A Talk with A-B's Dave Peacock

FILED SEPTEMBER 19, 2009

Dear Client:

During my brief stay last week in St. Louis, I was invited down to One Busch Place for a visit with Anheuser-Busch chief Dave Peacock. As he conducted an impromptu tasting of Bud Light Golden Wheat and Select 55 (at 9:30 in the morning, you gotta love the beer business), Dave and I spoke of a variety of topics, including three-tier, Bud Light, distributor fears, sports marketing, and more. You, my good friends, are a fly on the wall. Here is Part I of a two-part series:

BBD: So you're going to sell your ADRs on the big board under BUD. Is that a big deal for you guys?

DP: For our people it's a big deal in the sense that, it's BUD back on the New York Stock Exchange, and there's something relevent for people about BUD being back on the New York Stock Exchange. I'm going up to New York tomorrow where Brito's going to ring the opening bell. It could ultimately make it easier for our employees to own the stock, and for 401Ks. So that's a big deal.

BBD: Did the "foreign ownership" issue have any bearing on the decision?

DP: No, I think it's just that we are one of the top-five consumer product companies in the world, so you had a lot of interest from U.S. investors. It just makes it easier for the everyday investor to own it.

BBD: Bud Light has been soft lately. Does that alarm you?

DP: No. Bud Light has been impacted by what Bud Light Lime was able to do, and I think you're seeing some of that within the Bud Light mega-brand this year. From a retail dollar sales standpoint, what we see for the overall Bud Light mega-brand is pretty good. And so we see where Bud Light as a mega-brand can go and we're pretty optimistic.

BBD: Al Ries wrote a story in Ad Age last week, the same theme he's put out for years, about how line extensions are bad because they just cannibalize the mother brand. Do you buy into that?

DP: I don't necessarily buy that they just cannibalize the mother brand. I think it depends where the brand is in its life cycle, and how those extensions are used. We can see both IRI panel data and some retailer data that Bud Light Lime was actually bringing new people to the category, more so than a lot of other new products we've seen. So that alone would suggest a positive for Bud Light.

And the belief is that the same could be the case, to some degree, with Bud Light Golden Wheat. This brand may pull more from within the beer industry - it will be interesting who migrates to this. Is it going to be someone who dabbles in craft, but wants something, quote unquote, 'more drinkable'? Is it going to be someone who's kind of being introduced to craft beers? It will be interesting to find out. And the nice thing about it is, it's 118 calories compared to the average wheat beer at about 170.

With Bud Light, if you go back to the early '90s all the way up to today, and we look at similar research in our drinker index, it continues to over-index to the younger 21 to 27 legal-drinking age adult versus what we see with other major light beers, which are indexing older. Even Coors Light, although it recently has improved, it's aging a little bit. And so the opportunity for Bud Light is how do you keep people with the brand as they age? Do people graduate out of contemporary brands or not? If they do, how do you keep them in the brand family? I think brands like Bud Light Wheat and Bud Light Lime can keep some people in the Bud Light family.

Also, unlike the major soft drink brands, we've differentiated Bud Light Golden Wheat's pricing and the package. Bud Light Golden Wheat has distinctive orange packaging and a different feel, and Bud Light Lime clearly has a different image positioning than Bud Light. That's how you distinguish it, instead of being a slight move off of the mother brand. So between price point and package and positioning, we've distinguished these brands enough that they should be incremental to the mother brand and not necessarily as cannibalistic as other extensions. So I disagree with Al.

BBD: Some of your smaller brands have suffered this year. Is part of that because you've put so much focus on the big brands?

DP: Probably partially. We are focused more on our core brands, what we call our focus brands. Also, I think you'll find a lot of the smaller brands are in the high end, so they're not immune to the effects of this economy. So, I think the combination of refining our focus behind the big bets and the challenging economy on those higher brands, make it challenging for those brands.

BBD: When talking with distributors, I think some are surprised that there haven't been more draconian changes from their perspective from you. The expression I hear the most is, "when is the other shoe going to drop?" Is another shoe going to drop, Dave?

DP: No. Look, with change comes a lot of fear. You know, we still need barley malt. We still need hops. We still need bottles. Just like we still need distributors. We still look at them as partners and rely on them to help get the products to market, and do it in the right way, every day. Distributors are partners. We've been very open for years now that consolidation is beneficial to the industry. To me, it's a matter of how that is enabled, and I think there was a fear that there was going to be some draconian approach to consolidation from us, which isn't the case. Consolidation is not something we're pushing. It should happen in a manner that's natural and by willing parties. And then there is this fear of a major cost shift to distributors. I look at the distributor profit pool within the U.S., and sure, there's an opportunity for more efficiency between brewer and wholesaler. It will result in changes in some of the ways we do business. I think there's a tremendous amount of inefficiencies we can drive out of the system working together with wholesalers. We're working closely with our wholesaler panel to try and identify those savings and share them. We'd like to see them be very profitable, because we like the fact that they're owners, and that they've got a profit motivation. At the same time, we think there are opportunities for us as brewers to benefit. So it's not really a change in philosophy.

BBD: Can you give me an example of something that the distributors could do better?

DP: I don't know that the distributors can do better, per se. What I mean is leveraging our scale. We are a large, national, and now gobal company with a lot of resources. And our wholesalers are 500+, large and small businesses. We need to find ways, given our scale, to provide resources and tools that enable efficiency across the system. Now, the levels of efficiences you can reach are going to vary based on your size and your location, as a wholesaler. But I think there's efficiency to be gained for everyone. A lot of it in the logistics area. Also in warehousing and back-office expense. So I don't think it's something the wholesalers need to be doing better, necessarily, it's just how can we leverage a larger-scale infrastructure to enable more efficiency.

BBD: You know, Reyes [large blue-silver distributor] does their delivering routing for all their companies at one location in Los Angeles, because of the time zone, and I think maybe their tel-sell too. Is that something you envision A-B could do for distributors?

DP: We might do that. You know, we have a routing service we provide our wholesalers now. We've got the UPS Logistics software platform. But with technology and where things are going, the opportunity for routing efficiencies across multiple markets is there. To me, it's about scale, and from a national standpoint, we have to look at how we can tap into the value created by scale, whether it's at the state level, national level OR regional level.

Part II coming tomorrow, don't touch that dial.


CALI BREWERS GET FEE RELIEF BILL PASSED

You may recall that the state of California, or rather its Department of Conservation, has increased its bottle container processing fee on July 1 from 5 cents a case to nearly 35 cents a case, costing brewers who sell beer in California millions. Well, the California Small Brewers Association, lead by exec director Tom McCormick, sprang into action by alerting its members to the serious nature of this issue and asking them to contact their legislators about relief.

That strategy appears to have paid off as a bill to rescind the processing fee increase was approved with a final floor vote on the last day of the legislative session for the year. The bill is still not law - it is now on the Governor's desk where he has 30 days to sign or veto the bill. Tom wrote to his members saying that their "efforts now turn to the Governors' office to convey our message of how important this bill is to the craft brewing industry." Tom then thanked small brewers for contacting their legislators on this issue, in particular singling out Mike Brown at Pyramid Breweries, Keith Cranmer at Seabright Brewing and John Martin at Triple Rock.

SOUTHERN LICENSE REJECTED IN INDIANA

In a surprising development, the Indiana Alcohol and Tobacco Commission has voted to deny wine and spirits wholesaler permits for Southern Wine & Spirits, the nation's largest wine and spirits distributor, "citing concerns over a track record of anti-competitive behavior," according to the Indy Business Journal [subscription req'rd].

Originally the commission denied Southern's license last year due to the state's residency requirement for wine and spirits wholesalers (beer wholesalers don't have such a requirement in Indiana anymore). That rationale, which Southern fought and won in Texas on Granholm commerce clause arguments last year, was deemed anticompetitive by the Indiana AG. So the commission apparently offered this new reason.

Opponents of Southern say liquor prices would rise and jobs would be lost if Southern entered the market. The most vocal opponent is, of course, National Wine & Spirits which serves Indiana and Michigan. National chief James LaCrosse told the commission Southern would put National out of business. He pointed to recently settled trade-practice violations by Southern subsidiaries in Illinois and New York.

The Indy Business Journal says that LaCrosse also expressed concern over the joint-venture arrangement between Southern and Glazer's Distributors, which in 1998 added Olinger, Indiana's second-largest wine and spirits distributor, as a subsidiary. The local owners maintain majority ownership. "What they've done is eliminate the competition for suppliers," LaCrosse said. "Southern is the 800-pound gorilla."

An attorney for Southern, Byron Leet of Louisville-based Wyatt Terrant & Combs, told the Journal, "The sky is not falling. Southern is a very reputable company." Southern is challenging the state in court. Another surprising twist: noted direct shipping advocate and attorney Alex Tanford came to the defense of Southern, saying, "Indiana is an underserved market. Southern Wine has much more product in their catalog they can distribute."

SO WHAT? What does this have to do with the beer business? A couple of observations. First, it's interesting to see Southern, a distributor, using Granholm to their benefit to help them tear down certain Prohibition-era laws (residency requirements in this case). Big distributors seem to be acting more like suppliers, and seem to be becoming more aligned with them than they are to distributors in general. It makes you wonder if this will happen in the beer business as distributors continue to consolidate and the big get bigger.

Secondly, distributors have typically been stronger in state legislatures and with state regulators, while suppliers have more success with the courts and the federal government. This tension manifests itself not only between smaller wineries and wine and spirits distributors, but lately with the big brewers and distributors, as seen with the recent Beer Institute / NBWA "agreeing to disagree" issue. But lines that were so clearly delineated in the past are now becoming blurry. For example, in the past, craft brewers and beer distributors disagreed on most three-tier issues. But today, while they still disagree on franchise law issues, they are much more aligned on many other three-tier issues as more distributors move to the center on self-distribution and on-site sales and more craft brewers move to the center on "for cause" termination and paying fair market value for brands. There's still work to be done, but there's much more overlap than five years ago.

In the other direction, there may be some differences in opinion on certain issues among big mega-distributors and smaller distributors in the future that we just haven't seen in the past. You can already start to see it today as some acquiring distributors in the MillerCoors system are "playing nice" with the brewer (quickly signing the new contract, taking on 30 packs, pushing Miller Chill physical distribution, etc.) so they don't get a black rose in the mail. It's an interesting new dynamic that I think we will see more of in the future.


FILLER: MOVIE SCENE AT ONE BUSCH PLACE

A Truth Squader pointed out to us that a new move just released called "The Informant" starring Matt Damon has a scene shot at the Anheuser-Busch North American headquarters in the lobby, featuring the giant bronze eagle. The scene was shot in late May last year, the very same day that BBD reported the first rumors of the Inbev acquisition. Here are the pics: http://wearemoviegeeks.com/2008/05/exclusive-the-informant-set-pics-of-matt-damon/

Until tomorrow, Harry

"A dress that zips up the back will bring a husband and wife together."
-James Boren

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