More on MillerCoors Tough First Quarter

FILED MAY 8, 2013

Dear Client:

MillerCoors had already reported highlights from their first quarter a few weeks ago (see BBD 04/18/2013 ), with 12 month STRs through March down 2.0% and a 3.3% volume decline in the quarter, trading day adjusted. Coors Light even turned negative, down low single digits, and we saw a high single digit decline in Miller Lite. On a conference call with analysts, MillerCoors' brass gave more color, announcing that premium and above brands drove a 4% increase in domestic net revenue per barrel in Q1. MillerCoors underlying net income declined 1.2% in the first quarter to $271.9 million.

MillerCoors chief Tom Long noted that industry volumes were "challenged" due to a combination of "tough comparatives led by last year's unseasonably warm weather and the payroll tax increase that impacted our core beer drinkers' disposable income." Trends for beer were down in every channel except mass merchandisers. Weather was a "substantive factor" but the good news is that the "outlook on beer [for the year] will be determined by the summer selling season." Bring on the sun.

Tom characterized their portfolio strategy as "working as evidenced by our growth in domestic net revenue per barrel, so there is reason for optimism as our strategy unfolds." He noted that Redd's Apple Ale and Third Shift have gained "early traction with consumers and retailers ahead of our initial projections."

TOM ON PREMIUM LIGHTS. "Our story gets better," he said, noting that share trends were improving and "relevance scores improved in the quarter" although "Miller Lite needs to drive reconsideration" with their new bottle being launched on-premise. Miller64 declined mid-single digits. Tom said they will be "ramping up" marketing efforts behind the brand.

"Retailers have taken a bit of margin and reduced price promotion on premium lights," noted Tom. But "retailers are in some areas are taking that back into balance." CMO Andy England later noted that he remains "very bullish on Coors Light" despite its dip in sales. "Coors Light gained share if you look at any metric.... It will come back in the summer."

TOM C. ON CIDER. The cider industry sold 700k barrels last year in cider which was a doubling, said Tom Cardella, and Crispin is "on pace to double the business this year. But in measured channels over last 26 weeks it is growing 250%. How big is it going to get? My crystal ball is only as good as yours," said Tom.

ON MARKETING SPEND. An analyst noted that SG&A was only up nominally which seems low when MillerCoors is launching two major new brands. Tom noted that some funds were shifted from the economy portfolio, although this is "not robbing Peter to pay Paul", but a shift to higher margin differentiated brands where "advertising grabs harder." Tom e feel like we are completely supporting Coors Light and Miller Lite, not robbing them. Investor relations guru Gary Leibowitz noted that brand marketing was up in the quarter.

TOM ON REDD'S. Tom explained to Molson Coors analysts that Redd's is usually positioned beside Mike's Hard Lemonade and price-pointed there. "Every now and again, it's put near ciders. We prefer it to be in the FMB section and it has done quite well there. So that's net new space for us and that's one of the reasons for the placement. The premium light space is generally not challenged too much. It's actually the economy space that's been challenged in shelf sets by all the above-premiums." Andy noted that "velocity keeps growing on a period by period basis on Redd's although it's slower in the western part of the country...... What's working about Redd's is the simplicity of the message," said Andy. "There was a great unrealized opportunity in apple." Look for Redd's Apple Ale Strawberry coming soon.

ON THIRD SHIFT. Third Shift's distribution and velocity has been slower. It "takes a little more establishment" and "time to explain what Third Shift is." President Ed McBrien noted that he's happy with the pace of distribution, noting that it took Boston Beer a year to get Angry Orchard to 50% distribution. Third Shift is headed toward north of 50% distribution, and Redd's is over 60% "and it's incremental . Our distributors have done a nice job of leaning into those brands."

ON INNOVATION. Tom also distinguished MillerCoors' new brand strategy from A-B's, saying that they have a "distribution build that is step-by-step rather than a massive bang and a Roman candle. Our approach to new products has been very deliberate.... Our distribution continues to build rather slow" but he maintains that the brands will have more "staying power" that way.

When asked to confirm if MillerCoors is going to rollout Miller Fortune, the rumored higher alcohol brand, Tom merely said, "No", meaning he wouldn't confirm or deny. However, Andy pointed out that innovation in beer needs to be fast, and "craft has proven it." He said taking share back from wine and spirits is "wide open" and "we certainly look at all of beverage alcohol being our competitive environment." Reaching new "occasions is driving our innovation pipeline" and they have "many projects aiming at all occasions. Some will see the light of day and some won't. Higher alcohol and flavors seem to be doing very well with Millennial drinkers....We look at higher alcohol with a greater deal of interest....We may or may not enter that business."

DISTRIBUTOR CONSOLIDATION IN UPSTATE NEW YORK

Wright Wisner and Rochester Beer and Beverage have a purchase agreement in place for the Rochester's brands rights, Wright Wisner confirmed to BBD. That's about 1.5 million cases they would buy, pending supplier approvals. WW is not buying the company or the building and has no obligation to purchase any trucks or other equipment. All in after this purchase, Wright Wisner and branches will be 11 million cases (8 million beer and 3 million NA.)


ED. NOTE: Yesterday afternoon you may have noticed we accidentally published Wine & Spirits Daily to our BBD reader list. My apologies -- consider it a free sample.

Until tomorrow, Harry

"Anyone who works is a fool. I don't work - I merely inflict myself upon the public."
-Robert Morley

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