The Hill has been climbed, 3 times. Big brewers, small brewers and distribs each pitched Congress with different messages this spring, none resonating as powerfully as if they'd gone together. Gotta be easy for Member or staffer hearing over 30 days about dueling beer tax measures, neither of which distribs support, to dismiss all 3 groups. Meanwhile, rhetoric raising differences between tiers/players played out publicly via op-eds and barbed speeches at CBC, NBWA and BI. Troubling, tho perhaps inevitable: in some cases, misinformation served advocacy. Oddly, all this happening as most brewers and distribs alike enjoy healthy profits, beer is driving additional dollars at retail and consumers clearly have more choice than ever before. (This editorial written by Eric Shepard.)

Part of this is nature of assn dynamics. It's a lot easier for assns to rouse members by identifying imminent threats than by accentuating the positive. There are substantive differences between different tiers and players. But biz revenues and profits are up and there's an interdependence between tiers -- no, there are no truly independent tiers in a highly regulated biz including mega-players in each -- that suggests co-operation and compromise should be at least in balance with bitching.

Like what? Like a single fed tax bill that gives back to all, even hard-pressed consumers, original focus of rollback. Word is BI and BA working on just such a compromise. How about a model franchise act that accommodates craft growth and ability to move small-volume brands for FMV, rewards distribs' efforts and keeps successful system intact? Is it NY's law? Wisc's? Calif's? We don't know and even if there's a model answers will differ by state. But this should be doable; it's already done in numerous states. Besides, pursuing workable compromise has to be more productive than public shaming/threats.

What about BI's bid to push "Know Your Drink" past "a drink is a drink"? Well, all's fair in targeting adult bev occasions. But celebrating beer sure seems a more promising strategy than hammering "hard liquor" while simultaneously creating liquor clones. Besides, with public health constantly whacking "Big Alcohol" and even conservatives calling for a tripling of alc bev taxes (read on) the industry will need as many friends as it can get.  

Strange time. Lotsa talk about deals, everything from ABI-SAB to Pabst to various distrib possibilities, even craft, but nothin' happening so far. What's gotten most noise? Drumbeat of analyst sentiment that ABI will buy SABMiller. Talk got louder with May 20 75-pg deep dive by ISI's Robert Ottenstein. He pegged odds of deal happening next yr at 50/50. That same day several analysts discussed potential deal at Bev Forum (put on by Bev Mktg/Bev World). And whaddya know? Most viewed deal as likely. By end of 2014, ABI will be under its longterm target of 2x net debt to EBITDA. So if past is prologue, more big ABI M&A comin'. It's in their DNA, Robert sez. SABMiller is "most compelling fit," said UBS in Apr. First SAB and then Coke down the line, UBS suggested, as have others.

Buffett's Last Laugh on ABI or 3G Deal for Coke Closes "Dream Big" Book Coke? Kinda makes your head spin. How far could ABI go with its massive cash flow and unabated appetite for M&A? What would Coke deal mean in US? Would it eventually mean rejiggering beer and/or soft drink routes-to-market as some have suggested? Coke (KO) stock mkt cap at $180 bil. Such a deal would be monstrous, likely over $200 bil. Seems a stretch, but can't rule it out. At Berkshire Hathaway's annual shareholder meeting, legendary investor Warren Buffett raved about Brazilian investors in ABI and 3G Capital (his partners in Heinz deal). He touted a book about them called "Dream Big." Following Warren's suggestion, INSIGHTS read it. Warren literally gets the last word. Book ends with author asking him about possibility of Coke deal (Warren owns 9%) with ABI/3G's Lemann. "Buffett leaned his head back and laughed: 'You won't get anything out of me about that just now."

TAP on a Tear Meanwhile, Stifel's Mark Swartzberg named TAP (Molson Coors) his top stock pick, based on increased chance it will get rest of MillerCoors if ABI buys SABMiller. TAP stock on a tear recently, up more than 25% since Feb low. If TAP acquired rest of MC, what kind of changes would that portend at #2 US brewer? Perhaps a lot, since clearly 2 partners have very different views. Recall, SABMiller and Molson Coors ended talks over Miller's Canadian biz (SAB seeks to terminate) and going to court to determine fate of Miller brands in Canada. Talks were perhaps about more than just Canada, source sez, as 2 partners circle each other, each wanting what other has (rest of MillerCoors). One thing's for sure: ABI-SAB or ABI-KO deal would have huge effect on US beer.

Parade of PE Cos Peek at Pabst Then too, Pabst peddling itself, thru investment bank Perella Weinberg. In recent weeks, a number of private equity firms have paraded thru Pabst hq. One potential buyer: a family office that brought in former Pabst ceo (2x) Kevin Kotecki. But nothing imminent at presstime. Pabst earnings $75-90 mil, according to reports. Still, with asking price of close to $1 bil, some potential buyers have reportedly balked. Meanwhile, clock is tickin' and Pabst down 8% in Q1.

Distrib Deal Drought So far in 2014, just a handful of distrib deals earlier in yr and most of 'em were leftovers from 2013. But for most part, we're in very slow period, tho there are interesting possibilities percolating.  

As tuff as 5-yr trends for top 2 across 42 states where shipments data available, their draft trends in those states even softer. Each down 16-17% in draft in these states since 2008, and each lost 25% or more of their draft biz in some key markets 2008-2013. No wonder AB and MC investing big this yr to build on-premise biz. On-premise softness, especially for premium lights, "about draft" and "tap handle visibility," MC ceo Tom Long said on Q1 conference call. Losing taps and relegating premium lights to bottles "behind the bar" cuts volume 50%, MC figures. That's huge.

Look at some numbers. AB draft in reporting states down 1.2 mil bbls, 16.7% from 2008 thru 2013. That's while total shipments down 10.5 mil bbls, 9.8%. So in less than 7% of its biz, AB took 12% of its loss. It built draft biz in just 5 reporting states, all small draft mkts except Tex, where AB draft +13,000 bbls, 2.6%. In two key craft states -- Oreg and Wash -- AB draft down 35% and 25% respectively. This places in perspective recent AB 50% off draft prices on Goose and Shock Top there. AB draft down 21% in Colo, 25% in Pennsy, state with 2d highest share of biz still in draft (17.5%) during this 5-yr period. Biggest bbls losses: 90,000 bbls or more in Pennsy, Fla, Mich, Oh and Calif. MC draft trends not much better. It lost 817,000 draft bbls, 15.8% in 42 reporting states since 2008. That's about 11% of its total loss that period in 8% of its biz. It posted draft gains in 9 states, including Calif (+2.7%). But MC took huge draft hits in 2 key mkts, where it outships AB overall and in draft. MC shed 194,000 draft bbls in Pennsy since 2008 (-26%) and 123,000 bbls, 32% in Wisc. Down 88,000 bbls, 23% in Ill, 62,000 bbls, 17.5% in Fla and 54,000 bbls, 15% in Tex.  

In 5 yrs since the advent of ABI and MC, an incredible amount has changed in US beer biz. While broad outlines are familiar to most readers (total beer biz down about 4%, AB and MC each lost 10% of their volume, and top 2 brewers make $3 bil more a year), some state/regional volume changes even more striking with dramatic competitive shifts, problematic for AB and MC. They amount to almost a sea change in the biz in just 5 yrs. And they lead to an inevitable question: what will happen in next 5 or 10 yrs?

For AB, most disconcerting changes are across West. AB down 3.3 mil bbls, 16% in Mountain and Pacific regions last 5 yrs. So almost 1/3 of its volume loss in period from these mkts where it does less than 20% of its biz. AB under 40 share in West overall as well as in many key mkts. It has gone from a dominant player to non-dominant. This is especially true in most craft-centric mkts and/or where Constellation Beers strongest.

Key Is Calif; Generational Shift AB lost 1.4 mil bbls, 14% in Calif between 2008-2013. And its share dipped 4.7 points to 37.5. Both craft and Constellation are coming on strong in nation's largest mkt. Constellation Beers gained 582,000 bbls, 23% in Calif in last 3 yrs, gained 2.4 share to almost 14. And up double digits again so far in 2014. All Others (mostly craft) jumped 4 share in last 4 yrs to 17.4, climbing 870,000 bbls, 28% to 4 mil bbls. Craft volume up 18% there again in IRI multichannel + c-stores thru Apr 27.

AB and MC Lost 25 Share in 22 Yrs in Calif The most stunning view of all is what happened in the nation's largest beer mkt over the course of a generation. AB mkt share peaked in Calif in 1991 at 50.8. At that time Miller and Coors were separate, but they accounted for 33.8% of Calif biz. So the top 2 were almost 85 share. Flash forward to 2013 and AB+MC at just 60 share. That's right. AB and MC lost about 25 share in 22 yrs in nation's largest mkt. Over 1 share a yr. That's a ton of change.

Colo and Ariz Not Rocky Mountain Highs for AB Almost as striking: Colorado and Ariz trends. In Ariz, AB still about half the mkt. But it dropped 455,000 bbls, 17% last 5 yrs and lost 6.7 share. In Colo, AB dropped 260,000 bbls, 17% as well and lost 6.8 share down to 35.5. In Oreg and Wash, AB shares down to 30 or less. AB fell under 30 in Oreg (28.6) with 190,000-bbl, 19% drop last 5 yrs (likely even less if smallest craft players fully accounted for). In Wash, AB lost 333,000 bbls, 21% of its volume in just last 4 yrs. Fell 6 share to 31.5. In Calif, Colo, Wash and Oreg, AB has large % of its volume in branches.

AB Still 55-60+ Share in Midwest and South AB retains clear dominance in much of midwest and South, even tho it lost volume in almost all those mkts too. For example, its share across entire Southeast is still 58% and in West South Central (mostly Tex), 56%. While AB lost almost half mil bbls in Tex last 5 yrs, it lost just 1.6 share, down to 54.9.

Tex Is MC's Biggest Problem Spot; Big Losses in Other Big Mkts MC dropped 891,000 bbls, 15% last 5 yrs in its biggest mkt, Tex. Dropped 4.1 share there to 26. In fact, MC fell disproportionately in most of its largest volume states. Down 450,000 bbls, 13% in Ill and fell 3 share, down almost a half mil bbls, 14.5% in Pennsy and lost 4 share. Down 515,000 bbls, 16% in Fla and lost 3 share. Those 4 states about 35% of MC drop tho only about a quarter of its volume. MC lost another 1.1 mil bbls in 3 other top 10 mkts; Oh, Calif and Wisc. MC suffered big % losses in Oh down 360,000 bbls, and Wisc down 317,000 bbls. MC also lost 428,000 bbls, in Calif, but only down 7-8% and lost less than 1 share there. MC actually held share in entire West North Central region in last 5 yrs.

HUSA Hurtin' In Former Hot Spots; Big Tex Gain HUSA has some hurtin' mkts too; it lost more than 10% of its total volume last 5 yrs (tho up in 2012). HUSA hit hardest in NEast strongholds. HUSA dropped 77,000 bbls, 26% in Mass last 5 yrs. Down 95,000 bbls, 21% in NJ and 38,000 bbls, 19% in Pennsy. That's 20% of nationwide drop in 3 states where HUSA only did about 10% of volume. NY not a reporting state, but HUSA down 374,000 bbls, 19% in non-reporting states last 5 yrs. Suggests approx 20% drop in NY likely too. HUSA off 307,000 bbls, 16% in Calif last 5 yrs. About half its volume drop in 4 states: Calif, NJ, Mass, Pennsy. Yet HUSA also had notable gains: up 239,000 bbls, 35% in Tex last 5 yrs.  

Little change in latest data on health of beer so far this yr. While overall biz and on-premise somewhat soft, off-premise trends still a bit brighter, tho dimming there too. Apr shipments by domestic brewers up 60,000 bbls 0.4%, according to estimate by Lester Jones at Beer Inst. (This is Lester's last estimate; he'll be moving from BI to NBWA in June.) That kept yr-to-date shipments number modestly in the black: +324,000 bbls, 0.6%. But import loss thru Mar knocks that back to just +0.1%. Then too, recall AB shipments 1 mil bbls ahead of depletions in Q1. So true shipments picture actually in the red, just like depletions. Meanwhile, latest off-premise scan data from IRI shows volume up 0.6%, $$ +3% for 4 wks thru May 18. That's quite a slowdown from +2.2% (volume) and +4.9% ($$) for yr-to-date period. Is off-premise "catching up" with lousier overall figures?  

First incarnation of Craft Beverage Expo, a new standalone conference and tradeshow, convened in San Jose, Calif this week, attracting over 1000 attendees and 165 exhibitors on the first go. Opening panel dominated by parallel struggles with small scale and identity issues shared by "our brethren in the alcohol beverage industry," as described by moderator Steve Hindy, co-founder/prexy of Brooklyn Brewery. Four other Brooklyn, NY producers of different alc bev types shared stage, including Steve's co-founder Tom Potter, now prexy of New York Distilling Co, Shane Welch, founder of Sixpoint Brewing, Alie Shaper, prexy/winemaker at Brooklyn Oenology, and Nicole Austin, master blender of Kings County Distillery. While "all of us could sit here and complain about distributors," Steve said, the panel steered clear of that and typically prickly "tax issues," (where "a few jealousies" common). Instead, bulk of conversation orbited around idea, spirit and definition of "craft."

First to dig in, Nicole noted that small distillers now "playing catchup" to "get organized, get together." Since she helped found Kings County Distillery in 2010, 17 other distilling cos have emerged in NY alone. As first prexy of New York Distillers Guild, Nicole has worked to "tamp down" some "impulses" from other members that certain producers may be "not artisan enough." On national scale, Tom said distillers are "catching up on all those philosophical arguments" about what does and does not constitute craft, claiming he hopes the group may "learn from some of the mistakes" made in beer. He's encouraged national orgs to "try to be more inclusive," rather than exclude older family-run operations. When Steve alerted Tom about recent changes to Brewers Assn's craft brewer definition to allow in Yuengling and the like, Tom said "that's a good move." But these definitional matters get "emotional," Nicole reminded, sharing story of a pair of folks leaving discussion at meeting of American Craft Distillers Assn in tears. "At this point, we need more people on the inside," Tom said.

Interestingly, this is "not so much a conversation that's been on the surface in the wine world," Alie said. Indeed, "handcrafted" and "all sorts of marketing terms" like it have long been used on wine labels, but wine "almost expected" to be somehow craft. Larger entities have been "very clever" about bringing wines to market and maintaining small identities, she said. Large distillers have similarly been "expert at keeping a small identity" across many brands, Tom said. He shared "twin reactions" to large entities buying small producers: it can feel like "losing one of our friends to the big guys...but what price did he get?" Steve wondered if such transactions are "taboo" in spirits as they can be in the beer world, but "I think we're still figuring out what our taboos are," Nicole responded. She repeated tack that she or any org "can't control" marketing efforts of every competitor. Spending a lot of energy on that, folks are "always gonna be grasping at straws," and if you act on these impulses to exclude "then you just look ridiculous." Instead, she wants assns to focus on "the nuts and bolts problems," like "getting laws passed and getting tourism dollars."

On Brooklyn: Slow Starts, Self-Distribution, Cottage Community Sharing stories of founding their companies, the panelists identified parallel struggles of getting small brands up and running. Both Steve and Tom spoke of sketchy days of starting Brooklyn Brewery in dangerous neighborhoods. Yet connecting the co with the American Institute of Wine and Food a "critical" step, Steve said, as the "artisan ecosystem" now operating in Brooklyn "didn't really exist 30 years ago," Tom said. Brooklyn Brewery's success showed Alie that "a food product can be produced in the context of an urban environment." Brooklyn is also a "natural area for manufacturing." She founded Brooklyn Oenology with the understanding that getting customers to visit wineries to gain attention was "not necessarily practical" in NYC, so she brought NY state grapes to them. By the early 2000s when Shane opened Sixpoint, "Brooklyn became this epicenter of cottage industries." In early days Sixpoint had space in Brooklyn Navy Yard on a floor with 5 different vendors producing small-scale food products. Tho Sixpoint has moved on, the Navy Yard is still home to many small producers, including Nicole's Kings County brand. Both she and Alie pegged spirits and wine, respectively, as slower to catch on in Brooklyn. Tho Alie is less sure about wine's lag in the boro, Nicole was quick to remind that while homebrewing and home winemaking create inroads to becoming interested in going pro, "the home distilling we were doing was a little bit illegal," before opening. Shane spoke of importance of self-distribution to "bridge those connections" with retailers. Similarly, Tom reminded that Brooklyn Brewery's distrib biz was big part of co's health in early days, but that distribution in general a "grinding, low-margin, high-detail business.... Don't imagine the grass is greener over there," he told the crowd. Alie echoed the sentiment and importance of self-distribution early on: is it really worth losing the margin and fighting for attention at a distrib with a big book? Wearing out shoes and doing it yourself may be best to start. "You have to pay with either your time or your money," she repeated.

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