Nov 202018
 

Thanksgiving posts in the past have been a myriad of topics within the beer industry, the majority of them; however, have focused on subjects for which we are all thankful.  The most popular Thanksgiving story was the 2014 post on Lone Star Beer.

Many of the posts have highlighted past events for which we were thankful.  We are currently witnessing how these occurrences, for which we were once thankful, have shaped the future of the beer industry.  Let’s now project what the industry might be thankful for in the coming years:

  • Continued growth of the craft segment and the excitement that craft brings to the industry,
  • Premiumization of all beer,
  • The size of the millennial generation, the largest segment of the population in history,
  • Seltzers, FMBs, and spiked water which appear to be the beer industries’ next major growth segment and the best weapon against the onslaught of wine and spirits,
  • Taprooms and local breweries which signal a return to neighborhood connections,
  • Lower taxes and more jobs,
  • Higher incomes,
  • Lower gas prices,
  • Continued lower taxes on beer (all beer!),
  • Favorable legislation on both the Federal and State levels thereby fueling growth in the beer industry,
  • A growing export business for all makes and sizes of U.S. brewers,
  • Continued technological advancements which thereby enhance efficiencies and profitabilities,
  • Michelob Ultra,
  • Constellation Brands,
  • Boston Beer,
  • Higher quality in craft brewing.

These are just a few of the items the beer industry can be thankful for in the coming years.  If you know of additional future trends, please let me know.

By the time this is posted, perhaps there will be an end to the Pabst Brewing Co.’s suit against MillerCoors; a suit which is currently being litigated in Milwaukee.  There is much at stake for both breweries in this suit, but the outcome will also affect many wholesalers and consumers.   More on this after the suit ends.

I would like to take this time to wish all of those in the beer industry an enjoyable Thanksgiving holiday, and especially recognize all who make, deliver and service beer!  Happy Thanksgiving!

 

 Posted by at 7:00 am
Nov 132018
 

During the 60s and 70s, wholesalers represented only one brewery and the future of that wholesaler depended on the success of that one brewery.  Partnering was critical, and if the marketing did not connect with the consumer, both the brewery and the wholesaler felt the negative consequences.  The wholesaler had little choice but to support the breweries’ plans.

As previously discussed, today’s wholesalers spread their exposure across many suppliers and brands.  If one supplier hits a bump, the wholesaler might feel a slight repercussion, but the negative experience will not adversely affect the wholesaler.  Today’s model also allows wholesalers to take a more aggressive stance against a vendor when the vendor’s marketing or programs are questioned by the wholesaler.  Partnerships are strained and tenuous at best.  One really must question whether the relationship between the wholesalers and the brewery could truly even be considered a partnership.

During the summer months, majority of vendors develop their annual budget and marketing plans for the upcoming year.  Once approved internally, the vendor presents the upcoming years’ plans to the wholesaler.   These plans, which are created by the vendor, are based on the goals and strategies of the vendor.  The vendor has built their future around certain platforms and has invested their dollars against that strategy. In the business meetings, the wholesaler has input and many times these plans are modified, but typically the core plan remains.  Only when the strategy totally fails are the business plans changed.

Recently, a major AB distributor notified their beer vendors of a wholesaler–initialed price increase. The increase included price points and margins that the wholesaler was not only taking for themselves but, also what they were allowing their vendors to take!  This even included the date the beer price was to increase.

There was no discussion with any of the vendors as what effect this increase would have on their 2019 market planning, goals, or strategies.  The increases, which were deemed final, were focused on all keg sizes.  One wonders if ALL their vendors were affected or just a targeted few?  When a vendor has questioned the wholesaler in the past, the wholesaler’s continued response is “this is the policy.”

Leegin Creative Leather Products, Inc. v. PSKS, Inc. 551 U.S. 877 (2007), is a U.S. antitrust case in which the United States Supreme Court reversed the 96-year-old doctrine that vertical price restraints were illegal per se under Section 1 of the Sherman Act.  The aforementioned case replaced the older doctrine with the rule of reason. Resale price maintenance (RPM) is the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer’s product at certain prices: at or above a price floor, or, at or below a price ceiling. If a reseller (distributor) refuses to maintain prices, either openly or covertly, the manufacturer may stop doing business with the said wholesaler. This marked a dramatic shift in how attorneys and enforcement agencies addressed the legality of contractual minimum pricing and essentially allowed the reestablishment of resale price maintenance for most commercial situations in the U.S.

Simply put, if the wholesalers’ pricing has a negative effect on the vendors’ products, the vendor may have the ability to take legal action against the wholesaler.  If that happens, then who wins?

Alliances and partnerships produce stability when they reflect realities and interests.

 

 Posted by at 6:00 am
Nov 062018
 

Recently announced third-quarter results for ABI showed that; once again, the company’s depletions are down -1.5%.   ABI’s market share also continued to decline this quarter -.5%. This all equates to a year-to-date market share loss of -.45%.  Even with all the cutting and consolidations that ABI has done in recent years, their debt exceeds $100 billion!

ABI also announced that they will be cutting their dividends by 50%, thus saving four billion dollars per quarter to pay down the aforementioned debt.  The markets’ response to ABI’s announcement was a 40% drop in the beer giant’s stock value.

Is the clock ticking on Carlos Brito?  Regardless of the fact that under Brito’s leadership, AB has lost millions of barrels in volume and market share, it is the financial results that have afforded Brito the ability to be the darling of Wall Street and his shareholders.  The industry knows all too well that Brito’s cost-cutting measures and aggressively price increases have produced great financial results and returns for the company.  The question is, now what?

Brito has accomplished this position by buying large beer companies and applying ABI’s cost-cutting measures and pricing tactics.  In recent years, AB, Modelo, and SAB Miller have all gone down Brito’s path.  Perhaps Brito has run out of beer companies to buy and costs to cut.

Diageo is not going to sell Guinness. And for generations, Carlsberg and Heineken have been tied into a family and will not sell.  While nothing is certain, it is safe to say that these companies have no interest in selling to ABI.  What else is there?  There are still some nice breweries out there, including the six million Hectoliter Krombacher, but that, too, is family owned.  Unless ABI jumps deeply into China’s breweries, there is nothing with significant volume remaining to be purchased.

What about Pabst?  Since Pabst is a virtual brewery, adding that volume to the declining volume of AB would certainly help with the latter’s excess brewing capacity.  Pabst’s portfolio, however, does not fit ABI’s strategy.  ABI, not known for effective brand marketing, would up-selling Pabst’s products resulting in accelerating ABI’s declining volume even more.  In addition, ABI might violate their DOJ agreement regarding the purchase of more U.S. companies.

How does Brito increase shareholder equity, make his board happy, and reduce ABI’s debt for future expansion?  What if Brito sells all or part of AB in the U.S.?  Why not?  When ABI acquired Modelo, brand rights were sold to Constellation Brands in the U.S., similar to the situation in which Miller was sold to MolsonCoors when they bought SAB.  By selling the U.S. market, ABI could retire the debt, AB stock would soar, and ABI would be in a much stronger position to buy Coke or Pepsi!

In the end, Brito is not going to continue doing what he is doing now. His make-up will not let him.  He will, however, do something to move the needle for his board and selling AB in the U.S. might just be the icing on the cake!  Sound crazy, well nobody thought AB would ever sell either!

Egotism is the anesthetic that dulls the pain of stupidity.

 

 Posted by at 5:00 am
Oct 302018
 

It was again reported last week that Reyes made another major purchase, this time buying the rights for Constellation Brands in southern California from three wholesalers: Markstein, Triangle, and Beauchamp.   In all, these purchases represent just under six million cases of STZ products.

It is also estimated that Reyes paid up to $37 per case which translates to approximately seven times GP for the STZ brands.  In doing the math, Reyes paid $200 million for these products.  Did Reyes overpay or not?

Traditional wisdom has always stated that if the buyer can recoup their investment within five years, then the purchase was considered a “good deal.”  In today’s market, however, if a distributor is a long-term player, meaning they have no intention of selling-out, the traditional ROI methods can be thrown out.

Today, if given the opportunity to purchase STZ brands, a wholesaler might look at this as a once in a once in a lifetime chance and would surely pay whatever the asking price.  Take for example, the AB wholesaler who, years ago, turned down the Model brands.  This represented what many at the time thought was an unrealistic price.  If those wholesalers had a mulligan, one would speculate that they would now write the check.

Reyes paid the wholesalers what some have called a “premium multiple.”  Obviously, this multiple was not in dispute as this deal had been negotiated and agreed upon.

In past decades, when a multiple was in dispute, the usual method of resolution was through the courts.  Such disagreements were typically resolved using industry expert witnesses who determined a range of value.  Some experts used DCF as a way to determine the value and others used ROI.  In recent years, however, several courts have determined that the ROI projections represented a better value for a brand over the DCF method.  If the multiple is at seven times or more, neither party seems to have an issue with that valuation.

At the recent Beer Business Daily’s Distributor Productivity conference, Joe Thompson, John O’Conner, and I had the opportunity to visit.  The three of us, along with Mike Mazzoni, were the expert witnesses in many of the beer industry disputes on valuations over the past 30 years. Interestingly, none of us, including Mike, were involved in any expert witness cases at this time.  Part of this was our decisions to no longer accept such cases.  One has to believe, however, that if companies like Reyes are now willing to pay multiples of seven times or more for products, there will be very few, if any valuation disputes.

In addition, many states now address GP multiples for breweries desiring to leave a distributor if they fall into that state’s definition of their percent of the distributors’ business.  This eliminates any issues and moves away from any lawsuits, a good move for the industry.

Going forward there will always be situations where an expert witness will be needed, but in the current market, the seller will more than likely get their asking price.

An expert knows all the answers – if you ask the right questions.

 

Beer Fodder;

 Posted by at 6:00 am
Oct 232018
 

The last Coors distributor convention I attended was in Hawaii in the early 2000s.  As with many others, the highlight of this convention was Bill Coors’ speech featuring that year’s business overview.  As with every other Coors convention, Bill received a standing ovation from the distributors following his speech.  The ovation was not for his comments, but for his many years of contributions to the beer industry and his decades of successful leadership at the helm of Coors.

In the late 1970s, when the annual Coors convention was held in Phoenix, I was the general manager of Coors of Kansas, one of the five largest volume Coors houses in the nation.  The trip from Kansas to Phoenix required me to change plans in Denver. As I boarded the plane in Denver, I noticed Bill Coors sitting next to an open seat.  I happily joined him on the flight to Phoenix.

At the time, Coors was just beginning to expand their footprint into the eastern U.S.  The expansion was the result of the excessive volume caused by a California Farm Workers and gay right boycott.  Yet, despite the boycott, Coors remained the number one selling beer in their western markets.

During the plane ride, as Bill and I discussed this topic and others, I gleaned additional appreciation for the challenges the brewery was facing.  I was thankful for Bill’s time during the two-hour-long plane ride. Then, as is true now, it was most difficult for a distributor to have the privilege of spending time with such a storied industry leader.

That convention in the late 70s proved to be interesting given what the brewery was facing in California.  Coors had arranged a barbeque for the distributors at an area ranch during the convention.  The conversation on the bus ride to the ranch was focused on the California distributors and their complaints of lost business due to the Coors family’s anti-union policies.  The distributors were having a difficult time understanding why and how our Coors business in Kansas was still growing despite the turbulent times in California.

Many years have come and gone since the Coors convention in Phoenix, but the recent announcement of Bill Coors’ passing puts an end to a period in the beer industry where dynamic leaders backed their beliefs with actions, sometimes to the determent of their wholesalers.

I have had the opportunity to work for, and spend time with, a number of beer industry leaders during my years in the industry including Harry Jersig, Bob Uhlien, Paul Kalmanovitz, Jack Joyce, Bill, Joe Coors, and others.  All have left a lasting legacy on the industry.  Decades from now, the leaders of the craft movement might be viewed in a similar light to these great leaders.  For the well-being of the beer industry, let us hope that holds true.  Their shoes are very big!  Yes, it has been an interesting career.

“I’ve taken my kicks, but I have a fascinating life and I have been richly rewarded.” – Bill Coors

 

Beer Fodder;

 Posted by at 6:00 am
Oct 162018
 

Like many college students, I was uncertain about the direction of my professional career following graduation.  During the summers I worked as an assistant on Coors beer trucks and it was at that time that I developed an interest in the beer industry as a potential career.  It became clear to me that in the industry, one could work for either a brewery or a distributor.

These two employment options remained static until the 90s when the beer industry digested the Bush administration’s doubling of the federal excise taxes.   It took years for the industry to return to its annual growth rate and for companies to begin the hiring process following the legislative act.  During this time the beer business experienced extremes in cultural differences within certain companies.

Perhaps the most desirable beer importer to work for was Wisdom Imports.  This company hosted a growing and fun portfolio along with an employee-centric culture.  All that changed, however, when InBev bought Labatt’s.  Sound familiar?

During the same time period, Modelo was imported by Gambrinus and Barton Beers.  While both companies had similar portfolios, the cultures of the two distributors were polar opposites.  Many previous AB, Miller, or Coors employees who transferred employment to Gambrinus had the perception that they could easily adapt to the Gambrinus culture.  They soon discovered they were only kidding themselves.

Perhaps the personification of a culture change was the dramatic shift instituted by InBev during their take-over of AB.  Most former AB employees lamented those changes as they moved on to other brewers and careers.

Likewise, many of today’s successful crafts have also undergone cultural changes.  When a start-up craft begins to find some traction in the market, the company’s culture begins to shift.  Over time, brewers like Sierra Nevada, New Belgium, and Founders have discovered that experienced and professional beer executives are needed to continue the growth curve.

With 7,000 breweries currently in the market and more to come, the talent pool is limited.  A big challenge is for potential employees to decide with which brewery to hang their hat.  Will the potential brewer meet the expectations of the employee?  Because many small, start-up brewers work with an unstructured entrepreneurial culture, few provide much in the way of policies or procedures.

Recently a young, highly qualified sales rep with a new brewer was concerned over the lack of structure in his company.  Perhaps this individual would have preferred a more structured and formal company, though he may not have realized such a need for more structure without first experiencing work in a start-up brewery.  This is especially true for those individuals who have high career aspirations.

Many early employees of Sierra, New Belgium, and Founders have moved on as these breweries were no longer a fit.  Finding the right culture is a challenge for both the brewery and for the individual. Perhaps this is the underlying reason that companies attest that they cannot find qualified employees and qualified employees say they cannot find top jobs.

Keeping customers is about the experience, and frequently the employees control the culture and temperature of the business.  Never forget that.

 

 

 Posted by at 6:00 am
Oct 092018
 

There is no doubt that the beer business has many convoluted laws governing the industry.  The law dealing with beer packaging, however, might take the cake.  Take, for example, the law that required Florida and Texas to implement 12-ounce packaging restrictions.  In Texas, a beer with 5.0% ABV or less could only be sold in either a 12-ounce package or a 32-ounce package. The law stated beer of that ABV had to be in a 288-ounce case.  Schlitz, thinking outside the box, came with a 12/24 ounce can.  This package turned out to be a huge success for Schlitz.

So do creative packages like Michelob’s teardrop bottle aid in sales?  The Michelob bottle and Corona’s clear longneck bottle might be considered the two most successful packages in years.  Even with the success of the Michelob, Schlitz, and Corona packaging, however, these containers two of them are long gone, and only the Corona packaging continues today.

A couple of years ago, ABI increased the can volume from 24 to 25 ounces in their single serve c-store cans, thus providing the consumer with an extra ounce of beer for the same price.  Perhaps this technique has not worked like no other major brewery has followed ABI’s lead.

The c-store trade channel which has long been dominated by both AB and MC has now become a target of the craft industry.  In recent years, this channel has seen Constellation Brands, with their single serve offerings, chip away at both the AB and MC’s market share.

Both Texas and Florida changed their packaging restrictions years ago by eliminating the 12-ounce requirements, thus opening the door for imports to move from their .355 ounce packages to their .33 (11.2 ounces) package. This 11.2-ounce package is now used worldwide as it is more convenient for international breweries.

Crafts have discovered the 19.2-ounce package.  By reducing the amount of liquid in the can or glass container, as other CPG companies have done, the volume can be lessened instead in lieu of increasing the PTC. As an example, the product might be in a 12-ounce product but instead of a price increase, the product is now an 11.2-ounce package.

Crafts are offering their beer at a PTC near or at the domestic price, but only giving the consumer a 19.2-ounce package versus a 24-ounce package.  Everyone but the consumer wins with this model.  It becomes incumbent on the craft brewer to prove that their beer is worth the cost versus a larger size competitor.

One wonders how these crafts would do if packaged in a 24-ounce bottle/can when competing against the main domestics or imports?  This c-store trade channel is one of the last remaining strongholds of the domestic premiums.  If these crafts can steal market share from the big boys, then the 19.2 package wins.

Sometimes life gives us lessons sent in ridiculous packaging.

 Posted by at 6:00 am
Oct 022018
 

Grupo Modelo was founded in Mexico in 1922, and within just three short years the Mexican brewery introduced Corona and Modelo Especial.  Now, 93 years later, Grupo Modelo maintains a more than 60% market share in Mexico and is part of ABI.  In the U.S., Constellation Brands now owns Modelo, with Corona and Modelo Especial being the number one and number two imported brands, respectively, in the U.S.

In the last fifty years, perhaps only the success of Bud Light, Miller Lite, and Coors Light, equals that of Corona.  In the early 1980s, Corona was packaged in a stubby brown bottle and was predominantly sold in border cities, sales, however, sky-rocked when Grupo Modelo began packaging Corona in a clear long neck bottle.  For decades, the brand grew at double-digit rates.  Fueling Corona’s growth were the sales teams of Barton Beers and Gambrinus. The relationships developed with wholesalers, and increased package additions, which included 12-packs, seven-ounce bottles, cans, single serve, and draft, all added to Corona’s sales explosion.

Modelo Especial’s growth, however, was much slower, taking years to establish a foothold.  Part of that sluggish growth was due, in part, to the poor quality of Modelo’s packaging, but also because both importers’ primary emphasis was on the growth of Corona.  In recent years, however, Modelo has caught fire with some truly effective advertising and support.

Modelo and Corona are the two great success stories of the beer industry.  Wholesalers who have had Modelo for years are envied by their competitors.  While Modelo Especial continues to produce double-digit growth, the recent scan data proves that something is happening to Corona.  Corona and Corona Light are beginning to show a decline in sales.  In fact, Corona Light is down as much as -13% in the recent four-week period.

Much of Corona’s waning can be attributed to Constellation’s roll-out of new products, including Corona Familiar, and the very successful Corona Premier, targeted at Michelob Ultra.  The beer industry has historically shown that when a successful product produces offshoots, the flagship brand begins to lose volume. Or can Corona’s slow decline be attributed to the much-discussed product lifecycle?  After over 35 years of growth is the consumer looking at Corona as another product of the past generations?

Many brewers’ brand-marketing groups view line extensions as an easy way to add instant volume and increase the brands’ retail space.  But perhaps the question is: what is the real cost of line extensions?  The argument can easily be made that if the overall portfolio grows, then the brewer wins!  The real cost of these extensions, however, might be paid by the wholesaler considering the warehousing, logistics and manpower investments that have to be made.

The industry can only wonder what other future line extensions are being planned by Constellation brands.  Perhaps wholesalers will see Corona Lime, Corona Light Lime or Orange in the coming years?  Why not?  It seems to be working for Bud Light.

The next five years will be interesting for the Corona family.  Success is a lousy teacher.  It seduces smart people into thinking they can’t lose!

 

 Posted by at 6:00 am
Sep 252018
 

It is likely that if you have been in the beer industry for any amount of time, you are aware of either a wholesaler or vendor who has broken state or federal laws.  This is nothing new.

In a past blog, it was illustrated that, as a Schlitz wholesaler with a 30%+ market share, I lost all of my draft handles on South Padre Island just prior to spring break, the largest selling month of the year.  It turned out that AB had obtained my draft accounts. Soon, however, the TABC investigated and discovered inappropriate activity and the AB wholesaler was fined $2,000.  Given this action by the TABC, a wholesaler could assume that a $2,000 fine was the baseline for buying draft accounts.  That being said, the wholesaler or vendor could then determine a risk/reward approach to buying accounts.  Is the account worth the risk of a $2,000 fine?

The recent $900,000 fine paid by Warsteiner for trade violations continues to be a focus for TTB seminars and discussion.  Going forward, this fine could be considered the baseline for penalties against similar sized importers or brewers, regardless of whether the actual violation fits the crime.  If the TTB maintains this standard in fines, does the industry have a 2019 baseline going forward?  If so, then a vendor of Warsteiner’s size, 75,000+ HLs, could assess the risk/reward benefit for incurring TTB violations.

Perhaps the most sought-after venue in the U.S. for any German brewery is the German pavilion at Epcot Center in Florida.  This pavilion hosts over one million visitors annually and depletes over 7,000 kegs.  A multi-year pay-to-play contract for a German brewer and their local wholesaler at Epcot is highly sought after and could facilitate positive momentum for the vendor and their brands. The vendor could totally focus its annual marketing on Epcot’s German pavilion by using the location in a majority of its p-o-s and incentive programs for wholesalers.  Winners of the incentive could receive an all-expense paid visit to Epcot and the German pavilion.  Conversely, the pavilion’s leadership could visit the German brewery, spending time there with brew masters and senior management.  Most vendors will see the opportunity to be showcased in a venue like the Epcot Center as a reward, and might be willing to risk a fine of $900,000.  Consideration for such a fine would include: the keg volume over a three-year period; the opportunity to showcase one’s products in front of over three million people; and having one’s brand be the primary product served.

Warsteiner’s willingness to pay a fine of that size without further negotiations with the TTB may, or may not, motivate other vendors to do the same thing. Or, that amount alone may cause some vendors to remain on the fence.  Either way, do not expect this type of activity to disappear.  Such inappropriate pursuits have been going on for years, and in all likelihood will continue

I have no problem with cheating…whatever you can get away with….right?

 

 

 

 

 Posted by at 6:00 am
Sep 182018
 

When Miller Lite was introduced in the early 1970s, along with AB, Coors, Schlitz, and other light beers, it took the industry ten years to realized that the light segment was not only here to stay, but could make a major impact on industry sales.

When Corona changed from their stubby brown bottle to the longneck clear bottle, sales for the beer skyrocketed. Corona, however, unlike many other light beers, was not taken seriously until the early 1990s, a full ten years after the bottle change.

It can be said that the craft beer segment took about 10 years to develop.  Boston Beer, Anchor, Sierra Nevada, and other breweries were established long before the mid-2000s, but it was not until AB was purchased by InBev that the crafts actually began to soar.  Now, more than 10 years later, crafts are part of the industry fabric even though their overall sales have begun to slow.

In the September 4th issue of Beer Business Daily, Harry highlighted several of the beer brands that realized successful sales over the Labor Day weekend.  Michelob Ultra remains the engine driver for AB, but Bud Light Orange seems to have grown legs.  Natty Daddy and Ultra-Pure Gold maintain their growth, thereby further adding to AB’s successes.  Corona Premier and Corona Familiar continue to look like winners, and with Modelo and other Constellation brands, life is good!  MC’s Keystone Light and Keystone Ice sales are rising, and add Hamm’s and Steele Reserve to the mix and one sees the number increasing. As BBD illustrates, MC does not have a premium growth share until you look at Sol.  Coors Banquet, however, continues to chug along.  Most of these beers are light lagers that are increasing in volume and share.  Once again, the light segment remains alive despite the struggle that Bud Light, Miller Lite, and Coors Light are experiencing.

A recent visit to the local Total Wine store before the Labor Day weekend revealed what might be the beginning of another ten-year change.  While walking into the retail store, looking for the holiday weekend’s beer specials, the end-caps revealed a true surprise. There was not a single end-cap that highlighted either a light lager or a beer.  Every end-cap featured a seltzer!  White Claw, Truly, Seagrams and others were with special PTCs.  Prices on the light lagers and imports were not special PTCs!  I cannot recall a major summer holiday that did not have any lager beers displayed or featured on the floor!  Perhaps this was an enigma, but the fact remains not a single light lager or a beer was starred at this particular retail establishment.

Scan and syndicated data show these seltzer products are on fire this summer.  So the question is: are these products just a summer seasonal or are they here to stay?  As with light lagers, Corona, and crafts, the industry could be on another ten-year growth of a new category.  This time it appears the industry is taking these products seriously.

Whatever happened to “Light Lagers!”

 

 

 

 Posted by at 6:00 am