A-B and PepsiCo Strike Procurement Deal

FILED OCTOBER 14, 2009

Dear Client:

It's all about scale, folks. Just moments after having candid discussions with distributors about how close AB InBev is with PepsiCo, it was announced by the two companies that they have agreed to jointly purchase certain "indirect goods and services" in the United States and used primarily for their U.S. operations, "such as information technology hardware; office supplies; travel and facilities services; transportation; and maintenance, repair and operating supplies." The agreement allows them both to buy "more efficiently at competitive prices - effectively managing costs that can be reinvested back into areas that will grow their businesses. A team consisting of procurement experts for each company will focus on common areas of spending and negotiate purchases on behalf of both companies." Wow, it's like getting the benefits of a merger without the merger. It will be interesting to see how these two companies, who have a long history together on the InBev side, will work together. And whether this is the first baby step toward an eventual full-on merger?


MARIN DROPS BOMBSHELL REPORT

In the midst of the recent brewer-distributor tensions on a variety of issues, the alcohol watchdogs at Marin Institute dropped a bombshell of a report, which we found was chock full of kookoo claims about beer (in particular going after the top two brewers), while at the same time throwing distributors a more sober bone by recommending a stronger three-tier system. That has the brewers' hair on fire as it is thought that the cozier relationship between distributors and Marin is at the root of the positive three-tier language. Problem is, can you separate the crazy stuff from the three-tier stuff when they come from the same group? Distributors think so, brewers disagree.

Among the recommendations that are distributor-friendly: "Maintain the integrity of the three-tier system" and encouraging attorneys general to be "vigilant in publicly rejecting potentially illegal contract clauses and end-runs of state franchise laws...... The distribution tier is a vital component of the three-tier system. Distributors help act as a buffer between potentially overzealous producers and retailers......Moreover, distributors are part of the communities in which they are based and have a vested interest in addressing alcohol industry concerns that arise locally. This also means that distributorships are accessible to hear concerns from the general public and government entities, unlike the foreign-based beer giants."

But then there's the not-so-friendly language for the big brewers: Marin wants the Obama administration "re-open and reconsider the inadequate review of the mega mergers approved in the final year of the Bush administration," to curb the industry's "undue political influence globally and domestically", raise excise taxes, exclude alcohol execs from WHO negotiations on alcohol policy, among other things. Marin somehow makes the logic hop, despite recent price increases, that AB InBev and MillerCoors create "an unending and ubiquitous supply of cheap beer." Craft brewers may agree, but that's another topic.

But here's where it really comes off the rails and delivers the crazy talk that has everybody heated up. From the report: "Beer is not harmless. Indeed, beer is the most commonly abused drug in the United States, and the most popular drug among youth. Beer should be treated as the drug it is..." Whaa? First of all, the source Marin lists for this claim is a press release by Narconon Arrohead, a drug rehabilitation program affiliated with the Church of Scientology. Second, the dubious source doesn't claim beer is the most commonly abused "drug", but rather that "alcohol remains the most commonly abused substance in America." Whatever, I get it, beer is more popular than wine or liquor. Regardless, by that criteria, we would suggest that the coffee, tea, and energy drink industries are starting to feel left out as the leading vehicles for administering the actual most commonly used "drug" in America: caffeine, used daily by over 90% of N. Americans (source is Wikipedia, which while not infallible, is certainly more credible than Scientology, unless you're Tom Cruise).

Or were they meaning drug as in "narcotic"? If so, I doubt the average voting soccer dad -- or President Obama for that matter (who routinely drinks beer on camera) would appreciate his favorite beverage being styled as a narcotic or himself as a drug user, in my opinion. But that and two bucks will get you a Red Bull. (Watch out, it's full of taurine).

The AB InBev and MillerCoors deals were the biggest industry news of the year, and we knew the watchdogs would tackle it from that angle at some point. In fact, this report is the final version of what Marin presented back in June at NCSLA. But because of distributor-friendly language, this report will do nothing to improve relations between brewers and distributors.


MILLERCOORS CLARIFIES MARKET INVESTMENT MODEL QUESTIONS

MillerCoors Market Investment Model, which seeks to divide local marketing dollar costs between distributor and brewer in a "revenue neutral" way, has created some questions. A joint memo from chief Tom Long and distributor council head Pete Betka seeks to dispel some of that confusion. Basically, both chain and general market POS costs will be shared 50:50 with distributors. However, distributor print shop POS is not included in the co-op and will be funded by distributors. Also, the print shop line item will be removed from the market investment P&Ls to prevent confusion. However, the "use of MillerCoors tactical funds to support print shop expenditures is a locally negotiated item, but any decisions to support print shops won't raise the aggregate pool of tactical funds." Whenever there is a change in co-op rules, distributors get wary. Stay tuned....


RECESSION OVER, SAYS LEADING ECONOMICS, BUT CONFIDENCE LOW

Let's have some good news. A new survey by the National Association for Business Economics found that over 80% of leading economists believe the recession is over although recovery will be slow due to the lack consumer confidence, reports the Associated Press. They cautioned that unemployment rates and the federal deficit are expected to remain high through next year, although they expect the economy (measured by gross domestic product) to grow 3% in 2010. Forecasters expect the unemployment rate to continue to rise, to 10% in the first quarter of next year and then drop down to 9.5% by the end of 2010. On the bright side, the housing market is recovering and home prices are expected to rise 2% in 2010.
Until tomorrow, Harry

"One of the sanest, surest, and most generous joys of life comes from being happy over the good fortune of others." --Robert A. Heinlein

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