Was July 4 Decline Overblown?
The Wal-Mart Effect

FILED JULY 29, 2009

Dear Client:

There's been a general feeling of doom that July 4 beer sales were terrible. Indeed, for the 4 weeks ending July 11, all channel scans by Nielsen show the industry off by -1.6% and dollar volume grew just +0.8%. The food channel for those same 4 weeks was -0.6% in case volume and +2.3% in dollar volume, while the convenience channel was off by 1.7% while dollars grew a meager +0.4%. So, yeah, nobody doing back flips over those numbers. But there's more to the story than that.

The situation is "not horrible when one considers the entire picture, and wraps in effects of the economy on operators and on the consumer," says Nielsen's vp bev-alc Nick Lake to BBD. Here's his reasoning: The Beer Institute estimates the industry to be down 1.3% through June, and clearly the beer industry is feeling effects of the economy, especially in the on-premise. Using their GuestMetrics data combined with BI numbers, Nick estimates that the on-premise beer business is down somewhere between 5 and 7% in volume this year (that's a new data point we haven't seen yet). We also know consumer trips to the supercenters and club stores have increased and continue to increase during the recession, while trips to the traditional food stores and the convenience channel have declined.

And then you have the Nielsen Homescan panel data (where they keep track of what a panel of consumers actually buy, so it includes un-scannable outlets like Wal-Mart). So, when you combine the panel data with the BI number and tease out the on-premise volume (20% of total industry volume), it suggests that volume for the club, mass and supercenters to be up a big 10 to 15% for the year. That's huge. In other words, as Nick puts it: "Some of the July 4th volume has merely shifted channels."

To put it in yet simpler terms: Wal-Mart, which doesn't provide sales data to the scanners, was likely up big in beer, helping to offset the poor c-store, on-premise, and food store numbers. Incidentally, Whole Foods, Trader Joe's, and Tesco also do not provide scan data.


Taking a page from the Heineken DraughtKeg playbook, MillerCoors is testing a 1.5 gallon "Home Draft" unit for Miller Lite and Coors Light, retailing at around $20 (same as Heineken) for slightly more beer. It is designed to last 30 days in the fridge, unlike Coors' previous entrant into this category in the 1980s with the "Party Ball", which had to be consumed soon after tapping. The Wall Street Journal reports that the Home Draft box will be tested in San Diego, Phoenix and Dallas.


Stella Artois has been on a roll. The brand has been on fire since it starting hitting the mainstream import radar back in 2005. Originally a hipster draft brand in New York, the brand has blossomed into "the new Heineken," as one industry observer put it to BBD back in 2006.

And since A-B has taken the reins, the brand's growth has accelerated as A-B drove ever-increasing points of distribution, introduced 12 packs, and starting inserting it into more aggressive display and promotion schedules. The old routine of "a dollar off one month, full price the next" seemed like a mundane and arbitrary way to sell imports and crafts. Those days are over.

We knew it would happen, we just didn't know when. There's a possibility that this summer marks the time when Stella Artois is starting to reach its distribution penetration saturation mark. That's a big phrase, so I'll repeat it: distribution penetration saturation mark (DPSM). In other words, it's now everywhere it needs to be, and putting it in more places won't necessarily accelerate its growth. It could still grow, mind you, but the rate of growth may slow. Also, a sign of DPSM is that velocity rates slow to zero -- velocity being sales per point of distribution. Indeed, as we went into spring this year, Stella Artois started posting flat and slightly negative velocity rates in IRI supermarket scans. (See how the Femsa CFO compares saturation with velocity when talking about Dos Equis versus Tecate below).

My friend Bump Williams, who consults with retailers, brewers, and distributors every day about these very questions, showed me a chart he worked up with another interesting metric: the amount of Stella that is being sold on promotion (Ed. Note: Bump used IRI scan data for this analysis, and IRI defines promotion as either display, feature, price reduction or a combination of any). This number has ballooned since 2006, likely due to the strengths of A-B's chain marketing machine. This isn't necessarily a bad thing -- after all, that's what A-B's chain guys are paid to do (although we can debate what it does to the long-term equity of the brand later). But when velocity rates start to lag, it means that incremental dollars spent on promotion won't provide the level of lift they did in the past. Marginal promo dollars become more inefficient.

Bottom line, all of these observations point to a general slowdown in Stella's growth prospects going forward, maybe a dramatic slowdown. I don't know what Stella is doing on-premise, so that is a hole in our analysis. Still, this happens to all brands at some point in their life cycle. Stella isn't the only one. I haven't gone over the numbers, but Blue Moon is likely even farther down the life cycle line as Stella, and that's why you've seen Blue Moon's numbers soften lately.

However, for both Stella and Blue Moon, there is a caveat. On occasion, "discovery" brands like these will hit a wall for a year or two, and then their sales will suddenly reignite and their sales will explode as they really hit the mainstream consumer. This phenomenon is rare, but it most notably happened with Corona in the late 1980s. The brand hit a distribution wall, and sales lagged. Then, when all brands took a big GPI after the 1991 doubling of the federal excise tax, Corona's marketers decided to sit tight and continue investing in marketing, and sales suddenly exploded again, and the brand grew like a rocket for the next fifteen years. The brand was catapulted from "discovery" status to the point where old white ladies where even drinking it. No offense to the old white lady readers of BBD, but when your demographic has embraced a brand, it's definitely hit the broad mainstream. [Ed. Note: But now, Corona is up against a ceiling again, as it hits the distribution penetration saturation mark, not for "discovery brands" or even mainstream imported brands, but for domestic premium brands. Incidentally, Corona distribution numbers have held up remarkable over the summer, even as velocity has markedly slowed down].

So that kind of thing could happen to Stella and Blue Moon. Only time will tell.


That's mostly to the USA. There was no brand breakout or much more in the way of detail, except to say: "In the U.S., we continue to increase marketing spending, particularly behind Dos XX, with very encouraging awareness and volume results," said Javier Astaburuaga, Femsa CFO.

Later in the conference call, when asked whether Tecate's and Dos Equis' growth was due to distribution gains or through increases in velocity, Javier said:

"I would spit it in two. I would say that the Tecate brands are still performing extremely well in most markets, but in some of the markets in which the immigrants are more fiercely pressured [Ed. Note: that's code for Arizona], Tecate is suffering. But I wouldn't say that Tecate is driven by distribution. I would say that Tecate performance is more driven by frequency of consumption and the capability of driving consumers to the brand. I would say that if you look at the kind of advertisement we have in play today -- and this is not our opinion but both the Heineken USA guys and the wholesalers in the U.S. are telling us [that it's good]....For Tecate I would say the marketing we have in play and the promotions are running very well.

"The explanation behind the double digit growth in Dos Equis has a lot to do with distribution. In fact, 60% of the growth of the brand is coming from expanded distribution, which speaks well for the brand, because it has the strength to go into accounts where it was not present before. But you still have a good 40% of acceleration that is coming from velocity. So when you look at the 'Most Interesting Man' campaign in the media, and the amount of money we're putting in, with 2009 being the first year we have national media for the brand, and the distribution expansion and velocity and key brand indicators, all things are going well for Dos Equis."

What about focus? One analyst asked Javier how they will maintain focus within Heineken USA when their own portfolio is having troubles. Javier responds:

"First of all I would say is that one of the important reasons why we entered into a commercial relationship with our partner in the US, Heineken USA, was because the way they handled the business. This is a very robust organization and a very well-run organization. Even though they are facing tough times for their brands for very specific reasons, although it's becoming much better as we speak I'm sure, there's a very clear distinction on resources which need to be allocated to the Mexican brands, and these guys are very professional, and I would say they are stretching the time and the resources in order to, I would say, putting more time behind their portfolio of brands, but still continuing to do the best they can for our brands. And of course our brands have a good performance. Our agreement has very specific terms that allow for our brands to be very well taken care of, so there's not the slight concern that the performance of their portfolio is going to create a difficult situation for our brands. We are very happy with the relationship."

You know that Femsa drove a hard bargain when they renegotiated their contract with HUSA, so they are taken care of no matter what.

One more theme of interest from Javier was the explanation he gave of why they don't just sell all of their brands in all of their markets.

"The core of our beliefs in terms of brand portfolio strategy is segmentation. We do think that we need to target different brands to different groups of consumers, and also we have to recognize the base that the different brands have in different territories. So it's not like a guy in Monterrey deciding what people should be drinking, or in Sao Paulo, or in North Dakota, or wherever. So the truth of the matter is that if you look at the performance of our brands in the different territories starting with the U.S. -- I mean, Dos Equis is the first or second fastest growing import brand in the U.S.. But if you look at the Tecate performance, it is also very strong. And these two brands are so different in characters, liquid profiles, packaging strategy, and so different even in price po ints, that you will need to say that it has been a success. ..We're pleased with the brand strategy in the U.S."


MOTLEY FOOL WEIGHS IN ON PRIVATE LABEL AND CRAFTS: "Unless you shopped at Trader Joe's, you might not find a house beer. Last year, however, Costco began selling Kirkland-branded beer. I'm not sure that Budweiser fears shoppers bringing home a pallet of suds along with their 50 rolls of toilet paper. Still, a Kirkland brew could actually make inroads into the beer market, which already offers a 4% share (by volume) to craft breweries. More interestingly, craft brews commanded a disproportionate 6.3% share of revenue dollars in 2008, meaning that craft beer offers the potential for more profit."

JUST AFTER WE published our tome on beer versus wine connoisseurships, we see that beer is indeed catching up. New York Craft Beer Week is underway, and check out these offerings: $350 a head for a Brooklyn Brewery dinner at Per Se. $195 for a Sam Adams dinner at Mas. $175 for an Ommegang dinner at Resto, and the best deal: $90 a head for a Goose Island dinner at Tabla.

NO LESS THAN THREE reporters called the BBD mothership yesterday -- one even from the Wall Street Journal -- on the subject on what beer brands President Obama, Harvard Professor Henry Louis Gates, and Cambridge police Sgt. James Crowley on Thursday. This seems to be the largest beer industry non-story this year. Having said that, if the brand names are released, you can be sure it will be a marketing coup. Regardless, I think it's great that beer is getting so much press as the beverage of choice when people need to sit down and have an intelligent discourse.

Until tomorrow, Harry

"The only true wisdom is in knowing you know nothing."

--------- Sell Day Calendar ----------
Today's Sell Day: 22
Sell days this month: 23
Sell days this month last year: 23
This month ends on a: Fri
This month last year ended on a: Thurs
YTD sell days Over/Under: 0

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