Recall unique exchange between Glazer’s and Heart of America MC distrib we reported Feb 12.  Glazer’s got HoA’s Ark biz, about 475K cases; HoA picked up about 200K cases in Mo, including Sierra Nevada, Odell, Vt Hard Cider, Paulaner, Sapporo and others.  But HoA only wanted to keep brands in its Joplin and Springfield mkts.  So it sold off rights elsewhere to combo of AB and MC distribs, at healthy 8.75X GP multiple.  All deals nearly closed.  Bell’s is only big supplier still doing due diligence.  Originally, looked like it was going to be all AB distribs among buyers, but “some passed,” HoA principal Bob Walkenhorst told us this morn.  Brands ended up at: Summit (MC) in St Lou; Kohlfeld (MC) in Cape Girardeau; Grellner (MC) in southern Mo; Scheppers (AB) in Columbia; Golden Eagle (AB) in eastern Mo; Great Rivers (AB) in south central Mo.  In Kansas City, AB distrib North Kansas City Bev took brands for entire city, going outside its AB footprint.          

“On the face of it, this was a very complicated transaction,” Bob told Express.  But the “breweries for the most part were remarkably understanding and tried to work with us,” including Bell’s.  “Each supplier had their own issues,” Bob’s co-principal Jim Ferguson said, and there was “a lot of compromise,” but again Jim “very impressed with the way the suppliers were willing to work with the group.”  Distribs “had to give sometimes too,” Bob noted.  It all worked out because “people wanted it to happen,” he said.  Heart of America, which also has biz in Okla, now sells about 4 mil cases.   

Recall, AB recently had $58 kegs of Bud in Mass and a very large amount of couponing activity in Wisc. These are still so far very isolated instances. But they lead to question of whether AB starting to get more aggressive on price as its share losses continue thru 1st qtr of 2014.  Tho their volume trends are very similar, ABI down over 1 share of $$ in Nielsen all outlet+ convenience data thru Mar 29, while MC down a few tenths. ABI avg prices up 36 cents yr-to-date, less than 2%, compared to MC up 66 cents, 3.5%. 

A lot of buzz last couple of days surrounding some incredibly deep discounting AB just started doing in craft-centric Seattle and state of Washington. Invoices show that retailers can get Shock Top at $54.50, down from front-line of $111 and Goose Island for $67.50 down from $135. That’s lowest keg price in mkt by far, sources say, lower than subpremium Hamm’s ($76). Under Wash law, all customers must be offered same price and can’t sell below cost, but “if the brewer/supplier funds the discount then it is not technically below cost,” so AB ostensibly funding the entire discount, sez source. So far, not that many retailers have reportedly added these brands. But Shock Top is currently priced $70 below Blue Moon, for example. “This is a very aggressive, desperate and overzealous move for ABI,” said one significant supplier. 

As US beer biz takes more competitive stance against spirits, North American Breweries has hired top spirits marketer to be its new CEO.  Kris Sirchio was exec veep, global chief mktg officer at Brown-Forman for a little over 3 yrs.  Introducing himself to distribs on conference call, Kris pointed out that when he came to Brown-Forman, Jack Daniel’s was stagnant-to-declining brand and execs there were talkin’ about how to manage vs grow it. But “a leader’s job is to grow brands,” Kris said, and BF sought ways to “reinvigorate” Jack.  That happened and Jack became one of fastest growing big spirits brands in recent yrs, thru 3-prong strategy of new ads, revitalized on-premise focus and innovation via  launch of  Jack Daniel’s Tennessee Honey, which became one of most popular flavored spirits brands. 

NAB’s portfolio “matches perfectly” with what Chris managed at Brown-Forman, he told us this afternoon.  Brown-Forman had craft-like spirits (Woodford Reserve) that parallel NAB’s Magic Hat and Pyramid brands.  “Many folks look at innovation in craft beer and small batch bourbons” in same light, said Chris.  Then too, BF’s premium biz aligns with NAB’s Labatt biz.  It also sold value brands (Early Times, another turnaround story) plus flavored bevs like Jack Daniel’s Country Cocktails, parallels to NAB’s Seagrams line.  Tho Chris had global position, he spent lots of time in US working with distrib partners “to build plans, collaborate and build value,” he told us.  In his positions at BF, plus Proctor & Gamble and agribusiness co Syngenta, Chris has history of “creating teams that endure and outperform,” said Ramon Mendiola, ceo of FIFCO, NAB’s owner.

Kris comes in at critical juncture.  Recall, NAB built volume from 2.3 to 2.7 mil bbls 2009-2012, then slipped 4.6% in 2013, with all brand families except Seagrams takin’ a hit.  Keep in mind too, NAB retains goal of doubling its US biz over next 4 yrs or so (via organic growth and possible acquisitions), even while facing stepped-up competition in FMBs (across board), economy (AB and MC), imports (fast growing Mexican brands) and craft (strong established players and newbies).  Kris’ mktg background, history of turning brands around and previous work within 3-tier system will no doubt come in handy.  As he comes on, NAB about to launch national Seagrams ad campaign and rolling out of new extensions from Labatt, Magic Hat and Pyramid.  

When Constellation Brands completed Modelo transaction last Jun, one of unknowns going forward  was that Constellation had never run nor built a brewery before.  At time we noted it “seems likely some issues will crop up” as co pushes to finish brewery in next few yrs. Well those issues were at forefront of Constellation conference call today when co disclosed it expects expense to build brewery will double from original estimate of $500-600 mil to range of $900 mil to $1.1 bil.  The “most significant incremental cost increase relates to outsourcing to third party external engineering resources,” and consultants, noted ceo Rob Sands. He noted that Modelo had benefit of using in-house resources, and that Constellation was spending more on engineering expertise because current timeline to complete brewery expansion from 10 mil to 20 mil hectoliters “is much shorter” period than Modelo’s original build.  Increased spending is also to improve efficiencies to squeeze the most out of that capacity with new efficiencies once brewery is completed. 

The brewery in Nava, Mexico is “still on track” to be completed in 2016, noted cfo Bob Ryder.  “Although the brewery expansion capex is higher than our original estimate, beer volumes and profits are also higher,” said Bob.  “Even with the higher capex spend, our goals of reaching $1 billion dollars in free cash flow in fiscal 2017” remains intact, he assured.  During Q&A he said to date, Constellation has spent $140 mil in capex on brewey so far, much of that in Q4. 

“Robust consumer demand” along with “strong sales execution” and “excellent” support from distribs helped drive beer divisions “amazing accomplishments” in fiscal 2014, said Rob.  Corona Extra did over 100 mil cases and outsold its nearest import competitor by 50 mil cases with depletions up nearly 4% and volume up around 2.5 mil cases.  Corona Light did 13.5 mil cases for yr, while Modelo Especial, its fastest growing brand had depletions gain “of nearly 20%,” added Rob.  Pacifico had its 3d straight yr of volume growth (+5%) while Negro Modelo was up 4^th straight yr (+4%). 

Corona Extra will be supported by a “120 Days of Summer” mkting campaign that will have 18 weekly themes as co’s goal “is to own summer” by continually driving repeat biz.  Corona Light draft program has now expanded to 100 distribs in 35 different mkts, and that effort will be supported by 15-sec spots airing during “high profile” sports programs, said Rob.  Modelo Especial Chelada has “significantly outpaced” co’s volume forecast in 6 mos so far.  

While BA director Paul Gatza included some key challenges to craft going forward, bulk of his and other BA leaders’ focus was celebration of good news that dominates craft landscape.  And much of that centered around “amazing, incredible” and otherwise positive growth and image enhancing role of craft brewers for beer. 

 “Craft is the story, and continues to be,” said Paul as “nearly all media” attention is on how “craft reshaping the perception of beer.”  Earlier in program Craft Beer Program Director Julia Herz pitched importance of coming American Craft Beer Week, noting that Google searches for “craft beer” hit 1.25 million last May, during  month of ACBW.  And graph of those monthly searches, with repeated spikes in May, have already almost reached that level in early 2014. 

Paul asked: “Is beer broken?” given that peak total shipments reached in 2008, 14 mil bbls higher than now (ex-FMBs).  And “it’s hard to see how light lagers will drive us back to those levels.”  But craft growing steadily at double digit rate on bigger and bigger base, brewpubs opened at triple digit pace in 2013, micros are growing share at faster rate than in past, increasing number of regional brewers are pushing past 50K, 100K and 200K bbls.  Then too, capacity expansions are keeping up with growth, as Paul and BA economist Bart Watson pointed out.  Bart estimated about 23.9 mil bbls of capacity available in 2013, compared to 20.7 mil bbls in 2012, +15%.  Net-net: “Beer is not broken.  It is evolving,” Paul concluded.

Bart reviewed previously reported 18% craft volume growth last yr within BA-defined segment of 15.6 mil bbls, with 2.3 mil bbl increase larger than any single craft player. 2014 total will be significantly higher with addition of Yuengling, other traditional brewers’ data added in, Bart reminded.  While openings running at 400+ last 2 yrs, number of closings (just 44 last yr) likely to rise as well, Bart said, a normal aspect of “rapidly maturing industry.”  Brewpubs tacked on 103K bbls, 12% last yr; micros +486K bbls, 25% (even with 22 micros jumping to regional status) and regional brewers up 1.73 mil bbls 17%.   

There are currently 1898 breweries in planning as of today, already up from 1744 at end of 2013.  In fact 4- 5000 breweries “could be our future,” Paul said.  A whopping 304 new micros opened vs just 20 closings.  Number of brewpubs up triple digits (109) compared to only 24 closings.  BA used to report per capita per brewer but now enuf #s to report breweries per capita.  National rate is 1.2 breweries per 100K adults age 21+.  But number is as high as 6.3 in Oreg, 5.3 in Mont.  So if US looked like Oreg, there’d be 5X as many breweries.  In 2013, 25 new breweries opened in Oreg, 21 in NC, 43 in Wash and 65 in Calif.

Key Trends Goin’ Forward  Paul listed number of key trends going forward: 1) accelerating growth; 2) a “longer fatter tail” of very small brewers; 3) lotsa openings on tap and with 7K wineries in US “easy to see” 4-5K brewers; 4) stylistic innovation will continue  given new hop varieties available.  Flavor- positive barley is plus too, and small hop growers, maltsters will provide more choice; 5) growlers gaining popularity; 6) more beer-food pairing on the way; 7) craft finding more occasions a bigger pool of drinkers and “winning on premise.”

Other reasons to be cheerful:

$1·         Large retailers “coming around” on need for craft in shelf sets as brewers get “more sophisticated” about making chain presentations.

$1·         Legislators recognize value of local craft. 

$1·         New states are discovering craft. Older perceptions that craft can’t sell where it’s really hot has “totally dissipated.  Craft goes in all weather.”

“Unfair beer franchise laws” topped Paul's list of concerns for the industry during general session, echoed repeatedly throughout morning program at CBC.  The BA generally and its leadership individually clearly dialing up focus on this issue.  BA chairman Gary Fish sounded theme in his comments, noting Steve Hindy’s recent NY Times op-ed “fully supported by BA.” He added that BA supports 3-tier system for big suppliers, but system “needs to evolve.”  Similarly, while craft brewers support 3-tier system and independent distribs, franchise laws “are not the 3-tier system,” Paul claimed, but instead a "construct," passed to protect distribs vs largest brewers. "Carve outs for unfair beer franchise laws" needed in many states and industry members that "obstruct" such carve outs may see "more dramatic changes" than if they choose to "negotiate" with state brewers guilds and other advocates.  Welcoming speech from BA prexy Charlie Papazian earlier in program hinted at these comments, listing "how to better protect yourself from unfair" laws or legislative action among topics for learning at CBC.  

Board member Dick Cantwell noted that some of "quirkiest, most onerous" laws govern beer in introducing recipient of FX Matt Defense of Industry Award, Jester King Brewery.  "Weathered," donning "scars," "craft brewers are the type to fight back."  Accepting award for Jester King, Ron Extract celebrated changing of "unjust and antiquated laws that were on the books in Texas," overturned by 2011 court ruling.  Though that court ruling and subsequent legislative changes in Texas supported by some state wholesalers, others continue to lobby against small brewers.  Further, "many" small brewers "continue to sign on with" those distribs that lobby against small brewer interests.  So "please call them out, hold them accountable for the decisions they make....  Please consider where your distributors stand on these issues" and "what associations they belong to" when making these choices.  

Amidst celebration of new all-time highs reached by craft biz in 2013, BA director Paul Gatza once again insisted on importance of craft brewers maintaining “quality” to keep momentum going.  Indeed, “quality” was 3 of his top 7 challenges going forward.  At “top end” of craft, quality “continues to improve,” Paul acknowledged.  But “some quality cracks” showing up among new brewers, said Paul.  After recent visits to 10 new craft brewers, Paul found 7-8 “needed improvement.”  Those brewers thought their beers were “great, awesome.  But the truth is: they [were] not.”  All brewers need to track quality, invest in lab services and or build their own, Paul advised.  Many craft brewers have spent large portion of their lives to assure quality beer, he pointed out, “so seriously, don’t $%&# it up.”  This yr’s brewing innovation award winner, Stone’s Mitch Steele, picked up on Paul’s plea.  Addressing newbies: “If you’re opening a brewery, please for god’s sake hire someone who knows what they’re doing to brew the beer.”  Nuff said.  

Constellation Brands reported another bang up qtr for its beer division this morn (formerly known as Crown imports).  Revs up 13% for 3 mos thru Feb.  Beer shipments up 9.9% in qtr, but depletions up 11.6%, reported RBS analyst Nik Modi.  Wow!  And so rev per bbl up 3.3% for qtr.  

Beer division revs up 10% for full yr to $2.835 bil, reported Constellation with depletions up 8% (and double digits last 6 mos).    Constellation earned $773 mil on beer last yr, up 73%, including “100% of Crown’s operating income for the entire year and brewery profits since the date of acquisition in June 2013.” Beer operating margin at a strong 33.5% in 4th qtr. 

Constellation expects solid beer volume and big beer earnings growth in fiscal 2015 that began Mar.  Targets “mid to high single digit net sales growth for the beer segment” (that would be slowdown from trends in past 6 mos).  And expects “beer segment operating income to grow in the low-to-mid 20 percent range.”  Excluding benefit from acquiring brewery, Constellation expects underlying beer oper income to be up 10-12%. 

Strong as Constellation’s growth and earnings expectations are for beer segment, high costs associated with getting there.  Deal for Piedras Negras brewery cost  $5.3 bil including higher-than-expected $558 mil post-closing purchase price adjustment. And Constellation has also revised upwards how much it will spend to build out brewery.  Now sez  it expects total expansion investment “to be in the range” of $900 mil to $1.1 bil and “we remain confident” brewery expansion will be completed in calendar 2016.  

To stay on top of trend towards beer’s rapidly growing high end, you won't want to miss the 2014 Beer INSIGHTS Spring Conference at the Ritz Carlton in Chicago. The program features an interview with the industry's current growth leaders: Crown prexy Bill Hackett and Boston Beer founder Jim Koch, moderated by BMI prexy Benj Steinman.  The hottest craft brewer of recent yrs, Lagunitas founder Tony McGee will also join us for another candid conversation.  Consultant Mike Mazzoni will be sure to shake things up in his provocative industry analysis.  We’ll have a panel with a handful of fast-rising craft brewers: Allagash founder Rob Tod, Ninkasi ceo Nikos Ridge, Odell ceo Wynne Odell and Devils Backbone founder Steve Crandall. That will be moderated by consultant Bump Williams. Also on our program: new Heineken USA chief mktg officer Nuno Telles and MillerCoors innovation veep David Kroll on a panel about innovation. More speakers to come. Per usual, BMI's Benj Steinman will present an overview of the segment, with plenty of numbers and insights. For more info, click here. To register, click here.