Bump: Some Tiers' Growth Plans in Direct Conflict

FILED DECEMBER 2, 2015

Dear Client:

For his last monthly analysis letter of the year, retailer whisperer Bump Williams recounted some twists and turns the industry experienced in 2015. After running through an innumerable amount of deals in all three tiers, Bump said he was "amazed" that the industry remained relatively healthy, given the "disconnect between the growth strategies across each segment of the three-tier system!"

Bump splits the industry into "2 unique camps right now." On one hand we have "the hungry, passionate, and unentitled, hard-work ethic, go-getters who still have the fire in the belly to 'win' every single day." And on the other is the "people who are simply greedy power brokers driven by ego and the lust for more power no matter what the cost is on other people, and look to change the rules of the game to their advantage whether it be through consolidation, forced business practices or legislation that serves the few instead of the many."

Highlighting that "disconnect," Bump pointed to results from an in-house survey of the three tiers. His company asked an audience of retailers, distributors and suppliers, "What is your #1 focus for growth over the next 1-3-5 years?" They then tallied responses by tier. Alarmingly, there doesn't appear to be terribly much consensus among results, though "innovation" and "local" get mention across the tiers.

Brewers' top three responses to the question included "quality," followed by "local roots" and then "strong flagship." Distributors' top strategies for growth include "pick[ing] up new brands"; "expand[ing] footprint/territory"; and "restructur[ing] compensation" (an interesting response that brings to mind recent past discourse on A-B distributor incentives [see BBD 09-22-2015]). Finally, retailers' top focuses for growth include, again in descending order, "improv[ing] margins"; "market basket $"; and shopper loyalty.

Bump points out that some of these points are in seeming direct conflict: For example, suppliers' want to grow their flagships seems to spar with distributors' want of new brands.

Bump made a few points that we think really resonate:

"The Brewer and the Distributors do not share ONE single common growth platform in my assessment," though he notes "there is some argument on the use of the term 'Innovation' as being a shared goal."

Similarly, "the Distributor and the Retailer do NOT share one common growth initiative unless one is to assume that 'Innovation' is synonymous with picking up new brands."

And "only the Brewer and the Retailer share some common growth programs - Innovation and the Importance of LOCAL, while the Brewers desire to get more focus on their brands" -- "share of mind" was suppliers' eighth most popular result -- "is at direct odds to the Distributors #1 growth platform."

Could this be a big contributor to the beer industry's labored growth? To Bump, it almost seems like we have our work cut out for us in 2016:

"With this type of MIS-alignment in growth strategies, is it any wonder that the BEER industry has struggled in terms of growth and relationships?" He asks. Fair question.

He continues: "Doesn't it surprise anyone that while we remain at odds with one another in terms of growing Beer, the Wine and Spirits companies continue to make great strides in attracting Beer shoppers, building stronger relationships with one another and are now taking control of 'Beer category management' initiatives for one of the largest Grocery retailers in the country? My guess is that IF the SW&S initiative with Kroger is successful, you will see other large ACV retailers start to engage this same practice - we need to get back in alignment with one another and take the business back if we want to continue being industry leaders don't you think?"

A-B LOCKS ANOTHER FOUR YEARS UP WITH THE NBA

Anheuser-Busch has fortified its ties with the National Basketball Association, inking a deal to tack on another four years to their longstanding partnership, which dates back to 1998.

A-B will continue to be the official beer partner of the NBA, the WNBA and NBA D-League, under the new agreement, and grab new partnerships with USA Basketball and Noches éne•bé•a, the league's Latin nights program.

The new contract also gives A-B "enhanced packaging and marketing rights," per official release. This means the brewer can "feature select NBA and team logos collectively on a national basis on cans, bottles and other packaging and in promotional campaigns."

Budweiser and Bud Light will run simultaneous marketing activations for the season and both brands will "own year-round platforms and different marquee league events, including NBA All-Star, NBA Playoffs, The Finals, NBA Draft, and WNBA All-Star.

"The marketing commitments being made by the Budweiser and Bud Light brands will engage fans in a multitude of new ways through live events, retail programs, digital activation and great storytelling," said Emilio Collins, NBA Executive Vice President, Global Marketing Partnerships.

Another first for A-B is teaming up with the NBA to "produce an original digital content media series… which will appear on NBA-owned properties and shared on A-B-owned properties this season.

"We've expanded this longstanding partnership in key areas that matter to our consumers, like content, packaging, and our new affiliation with USA Basketball," said Lucas Herscovici, VP consumer connections. "The new agreement will allow us to connect our brands with the league, its teams, and its fans through authentic campaigns that shape the industry."

A-B will use the NBA's broadcast partners as a vehicle to promote their brands and connect with fans on a local level through its 22-team deals. The brewer's ties to the NBA have gone global as well, with a new partnership in Brazil and an extension with Harbin Beer in China.

KINDER, GENTLER A-B? NOT SO FOR SOME CRAFT CAUGHT IN CROSSHAIRS

Last month we reported on new A-B distrib incentives under title, "A Kinder, Gentler A-B." But maybe not so for some big craft getting caught in crosshairs of distributors trying to comply with higher A-B product percentages of total sales to satisfy incentive requirements.

A reliable Truth Squadder wrote in to inform us of one such casualty: Grey Eagle Distributing in Missouri has apparently sent Deschutes notice that as of Jan. 1 they will no longer be selling the Oregon brewer's products, as they intend to sell the brewer's products to another, unnamed distributor. This is, says Truth Squadder, a direct result of Grey Eagle getting to certain A-B percentage.

"This is ABI's way of getting their distributors back to 100% share of mind," source believes, who also asserts more breweries have been given notice.

"I hope A-B distributors don't look at this as a short term issue," source said. "What happened to them 15 years ago when A-B really pushed this? AB Distributors missed out on a lot of the Craft Brands and not to mention the Constellation and HUSA Mexican Brands and then their mother ship brands started taking a nose dive."

OUR TAKE. Jesus, this is history repeating itself. The biggest and perhaps the ONLY blunder the old A-B made under the August Busch III regime is that he demanded exclusivity, thereby weakening his red distributor network relative to the blue-silver system, and it ended up crippling his distributors, hindering their consolidation, and undercutting their margins compared to consolidated MillerCoors distributors. And finally the red network woke up -- most publicly with A-B's largest distributor at the time, Ben E. Keith's Keven Bartholemew announcing at NBWA on stage that he was taking on a non-A-B brand with no regrets. There were audible gasps in the crowd. Often bold leadership decisions generate gasps. The floodgates opened and the industry dynamic changed forever.

This push to suppress the brands people want through the mechanics of a particular distribution network is a fool's errand and a waste of time and resources. We've seen Schlitz try it, we've seen Stroh try it, we've seen countless regionals like Lone Star and Ranier try it -- where are they now? That may work in second and third world countries where you own distribution and retail and the laws are pliable, but that tends to backfire here.

And I even think if you asked August III today whether he could go back to the 1990s and reverse that policy, he may even say it was a mistake (although I admit I was never great at reading his mind). Because it caused the greatest shift in enterprise value from one distributorship network to another in a very short amount of time. It was dramatic. And while A-B distributors have clawed back to relative parity, now they are being asked to go back and push the toothpaste back into the tube (but still compete at the same level).

I told somebody yesterday privately that it's almost like top brewery executives don't understand inherently that the strongest distributor in the market -- and this has always been the case and always will be -- is the one who has the highest gross profit per stop per week. What is unbelievable to me is how many brewery executives refuse to believe this fact. Everybody talks about metrics, about KPIs or whatever you want to call it: THIS is the only metric that matters to a distributor's ability to re-invest in the market behind your brands. Strip a distributor of that metric, and you strip it of its efficacy, and it becomes a backwater with desultory millennial employees just mostly checking their snapchats and taking orders and doing the bare minimum because they're not excited about the brands they are selling. It's like taking away a distributor's mojo.

But let's continue to blame A-B distributors for lack of focus on A-B brands for the overall lack of market share performance -- the very same distributors who presided over the largest and fastest growth in market share in the history of the U.S. beer industry. Did these distributors somehow forget how to sell beer in 2008? The data do not support that. We can't continue to pretend this isn't a pull issue with some of the most terrible marketing I've ever seen in my 20 years covering this industry (except Bud and Mich Ultra). And let's pretend that loading distributors up with paperwork and inventory and a million SKUs and exclusivity demands is going to stop A-B from losing 0.5 to 1 share point a year. Does anybody really think this trend will stop?

It's not a distributor problem, it's a brewery execution problem. I've spoken with nearly half a dozen retailers -- a few of them major ones -- who can't recall the name of the person who calls on them from A-B. Can you imagine that? As one distributor put it, "This brewery is run by a bunch of kids who wouldn't know a retailer if they tripped over one." Spreadsheets and Mobility and cascading goals and powerpoints apparently don't sell beer after all, as they've must've clearly learned by now given the 15 million barrels of beer they've lost since they bought the brewery, mostly to Constellation, who I can say those same retailers know exactly who they deal with and have dealt with for many years. It's almost like A-B wants to lose market share. "Let's put this kid who has virtually no beer experience or a relationship with this retailer and have him call on them." That kid fails, gets promoted. Repeat. Then load up distributors with a bunch of needless paperwork and unachievable goals and inventory and push it through.

Is that really the strategy? It was (allegedly) Diageo's strategy for years, but eventually it catches up to you: Load the trade and sell off at a fire sale when nobody's looking. Classic giant corporation blunder. If I'm wrong, then show me proof, any proof, otherwise, and I'll eat my underwear.

And by the way, while you may think I'm unfairly picking on A-B here, MillerCoors has their own issues too, which I'll address at another time.

BEER BRIEFS:

MORE INTERNATIONAL DIVESTITURE SPECULATION FOR ANHEUSER BUSCH INBEV as The Australian Business Review reported yesterday: "Talk of a Foster's spin-off is gathering momentum as it is revealed giant brewer Anheuser-Busch InBev -- which will soon gain control of Foster's through a merger with SABMiller -- has held talks with Japanese heavyweight Asahi." Outlet said last month's discussions ultimately "fell flat" but they're "another signal of divestment intent," of course. "AB InBev is tipped to chase around $35 billion in asset sales post-merger, with Foster's potentially contributing between $11bn and $13.5bn."


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Until tomorrow, Harry

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