Scary October

FILED NOVEMBER 13, 2009

Dear Client:

The hits just keep on a'coming. October off-premise scans (four weeks to November 1) corroborated what we've been hearing anecdotally for weeks: pricing timing, weather, sell days, and unemployment have conspired to dampen beer sales.

Consider these trends for October in national IRI all-scan, which seem to be worsening every month:

-Bud Light down 9.2%
-Budweiser down 14.5%
-Miller Lite down 7.6%
-Coors Light down 2.3%
-Corona down 9.3%
-Heineken down 13.6%

All of these brands are experiencing accelerated decreases in their trends compared to 13 week data, with the exception of Miller Lite which has seen a slight stabilization. Coors Light is now in negative territory for the first time in years. Bud Light Lime has hit the distribution ceiling apparently, down 7%.

But hey, let's focus on some positive notes. Yuengling continues to defy gravity with big increases in both pricing and volumes, the latter up 27% in IRI scans. Yuengling chief operator Dave Casinelli told BBD that while October was clearly tough for everybody, they managed to "tweak out a 2.5% increase which was our smallest growth month for the year" despite the lost sell day, a price increase in October last year, and tough comps, so "we were pleased to finish where we did."

Dave notes that "consumer buying patterns are in fact changing before us. There is still solid growth in second tier brewers and crafts but as we know the problem is we are not making up all the losses coming from the mega brand slides." We'll have more from Dave next week, but methinks he's right.

And then of course BBD's favorite beer Bud Ice is up 33% in October, says IRI (we're always watching you).

NICK LAKE ON CHANGING BEER LANDSCAPE

Nielsen's Nick Lake presented at the CBBD conference yesterday, painting a pretty tough picture for the beer industry. While Nick pointed out that consumers are drinking more at home, seeking value, and trading down, he said that more consumers today are waiting for their favorite brands to be on sale (38% today). Not only that, but coupon redemptions are skyrocketing, going up 17% in Q1, 33% in Q2, and 40% in Q3. You can bet that Q4 redemptions will be even higher. Curiously, more affluent customers redeem more coupons.

In the on-premise, Nick calls it a "dining disaster." A full 33 out of the top 34 casual dining chains saw lower same-store sales this year (the exception being Buffalo Wild Wings). Even so, the US saw 662 more restaurant outlets with beer licenses than last year. Nick chalks that up to more restaurants that didn't serve beer now serving it to increase revenues.

Large packages are also on fire. 30 and 36 packs are up 14.3% in dollar sales in the last 13 weeks. Also, chains are putting more sub-premium beers on feature and displays than last year. "Is driven by the consumer or the retailer? That's a good question," says Nick.

JOE THOMPSON: PAT YOURSELF ON THE BACK

Consultant Joe Thompson at IBG (and Summit speaker) had some rare good news: He showed how pricing and cutting costs have given distributors "they highest profits this year, ever......everybody should pat themselves on the back." In fact, Joe maintains that beer distributors have been cutting costs since the 2005 price war, so in effect distributors became aware of the need to cut costs two years before the rest of the country did." But he also indicated that the continued volume losses are going to make that trend tough to sustain. What to do? Joe thinks beer is too expensive. He showed a chart showing the exactly inverse relationship between beer pricing versus the CPI, and volume weakness. In other words, when Beer CPI exceeds the overall CPI, volumes go in negative territory. His chart seemed to bear that out.

Joe also blamed volume softness is mediocre marketing from the big guys that "has lost its sizzle.....it's just not as good as it was ten years ago..... with Twitter and Facebook and texting and all that, the big brewers have simply lost their edge." Joe says not to downplay the role that the tax increase on cigarettes, increased lotteries, and increases in the cost of living for those making under $50k have on beer sales. Also, increased competition on the shelf from energy drinks, wine and spirits, and coffee has taken its toll.

KIM JORDAN REVISITS 10 SHARE SPEECH: "LET'S GET AFTER IT"

Six years ago, Kim challenged the craft brewers at the Craft Brewers Conference in New Orleans to "be relevant" and "get after it." She challenged them to treat "craft beer" as a brand, be "true to ourselves" and go for the brass ring: 10% market share. People may have thought she was crazy, but they're on their way.

Kim yesterday challenged California distributors to embrace craft beer. "You are absolutely integral to our growth," she said. She pointed out the two roles distributors play: as administrators and regulators, and as a guide to build brands. "Which one is more likely to build your relevance?" she asked. Kim also queried distributors, if there craft brand volume doubled, what would that do for their profitability.

Kim also pointed out that the trend of SKU rationalization -- "what a great term," she quipped -- is anathema to today's craft beer growth. Millenial consumers are demanding variety, and variety is the "golden egg" that will keep craft growing. "SKU proliferation" is now the optimal phrase, even though she acknowledged it creates "logistical challenges" for distributors and brewers.

MORE ON A-B'S DISMAL SHIPMENTS

A-B's shipment trends for Q3 were down over 5%, surprising many on Wall Street and in the industry. But where other public companies sometimes try to load the trade at the end of a tough quarter to hide soft sales, A-B takes the opposite approach: they cut the inventory in the pipeline to generate free cash. While sales over the summer were no doubt soft and distributors likely had too much beer on hand, A-B also was lowering inventory days for its own branches (WODs) by 2 or 3 days below indy distributors to free up capital. You've also got the brewery trying to minimize freight by spreading SKU production efficiently across its system of breweries. But things can get in the way, like a glass company at one brewery that imposes minimum bottle purchases, so you have to make the beer there in bottles even as can sales of sub-premiums are growing and glass isn't.

But the fact remains that A-B is soft, as indicated in scan data. We expect the brewer's STRs to be down as much as 30 million case equivs this year, which is the worst year in memory -- maybe the worst since the Volstead Act. But we must always keep in mind that while volume is very soft, dollars aren't as soft, and revs per barrel have consistently north of 3% this year. You can't cash a case of beer at the bank, but you can cash a check.

BRITO SPEAKS ON RESULTS

As we reported yesterday, shipment volumes in the United States were down 5.1% in the third quarter, while sales-to-retailers (STRs) were down only 2.8%. ABI chief Carlos Brito said the reason for the large disparity between volume shipments and shipments to retailers is a result of destocking and some "technical factors" regarding logistics (see above). STRs also suffered from tough comparables. Recall that in Q3 of 2008 AB-InBev launched Bud Light Lime and saw STR growth of 3.6%. Nonetheless, Carlos said "we will not change our position of premium brand building and price discipline."

CARLOS ON DESTOCKING: "We tried to optimize our brewer footprint and minimize transportation costs but also we started the year with an inventory level that was what it was. We kept the inventory level in the summer because we thought the summer would be at a certain level. It was softer. Now what we are doing on top of the technical issues is also destocking. Now that the summer is over, bring it back to levels that are aligned with the business going forward because it's a seasonal business."

CARLOS ON STREAMLINING LOGISTICS: "This is a change in the way we manage our business there. In that we're trying to optimize the footprint we have in terms of batches and runs and by doing that optimize and streamline what we spend in transportation and logistics. This is good in two areas. First because of the cost as I just described and second because of the freshness of the beer which is a very important selling proposition in the US and has always been. It's a technical point but has to do in the end what consumers like which is fresh beer."

CARLOS ON THE PRICE INCREASE: "The full price increase has been received well so far by distributors and retailers.... What we saw in the marketplace is that some competitors did follow. You remember 2008 and the impact we had on input costs. We have to recover some of that so that's the reason behind the price increase...it's very affordable and below CPI for that period."

He wouldn't disclose the exact price increase but noted that it's different by brand, region and channel. "It will depend on how the price will stick. But the stickiness of those prices have been very good, very, very, very good year to date."

Next price increase in the US will be in line with inflation, said Carlos. They will make their next price increase "less significant" by addressing innovations and mix effect.

CARLOS ON POSSIBLY ACQUIRING MODELO IN THE FUTURE: "No comments other than that we continue to admire their business model, their brands. We are still waiting on the results of the arbitration which is a private process so we cannot comment on that. Other than that we are very happy to be associated with them and have a great deal of respect for them."

CARLOS ON THE NEW COMPANY CULTRUE: Carlos noted that the "ownership culture has taken hold. I'm gratified by the state of enthusiasm in which our new colleagues have embraced and enhanced our culture. Our distributor network is one of our key competitive advantages. I had the pleasure of addressing our distributors at our fall sales meeting in the first week of October. Our meeting was very successful and we received positive feedback on the business practices we are encouraging: discipline, focus and accountability."

CARLOS ON PEPSI AGREEMENT: "We have that type of cooperation with other companies and we did not announce or disclose any type of potential savings. We just said it's something that we believe in because it will bring us more scope in the negotiations, more scale, and therefore better costs if we succeed, and that is of course an important thing for us."

BEER BRIEFS:

WIRTZ BEVERAGE GROUP appointed Mark Switaj as Vice President of Training and Development, over their entire company including their beer divisions. Mark comes from Wirtz Illinois and previously had positions with Diageo-Guinness and Gallo.

Until tomorrow, Harry

"f you only have a hammer, you tend to see every problem as a nail."
-Abraham Maslow

--------- Sell Day Calendar ----------
Today's Sell Day: 10
Sell days this month: 20
Sell days this month last year: 19
This month ends on a: Mon.
This month last year ended on a: Fri.
YTD sell days Over/Under: -1

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