The Remarkable PBR

FILED NOVEMBER 18, 2009

Dear Client:

Hey I've got an idea. Let's take an ageing sub-premium brand that been in decline for 20 years, and introduce it back into the hipper downscale bars. And let's bring it back on tap. No, no advertising, let's just rely on word-of-mouth marketing. No crass sponsorships either, except some free beer for bands. And then let's bring it back into the independent accounts and start raising the price. After we succeed there, let's focus on the top national chains and get more features, so that trends will be up over 20% while the rest of the industry is down.

If I had proposed this to any brewer, they would have quietly pushed the security button under their desk and lead me away.

But that's pretty much what the folks at Pabst Blue Ribbon have accomplished. They turned around an aging sub-premium brand, while simultaneously raising the price, without the benefit of expensive national or even regional digital media. And without flooding the market with new SKUs. What is particularly remarkable is that this was accomplished in the off-premise by first making PBR a player again in the on-premise. If you think beer brands aren't built in the on-premise, here's your proof (and the reason why private label and centrally warehoused brands can never reach scale or get pricing power). Brad Hittle's marketing team has done a very good job at unmarketing, or marketing without seeming to market. It's a tightrope.

Since there's scant data in the on-premise, and Pabst Brewing Co. isn't much of a talker, let's look at what PBR has been able to do in the off-premise. It's truly extraordinary. Through a review of IRI data and some nosing around with industry folks, BBD has been able to paint a partial picture of how the folks at Pabst Brewing Co. have grown PBR volume 25% in food, drug, and c-store channels in the latest four weeks to November 1, with share increasing 0.2 points and pricing up 65 cents a case (Bud Ice pricing, in comparison, was down $1.24 a case in the same period .... oh yes, we're still watching you). That's not an anomaly. For the 52 weeks ending November 1, PBR's volume is up 22%, with 0.2 share point gains, and pricing was up $0.86 cents a case, says IRI. And that includes c-stores. The picture is even rosier in supermarkets. The number of features for PBR is up over 50%, and their points of distribution is up 22%.

So how have they done it? From what we can ascertain by cornering people with pointed questions who would know, it's by keeping it simple with national accounts, my friends. It's all about focus. Abbott Wolfe and Mike Montee's chain team has put a laser focus on the top dozen or so national chains, and doing it with a similarly laser-like focus on very few SKUs. Very few. No reverse-engineering new package configurations to meet price points. They have identified local sales opportunities with the top chains -- at a top-to-top level -- and once the secured the commitment, they worked with their distributors to gain distribution, get more feature activity, more displays, and more placements. They executed. When you can't afford much marketing, it pays to double-down on sales. Blocking a tackling really. And by raising prices, they've incentivised distribs and retailers to put more time and resources behind the brand.

And this is key: They assign individual catman experts at each national account who "put more focus on true thought leadership rather than data dumps," one source told us. People always say that chain buyers are "fact based." That be true. Buyers are also human beings, and selling-in a compelling story by showing how the brand is fairing at neighborhood bars, restaurants, and indie outlets near the buyer's stores is also important. Being an underdog also gets some sympathy votes from a few chain buyers. As I said, contrary to popular belief, some chain buyers show signs of being human.

Up-and-down the street business growth near the chain's stores is a compelling selling point, just as Andy England pointed out in his Orange Crush example in yesterday's issue (see BBD 11/12/09). The bar and bogeda business sends drinkers into chain stores, even if they have to be in disguise, to pick up 12 packs of PBR for their communist sympathizer parties. Nobody, even chain retailers, is an island.

This work done by word-of-mouth and account-by-account selling on-premise and in independent accounts is hard work, expensive, and takes time. But it is crucial before you can get pricing power and stroke within the chains, and that's where you get the golden payback.

Pabst is an authentic brand to consumers. "No way, Harry, it's brewed by MillerCoors and doesn't own a brewer." I know that, you know that, the consumer doesn't know that, or care. The fact remains that PBR's label hasn't changed in fifty years, and that equals authenticity more than anything else. As one industry player pointed out to me, "They didn't go from putting their logo on the label vertically to horizontally to back to vertical and back to horizontal like Bud's done." Other brands that haven't changed their labels since Repeal are Yuengling, Shiner, Dos Equis (much), and Modelo Especial. Hmmm.

It doesn't hurt, of course, that an iconic Clint Eastwood is shown holding an equally iconic PBR in about half the scenes of Gran Torino. It's telling that Pabst didn't pay a cent for that placement. They earned it, by making the beer cool again up and down the street. Plus it's a charity, feeding Catholic orphans, which is why I drink it.

ON THE BLOCK. Which brings me to my last observation. One thing that keeps coming up is the fact that the board at Pabst has to come to terms with its pending IRS deadline to sell the company/charity next year. Word on the street is that KPS Capital, owners of Labatt USA and High Falls, is negotiating with the board. One sticking point, of course, is that giant unfunded pension. The other is price. KPS is said to have made an offer that's not too far from the reported asking price of $300 million, according to a source. Stay tuned.......

COSTCO DISCONTINUES COKE NATIONWIDE

This isn't a good sign. Remember when Costco discontinued Budweiser in its California stores for awhile. They did it over a dispute on pricing as I recall. It was a penalty box sort of thing. Well, the three-tier system's favorite club retailer has now discontinued all Coca-Cola products in its stores nationwide, again due to a price increase. The worlds most recognizable brand -- not just in beverages but in all products -- has been DC'd in Costco in all of its stores. Costco sells a private label cola brand under its Kirland line (it also sells a private label beer under the same name). Coke told the AP it won't comment on ongoing negotiations but said Costco is an important customer that it is committed to working with it "in a spirit of fairness." Lordy, if there was ever a case for branding and state-based regulation, here it is.

In the beer business in many states, the big chains don't like the fact that they, in effect, "subsidize" their smaller competitors by paying the same price even though it's cheaper to deliver in bulk to them. Even in states that allow QDs, the big boxes believe they shouldn't have to tie up so much money in inventory to buy in bulk. They believe they should just get the discount at case one, because they're big.

OUR TAKE. But as this issue and yesterday's issue of BBD have shown, what the Big Kahuna chains sometimes forget is that they benefit from the brand-building that goes on in the smaller independent bars, bogedas, vending machines for NAs, neighborhood stores, delis, whatever -- the places that people who aren't actually shopping go to actually interact in a personal way with the brands. Look at the PBR story above.

Shopping is a chore, something to get done and check off your list of to-dos. Going to a bar is a guilty pleasure. I've done both. There's a difference, trust me. Joints like bars are the places that give the brands character, give them a halo of feel-good-ism, that chains can't do. Yes, chains subsidize the unprofitable delivery of the beer to the smaller accounts. But the smaller accounts pay it back to them, tenfold, in building the very personal consumer connection with the brand. The same consumers who then go and buy the brands in bulk at the big store.

Big box chains tend to rape brands -- more so in Europe than here, but we're heading there. And when they're done raping the brands, they turn to private label. That's unsustainable, and it thankfully doesn't work in beer, which is still a branded business, which by its very nature gives brands pricing power for all three tiers. DSD is the reason. 2,000 businesspeople, whose livelihoods are on the line, yes beer distributors, many of whom are my friends, put their life's work into making sure that beer brands still have value, one account at a time.

I still have several friends who are pre-salesmen and managers at beer distributorships. Trust me, they care. They are fiercely competitive. They will take a jackass bar manager to a ball game on their Friday night if it means a tap handle. They will work until 7pm on Christmas eve. They will break down empty boxes in the parking lot and stuff them in their van because they know this particular c-store owner doesn't like even flattened boxes in their dumpster. It's a tough business. They start at 6am and work late. Drivers work even harder. Beer is heavy, moves fast, and is perishable, so it's a physical business. No feather dusters in their back pockets. Beer moves too quickly to collect dust. But this effort sustains the beer brands and ultimately, by degrees, gives them pricing power.

Because of those friendships, if somebody shows up to my Thanksgiving party with Kirkland beer, I can assure you they'd eat at the children's table, even if I wasn't in the beer business.


COKE: BEER AND SOFT DRINKS TOGETHER DON'T MAKE MUCH SENSE

More on Coke. Coke's top chief told investors yesterday that beer and soft drinks don't always work well on the same trucks. "My feeling has always been that it is very important to keep the strategic functions separate," said Coke chief Muhtar Kent, according to Reuters. Coke historically hasn't cottoned much to Coke being sold on beer trucks in countries where it partners with local brewers for distribution. After A-B and PepsiCo announced a joint purchasing agreement for certain items, Wall Street was wondering if other synergies between the two could be had, even distribution. Ken said that the differences in selling soft drinks compared to beer -- different velocities, price points, differing trade channels, and regulations -- makes it difficult to pull off. He did not rule out synergies completely though. "If there are any possible synergies in terms of the back end, such as warehousing, freight, IT. I think in this day, we need to not leave anything on the table." Perhaps Coke and SABMiller/MillerCoors will make a similar type arrangement in the US as A-B and PepsiCo have.

OUR TAKE. We agree. Beer and soft drinks on the same truck only work in markets where the soda and/or the beer have low market shares. But if one or the other has a mid to high market share in the market, putting other products on the trucks dilutes focus and reduces truck capacity and unloading efficiency. And in the U.S., with distributor and bottler consolidation, the beer and soft drink portfolios are likely to have higher shares and high velocity except in rural areas. If you're servicing ice-laden fishing camps in the Finger Lakes, then yes, there's room for both on the truck and it makes sense. And it always makes sense to combine G&A .... & Planes.

But with so many SKUs in both businesses, even if you tried to combine beer with Coke or Pepsi, you'd send out about the same number of trucks every day than if you delivered them separately in most markets. Maybe there are some synergies in routing, loading/picking, route accounting and handhelds, etc. But the big money synergies are in filling delivery capacity, and I don't see it, unless your drivers are experiencing interminable windshield time with long distances for lower volume D accounts.

A Personal Note from your Editor: I speak from particular experience on this subject: My father owned a high share beer distributorship and my mother owned a low share Pepsi bottler in the same metro market. Good times. You can imagine the discussions at our dinner table: "Well, it must be nice to get paid in cash," my mother would say shrilly (Texas was and is a cash state for beer). "I wish I didn't have to pay half my profit in excise taxes," my father would retort stubbornly. Anyway, while they considered it from every angle, they couldn't see enough of a benefit to combining the two companies, not even delivery, without the risk of damaging the beer share, which was much more profitable. My mother's low share bottler sold more cases a year than my father's high share beer company. Guess who made more in profits. It's not how much you sell, my father used to tell me, but how much you sell per account. I learned the value of ratios at a young age. Neither owned airplanes, unhappily, so even the back office synergies were nominal. They eventually divorced, but that's not why ... at least I don't think it was. I'll ask and get back to you.

MORE ON TTB / FDA TIMELINE

As the FDA awaits the alcohol energy drinks companies' defense of the safety of their products (see BBD 11/16/09), more information has emerged on how the FDA came to this point. In an October 7 letter from TTB administrator John Manfreda to NABCA chief Jim Sgueo (the control state association), in response to NABCA's concerns about these beverages, the TTB reveals the sequence of events. In March of 2008, the TTB asked the FDA for a "health hazard assessment regarding what concentrations are acceptable when caffeine and alcohol are combined in a beverage." Apparently the FDA hadn't gotten back to them yet when, in August, the TTB and the FDA met at the request of the Attorney's General from Connecticut, Maryland, Utah, Tennessee, and San Franscisco (whaa?). The meeting was to "discuss the safety issues involving the combination of alcohol and added caffeine." They decided that the FDA should ask the AGs to "submit a case explaining their position on the safety of caffeine added to alcohol and to include pertinent scientific studies and expert testimony to support their position." The AGs got back to the FDA with such a submission in September 2009. And here we are.

What's interesting about this letter is that it appears the TTB was already looking to get a determination from the FDA on the safety of caffeine and alcohol when this AG thing blew up. The AGs merely sped up the process by horning in and going public (and seeking part of the credit). The TTB writes that "if the FDA issues new guidance on the use of caffeine in alcohol beverage products, TTB will take all appropriate corresponding corrective action in the form of label rejection, certificate of label approval revocation, and/or voluntary product recalls." So all eyes are on the FDA.

BEER BRIEFS:

BEER INSTITUTE ANNOUNCES the addition of Harpoon Brewery, co-founder Rich Doyle, and Dolf van den Brink, president of Heineken USA, as its newest members of the board. Rich succeeds Brooklyn Brewery founder, Steve Hindy, who was the first small brewer to serve on the BI Board. Dolf replaces outgoing director Don Blaustein, who left HUSA.


Until tomorrow, Harry

"Argument is meant to reveal the truth, not to create it."
-Edward de Bono

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