Beer Marketer's Insights
At this morning’s US Court of Appeals hearing on case between FEMSA and Interbrew over integration of Beck’s into Labatt USA, hard to figure where judges going. Recall that District Court granted FEMSA an injunction blocking Beck’s integration back in May. Interbrew atty began by stating that ruling based on “egregious errors of law.” He hammered: lower court judge found no “irreparable harm” other than loss of bargained for minority-right. But one of Appeals judges suggested harm could flow from breach of contract simply by losing “benefit of having right." If it can’t be enforced, "that right is lost." “How could you put a monetary value on loss of bargaining power?” another asked. Most senior judge summed up FEMSA position: “You had a right, you want that right.” Yet judges pressed FEMSA atty too: “Why can’t the whole transaction be undone later” if no injunction granted but FEMSA prevails in its claims? As for money damages, “heaven knows,” judge added, these are “deep pockets adversaries.” But FEMSA atty argued: “The right itself has value, separate and apart from any loss that might occur as a result.” One side told us to expect a decision in no more than 90 days.
AB Sez Disapproval of $57-Mil Tex Deal Was Legit; Sellers Should ?Take Nothing? from Suit
AB denies all allegations it acted improperly in its brief answer to charges in fed court by ex-distribs Williams/Durrill in Corpus Christi that AB illegally withheld approval of $57-mil purchase in early 2001 (See Jun 17 INSIGHTS). Argues Williams/Durrill not entitled to damages and requests that "upon trial or other final hearing of this matter Plaintiffs take nothing." Recall that Williams/Durrill charged AB violated Tex franchise law, breached AB equity agreement and tortiously interfered with a contract when AB nixed a proposed $57-mil asset purchase of their 3.3-mil-case distrib. AB subsequently approved a $51.5-mil purchase price (to same buyer) with additional $5.5 mil to be paid down road if buyer met certain targets. A year later, Williams/ Durrill sued for "fair market value as of the date AB violated the law" ($57 mil), plus damages.
AB quotes its letter rejecting original deal: "the proposed sale does not meet our qualifications and standards necessary for approval. Specifically, projections indicate a low projected return on investment. We believe the low return on investment would jeopardize [buyer] L&F Distributors, LTD?s ability and incentive to provide the financial support necessary for the successful operation of the business and to comply with the terms" of the equity agreement. AB?s answer also listed several "affirmative defenses." Key: AB argues Williams/Durrill "have no damages or greatly reduced damages as a result of the Deferred Payment Agreement" it signed with buyer, and that their claim for punitive damages is "barred" by US Constitution. AB argues too that Williams/Durrill have no standing to sue and they have already waived claims. Separately, AB filed motion to dismiss their 3d claim, that AB "tortiously interfered" with original agreement. In AB?s view "there was no valid, existing contract subject to interference." Besides, "AB was legally justified in disapproving the proposed sale"; since under the equity agreement AB "had the power to approve or disapprove a change in ownership, AB cannot now be sued for doing what the contract expressly permitted it to do." Dist Court denied AB?s motion.
This case raised lotsa eyebrows for lotsa reasons. Just one is price Williams/Durrill did get, let alone original deal. Recall that 4 of 5 Fla AB deals detailed in Maris trial were all between $4 and $6 per case. One went for $10/case. EBITDA ranges were between 4.7X and 8X. So this deal appears to be an outlier. Looking over copy of the $57-mil agreement, nothing stuck out to juice value. Buyer purchased "all business personal property" including land, 14 leased vehicles, inventory, etc, but Williams/Durrill kept 7 vehicles, a couple of buildings, a farm, an oil change business, plus boat and trailer. Note: AB very strong and growing in Tex, buyer was contiguous and this is area with growing population. Original $57 mil price "appears to be a fair market value transaction agreed upon by a willing buyer and a willing seller," sez atty Cris Hoel. Buyer "obviously was qualified in the supplier?s eyes," he added. Consultant and broker Andy Christon, who has done a bunch of AB distrib deals (tho not this one), agreed with Cris. Looking at $51.5-mil approved price, Andy said $15/case suggested an EBITDA valuation of a little over 8X. That?s not out of the woods "provided that this wholesaler?s adjusted EBITDA was in the range of $1.85 per case." In fact, one participant in Ippolito/Christon?s 2001 survey--a high-share, lo-cost, moderately growing AB distrib--recorded adjusted EBITDA at that level in 2000. But "these kinds of profit levels and high-end multiples are rare," he added. In Andy?s analysis, "adjusted EBITDA" means cash profits after adding back "discretionary expenses and family salaries." Consolidation savings can boost EBITDA, Andy adds. Finally, while 8X EBITDA is just 2/3 of AB?s current 12.2X EBITDA mkt valuation, Andy points out "such discounts (or greater) reflect a necessary valuation discount for lack of marketability of a privately owned" distrib.
SABMiller deal closed Jul 9 and went off without a hitch, but several signs point to tuff road that lies ahead. Most importantly, Miller still struggling to stabilize volume. In last qtr PM owned all of Miller, Miller down 2.5% almost 300,000 bbls domestically (tho intl volume up 15%). Means Miller beer brands down 5-6% in US in qtr, when you take out malternative intro numbers. Miller volume down every yr since 94, except 99 when it bought some brands from Pabst. In 1st half 2002, Miller down slightly again, about 0.5%. But despite lower volume and higher mktg costs, Miller oper income up $1 mil, 0.6% in 2d qtr, because of "better pricing trends...lower raw materials costs and higher contract brewing volumes," SABMiller said. Recall that PM took $23-mil charge against Miller earnings in 1st qtr for early retirement and "asset impairment." Factor that charge in and Miller income down $16 mil, 5.5% in 1st half to $276 mil. But reported revs up $180 mil, 7% to $2.6 bil as PM now including contract brewing in revs(up $40 mil in 1st qtr).
SABMiller?s 1st official statements weren?t particularly upbeat about Miller volume trends. Apr-May "characterized by disappointing sales volume, due to cooler springtime weather conditions? particularly in the Midwest and Northeast," it said. Then SABMiller ceo Graham Mackay told Sunday Telegraph in UK: "It is a question of the quality of the marketing, not the quantity" to turn around Miller. "It will be evolutionary rather than revolutionary? but it will turn around," he said. Graham "confident he can refresh Miller?s image and once again drive sales," Telegraph added, but "he admits however that it could be three years before anyone notices any change." Recall when deal announced, Miller prexy John Bowlin also said Miller now spending at competitive levels, but he called mktg "right on."
SABMiller global ambitions were dealt a temporary blow when it attempted to issue about $1 bil worth of shares to "maintain financial flexibility" and fund further deals, but had to halt proposal same day. There was lack of demand in current tuff mkt environment. "Basically, we have a pipeline of deals," SABMiller spokesman said, without naming names of its acquisition targets. Meanwhile, as part of this deal, Miller EBITA (earnings before interest, taxes and amortization) restated downwards by $88 mil to $422 mil. Why? That $88 mil allocated as central costs to Philip Morris. SABMiller sez it can save about half of that, but still earnings base for Miller lower than originally expected.
New INSIGHTS analysis of total high-end malt bev mkt in US shows why more and more brewer/distrib focus aimed squarely here. Two factors stand out: 1) high end grew far faster than overall beer biz, roughly 2+ mil bbls per year for each of last 5 yrs; 2) big brewers consistently lost share of this profitable, growing segment in recent yrs. High-end volume reached 39 mil bbls in 2001, we estimate. That?s about 19% of total US malt bev shipments. And high end jumped almost 3 mil bbls in 2001 alone; over half of gain was Smirnoff Ice. Since 96, high-end market expanded by 11.3 mil bbls, 41% and gained 5 share. Editor?s note: definition of high end depends on who?s definin?. INSIGHTS? first crack at total segment is expansive, including all imports (tho some sell at prices close to premium), all malternatives/hard lemons, all of old superpremium segment (mostly Michelob brands and Rolling Rock, ditto on price issue), and all craft beers.
In same 5-yr period when total high end jumped 11 mil bbls, AB?s high-end brands actually declined slightly: from 5.5 mil bbls to 5.3 mil bbls. More important, AB?s 20 share of high end in 96 eroded to 13.5 last yr. (Gotta note these figures don?t include AB?s 50% stake in Modelo brands, since AB doesn't control them in US. If you include half ownership of Modelo, AB?s high-end volume kicks up to 9 mil bbls and growing.) AB remained largest volume player in high end in 2001, but not by much. Most of AB?s high-end business is Michelob Light. It sold 2.9 mil bbls, which puts it behind only Heineken and Corona among high-end brands. But once-mighty Michelob slipped to 1.5 mil bbls, or just 4% of high-end volume, less than Smirnoff Ice. Time was, Michelob alone had over half of high end. Miller?s high-end biz dropped from 2.8 mil bbls to 1.1 mil bbls last 5 yrs, though most of drop was because Miller divested Lowenbrau and Molson brands. So Miller had just 2.8 share of high end in 2001. Miller?s high-end presence is imports-- Foster?s and Presidente-- and Leinenkugel. Coors passed Miller in high end by losing less. Each of its high-end brands down last yr, including a double-digit drop for Zima. (Coors? 2001 data does not include its Molson USA partnership.) Coors built a little high-end volume 96-2001 to 1.3 mil bbls, but lost a share. Net-net: in 96, top-3 brewers had over 1/3 of high-end biz, but in 2001 they had under 1/5 of much-larger segment.
Meanwhile, top 4 importers grabbed nearly 45 share of the high end and were very close to each other in 2001: Heineken USA (12.3 share), Gambrinus (11.4), Labatt USA (10.6) and Barton (10.1). Since 96, Gambrinus picked up 3.1 mil bbls; Barton gained 2.3 mil bbls. Behind strength of Corona and other Modelo brands, those 2 importers grabbed almost half the high-end gain since 96. And they doubled from 11 share of high end to 21.5. But biggest gainer in 2001: Guinness-Bass. Riding spectacular intro of Smirnoff Ice, it jumped almost 4 share of high end, from 4.8 to 8.5, even tho GBIC?s import beer biz down.
Other players in high-end segment much smaller. Boston Beer also got about 3 share, Beck?s and Molson got about 2 share each. Each lost share last 5 yrs. Mike?s came out of nowhere to grab 2 share of high end too. Sierra Nevada is only other player that grabbed more than 1 share of high end. All other micro and specialty brewers (over 1000 players) claimed another almost 10% of high-end market. But as group they lost about 3.5 share of high end in last 5 years. In all, specialty brewers lost 5.5 share of high end since 96, faring little better than big domestic brewers. All Other imports were another 3 share of high end, down from 5 in 1996. And all other malternatives, (including fast-fading wine coolers) about 4 share of high end. More detail and accompanying chart in our just-released 2002 Import/Specialty INSIGHTS.
"There seem to be signs" malternatives "are peaking," AB CFO Randy Baker said in conference call Jul 24. AB sees "nothing there that supports further significant growth," Randy added. YTD thru Jul 14, malternatives had 3.1 share of supermarket volume, according to IRI, up 0.8. Several Wall St analysts echo Randy. "We continue to expect malternatives to peak in the 3Q and forecast a 3.5% share for this segment, basically a niche segment similar in size to the craft or microbrewers," Morgan Stanley’s Bill Pecoriello wrote recently. (In 2001, micros had 3 share, malternatives had 2.5 share.) "We believe that the FAB category is going through a period of accelerated brand rationalization (akin to that of the wine cooler, ice beer, craftbrew, etc) as a result of recent disappointing FAB introductions such as Captain Morgan Gold and Sauza Diablo. We believe the lack of traction by these products have made wholesalers and retailers hesitant to stock up their shelves with new brands," Caroline Levy at UBS Warburg wrote. Biggest disappointment so far: Captain Morgan Gold, which Diageo supported heavily during 2d-qtr launch. The brand just did not sell. In fact, Diageo already pulling some excess inventory from distribs. At presstime, Diageo announced Smirnoff Black Ice intro in UK "to lure men" to RTDs, wrote Dow Jones. Black Ice coming to US in 4th qtr too, we hear.
Malternatives are still big talk of the biz, tho buzz less positive lately. One reason: BATF recently laid out agency’s new thinking about malternatives that could radically change way these products are sold/marketed in a year or so. Key: BATF may require that spirits "flavoring" can contribute at-most 0.5% of final alcohol volume. Turns out BATF found 90%+ of alcohol comes from flavorings in some of these products. Brands that don’t meet new standard would be considered spirits products and be taxed, regulated as such. That immediately would make ‘em more expensive/less profitable, far less available to consumers and take ‘em off network tv. In effect, BATF doing an about face after years of clearing labels/brands that don’t have much resemblance to beer. Per usual, BATF ain’t exactly barreling down this road tho. First step is "notice of proposed rule-making" by end of 2002. Then a 60-90 day comment period to give everyone from suppliers to CSPI chance to weigh in. Then BATF adopts final rule; it’s talking about Jan 2004. If suppliers don’t like new rules, they can go to court or legislature.
The supplier with most at stake, Diageo, is already trying to head off any BATF move to reclassify malternatives. It sent 6-page, single-spaced letter detailing why BATF shouldn’t change status quo. Diageo’s major points: it has already spent millions based on BATF’s current policy of allowing flavors without limit if alc content under 6%; consumers don’t care if alcohol comes from flavors; there’s no compelling public interest to make change; history and current definitions of beer/malt bevs under FAA Act and internal revenue code give brewers needed flexibility to use flavors. BATF also already received letter signed by 9 Congressmen asking it not to reclassify malternatives. They’re "concerned that ATF’s proposal…will effectively end this category of product, disappointing consumers, destroying jobs, harming the brewing industry and reducing excise tax revenues." Gotta note asst director Art Libertucci’s response to comment that new rules would kill category in Jul 25 conference call. Producers could continue malternative products, Art told industry execs, just not as cheaply or easily. Why is BATF changing its mind? Industry complaints, taxation issues and calls from the states, said Art. Indeed, Tennessee’s alc bev commission not waiting for feds to act. It’s very close to final ruling that malternatives with sprits flavoring are spirits products (urged on by wine & spirits distribs there who want to sell ‘em). Tenn ABC holds hearing Aug 19.
As Coors struggles to return to US volume growth, its earnings growth picking up steam. For 2d qtr in a row, Coors beat Wall St consensus earnings estimates by a wide margin even as US volume remained stalled. Fueled by its UK acquisition and progress reducing US costs, Coors oper income jumped about $48 mil, 66% in 2d qtr to $121 mil, excluding special charges. In Americas, oper income jumped $4.8 mil, 7% to $79 mil even tho volume down 0.7% and rev per bbl down 1.5%. (That?s $12.37 per bbl oper income, up 82 cents per bbl from a yr ago.) Coors? cost reduction efforts "gained momentum" in 2d qtr, said prexy Leo Kiely, with a 2% reduction per bbl after factoring out branches it sold last yr. Coors mktg, gen and admin costs up 2.5% in 2d qtr, but mktg up mid-single digits, while overhead flat. Rev per bbl up 1% apples-to-apples in US. (The branches Coors sold last yr had higher rev per bbl because they sold imports so Coors reported rev bbl down 1.5%.) That 1% far less than AB?s 3%. Why? Negative mix shift away from higher priced brands and no malternative intro. Coors got 2% rev per bbl from domestic price hikes and reduced discounting, cfo Tim Wolf told analysts (similar to AB) offset by 1% of "negative mix shift." Zima, Killian?s, Original Coors and exports each down, while Coors Light up slightly and lower-priced Keystone up "mid single digits." Coors got $51 mil of oper income from its UK operations in 1st half on $542 mil of net revs. Total Coors corporate revs over $1 bil in 2d qtr.
While Coors has "not yet seen significant lift" from new ads, Leo told Wall St, Coors still believes ads "on target" with "very encouraging diagnostics." While Coors Light grew slightly overall, Tex and Calif "continue to have their own challenges." Total beer biz "very soft" in Calif, and Coors in 1st yr of some Tex distrib consolidations which is "toughest" period and "certainly a factor." Analysts questioned Leo if Coors is spending sufficiently, given AB and malternative media onslaught, and share gains. "We really don?t feel disadvantaged" on spending, Leo said, adding that Coors at "critical mass" on spending. Coors Original "already showing signs of stabilization" with new ads.
Miller’s 2d qtr even softer in US than –2.5% that PM reported; Miller had loaded distribs toward end of 2d qtr, distribs say. Altho July better for some distribs INSIGHTS talked to, Miller well below its budgeted target in Jul too; its most recent malternative intros are not selling well. Meanwhile, Miller "confirmed it has reallocated spending on" Gen Draft, wrote Ad Age in front-page article, "until the agency gets its creative on track." That spending shifted to Miller Lite, according to spokesman. Gen Draft, Miller’s 3d biggest brand, down 4% yr-to-date in supers. At Miller distrib council meeting in mid-Jul, a notable absence: prexy John Bowlin, who was on vacation. But a key SABMiller exec did attend: Pete Lloyd. Pete’s official title "organization development director" doesn’t do him justice. He is SAB’s key transition exec and "man-in-charge," according to several sources. He raised some eyebrows with talk of exceedingly lean SAB corporate hq. Tho SABMiller execs have said it's biz as usual, many expect big changes at Miller. Already, one of 9 most sr execs, sr veep corp strategy and international Dick Strup, will leave in next several mos.
While total AB sales-to-retailers up 2% thru 1st week in Jul, Bud and Bud Light "slightly exceeded total growth rate," according to Randy. Michelob family "slightly less," as Michelob Light and Amber Bock had "solid" growth, Ultra did "very well" in test and Michelob brand down. (Ultra at 0.8 share in supers in 1 test mkt, wrote UBS Warburg's Caroline Levy.) As trading up continued, Busch and Natural families flat. While AB "pleased" with Bacardi Silver, Randy noted new malternatives generally are "getting trial," but "not penetrating traditional 21-30 male beer consumer to any significant extent." (See more below.) AB up 20%+ in China in 2d qtr and had "substantially higher profits" there. A few days after 2d qtr report, AB announced strategic alliance with #1 Chinese brewer Tsingtao. AB will increase its stake above 5% it now owns of Tsingtao.