Kentucky Contention

FILED AUGUST 21, 2014

Dear Client:

As reported here, Anheuser-Busch is in the process of purchasing the Hand Family's 800k ce operation in Owensboro, Kentucky. As required by Kentucky law, a legal notice had to be published in a local newspaper, in this case the Messenger-Inquirer, about the intent to purchase the distributor. Now we are starting to see the protests roll in to the deal. Five KY distributors sent a letter protesting the deal, but others have also emerged.

The Wine and Spirits Wholesalers of Kentucky wrote a letter to Stephanie Stumbo, the malt beverage administrator of the KY ABC, pointing out that a distributor's license under KY law "may be refused by a state director for any reason which the director, in the exercise of his or her sound discretion, deems sufficient." Ed. Note: I know Stephanie Stumbo, and she's no pushover. This could prove interesting.

The WSW of KY points out that wine and spirits producers are prohibited from distributing their own products in the state, but brewers are allowed to. They say this is because when prohibition was repealed, there were many local KY brewers who self-distributed. The law was never amended when large national brewers came to prominence in the 1970s, and A-B was able to procure Louisville and now is trying to buy Owensboro. The WSW of KY says that A-B expanding branch ownership "will drastically alter the three-tier system of alcohol distribution which has served this state so well. Kentucky has greatly benefitted from a strong three-tier system of alcoholic beverage sales during the more than eighty years since the repeal of prohibition. This system has provided the checks and balances that help protect the public from the abuses that were rampant prior to the imposition of prohibition."

They continue: "The expansion of manufacturer-owned distributors poses a threat to independently owned beer distributors. There would not be a level playing field. The manufacturer-owned distributor would be able to offer pricing and promotional programs that the independent distributors whose territories are contiguous to the manufacturer-owned distributor could not match. This could lead to severo disruptions in the marketplace for those products. The maintenance of orderly markets is one of the cornerstones of alcoholic beverage regulation."

That's not all. A KY craft brewer, Country Boy Brewing of Lexington, also has written a letter to Stephanie protesting the purchase. "We are a growing craft brewery with high hopes that our beer will be welcome in as many independent beer distributors as we can persuade of the value of our products. The notion that a massive multi-national brewer such as Anheuser-Busch, would be allowed to grow its distribution network in Kentucky gives Country Boy and, we think many other similarly situated craft brewers, great concem. The loss of competition and market access could be devastating to businesses like ours."

A couple of prominent KY law firms also sent letters to the ABC protesting the deal with similar arguments.

VAN BOXMEER: HEINEKEN BRAND IN U.S. A BEACON

Jean-Fran├žois van Boxmeer made a few remarks about their Heineken USA business in the conference call yesterday. He said that their "Heineken USA business is making progress in still a difficult market, still a market under pressure, and we are gaining slightly, slightly, slightly market share. It's a portfolio business, so it's not dependable on Heineken only, but it's a majority based today on our Mexican portfolio which is growing double-digit and Heineken, which has been in decline for a number of years and which seems now to stabilize into its relative market position for a while. Obviously, our ambition remains to one day grow the Heineken business again, but we want to do it back on its own merits, not on price decreases or that kind of thing. So, we remain confident on the medium term that Heineken can grow again into United States and America, but it is also a regional redeployment you have to consider. We are mainly - we have been historically under pressure where we were strong, which is in the northeastern part of the United States with their markets and especially the larger beer market is redeploying in the southern belt of the United States. So, this is also where the Mexican portfolio is growing the hardest. This is also where the future of the beer market for lager beer lies. So, it's also a regional redeployment of our business that we are working on. And so we are happy with the performance of our Heineken U.S. business, and we are confident that the Heineken brand is still a brand that has growth potential in the U.S. Do not forget, for Heineken brand, the U.S. remains still today, by and large, our largest single market for the Heineken brand, so it is a beacon market for us.

BEER BRIEFS:

A-B IS "DOWN TO THREE FINALISTS in its domestic media agency search," per Adweek, which said they include OMD, MediaCom and Spark, per "sources." Starcom is the incumbent, having overseen research and media planning for the past three years. Recall that the brewer launched a review in July. In-house Busch Media handles media buying.

Until tomorrow, Harry

"If you cannot convince them, confuse them."
- Harry S. Truman

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