My 2016 Predictions, Revealed

FILED JANUARY 4, 2016

Dear Client:

It's that time of year, where your editor peers into his foggy binoculars and attempts to divine what macro-events will happen or not happen in the coming year. As my father said, "You don't always have to be right, just never be uncertain." With that in mind, I am now embarking on my predictions for 2016. Please be kind.

-ABI will acquire SABMiller after the antitrust authorities in various countries extract their pound of flesh, including the sale of their stake in MillerCoors to Molson Coors. But ABI will do whatever it takes to get the deal done. While the markets will view this to be a more complex deal -- with fewer synergies -- than previous deals, ABI will nonetheless exceed their stated goals and value will be created, at least in the next year.

-A-B will also acquire three or more craft breweries to fill out its portfolio. It will take a few of them national. One of these craft brewers will surprise everybody, as it has touted its independence and is a beloved jewel of the beer sniffers.

-MillerCoors will become a wholly-owned subsidiary of Molson Coors, freeing up their hand to make other strategic acquisitions in the craft and/or FMB space. We'll see MillerCoors become much more active in the craft space, but ABI will obviously still have a leg up on them.

-Hard sodas will become all the rage before dramatically going down in flames after summer.

-Cider will continue in a free fall as hard sodas soak up all the oxygen in that space. But Cider will recover in 2017 when hard sodas collapse.

-Retailers, particularly off-premise chains, will throw up their hands and say the equivalent of , "Me No Alamo." Meaning they will stop accepting placements for new craft brands just because they're new (even local!).

-New Belgium will be sold either to a private equity firm or a larger brewer, (like MillerCoors).

-ABI will acquire outside the beer space.

-Diageo PLC will have to make some sort of major decision. Not necessarily in the US -- although that's their most promising market -- but they need to create value for their stock investors. The Chinese aren't going to be buying expensive spirits, so there has to be another big strategic move besides rum cover-overs in UVI (which could eventually end). Is that a combo with a beer giant? Is it a combo with a another CPG giant? Is it just more wine and spirits acquisitions. Spin Off of beer? A JV or two? Not sure, but something must happen.

-Distributor consolidation will continue to be a slow burn, except for footprint issues with brand territories and the one-0ff A-B deals where an Anchor buys a dog three states away.

-Meanwhile, A-B will continue to purchase branches where they can strategically, particularly after their SABMiller deal is consummated and it clears antitrust review.

-Constellation will continue to be the industry darling, with considerable runway for continued growth. But production issues will plague them, and it will turn out that building out the largest capacity brewery in the world in a second world narco country is not as easy as they thought, and Modelo/ABI is not motivated to lend a helping hand. There will be out of stocks. I repeat: There will be out of stocks. But they will still be the leading share-builder, both in volume and in value. They will expand Ballast Point substantially both geographically, increasing effective and physical distribution, and creating pull with rate of sale to get their ROI on that bil. But it's a crowded shelf. Is the Gold Network a real thing? I've been skeptical. But I think 2016 will be transformational for this company -- perhaps a Blue and Red network (like we have in the soft drink biz) is too simple for our complex and fragmenting business. Are we seeing a Dr Pepper/Snapple emerging? Clearly we are, as more than a couple of distributors we speak with say Constellation Beers are now their largest supplier, in gross profits. Regardless, one thing I know: Sabia and Jacobson will be busy beavers.

-ABI will continue to introduce Mexican brands to attempt to staunch Constellation Beer's share growth, to little effect.

-Heineken USA will have a transformation. Either it will make a big strategic alliance/JV with another major brewer (again, MillerCoors) or it will restructure how it goes to market, with Lagunitas in tow.

-Boston Beer will have a tough year, mainly because they've been so successful in the past. Innovations like hard soft drinks and such will help but it's tough to cycle Angry Orchard or Rebel or Twisted. But the year after….. watch out.

-Yuengling will open a state, but they will need brewing capacity and will be casting a net to purchase a brewer ----- maybe even a craft brewery that needs capital, in order to expand. (But it may be a few years out?)

-Carlos Alvarez will emerge from the darkness and be a major acquirer of brands, or a major seller. Perhaps he needs to meet Dick Yuengling. (I can make introductions).

-Private equity will figure out that they've been serving as a stalking horse in 2015 to drive prices up to buy craft brewers, and the real money is in distribution, not brewing, and deals on the production side won't be as hotly priced.

-Homebrewing will see a major overhaul as automated systems (like Picobrew) make it easy to make your favorite beers at home. Think of what Keurig did to the coffee business or what SodaStream did for soft drinks. A major brewer will make an investment in the technology or at least license it. Some brewers like Rogue, Dogfish Head and Elysian have already teamed up with Picobrew on PicoPaks (think K-cups).

-Home delivery of alcohol will become a big deal. Apps like Drizly and MiniBar will become more mainstream and liquor stores and producers will have to step up to learn how this will work, legally. Working out the underage problem will provide roadblocks, but technology and new ideas will work that out. This is Uber capitalism, but so far it doesn't seem to have an effect on the three-tier system, as the services buy from retail. However, as these apps/services gather enough data on purchasing habits, they will become increasingly powerful and important.

-Speaking of legally, the TTB will wake from its slumber and will hand down some major trade practices fines and will declare Kroger's category management plan facially and federally illegal as providing a service to a retailer, violating the ban against slotting fee and tied house rules.

-Marijuana legalization will begin to actually have an measurable effect on beer, wine, and spirits sales; and will have a policy effect as well. Regardless, craft brewers will embrace marijuana more. One of the largest attractions at GABF this year was a new brew from Dad & Dudes Breweria infused with cannabidoil or CBD, a non-psychoactive substance found in cannabis. I expect to see more of these types of collaborations. As marijuana inches closer to legalization, people are becoming very curious about the drug and this could be an easy way to attract consumers. But it also will compete with limited consumer dollars with ethanol.

-Oil will remain cheap, helping beer sales, particularly in the c-store channel. But cheap beer will continue to have cheap sales.

-ABI will realize that their harsh cost cutting was more expensive than the money they saved -- when you factor in all the market share points lost. They will invest more in brands -- particularly in the high end.

-MillerCoors will DC several brands that are underperforming (like the PET High Life bomber and Miller Fortune) and double down on brands that are working. Distribution among an increasingly crowded marketplace will become a major factor for them.

-MillerCoors will introduce a Mexican or South American beer brand to their portfolio this year, with a considerable investment behind it.

-Craft brewer openings will dramatically slow, and closures will increase.

-But craft demand will remain robust, but will dip into single digit volume increases, which will freak everybody out. It's the law of large numbers folks. Demand will still be strong as forty acres of garlic. Session IPAs will be de haute en basse.

-There will be a great divide between those dozen craft brewers who have changed their financial structure in the last year, and those who have not. The Brewers Association will have a tough time ahead of them trying to divine a balance between being relevant and being true to their original values as their largest and core brewer members defect to the Dark Side of the Force.

Peace out. Tell me your predictions: hs@beernet.com.

GASP: BRITO TAKES A CORPORATE JET!

The hard-hitting reporters at the FT have revealed that -- against all previous reports -- yes ABI chief Carlos Brito does occasionally take a company-owned private jet when he travels -- not coach on RyanAir or Southwest in a middle seat. (This is the worst kept secret in the beer business -- many top A-B execs take private jets routinely, when needed).

"AB InBev operates two Dassault Falcon jets, which it inherited and retained after buying Anheuser-Busch for $52bn in 2008," says the FT. "The St Louis-based Budweiser brewer owned eight corporate jets at the time."

AB InBev confirmed that "in light of his very hectic and unpredictable travel schedule of the past months, [Mr] Brito has used the planes for some of his business trips," says the FT. Duh.

"The travel was killing him," said one person with knowledge of the situation. "He had to take the private jets." But he doesn't have an office. He sits at other people's desks, apparently.

BEER BRIEFS:

GULF DISTRIBUTING NAMES NEW COO AND CFO. Gulf Distributing Holdings announced two new management moves over the holidays. The Mobile-based company promoted Jimmy Marston to the new position of chief operating officer and Jay Cox to chief financial officer. Jimmy joined Gulf Distributing in 1984 and his most recent position was vice president for sales and marketing. Jay came to the company in 2009 and has served as corporate controller.

Until tomorrow, Harry

"Wit is educated insolence."
- Aristotle

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