Beer Marketer's Insights
After a slow start, deal pace has picked up, at least in AB system, with 3 separate deals emerging in last mo or so. That's 7 AB transactions we've tracked this yr, with at least several more in works. So it will be a normal yr in AB system of 10-12 deals, if not more than that, tho most likely not the 20+ of last yr. Increasingly, we hear of smaller AB distribs selling out, or wanting to. Each of these 3 deals is some version of that.
River North in Chicago, owned by Yusef Jackson, has agreed to sell its 3.5-mil-case AB and craft distrib to BDT Capital by yrend for around $50 mil. BDT purchase quite possibly in tandem with JR Hand of Tennessee (see below). BDT Capital is investment firm that owns 70% of 17-mil-case City Bev, mostly in Chi metro area. AB owns other 30%, but must sell by end of 2014. BDT not an operating co, so it will need an operating partner.
Several media reports have JR Hand in deal with BDT Capital. JR Hand, 32, and his Hand Family Cos have been negotiating with AB to acquire that 30% stake. At presstime, informed sources say that discussions ongoing, but deal not yet done. Hand Family Cos have 14-15 mil cases in Tenn/Ky. BDT Capital would like to get lots bigger in beer, and is reportedly ready to deploy $500 mil or more. This sets stage for 20+ mil case AB distrib, finally uniting AB distrib network in Chicagoland. But presuming this partnership with JR Hand comes to fruition, also sets stage for other lotsa other potential deals.
Meanwhile Virginia Eagle buying Guiffre Dist in Springfield, Va. Guiffre around 3 mil cases. This is 4th deal for Virginia Eagle in last 4 yrs, and will put it around 11 mil cases in Va. Va Eagle had previously bought Sieg, BJ Sager and L.E. Lichford. Owner Kenny Wheeler has another distrib in West Memphis, Ark. And in Kans, Schatz about a 1 mil case distrib in Kansas City, Kans selling to O'Malley, which will now be right around 4 mil cases, with operations in St Jo, Missouri and Lawrence, Kans. Deal expected to close by yearend. Owners of Guiffre and Schatz, Mike Guiffre and Pat Scherzer, are 4th generation owners. These deals first reported in our INSIGHTS Express.
MC system has been much quieter. But things could pick up in not too distant future. In Q4 2013, deal environment suddenly getting mighty interesting again.
MC still has many organizational issues and most distribs and outside observers still believe it has yet to really develop a MillerCoors corporate culture. That's over 5 yrs in. Recall, there are still 2 ordering systems and 2 pricing systems Over a yr ago, MC embarked on its "business transformation initiative," spending millions with Boston Consulting Group. But this is not that, sez MC. Biz "transformation" is ongoing process. BCG and other consultants all agree that MC's biz too complex. So one has to assume this latest restructuring is just a start.
MC's senior leadership team has been relatively stable through much of company's existence, but underneath there's been lots of turbulence. Key members of the team have often been at odds, as we've heard many times, tho apparently they aligned behind current restructuring. During exit interviews and afterwards, INSIGHTS understands, exiting employees often questioned why they were let go tho sr mgt seemingly not held as accountable for MC's soft sales.
MC's JV structure also remains a problem. The 2 partners in the JV SABMiller and Molson Coors now dislike each other, we hear. "One partner says left, the ceo says right and the other partner says do nothing." That's how someone recently described MC's decision-making process. It's almost as if they are each waiting the other one out, as they'd each like to buy the other's stake. SABMiller would be most likely buyer of Molson Coors if the families ever decided they wanted to exit. On other hand, on Oct 28, Reuters flagged recent pickup in rumblings of ABI buying SABMiller, dubbed by one banker as "a matter of if not when." If ABI were to acquire SABMiller, it would have to divest SAB's 58% stake in MC, and Molson Coors would be in the best position to buy, since it already has 50% voting rights. And probably at a reduced price. Hanging on for that scenario is one of TAP's strategic reasons for being, sez a financial source.
Despite soft volume, notable optimism about US biz going forward from AB InBev ceo Brito on ABI Q3 conference call. While acknowledging string of short-term pressures on US beer consumers -- payroll taxes, unemployment, govt shutdown, health care, etc -- Brito said a coupla times that ABI "bullish" on "long term growth potential" here. Revealingly too, Brito stressed his belief that pressures on critical premium light biz here are "not long term." ABI has "plans in place" to drive Bud Light, maintains goal of building its volume and share of segment, share up in Q3 despite -3.3% sales-to-retailers trend, via "sharpened" brand positioning, new agency, "leveraging major properties" (i.e. NFL) and packaging innovations.
Then too, Bud Light brand extensions "very successful" (Ritas grabbed 0.8 share in Q3), Brito noted, and Cran-Brrr-Rita about to hit mkt. US innovation pipeline continues to be "healthy," tho Brito noted scope of innovation has to be "broader," including packaging and mktg efforts as well as liquid. Finally, Brito sees "big opportunities" on premise, admittedly harder hit right now. (Down 5% in Q3, sez GuestMetrics, including double-digit drop for premium lights). AB "hasn't focused so much in the past," on premise, he noted, but even if channel is under pressure "we want to be more active in that segment."
Two reasons to be cheerful for ABI amidst lingering volume softness in key mkts (except China): continued solid rev per bbl increases and faster-than-expected cost savings from Modelo, big boost to margins in Q3. In US, rev/bbl +3.2% in Q3, with 1 point from mix, and full impact of price increase not felt. That's expected to net out to 3%, "slightly higher than last year," as some hikes pushed to Nov, which will help Oct volume, ABI said.
ABI North American Earnings Up Slightly; 2/3 of US Profit Pool In US, EBITDA margin up 80 basis pts, as in Q2. North American EBITDA up 2.4% in Q3. That put it up 0.9% for 9 mos to $5.2 bil. Oper income at $4.6 bil. Last yr, AB had $5.1 bil of oper income in US. That's an estimated 69% of total $7.4 bil US profit pool, sez Bernstein's Global Beer Guide (INSIGHTS thinks total US profits slightly higher but AB still around 2/3). In any case, AB made $3.73 oper profit per case in 2012. Operating profit per case up 9% in 2011-2012, even while volume down. Operating profit per case up in 2013 too.
Globally, ABI beer volume down 1.4%, including losses in US, Brazil and Mexico. But avg rev/bbl +4.2% in Q3, (+5.1% for 9 mos!). Costs dipped slightly, overall and per bbl. So global EBITDA jumped 10.5% in Q3 to $4.7 bil and margin expanded nearly 3 full pts to 39.8. ABI already booked synergies of $325 mil from Modelo deal; maintains final expectation of $1 bil, tho Stifel's Mark Swartzberg estimates $1.4 bil.
US Volume Improvements But Steeper AB Share Loss Over Summer AB also sees overall US volume trends improving. From STR decline of -4.1% in Feb, that climbed to just -0.3% in Aug before slipping back to estimated -0.7% in Sep-Oct. Like MC, AB put up slightly better Q3 numbers than in Q2. Selling-day adjusted depletions -2.7%, vs -3.6% in Q2. That improved yr-to-date depletions trend a half-point to -3.3%, almost exactly the same as MC's -3.2%. All in, AB figures it dipped 0.8 share of depletions in Q3: 0.25 from Bud Light family, 0.35 from subpremiums, a "marginal loss" from Bud family tho Bud brand "continues to improve," and high end brands gained share. Price gap between premiums and subpremiums now at about 23%, said cfo Felipe Dutra, narrowed from 30%. "Ideal level" is still 15%, he said, but "this cannot be achieved in one shot." Mich Ultra now in top 10 in IRI, Brito noted, with just over 2 share (edged Miller High Life YTD thru Oct 6). Stella up high-singles and Goose "one of fastest-growing craft brands" in US. With shift of some volume to Oct, AB expects that share loss in US thru Oct will be closer to 0.45 for 10 mos, similar to 6-mo trend.
AB shipments trend -1.9% in Q3, similar to -1.7% drop in Q2, tho depletions a bit softer, -2.7%. For 9 mos, AB shipments down 2.15 mil bbls, nearly 3%. MillerCoors followed its biggest-ever shipments drop in Q2 with more modest 230,000-bbl, 1.5% decline in Q3. Depletions down 1.9% for the qtr. For 9 mos, MC shipments down 1.45 mil bbls, 3.2%. AB and MC each looking a lot more like 2010-2011 than last yr. Each down about 3% for 9 mos, slightly better for 12 mos. Those trends suggest share losses of 0.6 for AB, 0.4 for MC so far this yr. That's about 4 share off AB's peak in US, 2.5 share off MC's peak.
| Shipments (000) | Chg | Shipments (000) | Chg | Bbls (000) | Chg | |||||
| 3d 13 | 3d 12 | bbls | % | 9mos13 | 9mos12 | bbls | % | 12mos13 | % | |
| AB | 26,100 | 26,610 | -510 | -1.9 | 74,280 | 76,430 | -2,150 | -2.8 | 97,000 | -1.6 |
| MillerCoors | 15,045 | 15,275 | -230 | -1.5 | 44,055 | 45,505 | -1,450 | -3.2 | 57,500 | -2.7 |
| Crown | 3,710 | 3,390 | 320 | 9.4 | 10,170 | 9,667 | 503 | 5.2 | 12,805 | 3.8 |
| HUSA | 2,220 | 2,220 | 0 | 0.0 | 6,470 | 6,595 | -125 | -1.9 | 8,335 | -1.0 |
| Pabst | 1,675 | 1,675 | 0 | 0.0 | 4,650 | 4,700 | -50 | -1.1 | 5,950 | 0.7 |
| Others | 7,760 | 7,584 | 176 | 2.3 | 23,487 | 22,998 | 489 | 2.1 | 29,603 | 1.3 |
| Total | 56,510 | 56,754 | -244 | -0.4 | 163,112 | 165,895 | -2,783 | -1.7 | 211,193 | -1.1 |
| (Taxfree) | 1,300 | 1,293 | 7 | 0.5 | 3,745 | 3,713 | 32 | 0.9 | 5,112 | 3.5 |
| US Total | 55,210 | 55,461 | -251 | -0.5 | 159,367 | 162,182 | -2,815 | -1.7 | 206,081 | -1.2 |
| All brewer figures are BMI estimates of shipments, including tax-free. | ||||||||||
Boston reported monster 223,000-bbl, 29% shipments gain in Q3, including a bunch of cider (which isn't in overall beer shipments). For 9 mos, Boston shipments up about 460,000 bbls, 23%, again including cider. How lopsided has 2013 been so far? While AB/MC combined to shed 3.6 mil bbls Jan-Sep, Crown and Boston collectively gained near 1 mil bbls. Meanwhile, many other craft brewers growing at mid-teens segment trend or better. Yuengling numbers improving in 2d half, but still down almost 4% for 9 mos. Mike's Hard up slightly for 9 mos, having great Q4 so far and expects 7% gain to near 1.5 mil bbls for the yr. Off-premise scan data shows both NAB and Diageo-Guinness off about 8% thru early Oct. Net-net: 7 of top-10 suppliers flat or down yr-to-date, a near reversal of 2012 when 8 of top 10 gained bbls.
The world's biggest retailer will have revs of roughly $475 billion in current fiscal yr and it wants to double in beer sales by 2016. That will change beer landscape, no doubt. Many in beer biz embraced this with open arms. At NBWA's recent convention, Walmart's chief mktg officer Duncan McNaughton gave rousing remarks; he sees doubling as "lay up" and "getting the low fruit." Elsewhere, Heineken USA said its sales up 30% in Walmart, its #1 customer, gaining near 1 mil cases there this yr alone, even while Heineken down slightly overall. MC up at a double digit rate in Walmart, tho down 3% overall. Indeed, 4 of top 10 beer suppliers doubled at Walmart in last 2 yrs, Duncan said. On NBWA panel, HUSA prexy Dolf van den Brink said it's "great to see a major retailer leaning forward into beer" and MC ceo Tom Long said "Walmart is good for beer." Even Dogfish Head founder (and Brewers Assn chairman) Sam Calagione seemed excited about prospect of Walmart selling more craft beer. Top beer industry execs were basking in the glow. This is great, right?
Well, maybe not entirely. Will Walmart grow overall biz or just be taking from other retailers? More importantly, at what price? Walmart is of course famous for low prices above all and also for squeezing suppliers to get them. A "rare glimpse of Walmart's pricing strategy" in Bloomberg recently found its "markup on a 36-pack of Coors Light to be just 0.6%." Yikes! Walmart is using beer as a loss leader to build traffic. That's not a new tactic. Walmart's own struggles are important backdrop for its big beer push. Here's retail consultant Burt Flickinger on Walmart this summer: "Same store sales are down three of the last five years [and] leadership is cutting costs rather than driving demand."
Last week, Walmart held annual analyst day in Bentonville, where it "blamed the slow category growth in CPG… for much of its topline woes in the US," wrote Bernstein's Trevor Stirling. "The company is focused on increasing its share of those categories, particularly where Walmart does not see category growth returning," he noted. To get more share, Walmart "has committed to even more aggressive pricing on many categories, notably beer, fresh foods and paper products," added Trevor. It's investing too, having recently doubled number of alc bev buyers. But one byproduct of Walmart getting bigger in beer category is a hit to margin, noted one source who has experienced it.
After Constellation/Crown results came out, ISI Group analyst Robert Ottenstein did deep dive with execs and reported a number of factors that point to "opportunity for significant value creation" going forward. Many, tho not all, linked to Crown volume and margin "upside." For example, Robert "bullish" on Crown's draft oppy, which brings "similar" margins as glass, but "enhances visibility and customer options." Higher margin can biz is also oppy across portfolio. Only 20% of Crown biz in cans now vs 50-55% industry-wide.
Pricing is "looking solid," in Robert's view. He expects 2-2.5% increase this fiscal yr, same as last yr, as Crown "now increasing price broadly on Corona Extra for the first time in 4 years." Yet Crown intends to remain a "follower" and maintain $8-10 price gap with premiums. (In IRI scans, avg Corona case price approx $9.75 above Bud Light.) Crown "not worried" about 20-25% of its volume going thru AB distribs "given their independence and profitability" of the brands. Additional mktg investment from distribs -- nickel/case in 2013, another two cents in each of 2014 and 2015 -- is "all incremental and cumulative." Add it all up and mgmt "confident" it can expand margins 4-5 pts from pricing, plant efficiency, reduced freight, purchasing scale and more. In addition to new beer brand oppys, Robert sees other potential positives: acquisition of high-end tequila as "complement to Mexican focused beer portfolio," some "tuck-in wine deals," wine-beer synergies including co-purchasing of pkgng and media, "increased clout at retailers for shelf placement" and large promos like Thanksgiving promo for wine/beer/ turkey on tap at "a number of the largest national retailers." Meanwhile, Corona Extra had "best summer" since JV formed, depletions up 4-5%, as was Corona Light, Rob Sands said on call. Modelo Especial posted 17% gain in Q2, and has plenty of draft/distribution oppys, cfo Bob Ryder pointed out.
Miller legacy brands remain a big part of the problem, especially Miller Lite. Lite down mid-single digits in 3d qtr (and that's an improvement). Miller Lite dropped 3.6 mil bbls, 19.6% 2007-2012. It could be down nearly 1 mil bbls this yr. So it alone accounts for more than half of MC's total dropoff. Gen Draft lost over half its volume last 5 yrs. Down 1.8 mil bbls, 56%. Down double digits again this yr. High Life dropped 575,000 bbls, 11% since 2007. And it's off high-singles in 2013. Those 3 brands alone dropped 6 mil bbls in 5 yrs. Yet they still account for 20 mil bbls, 35% of MC biz. Their trends and that of other Miller legacy brands have gotten worse in 2013.
MillerCoors scan data trends are also revealing. MC down only 1.4% yr-to-date thru Oct 5 in Nielsen all-channel data. That's almost 2 points better than MC's all-channel trend thru Sep 30, so its on-premise biz likely very hard hit. While Nielsen trends are good directional indicators, they are clearly better than MC doing overall. MC has 6 focus brands. Only 1 is growing: Blue Moon, where franchise up 10% yr-to-date. Coors Light is essentially flat in these channels, up 0.3% (tho down 1.6% last 4 weeks). But the other brands are really soft: Keystone Light -6.6%, GD 64 -12.7%, High Life down 7.8% and Miller Lite down 5.7%. A few bright spots: Redd's is a solid success with mkt share still climbing. Up to 0.6 share of $$ last 4 weeks. Third Shift is incremental but modest at 0.1 share. Coors Banquet is having a very strong yr, up double digits in 3d qtr, SABMiller reported. Up 11% YTD in Nielsen, 13% for 4 weeks. And total Leinenkugel Brewing volume up 31% YTD and got 0.55 share of $$. Finally, thanks to trading up, MC revs even in qtr.
At same time, distribs have been paying brewers for distrib rights in Pennsy for yrs, atty Cris Hoel -- who reps both sides -- told INSIGHTS. Cris has negotiated such payments for at least a half-dozen craft and non-craft brewers over last two decades, maybe 30-40 deals in all, some as recently as last month. "First they [distribs] squawk, second they squawk, then they pay," he noted. Payments have ranged from cash up front to variations over time based on volume/profit/etc. Have Pennsy brewers been paid in neighborhood of 3x GP or $18/case-equiv? Cris: "Some more, some less." "Wholesalers who reflexively oppose this arrangement need better thinking caps, for several reasons," he said. "If principle of compensation among wholesalers for distribution authority is to be inviolate, how can one logically oppose brewery compensation at original establishment of authority, or perhaps in other contexts?.... Wholesalers should welcome treatment of these rights as valuable, and they must rely on reason and not forget underlying public policy." Another industry atty suggests it would be "disingenuous" for distribs to argue for franchise laws that allow them to sell brands rights as asset, then turn around and bar brewers the same right. Some suggest that tied house laws in states, including Oh, might bar outright payment as brewer ending up with "interest" in distrib. Past payments as mktg fees and Pennsy experience aside, in many ways, especially in sheer size of ask, NBB's bold move feels like something new under the sun.
New Belgium founder Kim Jordan maintains that what happened in OH is "not significantly different" than how it's gone to mkt in some other states, tho she wouldn't give details, citing non-disclosure agreements. NBB has always gotten upfront mktg commitments. Other small brewers have gotten upfront payments for mktg, converting from self-distribution to distrib network and even occasionally for brand rights. But nothing we know of has happened on this scale. NBB's ask is a quantum leap from most of these per-case mktg fees. And now that this has happened, New Belgium likely won't be the only one. Startups probably don't have leverage to seek big up-front $$, but some of fast-growing, high-profile craft brewers will likely closely consider this option as they open new mkts, i.e. Lagunitas, Deschutes, Bell's, Stone, Dogfish Head, Brooklyn and many more.
How will that change the landscape? This move has wide-ranging implications. Here are just a few potential effects: value loss for distributors, value creation for craft brewers, i.e. a transfer of wealth, plus the reactions of larger suppliers, other small brewers etc. Amazing since this is essentially a marriage of convenience. NBB needed the money. Distribs needed the brands. But it is likely to have unintended consequences.
How would it negatively effect distrib values? "The fundamental value creation for beer distributors has been an infinite return on capital employed (i.e. distribs have historically gotten brands for free)," said consultant Mike Mazzoni. "This is a direct assault on that principle which-depending on the future application by smaller supppliers-will certainly affect the equity base (read transfer of wealth) of the 2d tier."
How would it help craft brewers? This will be decided "market by market, state by state, brand by brand," said consultant Joe Thompson. But "it gives them more resources to expand, better and faster at the expense of the big 2. It has the potential to affect big suppliers." An ex-brewer source sez this will inevitably trigger "a reaction by the larger brewers who are just not going to put up with this anymore…. This could be the straw that breaks the camel's back." What exactly can or will big brewers do? Find a way to charge for their brands too?
How about one of most coveted expansion brewers of all, Yuengling? Yuengling's "business model" is different, coo Dave Casinelli told INSIGHTS. "Whatever commitments" distribs make, Yuengling doesn't "collect them up front" but rather they are poured "directly back into specific resources deployed against the marketplace" and it shares those commitments with wholesalers. Recall, when Yuengling came to OH, it originally demanded and got very high 1st-yr marketing fee ($2.50 per case). More and more suppliers are doing that these days. As craft brewers continue to grow, they are feeling their oats. And sometimes their demands are growing disproportionately to their clout, distribs say. Across many dimensions, value of brand rights in flux and more debated than before. Stay tuned.