Coca-Cola to take 17% Monster Stake; Will ABI Distribs Get Pushed Aside?

FILED AUGUST 15, 2014

Dear Client:

As has been speculated for a few years, The Coca-Cola Co. will pay Monster more than $2 billion and transfer its worldwide energy brands in exchange for a 16.7% equity stake in Monster. Coke will have two seats on the Monster board. "Monster will issue to Coca-Cola the shares of Monster common stock and enter into expanded distribution arrangements," per RBC Capital.

RBC estimates that about 30% of Monster U.S. sales are through A-B distributors, at about $400 million in profit dollars. But in light of this recent development, per quote above, A-B distributors stand to get the brand taken from them in favor of Coke bottlers.

A-B DISTRIBUTORS MAY LOSE SIGNIFICANT GP. It's not clear how this will work out at presstime, although if memory serves, the original 2006 Hansen distributor agreement with the red network provides for 1X GP payment for termination without cause (in other words, the previous 12 months average gross profits -- that sucks). Hansen can terminate for cause without compensation. (If there's an A-B/Monster distributor out there with more updated information on that, please ping me hs@beernet.com in confidence).

At the time, you'll remember -- because I know you read BBD every single day and memorize every issue -- Hansen was reportedly paying A-B a buck a case for the privilege of having access to the red network. Regardless, this news is clearly not good news for A-B wholesalers who carry Monster, as the brands carry a big $5-6x GP, and Coke will likely want to move the volume into their own red bottler network.

The deal is expected to close late in 2014 or early in 2015, of course subject to the regular regulatory approvals. "We have long believed that a partnership between Monster and Coca-Cola made sense, and we expect global distribution opportunities to increase significantly," RBC wrote.

HEINEKEN'S NEW CATMAN STRATEGY

Heineken has been towing a new chain category management strategy that execs say is snagging them share at stores, while helping retailers grow the beer category 3 or 4 points in some cases.

VP national accounts Steve Ward told BBD that strategy is related to a big restructuring of their national accounts team back in February. "We moved our team -- historically it's been constructed on a regional basis," said Steve. But now they're towing a more stratified, channel-focused approach: "So we have groups that just call on grocery customers, convenience customers and another group that calls on club/drug/liquor and military large customers." They've surrounded each team with specialized category development and commercial marketing teams.

Another group of large regional customers is now managed by teams based in their four sales regions.

Steve said they've seen some "pretty strong results from it out of the box: Looking at the performance in our top 20 big national customers, in the six months since we executed this change, we've grown nearly a sharepoint of the category in those customers. So it's having an immediate impact. It's demonstrating the customers really respond to the insights and programs that we can bring to the table."

He singled out the convenience channel as a major focus. Where they've historically been very focused on large grocery customers, they also see big opportunity for the upscale segment in convenience.

GROWTH AND PROFIT SOLUTIONS. Of course, every effective catman program needs a catchy acronym to anchor it. You may recall our writing about Heineken USA's soft launch of "GPS" last year. "We do have a new account planning process, which is called Heineken GPS: Growth and Profit Solutions," said Steve. That's how they leverage this new category management organization and insights: "Growth and profit solutions that enable us to identify our customer needs, and bring forward insights and programs to help them grow."

Senior director of category management Nick Lake elaborated. "What retailers can expect to see from us are cutting-edge insights and specific plans around helping them meet their objectives. Not only their upscale objectives, but overall category objectives."

UPSCALE BENT. Of course, in line with their portfolio makeup, the bent is upscale. But Nick Lake points out that all the growth is in upscale anyway.

"In order for a retailer to win, we've got enough evidence to suggest that only half of retailers are growing the beer category at all; and of those, 96% are leading with upscale," said Nick. "Only 4% are leading with mainstream. And of that 96% that are growing their category, a little over 50% of them are growing the category while mainstream continues to decline. It is about the category but it's about leaning into upscale and winning with upscale."

They'll touch the on-premise as well, though with about half the retailers as off-premise. "It's a super-competitive space," said Steve. "So we find they're very focused on their retail proposition ... and very focused on their target shopper." They work with casual dining chains like Buffalo Wild Wings, Hooters, Outback, Applebee's, and find that their target consumers "align very much." That resonates with buyers.

"We have a brand like Dos Equis, which is extremely hot in the casual dining segment right now, one of the fastest-growing. And they find the appeal of Most Interesting Man; it fits very well with what those chains are trying to say about themselves overall."

Their teams are currently steeped in the planning process with retailers for next year. We wanted to know what retailers are asking of their category managers these days. Nick said it's assortment and incrementality.

"We've actually made a big investment and gained lot of capability in understanding incrementality of each individual SKU and brand that they put on the shelf. To give you a sense, we worked with one retailer, whose overall category was declining by nearly 3%." Over a 4-month time period, they turned the category to positive. "So we ended up with a 3.5% trend change and brought the category back into the positive range. And what's great about it is, virtually all the segments, with the exception of value, saw growth. It had to do with getting the assortment right, and the flow right, and making sure that we helped them stay in stock with days of supply."

From an incrementality standpoint, "depending on retailers' current assortment, we can help them find anywhere from 1.5% to upward of 3% - 4%."

Steve added that "compelling shopper programming" is a big focus too. That includes "promotion in the store, and even before the shopper hits the store; that's actually an area of considerable growth potential, we think."

But with so many catman programs, are there too many category managers? Steve said it's all about the quality of insights. "The standard has gotten higher. You really need to find something of real relevance to the retailer which differentiates them from their competitive set."

They may already have proof that they can deliver. In CM Profit Group benchmarks related to working against retailer category objectives, they were rated a top supplier. "And we had some callouts and verbatims around specifically our planning process," said Nick. "So we're quite bullish on that process." They'll expand GPS to 30 retailers this year (and roughly 10 more on-premise).

"We're only 1 of 3 beer suppliers to see our scores increase in 2013 relative to 2012. But what's important about that for us is that stems a 3-year decline for us. And we actually improved in 7 of 10 questions. So we're obviously quite bullish; we saw our mentions for best specialty imports supplier increase by nearly 40%, so we believe we're getting traction in this Growth and Profit Solution planning process. We think that, coupled with our channel and customer focus that Steve talked about, we think puts us in a pretty good shape."

PABST DIGS IN THE VAULT TO REVIVE BALLANTINE IPA

Back from the dead is Ballantine IPA, you'll no doubt be delighted to know. Pabst has resurrected the brand with hopes that it can become a dual-threat in the marketplace as an old school throwback and a craft style brew as well.

Ballantine IPA was originally produced by Ballantine Brewing Co. of Newark, NJ, founded in 1878. Nearly a century later, Ballantine began to fizzle out as Big Beer began its takeover of the marketplace. Pabst later attained the rights to the brand through its acquisition of Falstaff in 1975 and pushed a watery version of the IPA until the mid-'90s, per report by USA Today.

As you know, Pabst Blue Ribbon has been coined as the "hipster beer" and was propelled by the millennial's attraction to its cheapness, history and lack of ads. "We are hoping that the current (Pabst Blue Ribbon) consumers will embrace the Ballantine IPA," said Pabst master brewer Greg Deuhs.

But there is another factor to play off of for Pabst. The brew is an IPA, the most popular (by growth) craft style of beer in the US. Greg mentioned that he had been eyeing Ballantine IPA since he first teamed with Pabst. "When I came on board," he said, "one of my challenges was, how do we get into the craft business? I said that we already have the answer: Ballantine IPA."

Greg had the answer but not much else. He had no original recipe, no notes, just analytic reports that spanned back to the '30s, which detailed the beer's qualities like ABV, IBU, and gravity level. Greg conducted research to find ingredients, accounts, and remembrances of the beer. "We wanted to make it as authentic as possible and a true craft beer," he said.

Ballantine IPA is set to hit stores next month in six-packs and 750-milliliter bottles. The IPA will be available in nine northeastern and Mid-Atlantic states, including New York, Pennsylvania and Maryland.

SLOW, STEADY, SILENT: A-B IS AMERICA'S LARGEST AND FASTEST GROWING BEER DISTRIBUTOR

It's been over a month since it was announced that A-B was leap-frogging dry Kentucky territory to acquire the Hand family's 800K case Owensboro, KY operation. We expect more news on this issue soon. But until that news breaks, let's consider it more closely.

While this issue hasn't gotten a lot of play in the press, it's surprising independent distributors in Kentucky (and in other branch states) aren't more concerned as the brewery appears to be flexing its branch muscle where it can. Or are they?

Let's look at the numbers : Since 2009, A-B has added branch territories in NJ, OK, OH, WA, and OR. (That is territory in more states than Reyes has added - CA, FL, IL (Windy city), VA). A-B currently owns distributors in 11 states (MA, NJ, NY, OH, KY, OR, WA, CA, OK, CO, HI) yet the pressure on A-B's independent distributors in 10 of those states (OH fixed this issue) can be destabilizing as distributors we've spoken with worry that their only viable option is to sell out to the mothership. Yes, we've heard they pay fair prices (although the due diligence is so thorough that one distributor recently told me he'd rather get a radical colonoscopy and keep the company). But as they get bigger within a state, those values naturally would fall as A-B becomes the only viable buyer. We've also heard from some of the employees of independent distributors who point out job cuts at the brewery and existing branches make them worry about them showing up at their door.

As a result of A-B's vertical integration actions, over 8 states, including Ohio, have passed legislation or had other forms of clarification that have resulted in large brewers being limited in acquiring branches. Conversely, since ABI infamously discussed its interest in expanding its ownership of distribution in 2009 (see BBD 06/24/2009 ), not a single state has passed legislation that would give A-B the right to be a distributor. That tells me distributors still have an awful lot of stroke in statehouses across the fruited plain.

What is DOJ perspective on this? Recall that following the global acquisition of Modelo last year, The US Department of Justice (DOJ) lowered the Hart-Scott-Rodino merger reporting threshold to $7.5 million for beer distribution deals involving A-B. Presumably, A-B has notified DOJ about the Kentucky deal. We'll see what happens there, if anything.

What about the small brewers? A full 99% of A-B's branches' volume is A-B products. A-B isn't buying distributorships to sell more non-A-B beer. Where does this leave the BA membership and their market access goals if distribution options are limited by branch ownership?

As an example, Sierra Nevada was with the Hand's Owensboro operation. New Belgium recently announced going to the same A-B distributor in Owensboro, perhaps unaware that A-B would be their distributor? What is next for these brewers in this market?

And then there is Yuengling. They are all around Kentucky but not in Kentucky. The A-B branch issues are reportedly huge in the Yuengling concerns for expansion states, we've heard.

Market access through independent distributors is a both a small brewer and distributor issue. I understand some distributors can live with branches as they like competing against them. However, the success that small brewers have enjoyed utilizing independent A-B distributors has been huge part of their growth. It must be weighing on their minds. (Here's a thought: Why have franchise reform if half the independent distributors are taken out of the picture?)

Internationally, Wall Street has return to this issue with Mark Swartzberg's note on ABI's conference call. Among other items, Mark was bullish in that ABI has recently increased its vertical distribution control in Brazil from 66% to 70%. According to Bernstein research, in 2000 Brazil had 27.3% direct distributorship. (We also note that the ABI management team has considerable experience of forward integration and consolidation in Brazil, where the %age of beer sold directly has steadily risen from 27% in 2000 to 54% in 2008). And as the Motley Fool noted recently, ABI makes more revenue per hectoliter for beer it distributes over what it "shares with independent distributorships."

So what does it mean for the US? Maybe nothing. A-B has repeatedly said that it doesn't have a grand branch acquisition strategy, but merely buys them when the opportunity presents itself. But opportunities seem to be presenting themselves fairly often. I think it's clear that A-B is a net branch acquirer, and we predict more and more of A-B's volume will run through branches. Your thoughts?

BEER BRIEFS:

TWO PROMOTIONS AT HEINEKEN USA. Heineken USA announced that Colin Westcott-Pitt, former VP of the Heineken brand, has been selected as the leader of global brands and innovation Africa and the Middle East, effective November 1. Colin has been with Heineken USA since 2009 and has been "instrumental" in a number of tasks and most recently contributed to the new Heineken light commercials. He will be based in Amsterdam.

Heineken USA also announced that Ralph Rijks has been appointed as the new vice president of marketing for the Heineken brand, effective September 15. Ralph has been with Heineken for six years. His most recent role was marketing manager for the brand in Central and Eastern Europe. Ralph will relocate from Amsterdam to New York City.


EDITOR'S SIDEBAR: I'd like to give a shout-out to my new friend Joe Cool. Yes, that's his real name (I made him show me a form of ID before I believed it). I met him by chance at the snack bar on a golf course with my sons in Colorado yesterday. Joe Cool is an Area Business Manager for Mountain Beverage Co., a silver-gold-green beer distributor servicing the Vail area. Your name is Joe Cool, you're a young dude, you're a manager for a beer distributor on the Colorado front range, and you're playing golf in the mountains on a Thursday afternoon with your boss. Joe, buddy, life is good. Savor it.

Until Monday, Harry

"The trouble with jogging is that the ice falls out of your glass."
- Martin Mull

THE 2015 BEER SUMMIT - The Beer Industry Summit will be at The Breakers resort in Palm Beach, FL. January 11 - 12, 2015. Register and more info here: http://beernet.com/beer_summit.php


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