A-B: Brand Extensions Go to Red Network, Except When they Can't

FILED AUGUST 20, 2012

Dear Client:

Anheuser-Busch clarified its position yesterday when it comes to introducing new brand/line extensions as it pertains to which distributor network it will go to (where it has overlapping distributors). In a memo to distributors, vp sales Dave Almeida writes that when new brand extensions are rolled out, the "distribution rights will be granted to the equity wholesalers, where permitted. In states where this is not permitted, new brand extensions will be granted to the current wholesaler who carries that brand family, whether they are equity or non-equity wholesalers." So while that clarifies their position, it should surprise nobody that this is their position. They would obviously like to consolidate all of their brands into their equity red wholesaler network, although there are still a few big blue-silver Stella Artois and Rolling Rock distributors out there. If Stella Artois Cider or something like that comes out, you may have two distributors both carrying Stella lines extensions competing against each other in some states.

"Anheuser-Busch believes the most effective and efficient distribution of our brands is through the network of Anheuser-Busch equity wholesalers," continues Dave. "If you currently do not distribute all Anheuser-Busch InBev brands, we encourage you to promptly contact the current non-equity wholesaler in your territory to discuss negotiating a mutually satisfactory transition of the brand rights."

Back in the 80s and 90s, as brewer footprint issues started becoming more common as line extensions started proliferating, distributors in many states worked to enact laws to prevent brewers or importers from awarding line extensions to competing distributors. The fear at the time was that if the owner of Bugsy Lager didn't like his distributor because he wore white shoes, he could come out with a Bugsy Lager 2.0 and sell it to his black-shoed competitor across the street. When Stroh bought G. Heileman in 1996 it got really bad and the distributors reacted in kind in statehouses across the country. Little did we know back then just how convoluted the distributor footprint issue would end up when the big brewers started consolidating. Still, some pretty big volume states lack a line extension law. And in states where there isn't one, there's been litigation.

A REVOLUTION HAS BEGAN

I'm sure you've read by now the positive numbers from the Gallup organization about beer numbers.

That title above does not have a typo in it, at least not intentionally. It's a great understated line from the movie Braveheart, where Robert the Bruce casually tells his dad: "Father, a revolution has began." And indeed it has in beer. Oh, I realize I'm not being very original in calling this boon in craft beer a revolution. But let's for a moment look beyond the volume and dollar trends, and peer into the cultural zeitgeist, measured of course by Google Trends, which measures keywords based on how often they are searched and how many news articles are written about them. Below you see the Google Trends -- first for the keywords "craft beer" and then just for the word "beer" for the U.S. from 2004 to YTD 2012.

As you can see, significant Internet chatter for craft beer didn't really start until 2008. There were a few spikes in 2007, but 2008 is when craft beer really started to consistently resonate on the web. That's only four years ago. The interesting thing is that while the term "beer" hasn't had quite the rise that "craft beer" has, beer has risen on craft beer's coattails as well. The good news is that the chatter seems to be continuing to increase. The news that more and more people are requesting craft beer at their weddings and are toasting with beer is a good sign.

Incidentally, I don't think it's an accident that craft web activity has increased just as "IPA" has. They seem to go hand in hand.

While craft beer is obviously hot, the reality is that for distributors to maintain and grow profits, domestic premium and imports probably need to grow as well. For domestic premium, it's tough because the brands are so big that it's difficult to tease out what's happening under its choppy surface.

[Sidebar: Anecdotally, from a few weekends spent in Austin with my college-aged son, the market in the young adult on-premise seems to have bifurcated between shots and beer. "Shots for the alcohol, beer for the chill," as one recent graduate put it].

Regardless, craft beer has gotten people to talk about beer again. You get rather tired of people talking about wine, or even now talking about barrel aged rye whiskey. Finally, beer has given them something to talk about. The question is, will it provide a halo effect for all beer? Or does it even have to?

Year-to-date, in off-premise Symphony IRI scanned channels domestic premium beer has sold around $7.5 billion while craft has sold $800 million. That's about a tenfold difference. So craft would have to grow pretty quickly, even at higher margins, to make up for the loss of domestic premium beer. Domestic premium is losing 0.7 share points while craft is gaining 0.3 points for a difference of 0.4 share point. At 760 million total cases sold in scanned sales YTD, that means a net loss of about 30 million cases (not including other beer categories). Craft would have to be over twice as profitable as domestic premium on a per unit basis in order to "break even" on gross profits for distributors. On average, craft doesn't quite get there. And that doesn't account for the "below the line" extra warehouse, handling, delivery, and selling costs of all the extra SKUs.

But luckily, craft doesn't have to carry the entire load. Yes, that's right. Craft has gotten the lion share of press -- even here -- but in reality it only has to maintain current growth rates and the beer industry will be okay.

We've heard a lot of forecasts of craft doubling share, most recently Charlie Papazian predicting that craft will reach 10 share by 2017. That seems like an achievable goal. Even more so when you consider that the Great American Beer Festival sold 49k tickets in an hour. The sale of tickets at GABF mirrors the craft beer Google Trend line above. Five years ago tickets were still available the week of the event; by 2011 tickets sold out only seven days after they went on sale, and this year all four sessions sold out in a hour.

Many folks have said this is due to scalpers. But Terrapin founder John Cochran points out in his blog that scalpers accounted for probably less than one to two percent of all tickets. "Something bigger than scalpers is going on here." Indeed. And he even invokes the word "revolution."

John ups the ante on Charlie: "I absolutely believe craft beer is headed to 15% plus national market share in the next 10-15 years. Why? Because it's part of a bigger trend. People are moving away from mass-produced items of all types and are supporting local farms and local foods. We are eating better breads, enjoying better cheese and drinking better coffee. And, along with that, we are learning about better beer."

HERE'S THE GOOD NEWS. For most distributors, we'd better hope he is at least partially right. Because losing beer drinkers to wine and spirits is a poor substitute to swapping share to higher margin crafts. But even if John and Charlie are a little too bullish, which I don't think they are, beer distributors with moderately wide portfolios will be fine when you add in big brewer craft brands, super-premium brands, imports, cider, and high margin FMBs, all of which are growing like gangbusters (and way over-compensating for the losses in domestic premium). With all those segments growing, it becomes clear that the beer industry may be becoming slower moving, but everybody will continue to make more money. This year so far, super premiums alone are gaining more share of the beer category than domestic premiums are losing, and at a higher price. And year-to-date, all channel SIG scans show that overall beer volumes are up 3.2%, but beer dollars are up nearly 7%. That's strong medicine.

What do you think? Ping me at hs@beernet.com or http://beernet.com/hotline.php

BEER BRIEFS:

7-ELEVEN IS ACQUIRING 74 C-STORES and two land parcels from Prima Marketing LLC, a 7-Eleven licensee with stores in West Virginia, Ohio, Pennsylvania and Kentucky. The bulk of the stores being purchased are in West Virginia. This deal gets 7-Eleven one step closer to its goal of opening at least 630 new locations in 2012. Recall it is also acquiring Texas-based Tetco.

THE NBWA IS GETTING READY FOR ITS 75th Annual Convention on October 14-17 at the Manchester Grand Hyatt in San Diego. Your editor will be hosting a seminar on one of those days. And for the first time, there will be brewers and importers together on the same stage during the General Session on Oct. 16, including Sam Calagione of Dogfish Head, Luiz Edmond of ABI, Bill Hackett of Crown Imports, Tom Long of MillerCoors, and Dolf van den Brink of Heineken USA. Register at www.nbwa.org and don't forget to call for room at the Manchester Grand Hyatt at 1-888-421-1442 or clicking here.

HIGH GAS: DRIVERS PAID AN average of $3.72 per gallon Monday on gasoline, which is the highest price on record for Aug. 20. Look for more daily highs over the next few weeks. The national average has risen 12% since July 1 because of higher oil prices, and some problems with refineries and pipelines. But it has stabilized over the past few days and many analysts still expect the price of gas to fall after Labor Day.

CROWN IMPORTS plans to grow Pacifico beer 80% over the next ten years, chief marketer Jim Sabia tells the NYTimes. Pacifico sells 5.5 million cases a year, over 40% of them in California. Crown will step up Pacifico marketing budget to $5 million for one year starting last month, aimed at men ages 21 to 34.

CORRECTION: Last week when we reported that Blue Moon Belgian White was flat for the four weeks to 8/4 in Nielsen scans, it was actually up 2.6% in volume and 5.3% in dollars. I apologize for the error .... our "typos for breast cancer" program will get a double donation for that one.

Until tomorrow, Harry

"Continuous effort - not strength or intelligence - is the key to unlocking our potential."
-Winston Churchill

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