Predictions for 2014

FILED JANUARY 3, 2014

Dear Client:

It's that time of year again -- time to look through foggy binoculars and see what could (or could not) happen in the U.S. beer industry in the coming year. Last year we scored pretty well, but this year there are a lot of moving parts. Let's get started and let me know if you agree or disagree.

-Several states including California will legalize marijuana for recreational use. In states where it is made legal, marijuana sales will be initially very strong -- like crazy strong as Colorado has seen lines out the door at dispensaries this week -- and will cut into beer sales materially. But eventually weed sales will slow down to a level just slightly higher than before as curiosity wanes, and beer sales will slide back to normal. Still, cannabis will be seen as a new strong competitor to bev-alc as the press continues to position it as a "safer" or "healthier" alternative despite the facts.

-Craft volumes will continue to explode. A lot of folks have emailed me predicting that craft volumes will soften in 2014. I tend to think that we haven't hit the top yet, particularly in parts of the country where craft under-indexes. Craft is becoming mainstream (as in your grandparents are starting to drink it) and therefore has much more runway to grow.

-Premium light beer volumes, already soft, will get even softer this year as craft, imports, cider, and FMBs continue to take share. We'll see at least one major light beer brand down double digits in 2014.

-Sub-premium beer will actually fare slightly better, as cheaper gas prices and an improving economy coupled with a less aggressive price increase policy by the Bigs helps the segment along.

-This is the year when the industry acknowledges -- lead by retailers -- that out-of-stocks are a real problem. Big brewers and small brewers will point fingers at each other as sources of the problem, but ultimately catman ideas from both sides will need to be considered to tackle the issue.

-Smaller craft brewers will get into cider, big time.

-Despite the fact that craft volumes are still strong, craft pricing on the other hand will be softer. This seems counter-intuitive, but there are other factors at work here: 1. Ever increasing number of craft breweries increasing competition; 2. Expanded capacity of current brewers; 2. heightened competition as brewers large and small expand territories; 3. Pressure from national chains to do deals; 4. Big brewer national craft brands get more into the weekly ad/roller game; and 5. Commodity pricing will be lower.

-Craft breweries in planning will finally top out, and we'll see dramatically more brewery closings this year than we've seen in the recent past.

-"Buy local" will hit the mainstream and larger flagships from big craft breweries will take a hit due to this trend.

-There will be even more tension between larger craft brewers and smaller craft brewers as both realize that their business models and needs are dramatically different. Brick-and-mortar brewers will also be taking more pot shots at contract brewers.

-Craft vs crafty will not be a major issue this year as everybody finds they're tired of talking about it, and there's little you can do about it anyway because nobody gives a damn.

-Sessionable lower ABV craft brands will be the "IPA" of 2014.

-Payola, or pay-to-play for craft brands by distributors will continue to be an issue. And while it will get more attention this year, it will also quietly become an even more widespread practice. It will be revealed that more distributors have equity stakes in brewers than was previously realized.

-Attacks on the three-tier system will come from surprising corners -- not just from the big brewers or retailers -- but from craft brewers and to some extent even distributors as the race to get bigger outpaces the need for regulatory protections. Distributor-on-distributor crime will increase as it has in the wine and spirits business.

-The industry will wake up to find that a surprisingly large amount of beer is now sold directly to the public through more lenient on-site sales by brewers in more states, more lenient laws allowing cross-pollination between production breweries and brewpubs, along with brewery-run beer clubs. Indie retailers will be the surprising champions to swing the pendulum back toward regulated three-tier.

-At least two notable craft brewers will be sold to either private equity or to bigger brewers.

-Wall Street will finally come to the realization that AB InBev buying SABMiller is not in the cards due to the complexity of integrating such a deal and the fact that they'd have to punt MillerCoors at a discount. The reality is that the Brazilian owners of ABI (3G Capital Management) seem to be using ABI's steady and hefty cash flow to help finance the buying up companies in other industries (Burger King, Heinz, etc.).

-Big distributors will buy up smaller distributors more aggressively. Distributor consolidation slowed down somewhat in 2013 but will heat up again in 2014 as interest rates are threatened to increase and cheaper fuel prices drive profits. Multiples paid will continue to be sky high.

-As a corollary, more mega-distributors will be buying up distributors that are not contiguous to their main operations, hopping from state to state. It's not just about synergies anymore, but a land grab to get scale.

-We'll see more specialty beer distributors popping up and the industry will acknowledge that distributors don't have to have AB/MC to be profitable operations.

-MillerCoors and ABI typically take turns being the bad guy in distributors' eyes year to year, and this year it's MillerCoors' turn again.

-A-B will cut a deal with their unions without a hitch in production, but the negotiations will come down to the wire and there will be a lot of saber rattling on both sides. A-B may come out of it closing a brewery.

-We'll see ABI buy more branches.

-The Justice Department will follow up with the ABI - Modelo deal with more requests for information, but no real action will come of it.

-Private equity will become an even bigger player in both brewer and distributor tiers.

-This is the year we see several top management changes at the supplier level.

-Wine and spirits rates of sale will begin to slow relative to beer. They will still take share of ethanol, but their rates of share growth will slow.

Tell me what you think at hs@beernet.com.

BEER BRIEFS:

DISTRIBUTOR IN THE SOUTHEAST is looking for a new IT manager. Qualified people send your resumes to southeastjob78@yahoo.com .

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Until tomorrow, Harry

"When I am abroad, I always make it a rule never to criticize or attack the government of my own country. I make up for lost time when I come home." -Sir Winston Churchill

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