Will the DOJ Get Involved in A-B's Ohio Distribution Deal?

FILED MAY 22, 2013

Dear Client:

The scuttlebut around the state of Ohio is that A-B has contacted red distributors in the state offering to buy them out ahead of the July 29 deadline, when the new law banning branch expansion comes into effect. And A-B is willing to pay, we hear. Bottom line: expect more coming out of Ohio in the coming days.

Whether there are more deals or not, one big question remains: Will the DOJ get involved or not ? Recall that for any distribution deal for distributors over $3 million, A-B is subject to the consent decree that they agreed to with the DOJ to get the Modelo deal done, and that decree gives the DOJ the right to fully investigate the deal. And the clock is ticking, as the consent decree provides that A-B has to give the DOJ 60 days to investigate before they can close the deal. The plot thickens as C&G Distributing carries competitive brands, including Yuengling and Modelo, which may interest the DOJ. It also thickens because of the timing issue...It's May 22 now, so A-B will has just barely enough time to close the deal(s) before the July 29 deadline if everything falls into place AND the DOJ doesn't investigate or does investigate and gives its consent.

One legal source tells BBD that the "Justice Department clearly sees independent distribution as being essential to keeping the market competitive. Even a small transaction like this distributor in Lima could get attention from the antitrust division." The DOJ has a lot of other things going on (AP, Fox News), but the question is will they become activist in small distribution deals? Remember, ABI is under the DOJ's watchful eyes for 10 years.

LUIZ ON UPSIDE, INNOVATION, AND ANCHORS

"At this point you're probably tired of the same explanations - the weather was really bad," A-B InBev North America chief Luiz Edmond told a bow-tied Michael Bellas on the state of beer so far in '13 at the Beverage Forum. "We don't accept that as an excuse, but accept as explanation." What else is at work? For A-B, cycling last year's Platinum supply push. And payroll taxes, especially for their middle class, lower-income consumer, whose had some $500-$600 taken out of their discretionary spending. The good news: by now he believes consumers have adapted, and "as they understand how much is really left in their pockets they come back." Plus, the weather is getting better.

INNOVATIONS: PLATINUM, LIME-A-RITA. "It's no major secret ... that we underindex in the high-end," Luiz started in on innovations.

"Our brands, even though we call them premium -- they are not delivering the premiumization consumers are looking for." But they "do believe there's opportunity to address some of the key concerns of consumers." Platinum's package, alcohol content and liquid is one such answer.

Lime-a-Rita is too -- though it's a different animal, "a much faster innovation" than Platinum's 3.5 years in the making. They developed Lime-a-Rita in a quick 6 months after witnessing consumers carrying margaritas alongside Bud Light Lime. They were surprised at its quick growth but have invested in capacity to keep up. Straw-ber-ita is even bigger, and plays especially well with women.

Their innovation mantra? Go big. "We've had years we introed a lot of innovation, and we had years that we had nothing," said Luiz. "The best years we have is when we intro 1 or 2 big things and not a bunch of small things." They "could start small, but they have to have big potential."

CLOSING THE GAP ON HIGH-END AND CRAFT. They have 10-11% market share in the high end. Apparently that's not enough: "Between 11 and our fair share there's a gap to be closed," and they're "working year after year to close it." Luiz pointed out that most of their competition in Brazil and Argentina comes from the low end. Its the opposite in the U.S., with MillerCoors, Heineken, and now Constellation.

ON CRAFT. As for the craft part of that equation, they have tanks that could produce 100 microbrews in one day. But they have to play the game their way. "If we play the same as [small craft] we're not going to win," said Luiz. "We believe in big brands," and "we can make a lot of strides in there." He pointed to Goose's 50% growth last year and projected almost 100% growth for 2013. That brand is a particularly good compliment to Shock Top. "Shock top is an amazing brand," said Luiz, "but because we positioned it in the wheat segment ... has its limitations. Think about IPAs, darker ales, there's some limitations."

WHAT'S UP WITH BUD LIGHT? "Will it ever grow, or has it exhausted its cycle?" Michael wanted to know. "I don't believe in the cycle," Luiz said. "We've said that time again. It's easier for me to lose my job than for us to give up on Bud Light. It's our biggest brand; it's one of the biggest brands in the world," and "last year, total Bud Light [family] had its highest market share ever." Some of Bud Light's decline "is self-inflicted" from Platinum: "Naturally the Bud Light consumers experimented" with it, and some "made the trade."

AS FOR BUD, "today 50% of its volume is sold outside U.S.," Luiz said, pressed on Big Red. That said it's "important the brand succeeds in the U.S." Can it get there? He thinks so. He points out that adding Black Crown to Bud makes things flat.

AND BELOW PREMIUMS. They were very concerned that consumers would trade down to these from Bud and Bud Light during the recession, said Luiz, so they saw an opportunity to close the gap. That and the hard-hit lower income consumer help account for the segment's softness.

They also didn't realize, however, that this price point made trading out to other bev alc categories attractive as well. "You hear a lot about the liquor industry growing in premium," said Luiz, but "look at the price of several liquors out there versus Busch" and there's a "clear correlation."

WHOLESALER ACQUISITION LANDSCAPE. Luiz believes they "have a role" in distributor consolidation, and would more likely participate "where we find a market we are underperforming or need to invest" or "in situations where two wholesalers should acquire each other to recover some of that synergy" which "should be reinvested in the market to take the scale to the next level." In all, "I'd say we have more buyers than sellers. Most of our wholesalers want to acquire and grow."

What of A-B wholesaler acquisition targets? Luiz wouldn't put any numbers to acquisition targets but noted "there are situations we believe we could make a difference. If these situations are open for negotiations, we will participate," he said, though "if you overpay, you don't have any returns." Their "priority," he clarified, "is to consolidate in the territories where we operate," like California.

THE BOTTOM LINE. Michael acknowledged InBev's cost-cutting culture and Luiz's key role in building $2 billions in savings that put ABI in a stronger financial position after the debt-heavy merger. "How hard was that?" Michael asked. "Well, I lost a lot of hair," Luiz joked.

"We operate on the edge" and "put out big dreams ... tied against objectives," said Luiz. Their cost proposition? "Save money, be more efficient, and reinvest the money back into business to grow topline." Innovation has its place, too: "Platinum costs more than Bud Light. Black Crown costs more than Budweiser." And Lime-a-Rita costs more than those two. So "we are frugal in the way we operate," said Luiz, "but believe if consumers buy more, more times, more often and pay more ... we'll be more successful."

GENERATION BEER

Millennials are so self-centered they took up the whole first day of The Beverage Forum 2013 conference in New York City. BMG chief Michael Bellas reminded the audience why they're "the biggest consumer change" of our time: They're already about to outnumber boomers. By 2033 they'll be over 80 million strong, only to grow with immigration, while Boomers will "recede" to less than 6 million. They're driving the trends of premiumization and personalization in beverage alcohol and beyond.

MillerCoors marketing chief Andy England kicked off a panel on "Meeting the Marketing Challenge of Millennials" thereafter. These days they apparently take their marketing cues from perceived "Millennial truths." Cultural diversity and inclusion are Millennial realities, for example -- hence their position with "Copa Oro" and Ice Cube spots. The company answers Millennials' corporate distrust and authenticity imperative with products like Hamm's, Tenth and Blake brands, and Coors Banquet. But Millennials are also "new value-oriented": Hence the "value craft" Third Shift intro.

Their 2023 outlook recognizes a central challenge in the pull among fragmentation, specialization and personalization trends across beverage segments. "How to get the balance right between delivering fragmented offerings [while] taking advantage of economies of scale" is the key to success.

Constellation CMO Chris Fehrnstrom later shared a Millennials share of stomach breakdown: Of 235 million U.S. adults, roughly 1/3 drink wine. Some 20% of those are core wine drinkers, who drink the category once or more a month. Millennials comprise 26% of that core; Boomers are 36%, Gen X is 22%, and "Swing" is 15%.

Of interest to the beer category: Millennial and Swing numbers have swapped places in the last 5-10 years, with the former "adopting [wine] at a faster rate than any other generation." Chris added that not all Millennials are created equal: The 28-35 Millennial cohort drinks more wine than the younger tier.

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Until tomorrow, Harry

"Great people talk about ideas, average people talk about things, and small people talk about wine."
-Fran Lebowitz

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