MillerCoors Chief Tom Long Responds to Chesbay Ordeal

FILED SEPTEMBER 28, 2012

Dear Client:

It was just four years ago when the newly created MillerCoors found itself in a huge controversy with its distributors over its new contract.

This fall, the brewer finds itself in another fracas as it has invoked federal trademark law to block Reyes Holdings - its largest wholesaler and a larger business than MillerCoors itself - from acquiring Chesbay in Virginia.

As you can imagine, I've received a tremendous amount of mail on this burning topic, and opinions break into two camps: One group sees this as an attack on the three-tier system. A smaller group sees this controversy as essentially boiling down to MillerCoors trying to draw a line in the sand with Reyes.

"What is MillerCoors thinking?" one distributor asked us. We thought that was a fair question so we sat down with MillerCoors chief Tom Long to get at the heart of the matter. You, my friends, are a fly on the wall.

HARRY: Tom, thanks for taking the time. We might as well tackle the elephant in the room. It's no secret that MillerCoors' relationship with your biggest distributor, Reyes Holdings, is sometimes strained. Some distributors are saying this whole fight is about you trying to prevent Reyes from getting bigger. Is that true?

TOM LONG: We have a solid relationship and an ongoing dialogue with Reyes Holdings. We disagree on some issues that both teams see as important. But it's not personal. Let me say upfront we appreciate their business and I believe we both want to prosper together. That's how both companies have become so successful. But it's really pretty simple ... they want to grow new territory with our brands and others unconstrained by performance requirements or by signing our contract and we think that's important. We know we have a shared accountability for performance, and of course it's a two-way street. And we have lots of very big distributors who we grow with, and plan to grow with, and it works fine. And Reyes has big suppliers they work fine with too. On Chesbay, things didn't come together.

HS: Can you elaborate on that a bit?

TL: I'm not going to share private conversations, but it's fair to say in these sorts of transactions we want a commitment to certain performance standards, including small-store service levels. And as a rule we want distributors to service the entire territory, not just the accounts with the best economics. We want reasonable access to our brands for all licensed accounts, which I think is a fair expectation for any DSD supplier in any DSD industry. That's fundamentally why DSD crushes warehouse. It's not just the big accounts Harry, it's up and down the street.

One of your readers summed it up very nicely yesterday saying "I strongly believe MC should be able to pick my successor. I would be gone and they have to live with whoever buys me." Doesn't that sound reasonable?

HS: Reyes has famously not signed the MillerCoors contract you rolled out several years ago. Is that a factor here?

TL: All other aligned distributors whom we support for territory growth have signed it and it's nearly 90 percent of our system. And things have gone really smoothly since then by all accounts. And distributor valuations have continued to explode, contrary to the naysayers back then.

HS: Some people say this is about MC trying to prevent Reyes from getting any larger. Is that true?

TL: Well, we are concerned about keeping the model local for all kinds of reasons. But in this case the answer is no. Because there are pretty simple conditions under which we would approve expansion. We have communicated that and the conditions are consistent with our expectations of any distributor. We need to make sure we have shared principles, are tracking the same things and are strategically aligned as we go to market.

We don't have an arbitrary cap on size. But at the same time we don't want to go from a world where we have 500 to only 15 or 20 distributors. I'm sure everyone thinks that's way too few! Our business was built by distributors with a local touch who service every account like it mattered. That local touch still matters and if we go to a world where we have 15-20 distributors I can categorically say that we will lose our industry if it goes that far.

Look no further than soft drinks.

HS: Now, your amended complaint invoking federal trademark law as superseding state franchise laws certainly got everyone's attention. Can you elaborate on your reasoning?

TL: I can tell you, unequivocally, that it was not an attack on state franchise laws. Rather, it is about us trying to protect the value of our brands by making sure we're partnering with the distributor we believe best suited to that market and our brands under current conditions.

Because at the end of the day, Harry, the beer business is about brands and its health and profitability demands that we have strong brands. As a supplier, it's our job to bring great brands and invest billions of dollars on marketing and sales initiatives to make sure those brands are as strong as they can be.

And it works great most of the time.

HS: So are you walking away from the Three-Tier System Doctrine?

TL: No, and I'd like to get real clear on what the Three-Tier System Doctrine says and does not say. The Three-Tier System Doctrine clearly states our position that MillerCoors believes the three-tier system of production, distribution and retail sale is the most powerful route to market for our brands. Additionally, the doctrine speaks out specifically about the balance needed in federal and state law as it applies to our businesses. It does not say that we would never have disagreements with our distributors. It does not say that state laws mean whatever a distributor may want them to mean. It does not say we would not protect our interests - and our system's interests - within the context of the three-tier system when we believe those interests are being undermined.

Our actions honor those principles and commitments and the facts of this case are unique to this particular transaction. Our position does not threaten the three-tier system. Rather, we seek to maintain the appropriate balance between the tiers so we can ensure that our brands continue to grow to the benefit of both us and our distributors.

HS: Some distributors fear that if you prevail on the trademark issue, you will suck a lot of value out of the system. Is that true?

TL: Actually Harry, the exact opposite is true. If we lose control of our brands, we can't build their value and ubiquity, which in turn builds the value of a distributor's business. We just want to protect our ability to match an offer from another purchaser and assign the right to someone who'll help us build brands locally. The seller has to be kept whole. We get that. That's table stakes. But we need to keep our brands whole too. Our company value depends on our brand value too. Just like distributors trade on the brand franchise and equity value, so do we.

HS: What do you say to distributors who say you've violated their trust?

TL: We have fought hard and fairly for our distributors because it's good business. And they do the same for us. Almost universally. We've given up our rights to own distributorships long term in several states and been clear that even here at Chesbay, we are temporary minority owners. It's commitment, not competition. That's not going away. But it's a two-way street.

In fact, just in the last few years we have demonstrated that commitment through actions that hurt our pocketbook short term and benefited our distributors, like moving to 70/30 on price promotion, a move aimed at building alignment and trust. To my knowledge, nobody else followed. At the urging of our National Distributor Council, we revised the freight and fuel model, taking more forward fuel risk. And, we penned the Three-Tier System Doctrine and stand by the spirit and letter of that document.

We know we need to get the focus back on selling great beers and we don't like this distraction one bit, but it's a necessary business decision to protect our rights as brand owners.

We hope to return the dialogue back to selling beer next week when we kick off our fall meetings. We're going to be previewing our sales and marketing and innovation plans for the balance of the year and 2013. We think we have a strong show and some strong work.
We're very cognizant of the fact that if we ask high standards of our distributors, we must set high standards for ourselves.

HS: Thanks Tom for your time.

DISTRIBUTOR STATE ASSOCIATION COMES OUT BLASTING AGAINST LAWSUIT

Eric Criss, the president of the Beer Industry of Florida, links the lawsuit against Chesbay by MillerCoors to the general deregulation in press release issued last night. Recall that Reyes is a member of both the Beer Industry of Florida (blue-silver network) and the Florida Beer Wholesalers Association (red network).

"Beer distributors strongly support laws which preserve America's state-based system of alcohol regulation," he writes. Eric says this system is "acclaimed by public health experts worldwide" and that state franchise law a "critical component of the three-tier system in dozens of states across the nation. They are proving to be one of the few remaining protections for local, family-owned, beer distributors against the undue influence of foreign-owned, mega-brewers who control 80 percent of the world beer market." Pointing to recent press reports of minors buying alcohol in the internet, Eric encourages "companies engaged in the production and sale of alcohol to stop the endless line of lawsuits designed to tear down the system of alcohol regulation that protects our children and our communities. Specifically, we call on MillerCoors to drop its lawsuit against Chesbay Distributing and end its unwarranted attack on family-owned distributorships."


SUPPLIERS TO BREWERS SPEAK AT CONGRESSIONAL FORUM ON IMPORTANCE OF BEER

Representatives of companies that produce hops, cans and bottle caps spoke at a Congressional forum yesterday to a packed house of about 50 Hill staffers, sponsored by the BI. The major theme was how the U.S. beer industry supports more than 1.8 million American jobs in industries as diverse as farming and manufacturing.

The forum, "A Jobs Success Story: The Economic Impact of Brewing and Importing in America," included remarks by BI chief Joe McClain and others.

BEER IS BIG. Here are some facts to save on your iPhone for when you need them. An economic analysis shows that brewing and importing accounted for $223.8 billion in the economic output of the United States - with employees earning nearly $71.2 billion wages and benefits, and generating more than $44 billion taxes. In 2010, the last year tax statistics were available, 45 percent of what every beer drinker paid for a beer went to taxes of some kind. "That makes taxes the most expensive ingredient in your beer," says Joe.

Prior to the Congressional forum, the Beer Institute released a national poll of 1,000 likely voters, which found strong opposition to increasing taxes on beer. Nine out of 10 voters in the poll agreed that "raising taxes on beer will mean working class consumers will have to pay more."

BEER DRINKERS ARE POLITICAL. The poll also found that self-identified "beer drinkers" are a larger proportion of the electorate than self-identified supporters of either the Tea Party of Occupy Wall Street movement, and were evenly split between Republican and Democratic parties.

Beer drinkers are also more political than the average likely voter:

-68% of regular beer drinkers say they discuss what's going on in the presidential campaign with friends or co-workers;

-66% of regular beer drinkers say they are going to be watching the presidential debates, meaning they are more likely to watch presidential debates than watch the World Series or an NFL game;

-25% say they will likely donate or contribute money to a political party, cause, or candidate running for public office; and

-14%(or one out of seven) beer drinkers say they will likely volunteer for a political party, cause, or on the campaign for a candidate running this year.


BEER BRIEFS:

AUGUST DOMESTIC TAXPAID shipments were up 1.2% against an easy comp, making YTD domestic shipments up 1.7%, according to estimates by Lester Jones at the Beer Institute. Including imports, the beer business is up 1.7% for the year. Not bad. Comps start getting harder now though.

AMAZON.COM IS CONSIDERING getting into the direct wine selling business again, according to Wine Industry Insight. They flirted with this idea a few years ago but pulled back after considering the regulatory hurdles. Apparently they will handle the orders but wineries must take care of fulfillment to get around the legal issues in California in particular. How long before beer is added to the mix?

HERE IS AN interesting infographic of how drinkers of beer brands vote: http://hotlineoncall.nationaljournal.com/archives/2012/09/the-politics-of-3.php

WEEKEND READING. Check out consultant Tim Coughlin's piece, "The Art of Wort", (nice title) which examines what enemies of three-tier would do if they followed the tenets of Sun Tzu: http://www.dmgfinancial.com/the-art-of-wort.html

Until tomorrow, Harry

"A good listener is usually thinking about something else."
-Kin Hubbard

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