl from domestic price hikes and reduced discounting, cfo Tim Wolf told analysts (similar to AB) offset by 1% of "negative mix shift." Zima, Killian?s, Original Coors and exports each down, while Coors Light up slightly and lower-priced Keystone up "mid single digits." Coors got $51 mil of oper income from its UK operations in 1^st half on $542 mil of net revs. Total Coors corporate revs over $1 bil in 2d qtr.

While Coors has "not yet seen significant lift" from new ads, Leo told Wall St, Coors still believes ads "on target" with "very encouraging diagnostics." While Coors Light grew slightly overall, Tex and Calif "continue to have their own challenges." Total beer biz "very soft" in Calif, and Coors in 1^st yr of some Tex distrib consolidations which is "toughest" period and "certainly a factor." Analysts questioned Leo if Coors is spending sufficiently, given AB and malternative media onslaught, and share gains. "We really don?t feel disadvantaged" on spending, Leo said, adding that Coors at "critical mass" on spending. Coors Original "already showing signs of stabilization" with new ads.