Big Brewer Bash


Dear Client:

There's something in the air. Have you sensed it? We've noticed in the past few months there's been a heightened acrimony by craft brewers directed at big brewers. It's manifested itself in many high profile press pieces, but it's been amplified by the proposed ABI - Modelo deal with the DOJ, which has given small brewers a national platform on which to vent their frustration with fighting against the Bigs for distributor, retailer, and consumer attention.

There's also a large, well-funded progressive advocacy community out there that is built to fight big business on behalf of small, and they've enjoined this fight in a big way..... to wit:

You could tell the day's tone from the outset. Near the beginning of yesterday's "Big Beer Blitzes America: Is Anheuser-Busch Too Powerful?" a nonprofit-sponsored symposium on big brewers in general and the ABI-Modelo deal in particular, Barry Lynn of the hosting New American Foundation warned he "didn't want to offend anyone."

"People in business do what they do … their job is to push the envelope, to sell more stuff. … What we want to shine the light on today is bad law, especially bad enforcement of law. The fault in this lies in no big company, it lies in the us, the citizenry. We the people have failed … to perform our most fundamental moral, political and civic duties … which is to regulate this extremely complicated set of marketplaces and ensure that no power ever comes sufficiently great to be able to once again overwhelm local control. To overwhelm, to push alcohol into our markets, to push alcohol across the lips." Where is Carrie Nation?

Not that anyone is taking sides. But 'the fault' also lies in our elected reps: "The Obama Administration should understand that brewing 5 gallons of homebrew is not a sufficiently powerful action." If the Administration is to serve the public interest, "it must use the power in that office to assist us in re-establishing open and competitive markets again, free from domination from any private, very large companies."

A DISTRIBUTOR'S TAKE. Wholesale Beer Distributors of Arkansas director Steve Higginbotham (a friend) would soon after speak during the first panel, which explored whether consolidation presents a threat to consumer. Mostly Steve recapped Arkansas' uniform FOB price fight a few years ago, presumably to illustrate the importance of a well-regulated and enforced 3-tier system.

For example: In the leadup to the uniform FOB fight, Steve relayed how "suppliers were able to discriminate in pricing to their own like wholesalers. My guys -- the distributors -- didn't realize all the price discrepancy, because they didn't realize pricing of other distributors being sold to but the retailers picked up on it quickly. So we had a situation where like retailers, who might be on a county line, different franchise areas, were paying as much as $3 more for a case of beer." Of course the suppliers were against a uniform FOB law.

Point: "This business is competitive enough without you have to compete against your own products. The point of our non-discriminatory legislation, [is] it prevents a supplier from picking favorites" in other words, a supplier can't come in, charge different prices to wholesaler. Because that can force involuntary consolidation," not to mention punish wholesalers who take on competing craft brands.

Further, in case you were wondering: "When I say independent beer distributors, I'm not talking about breweries owning wholesalers," said Steve. Branch distributors are illegal in Arkansas. "And when the largest brewer in the world owns 2-tiers of the 3-tier system, we feel like that's not appropriate."

CRAFT'S TAKE. Another panel member, Dogfish Head's Sam Calagione, expressed a similar sentiment. During Q&A, one antitrust lawyer asked him whether craft brewers would be satisfied if the DOJ solution to the deal in question were divestiture of something like Bud Light Lime. And as an alternative, would his distribution concerns be alleviated if there were a prohibition on A-B building its strength in distribution?

Says Sam: "I don't think I have the perspective to speak to exactly what the DOJ's decision should be. I will say as a small brewer I have very deep concerns with [the deal] as it's written and as I understand it. Particularly when a brand like Corona sells at roughly craft retail prices. What does that mean for finite shelf space for small brewers? And also frankly … the proliferation of branch ownership is extremely daunting from a small brewer's perspective. Right now I believe ABI can control 50% of their own distribution and yet we're talking about how wonderful it is to have an independent middle tier. How independent is that?"

But for the record: "I want to state clearly," he'd said earlier in the panel, "I want to see the big brewers right the ship on their flagship light lagers being stagnant … I want to see beer stop losing market share to spirits, wine. But I just think we're frankly in a totally different industry than those big brewers," pointing out that among the roughly 2,000 craft brewers, only Boston is public -- a unique situation, because Jim [Koch] controls the voting stock" can still make decisions with his brewer's hat on."

There was even a priest there poo-pooing the clear road to alcohol perdition.

MillerCoors spokesman Pete Marino sent a response some of the remarks on the panels:

‽There are more small breweries in the US that are thriving than at any other time in the past century. To suggest that small brewers are being handicapped when they are growing so rapidly is absurd. Consumers decide what beers to drink.”


The Capitol Forum newsletter spoke to a "regional brewer" who was interviewed by the Department of Justice, and who told them the DOJ's investigation "appears to be focused on a broader array of competitive effects when compared to the agency's investigation into prior beer deals," like the MillerCoors J-V. That merger was focused on pricing implications. But the DOJ are now asking a "diverse assortment of questions including ones about pricing, distribution and planning strategies, on-premise v. off premise considerations, and channels of trade issues concerning the middle tier and state franchise laws," although they haven't asked for any documents, even though they were asked for docs on the MillerCoors J-V. The fact that the agency didn't ask for documents may indicate that they are not planning on litigating the deal. On the other hand, they may have gotten docs from other sources or is focused on finding a proper remedy.

A distributor in favor of the deal pointed out that an independent Crown Imports, free from the J-V with Modelo (which is 50% owned by A-B now), will actually be more independent and competitive. He points out that Constellation didn�� t invest as heavily in the Crown J-V because it was never sure that Modelo wouldn�� t pull the trigger and take back the brands. With complete control of Crown, Constellation will be incentivized to compete aggressively. On the other hand, the distributor notes that Bill Hackett has worked for both Constellation and Modelo, whereas now he�� d just work for Constellation. Would things change under that scenario?


Meanwhile, Brooklyn Brewery founder Steve Hindy took to the opinion pages of to voice his opposition to the deal, writing that the deal is causing deep concern among America's craft brewers", pointing out that A-B and MillerCoors would control over 80% of the US beer market after the deal.

The concentration of market share in two global companies means they have tremendous influence over distributors and retailers. This gives an advantage to big brewer beer brands over small brands created by America's independent craft brewers.” While conceding that A-B has said it would have no control over the sale of Modelo brands in the US [see Bill Hackett interview yesterday, BBD 12-12-12], ‽it's hard to understand how a brewery could own another brewery and not have some control over sales and marketing. Doesn't the owner control the price of beer sold to the importer/marketer? Doesn't the owner contribute to the sales and marketing programs and costs of the importer/marketer? Doesn't the owner have some say over the hiring of personnel for the brewery it owns?” (Ed. Note: Bill Hackett has said that, no, under the agreement ABI would have no line of sight” or control over any of those things, but craft brewers seemingly aren't buying it).

Steve concludes that given their already huge market shares, control over distributors, and control over retailer shelves, he and other craft brewers are baffled by the state of the U.S. brewing industry. How did we ever get to a situation where two companies control 80%? And how can we allow them to control more?”


As I've said before, we don't have a dog in this hunt. But it seems to me this issue seems to come down to who do you believe? ABI and Constellation/Crown have said that their agreement essentially sells the rights to the Modelo brands to Crown/Constellation in the U.S., and ABI would have no control over those brands other than to be a contract brewer under specific pre-set pricing and control provisions. They stress ABI would have no control over Modelo's US marketing, distribution, retail strategy, incentives, etc.

On the other hand you have many of their competitors and others vocally saying that a contract is a mighty thin paper barrier to ABI controlling Modelo, even if that control is indirectly through Crown. And besides there's a 10 year option to buy so why wouldn't Constellation go along with ABI? (Although I think the 10 year option will be the first thing to go under a DOJ deal).

So the real question is who will the DOJ believe? While ABI and Constellation make a compelling case that Crown will actually be more independent after the sale than they are now, the DOJ is most definitely listening and giving weight to competitors' concerns, and craft brewers have been particularly vocal against the deal. And make no mistake, the DOJ is not immune to politics. It's no coincidence that there have been a rash of high profile anti-big-brewer articles appearing in the press lately. And you have this New America Foundation Event which brought together a diverse group of voices against the deal; and whose organizer, Barry Lynn, is a favorite of New York Times progressive columnist Paul Krugman and apparently has the ear of many influential Congressmen.

Let us not forget that the victory of President Obama and the extension of his Administration another four years will also have an effect on the direction of the DOJ, as it presumably will continue to take a more aggressive stance against antitrust cases.

So what will the DOJ do? Nobody knows yet and very tough to handicap. But it seems like ABI's hints that it will be smooth sailing are somewhat optimistic. My guess: deal gets done but with some hefty concessions.

But here's the thing: The deal has already been approve by Mexican antitrust authorities, as well as most of the world. So even if the US DOJ disapproves, ABI can still purchase the company, or perhaps their subsidiary Ambev purchases it. Ambev in fact simplified their stock ownership structure earlier this week to make it easier to raise cash. Hmm. If Ambev moves forward with the purchase without the DOJ, they could conceivably attempt to keep the status quo with Constellation as a JV partner in Crown. When you put it in those terms, it becomes clear that the US remains just a distribution deal for them.


In yet another presser on big brewers vs craft brewers, SABMiller exec chairman Graham Mackay touched on his views of the American craft movement in a CNN Money/Fortune interview, and it seems he's got a pretty good bead on it. When Fortune asked if the craft movement is US global or US-specific, Graham said:

"It's U.S.-specific in the sense that the U.S. had gone in a particular direction of large-scale consolidation, dominance by a relatively small number of big brands, and trends toward less and less flavor, more repeatability, less satiating, and the rise of light beers. The U.S. was not the only one moving in that direction, but it moved furthest in that direction." What drove that was "the endless quest in the U.S. for repeatability [what we call sessionability]. Obviously, every modern society has a bit of that. Also, the elimination of harsh and intense flavors has been the central sweet spot of the beer industry for decades, if not generations. If you go back 30 or 40 years and look at the formulations for the big brands that still exist, their bitterness levels in the U.S. are 7 to 9 IBUs. Those brands, 30 or 40 year ago, were up at the 17, 18, 19 kind of level. European lagers are somewhere between 20 and 25. The consumer has gone back to saying, 'Let's get a bit of interest, let's have a bit of difference.' So, there's been the growth of craft beer. But it's also local, anti-marketing, anti-global, anti-big, and more focused on experience and knowing the brewer who produces it."

Graham also says that MillerCoors is always looking "selectively to acquire, or form partnerships with, or cozy up to people who have incubated good businesses" because it's hard for big companies to "incubate small brands. That, at its heart, is the dilemma. To start a small brand in a credible, consistent, sticking-to-it kind of way is hard for big companies." Indeed, all of this tense feelings from craft comes from the perception that "we're stealing their authenticity. What we say is, ''Let the consumer decide.' If we're authentic enough for the consumer, that's authentic enough for anyone."

Will craft continue to grow at these levels. Graham says that he doesn't think it will continue indefinitely "in this guise" as "too many people won't make any money" and "I think it will become less fashionable. These things are fashion to some extent."

And interestingly, Graham says that while Tenth and Blake is set up to incubate small brands, once they become big it makes sense to move them to the mainstream sales and marketing departments. And Blue Moon may not be far from that stage. "Blue Moon is still handled by Tenth and Blake, but it's almost inevitable that at some stage in the not too distant future, you might contemplate moving Blue Moon out into the mainstream and just treat it as another brand."


On to less heady and controversial topics. Upstate New York blue-silver distributor DeCrescente Distributing announced the groundbreaking of a 45,000 square foot addition to its main warehouse at the company�� s Mechanicville, New York headquarters. The expanded facility will accommodate the needs of the growing company, which in the last 18 months has had three significant acquisitions adding more than 1.8 million cases to its annual volume. Expected completion is May 31 of this year. The expansion will bring the company�� s total facilities to 287,000 square feet.


Something going down at Boston Beer Co.? Several finance sites earlier today put out the alert: "Boston Beer trading halted with news pending." Turns out the company is increasing its 2013 depletions projection range to be between 10% and 15%, from its previously communicated growth of high-single digits, based on its current depletions forecast for 2013.


The Beer Institute announced new data today showing that the number of active permitted brewers rose to a historic high of 2,751, as reported by the Alcohol and Tobacco Tax and Trade Bureau (TTB). This high water mark is up from 2,309 active permitted brewers in 2011. This is the highest number of U.S. brewers ever recorded by the Beer Institute.

In 2012 the industry gained 442 new brewers with California gaining 31 brewers, Texas gaining 29, and Colorado, Illinois and Washington all gaining 28 each.

BREWPIC: Number of permitted breweries in the US

Until tomorrow, Harry

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