Five of Big Six Mega-Brands in Free Fall

FILED JULY 24, 2009

Dear Client:

The U.S. beer industry's workhorse mega-brands, those Big Six premium and big imported brands that have driven distributor and brewer profitability over the last two decades, are in a free fall, and the consequences of these brands not recovering could be dire.

BBD's analysis of scanner data provided by IRI all-scan show that the Big Six premium and import work horse brands, which are Bud Light, Budweiser, Coors Light, Miller Lite, Corona Extra, and Heineken, have been in a six month free fall, some significantly, with the exception of Coors Light. The Big Six brands account for 60% of the total volume of IRI's top 30 beer brands of any category.

For the 13 weeks ending July 12, IRI all-channel scans show that Bud Light is down 5.5%, Bud down 11.3%, Miller Lite down 7.6%, Corona Extra down 8.5%, and Heineken is down 15.2%. Of the the top brands, only Coors Light is up, and it's growth has slowed to plus 1.7%.

For many distributors, these brands account for the lion's share of their total gross profits, and they represent a crucial source of cash flow to cover growing overhead costs such as fuel, rolling stock, insurance, and for many acquiring distributors today, debt service.

Many of you may be saying, Harry, 13 weeks of scanner data doesn't mean much. But a glance at year-to-date numbers don't paint much of a better picture. yes, the trends are a little better, but the fact remains that every Big Six mega-brand except Coors Light are posting negative trends. You have to think that on-premise the picture is only worse.

The reasons for this relative free-fall in mega-brand growth can be attributed to several factors:

1. The economy. Premium and import losses are sub-premium gains. Natty, Busch, and High Life are all up mid to high single digits, and Key Light and Bud Ice are up double digits. These brands are important to keeping the lights on, but they aren't great growers of profitability, and they dilute margins. Also, the move from c-stores to larger format stores and larger pack sizes drives the sub-premium 30 pack at the expense of premium and import 24 and 18 packs. The loss of the Hispanic consumer is also hurting premium lights and imports.

The loss in c-store traffic is likely tied to the economy, but one distributor notes that their sets may partially at fault. He writes: "Same old sets, same old results!... C-stores hammered is hitting the nail on the head! While national c-store chains (most cooler sets controlled by one of the big 2) lost sales ; c-store independents whom have embraced the craft/ FMB sector especially in "Bopper" bottles showed identical trends to supermarkets here." He goes on to call c-store sets "category mismanagement."

2. Pricing. Historicaly, if the industry posted such poor numbers, A-B or MillerCoors (or legacy Miller and/or Coors) could be relied upon to start an ill-advised deep discount war, a la 2005. Today, debt-ridden ABI and cash-flowing MillerCoors aren't as trigger happy, so prices tend to be holding up, affecting volume. Of the six mega-brands, only Corona has a lower average IRI price per case compared to last year. Does this mean the promise of an October GI is up in smoke? Possibly. We hear retailers are pushing back to A-B on a GI.

3. Consumer shifts in taste. Craft brews, particularly big hoppy flavorful craft beers, are still growing big. That's the silver lining on this crowd as crafts hit critical mass and start to slowly replace the lost profit growth formerly provided by the mega-brands. Crafts also appeal to people because there is a real person behind many of the brands. One distributor pointed out to me yestserday that her wine snob friends, who would crow about Duckhorn because they met Mr. Duckhorn, now crow about Dogfish Head because they've met Sam Calagione. The trade over from wine to craft beers is indeed having an impact.

4. Marketing. The Big Six mega-brands have typically enjoyed world-class marketing in the past. But today the general sense I get from distributors with lots of experience in consumer marketing is "ho-hum" (again, with the exception of Coors).

The big question is: How long will this free fall continue? Considering how important these brands are, many distributors are wondering if there will be a magic marketing coup that revive some of these brands, or if up-and-comers like Yuengling, MGD 64, Bud Light Lime and others will be big enough to pick up the slack.


MILLERCOORS UPS THE ANTE ON MGD 64

And speak of the devil. As A-B gears up to test its new Select 55, MillerCoors is attempting to "blunt ABI's latest move" by nearly doubling the marketing budget for MGD 64 in the third trimester of 2009, so says a memo from chief Tom Long to distributors yesterday.

MillerCoors says that A-B is rolling out Select 55 to "hold shelf space" as the "Bud Light growth engine" slows down, a strategy A-B has used effectively "again and again for three decades." With this marketing investment increase, MillerCoors hopes to neutralize "their distribution muscle" as they did when "fending off Bud Select," writes Tom.

MGD 64 will have a television presence at key points through October that's "on par with Coors Light and Miller Lite. We're also providing incremental funding for additional local media support in key markets, as well as for new digital marketing, public relations, on-premise sampling, increased off-premise tools and crew drives."

Tom also advises distributors to tell their retailers to swap out Select 55 into Bud Select space.

MillerCoors notes that MGD 64 only has 72% grocery distribution and 59% c-store distribution, compared to goals of 95% in soopers and 75% in c-stores.


REPORT: CALIFORNIA PREPARES INTERNET WINE CRACKDOWN

Calfornia's Alcohol Beverage Control (ABC) issued an advisory last month warning that third-party service providers who provide assistance to wineries selling wine online require a license if they facilitate the sale of alcoholic beverages and share in the revenue, according to a report in Wine Spectator. Spectator scribe Augustus Weed notes that "while the ABC says it has not passed judgment on any of the programs offered by these providers, wineries working with unlicensed businesses could potentially lose their liquor licenses, a devastating blow."

The advisory describes third parties as, "persons or businesses operating Internet websites for the purpose of promoting, marketing or selling alcoholic beverages." This ruling could put a chink into Amazon.com's reported interest in entering the Internet wine trade.

What's amazing to me is that there are folks who would think they could take part in wine transactions without a license. The Internet wine business is a wild west out there with lots of allied operators.


BEER BRIEFS:

CONSTELLATION BRANDS IS consolidating its wine and spirits distributors from forty down to 14 distribution points, with an ultimate goal of 4. The winning distributors are Southern Wine & Spirits, Republic National Distributing Company, National Wine & Spirits and Johnson Brothers Liquor Company.

AMBEV WAS FINED $186 million by Brazilian antitrust authorities (CADE) for allegedly stifling competition by giving gifts and discounts to retailers if they would maintain AmBev brands at 90% of inventory. AmBev denies any wrongdoing, says it was shocked, shocked to get this fine.

IN CASE YOU MISSED IT, we sometimes make excess commentary on our Beer Blog, which you can read here: http://www.beernet.com/publications_beerlog.php

Until tomorrow, Harry

"Middle age is when your age starts to show around your middle."
-Bob Hope

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