With total industry down 1.3% and top 2 (about ¾ of biz) down double that rate, it's become even more difficult for mid-sized players that aren't craft. Pabst, NAB and DGUSA each had challenging yr in 2013. Collectively, those 3 suppliers shipped 10.75 mil bbls of beer, a little over 5% of US biz. They lost ½ mil bbls, 4% between 'em, including DGUSA drop of 8%. Probably not coincidence that they were 3 of 4 top 10 suppliers that announced change at top of org in last 12 mos (Mark Anthony the other and only 1 that grew). Incredibly, with recently announced departure of Kevin McAdams, he's 2d Pabst prexy to leave in last 12 mos. Kevin earned distribs' respect in short 5 mos he was prexy. This has gotta be some kind of record: next prexy will be 5th in 4 yrs of Metropoulos era.

Is Metropoulos era coming to an end? Sure seems like. Pabst on block, say several sources. Pabst reportedly has headhunters telling prospective candidates for ceo that there will be a "liquidity event" coming soon. But who would be buyer? While some view MC as perhaps most logical because it already does contract production, would MC want to buy those brands? At what price? Tho they don't quite openly say so, execs and Metropoulos family come close to acknowledging that sale coming, tho they also talk vaguely of partnerships and even acquisitions (none in 3.5 yrs Metropoulos & Co has owned Pabst).

"One area of focus will be to review strategic opportunities for Pabst," said Metropoulos family in letter to distribs, "including accretive acquisitions and financial alternatives." Many distribs interpreted "review strategic opportunities" as code words meaning it's for sale. Metropoulos & Co "has decided to focus on the core of our private equity acquisition business," i.e. dealmaking and so family is reducing daily role at Pabst. This is a long way from "long-term" claims that Metropoulos & Co made when it bought co, assertion that it would double in 5 yrs made in 2011, or even "very hands on" approach, Dean attested to last summer. Metropoulos & Co has seemingly moved on, preoccupied by other big deals like Hostess and EPAQ, plus others in works.

North American Breweries down 4.6% in 2013, including double digit decline in craft portfolio, yet it just finished surprisingly upbeat meeting with distribs in Costa Rica. That's home of new owner FIFCO, a $1.1 bil in revs public co there. FIFCO stock up 95% in 2013. And tho NAB deal highly leveraged ("close to 7 times," wrote Moody's as it said NAB outlook "negative" last summer), total FIFCO reportedly in fine financial shape. Distribs liked tone and at least some of plans. Calling 2013 a "year of transition," charismatic ceo Ramon Mendiola said "clock is ticking" on its "strategic plan" to double in 3-5 yrs (including acquisitions). Now it's 2-4 yrs and "we remain committed." NAB prexy Rich Lozyniak will be departing after good run building co that KPS sold to FIFCO and tuff 2013. Makes next NAB prexy hire crucial to FIFCO plans. NAB's next moves bear watching.

Of the 3 cos, Diageo Guinness USA had biggest loss. DGUSA volume down 8% and revs down 10% for 6 mos thru Dec, Diageo recently reported. INSIGHTS figures DGUSA fell 8% for full yr 2013. Diageo Guinness USA has lost 900,000 bbls, 28% of its volume in last 7 yrs. And prexy Tom Looney is 4th in last 6 yrs. Most of that drop in FMBs where it has faced increasing challenges, first from Mike's and Boston Beer, more recently from AB and MC, plus pouches flop. But DGUSA beer brands ain't that healthy either with volume down 3% for 6 mos thru Dec and Guinness about flat, with big mktg hike. Even Guinness is increasingly under pressure on-premise from craft stouts like Left Hand Milk Nitro Stout and others. Tho DGUSA dropped over the yrs, its parent co Diageo has had great run in spirits biz. While Pabst for sale, NAB looking to buy, some suggest DGUSA brands would be better off handled by another co more focused on beer biz. But Diageo has no need to sell and remains committed to total bev alc approach. Last summer, Diageo North America prexy Larry Schwartz said: "I think we'll figure beer out this year." Not yet.  

If beer glass half-empty right now, spirits glass more than half-full. That's clear from looking not only at recent volume and $$ trends, but also from demographic, policy and other angles. Spirits enjoying tailwinds while beer facing headwinds. Look at the numbers. Spirits volume up 1.9% in 2013 to 206 mil 9-liter cases, Distilled Spirits Council estimates, while supplier dollar sales up 4.4% to $22.2 bil. Corresponding trends for beer: volume -1.3%, supplier $$ +2.1% to $31 bil. (DISCUS estimates/reports gross $$ sales for suppliers of each alc bev; it does not make public its volume estimates for each bev. Table below includes our volume estimates.) Spirits have enjoyed at least a decade of success, numbers show. Indeed, spirits volume outperformed beer each of last 10 yrs and distillers outperformed in $$ sales every yr except 2008-2009 during worst of recession when distiller prices flat or down. As result, spirits built share of $$ and volume, gaining 4-5 points of each over the decade, while beer lost 5.5-6.5 points of each (wine outperformed beer too).

Why is share of alc bev so important? Overall alc bev volume changes little in US. One share of volume is 4 mil bbls of beer, we estimate. Then too, one share of supplier $$ is about $640 mil, DISCUS sez. As numerous beer execs have acknowledged, spirits have won occasions from beer, especially with millennials, multicultural drinkers. Demographic data shows only 33% of female adults drink beer, vs 42% who drink spirits, 36% who drink wine. Half of 21-24 yr-olds drink liquor vs 45.7% for beer. Hispanic and Asian consumers more likely to drink beer than spirits, but 43% of African Americans drink spirits vs 35% who drink beer, according to 2012 data from Mediamark. DISCUS attributes spirits growth last yr to: "whiskey renaissance"; premiumization (highest end spirits segments up double-digits, premium up low-singles, value brands declined); innovation (especially flavors, near 30% of liquor biz vs under 5% for beer); increasing access (Sunday Sales, more wet communities, expanded tastings); "hospitality tax restraint". Asked specifically why spirits outperforming beer, DISCUS prexy Peter Cressy said efforts to promote spirits originally "came out of a more Prohibitionist base than beer and we're still working our way out." Importantly, "cultural acceptance has been the main baseline foundational effort" at DISCUS for over a decade, to increase access, get more stores open in control states, etc. Beer has "never emphasized tastings," Peter added, wine and spirits have. "If you want growth on the revenue side, if you want consumers to buy up, you have to give them a taste." Then too, DISCUS member companies have picked up their mktg and ad efforts. "They know what they're doing," said Peter.

Take another look at premiumization and how it's boosting spirits. Above premium segments in spirits ($18/bottle and up), have 27.1 share of volume, up 6-7% last yr. High end revs already near-50 share in spirits, and up 8% last yr. In beer, above premium has very similar 26 share of volume, far lower 36 share of $$ and growing faster, up double digits. Big difference: big spirits players play more successfully in high end than big US brewers. Is that oppy for beer/big brewers or challenge to overall growth? Both?

So, distillers have tailwinds: sales momentum, better big brand health (as we noted last issue), continued growth in premium segment along with trade-up, increasing access, demographic advantages, ongoing innovation and more. Meanwhile, brewers, especially AB and MC, face heavy headwinds. We've noted them over last few yrs, but perhaps best put in recent letter to clients by consultant Bump Williams. Indeed, he listed no fewer than 17 significant ongoing challenges that he believes will lead to flat yr "at best" for beer in 2014. Included: 1) continued big brand declines, especially on-premise; 2) status quo of CatMan practices discourage needed change; 3) aggressiveness of liquor/wine mktg and their success with women; 4) higher ABV beers reduce consumption; 5) fewer purchase occasions for mainstream beer; 6) liquor-oriented AB/MC brands (Rita, Fortune); 7) distribs' dissatisfaction with big brands and search for alternatives; 8)ineffective ads; 9) infighting between brewers and tiers; 10) legal/legislative issue sapping focus on sales; 11) win-lose mentality between competitors that hurts overall beer.  

Hard to find much silver lining in cloud over on-premise beer biz in 2013. Beer took a 4% volume hit and $$ down 0.7% in channel that's still about 18 share of all beer sold, (but a much higher share of $$ and key sampling ground), GuestMetrics data shows. Analysis includes casual, fine dining restaurants and bars/clubs, approx 4,300 outlets, over $10 bil in food/bev sales annually. Spirits biz not much better; volume -2.6%, $$ +1%. Wine volume -0.5%, $$ sales +1.1%. So spirits/wine split beer's 0.4-0.5 share losses. Beer did better in fine dining outlets, down just 0.8%. But volume in casual dining and bars/clubs down 4.5% and 5.1% respectively. Segment-wise, pain felt virtually across the board too, but especially acute for premium light (volume down 10.9%) and premium regular (-7.4%). Imports took nasty 6.1% knock too. Even craft up just 3.8% on premise, tho $$ up 7%. But craft jumped to 28.5 share of volume on premise, passing premium lights. Craft grabbed just under 1/3 of dollar sales. Premium lights still 26.4 share of volume but dipped below 22 share of $$. That's right. Craft collectively far more important than premium lights on premise, according to GuestMetric data. Cider up nearly 50%, at 1 share.

AB and MC trends much worse on premise than off- and overall. Each down about 8% (compared to 2.5-3% overall). AB slipped to 25 share (vs still nearly 60 share in c-stores), MC to 18.6. Top 2 under 44 share of on-premise volume. Even Crown off slightly on premise, tho just 1% and gained 0.2 share to 5.6. Heineken USA took same 8% hit as top 2. Also down: Diageo Guinness USA, Yuengling, Pabst, New Belgium. Of top players, only Boston up: +8%, gaining 0.3 share to 2.9, with Angry Orchard alone +0.3 share. Only other player to gain 0.2 share: fast-growin' Lagunitas.

Big brewers took hardest hits on biggest brands, with 3 of top 4 down double digits: Bud Light -10.6%, Miller Lite -13.9% and Bud -11.5%. Coors Light not much better, -7.3%. Those 4 brands lost 2.1 share on premise, slipping to collective 28.5. (They have over 40 share overall.) Here's another measure of their loss. Combined, $$ sales per point of distribution declined by over $5,000, 7.5%. No surprise then, that each also lost at least a half-point of distribution across these locations. Meanwhile, 2 brands gained about $1,200 each in sales per point of distribution: Lagunitas IPA and Angry Orchard, +18.2% and +29% respectively.

Corona Extra, Blue Moon and Stella (each has higher share than Bud on premise) off low single digits; each gained 0.1 share. Michelob Ultra and Yuengling down 3-5%, held share. Number 10 brand, Dos Equis, was only gainer among top 10: +4.4%. Indeed, only other top-20 brand that gained was Corona Light, eking out 0.5% increase. Collectively, top 40 brands down 6.6% reports GuestMetrics. Remaining 12K+ brands up 0.5%.  

We don't like bein' bad news bears at BMI; we'd love to report more good news. But even with continued trade-up trend and solid profits (for most), hard to deny that at least right now, challenges overshadow blue skies. This issue focuses on some of those challenges: 1) a very difficult yr in 2013 on-premise, especially for big brewers/brands; 2) spirits continue to outperform beer across broad range of biz, consumer, policy issues; 3) several mid-sized non-craft suppliers struggled last yr; 4) importance and challenge of AB turning top-brand trends. Meanwhile, early reads on 2014 biz very mixed, mostly not-so-hot. Nielsen reported 0.5% volume drop across off-premise channels for 4 wks thru Jan 25; IRI said volume up 4% for 4 wks thru Jan 26. Hard to tell what's goin' on with that disconnect. GuestMetrics data suggest on-premise trends got even worse, down 7.4% for 4 wks thru Jan 26. Most of what we heard from distribs supports soft Jan except some pockets. Imports up 12% in Q4 2013, closing yr off just 0.7%. But that was all Mexican gain. For full yr, Mex shipments up 700,000 bbls, 4.6%. Shipments from every other top-10 source country declined. Shipments countries other than Mexico down 900,000 bbls, 7%.  

While “a bad habit and a vice,” marijuana is less dangerous than alcohol “in terms of its impact on the individual consumer,” President Obama told the New Yorker, part of a long, wide-ranging article about the President that appeared over the weekend.  “I’ve told my daughters I think it’s a bad idea, a waste of time, not very healthy,” the President said, but also that “I don’t think it is more dangerous than alcohol.”  Not shying away from the complexity of marijuana legalization, the President dug into both class and race issues during the interview, arguing that “we should not be locking up kids or individual users for long stretches of jail time when some of the folks who are writing those laws have probably done the same thing.”  He also acknowledges that anyone who claims “legalizing marijuana is a panacea...are probably overstating the case.”  Further, “there are some difficult line-drawing issues” with drug policy, since “when it comes to harder drugs, the harm done to the user is profound and the social costs are profound.”  So, “there is a lot of hair on that policy,” a comment that calls back to an earlier comment about “the messiness of getting something done,” and that “if you’re doing big, hard things, then there is going to be some hair on it--there’s going to be some aspects of it that aren’t clean and neat and immediately elicit applause from everybody.”  

Elsewhere, Washington state’s Attorney General issued opinion that local municipalities still have the right to institute bans on marijuana growing, distribution and sales, according to the Yakima Herald-Republic.  The AG’s opinion is not binding in court, but does provide communities resistant to allowing marijuana sales, mostly in the eastern, typically more conservative parts of the state, some flexibility.  Wash’s Liquor Control Board, tasked with regulating pot in the state, expressed its concern that local bans could “impact public safety by allowing the current illicit market to continue.”  The LCB reminds that it would “also reduce the state’s expectations for revenue.”  

AB announced deal to buy Oriental Brewery from KKR today for $5.8 bil and 11x EBITDA, expected to close this spring (that’s over $1 bil higher than advance chatter on Friday).  Purchase price about triple what ABI sold it for in 2008.  KKR has grown this biz dramatically, gaining more than 10 share points (from 39 to 51 mkt share,  sez Bernstein Research), and doubling EBITDA to $500 mil, growing earnings 20% per yr, sez WSJ.  Korea’s beer mkt growing 2% per yr in recent yrs, according to ABI and is expected to grow 13% from 2012-2022.  The multiple of earnings was predetermined based on agreement ABI had with KKR back in 2009.  As result of deal, even tho “this transaction does not represent a material increase in leverage,” ABI “now expects to achieve” targeted net debt to EBITDA ratio of 2.0x “after the end of 2014.”

“At first sight it looks very strange to sell a business and then buy it back five years later for three times as much,” said Bernstein’s Trevor Sterling “and it certainly has been a brilliant deal for KKR,” he added. But the 11x ABI is paying “looks reasonable for a business, whose core market is growing modestly.”  The Economist says deal suggests several things “none of which reflects well on ABI bosses.  The first is that they sold Oriental for too little in 2009…. The second is that there were lots of obvious things Oriental’s owners could do to boost profits, which ABI didn’t do prior to 2009…. The third is that private equity buyers with no real brewing experience can do at least as good a job as ABI when it comes to running a beer business.”  ABI said mgt team at Oriental “has done a tremendous job of growing the business over the last few years.”  

Govt’s consumer price index for beer beat inflation in 2013.  CPI for beer increased 1.7% last yr, down from 1.8% gain in 2012, but that was higher than 1.5% increase for inflation (govt’s “all items” index).  Wine prices finished 2013 flat after being down each of the previous 3 years.  CPI for spirits increased 1.1% last year after finishing 2012 flat and up just 0.1% in 2011.  Since 2010, CPI for beer has gone up 5% compared to a 6.8% gain for general inflation, while wine prices were off 0.3% and spirits up 1.2%.  

Teasers for new Bud Light campaign appeared on NFC and AFC conference championship games yesterday, including several celebs such as Arnold Schwarzenegger, Don Cheadle and comedian/musician Reggie Watts.  These teaser ads generated lotsa followup articles and are designed to create buzz and anticipation. “Our six Super Bowl ad teasers give viewers a peek behind the curtain, but fans will have to tune-in during the game to see how these seemingly unrelated events form one cohesive story,” said AB veep Rob McCarthy.  Arnold got $3 mil for his participation, according to NY Post.  “Is he worth it?” asked Ad Age. “You be the judge.”  Click here for the teasers.  

As craft continues its crazy ascent, more and more craft brewers are beginning to get a little heft on ’em.  Last yr, 4 craft brewers, Brooklyn, Stone, Dogfish and Harpoon, jumped over 200,000 bbls for 1^st time.  Brooklyn shot up 23%, 40,000 bbls to 216,000 bbls, turbocharged by strong export growth.  Stone up 36,000 bbls, 20% to 213,000 bbls.  Harpoon up 6% to 205,000 bbls.  And Dogfish Head jumped 17% to 202,000 bbls.  That makes 12 BA-defined craft brewers over 200,000 bbls, an increase of 50% (from 8) in 1 yr.  INSIGHTS also includes Craft Brew Alliance and Magic Hat/Pyramid.  Wasn’t too long ago (2009) that there were only about a dozen craft brewers that sold more than 100,000 bbls. Back then we dubbed it the 100,000 bbl club.  Now there are about 30 craft brewers over 100,000 bbls.  More details in our Craft Brew News later this week. 

Final figures not in, but based on current estimates, it appears beer’s share of absolute alcohol consumed in US slipped below 51 in 2013 for first time since early 80s.  That’s down another half-share or so, down 5 points since 2005 and 8 points from 58.8 in 2001.  In mid-90s, before spirits growth returned, beer had reached just under 60 share of all alcohol consumed in US, having grown from 50 share in 1980.  Loss in 2013 came as US beer shipments down about 1.4%, again depending on Dec taxpaids and imports still to be reported.  Meanwhile, spirits slowed to 1.3% growth last yr, estimates Impact Databank, down from 3%+ gains in 2011 and 2012.  And wine volume up just 1.5%, also via Impact.  But those modest gains enough to take more share.  Spirits now fully 1/3 of absolute alcohol consumed in US, wine just below 16 share, we estimate.  Why does share of absolute alcohol figure matter?  Given that overall alcohol consumption in US doesn’t change much, 1 point of share means almost 4 mil bbls.  DISCUS will announce its estimates of spirits biz and comparative share of supplier $$ in a coupla weeks and we’ll put finer point on volume shares when all final figures in.