Beer is Best, But Still Lots of Headwinds

FILED SEPTEMBER 6, 2013

Dear Client:

I realize I've been reporting a lot of downer news on the beer industry. And I'm about to report more. But let's recognize that we still have so much to be happy about: craft is the fastest growing segment in the bev-alc segment and one of the fastest growing of any consumer good, the high end of domestics and the high end of imports are growing the fastest, pricing is still sane, profits are are up, and this is still the best industry in the world.

But let's cry in our beer a little more, and then I promise to end on an upbeat note.

First, you've already read of the terrible on-premise trends for beer, so I won't pile on. I'll just quickly add that while spirits and wine both saw volume trends improve slightly through mid-August, beer trends deteriorated, with growth slowing across all segments of beer, according to GuestMetrics. This is against a backdrop of continued weak overall restaurant and bar trends during 3Q, with total traffic down 1.9% during the 4-week period ending August 11th. It's bad out there in restaurant-ville.

Second, as if beer isn't facing enough competition from wine and spirits, now we have to deal with the weed dealers. USA Today fronted a headline yesterday that trumpeted that Americans are increasingly embracing marijuana as a mainstream substance. And we reported earlier this week that more teens use weed than drink, likely because it's easier to obtain for them.

And then we have this news out of Denver, Colorado, where weed is soon to be legal. A pro-weed group called the The Marijuana Policy Project purchased a huge Lamar billboard next to the Sports Authority Field at Mile High Stadium, just in time for the NFL kickoff game, asking the league to discontinue punishment for its players who want to smoke weed.

The billboard suggests that marijuana is a safer choice than drinking, showing a beer on the billboard (see pic below). Last year Colorado passed a law allowing the personal use of weed for adults, and Washington passed a similar measure.

The billboard is in orange and blue Broncos colors and declares: "Stop driving players to drink! A safer choice is now legal (here)", per Yahoo. There's also a petition out there pushing NFL commissioner Roger Goodell to change the league's policy on marijuana use, which can be found at MarijuanaPolicy.org/Football.

A Colorado beer distributor wrote in an email that he finds this billboard outrageous and is right in the "parking lot where many of us spend thousands of dollars for tailgating activities entertaining our customers and employees. If I was in business in the Denver marketplace (or any of you doing business with Lamar), I would pull every single billboard and tear up every contract with Lamar Outdoor Advertising. I view this as a direct attack on the beer business and these folks are clearly not our friends."

We don't have enough data yet to know how legal weed use will affect beer sales, but declaring that weed is safer than drinking beer is quite a stretch in my opinion. For one, it's more difficult for law enforcement to detect on potentially impaired drivers. Another point to make is that while weed will be made legal, there will likely still be an underground illicit untaxed trade in the substance (particularly for the underage), as the infrastructure for that is already in place. Legal branded weed would be much harder to authenticate than legal branded and bonded Miller Lite or Jack Daniels. Enough about weed.

Another issue is supply. We've been receiving lots of noise in the past two weeks about supply issues not only from craft brewers facing capacity constraints, but from A-B and MillerCoors on certain brand-packs. A-B seems to have trouble providing enough kegs and premium 30 packs (among other packages), and MillerCoors had trouble supplying Leine's Orange Shandy and several anticipate shortages with the national rollout of Redd's Strawberry Ale on already strained Redd's Apple Ale supply.

And finally, distributors are griping about the marketing from the Two Bigs. We've already covered this, but by covering it we've inspired lots of other examples being transmitted. The main beef: there's plenty of push but little pull. For example, A-B is activating a scavenger hunt using social media from September through November with Platinum and Justin Timberlake. "Really, a scavenger hunt?" says one distributor. A-B has "fine tuned and getting more and more out of our execution, but we need PULL."

And I promised to end on a positive note. Our comment yesterday about Labor Day not being great in terms of sales got several responses from distributors with proof to the contrary. One distributor in the Midwest says Labor Day was a "barn-burner" and "we had a record amount of beer go out Monday, then on Friday we broke that by another 25%!"

GRAHAM MACKAY BACK AT DESK AT SABMILLER

A bit of good news: SABMiller said this morning that Graham Mackay resumed his role as non-executive chairman after his treatment for a brain tumor, reports Bloomberg.

Graham started work again yesterday after taking a hiatus since May. John Manser, who had been acting chairman, will return to his former role as deputy chairman and senior independent director.

"The directors are extremely grateful to John Manser for stepping so ably into the breach as acting chairman during my absence, and I personally have relied hugely on his support and wise counsel during what has been a very difficult few months for my family and me," Graham said in a statement. Also: "I am delighted that the transition of the chief executive's management responsibilities to Alan Clark has gone so well."

You'll recall that very soon after the MillerCoors Spring distributor meetings, it was revealed that Graham would have to undergo brain surgery to remove a tumor. We're glad he's back at work.

SPECIAL REPORT: JEAN FRANCOIS SHARES HEINEKEN GLOBAL STRATEGIES

Heineken CEO/chairman of the executive board Jean François van Boxmeer focused on the continued strategy for Heineken group at this week's Barclays Back to School Conference. He didn't share many specifics on their business in the Americas, which comprised 29% of their group beer volume last year and 24% of their operating profits. Nonetheless their Heineken brand and portfolio imperatives surely still affect this side of the pond. Indeed, part of Heineken's cache in America has to do with its status as a global brand.

HEINEKEN BRAND'S EVOLVING COMMUNICATION, DESIGN, ENGAGEMENT. The Heineken brand sells in 179 countries, so uniformity and quality is paramount in any market. "We produce it in 62 countries, so quality control is of utmost importance," said Jean François. "And then you build the brand through communication, design, and engagement. And we lead that centrally in terms of packaging design; we've leveraged that over the last 2 years in a much more forceful way." While there's now one glass bottle everywhere in the world, they now have aluminum and special edition bottles to "bring more excitement." Jean François said that design would continue to play an important role in the brand's future.

International sponsorships are key too -- especially those involving soccer (they've long sponsored the Champions League), "a hot spot" 'round the world, and increasingly so in America. Jean François said soccer has proven a powerful tool to "leverage awareness and excitement around the brand" but also for on-trade store promotions, "because you can leverage the same kind of universe in so many countries at the same time that makes for a lot of economies of scale."

They produce TV spots globally 3-4 times a year for the brand. "But we also increasingly use the Internet and social media as one of the enhancers of brand presence - a brand like Heineken has close to 15 million fans" on Facebook, which Jean François characterized as the highest number of followers for any alcohol brand. By way of comparison, "the Budwesier brand is tracking 4.4 million followers and Smirnoff is doing 9.8 [million]." They leverage that medium "very much." Says Jean François: "The way you do advertising today has changed fundamentally."

And there's their longtime James Bond sponsorship, which has brought Bond from martinis back to Heineken. "In the original books of Ian Fleming," said Jean François, "he was drinking every kind of beverage except milk and tea. But he was also in the original book I think, drinking beer. So he got back to the roots."

GLOBAL STRATEGIES: LEADING WITH NO. 1. As you know Heineken is the largest brewery in Europe and third largest by volume in the world, with 250-plus brands operating in 74 countries, comprised of 75% beer activity. Amid all that, their overarching strategy is a simple one, starting with their decades-long proposition of "being that leading premium brand in the world with Heineken ." That brand is 17% of their volume, but roughly 30% of profits, with "higher growth potential going forward," as it outpaces international premium segment growth at its +5.4% rate.

Next to that, "where we enter the mainstream market with a full portfolio, we need to be the No. 1 or a very credible No. 2. ... if we go off of that it will sustain long-term shareholder value," said Jean François. The business is driven by organic growth: "I always say if we have 88,000 people working across the world for us, we have 87,950 working on organic growth, and the rest working on what's the next frontier on consolidation."

But back to Heineken brand: Their share of the international premium segment (IPS) is north of 20%, up from 18% a few years ago. Of course they're looking to increase that. Jean François points out their momentum, as "[their] sales are twice as large as our immediate followers, being Corona in its international version or Carlsberg for that matter, and we intend to continue to lead the pack in the premium segment of the world."

He noted the benefits to Heineken's global scale, in terms of cross-managing, but also brands: "Where [the Heineken brand has] reached a high level of maturity [like in America], it's important to 'supplement' our portfolio with other strong premium brands." So they've been "engaging in pushing a limited number of other international brands." Out of their organic volume for fiscal year 2012, the global program and brands contributed 44% of growth. Their margin-enhancing global brands include, in order of increasing price index, Amstel Premium Pilsner, Heineken, Strongbow Gold, Sol, and Desperados.

Also interesting is their increased reliance on line extensions to increase marketshare and profitability globally. Jean François shared how Bulmers has benefitted from line extensions in the U.K., and how they're betting on a Heineken Light rollout in Taiwan.

But they're specifically looking for "sustainable innovation" that is accretive and doesn't dilute margins. "We had a number of initiatives which brought our innovation rate in the company to 6%; when we started the program in 2010 we wanted to reach that 6% in 2020. We've reach that 6% already now," said Jean François. "The challenge is to sustain the 6% growth year after year."

BREWPIC: The offending billboard near Mile High Stadium in Denver, asking the NFL not to punish players for smoking weed.


Have a great weekend.

Until Monday, Harry

"Sometimes I think we're alone. Sometimes I think we're not. In either case, the thought is staggering."
-R. Buckminster Fuller


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BEER INDUSTRY SUMMIT - January 26 - 27, 2014 in Scottsdale, AZ at the Phoenician Hotel. More info here: http://www.beernet.com/beer_summit.php

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