The New, New Beer Business

FILED JANUARY 14, 2016

Dear Client:

People within and outside of the beer business have always said that this industry moves slowly - glacially - with mainstream journalists often using weasel words like "archaic" and "outdated". Putting aside three-tier regulatory arguments for the purpose of this article, I'd like to talk about how, in the last few years, just how quickly and dramatically this business has changed.

SUMMIT PREP PAYS OFF. These thoughts have partially sprung from my preparations for our Beer Summit in New Orleans in a few days. The conversations I've had with the prominent lineup of speakers have sparked my synapses to the point where I've actually been forced to think. Imagine that. Me thinking. That in itself is quite a seismic change.

What's occurred to me the most is that some of the universal truths we've collectively long held as gospel truth in the beer business are just not true anymore.

For instance, I was quoted in Steve Hindy's book last year that one of the greatest shifts in power occurred when A-B distributors - the red network as we call it - began actively courting and taking on craft brewers, starting in a big way with A-B's largest distributor at the time, Ben E. Keith in Dallas/Fort Worth.

Before that, virtually the only option craft brewers had was to beg MillerCoors distributors (and maybe wine/spirits houses) to take them on, and the blue-silver network could pick and choose what they wanted. When the red network opened up, distributors of all colors found themselves having to court fast growing craft brewers, not the other way around, and you started seeing large distributors like Reyes Beverage Group and L. Knife becoming big sponsors at the Craft Brewers Conference (when before hardly any distributors even attended).

MORE DISTRIBUTION CHOICES ABOUND. But even this ground-breaking change is starting to show its age. For one, the notion that there is just a binary red and blue/silver distributor network is just not reality. Not only have wine and spirits houses actively gotten in the beer distribution business, but specialty beer distributors have sprung up with some achieving surprising scale (think Windy City) and craft brewers themselves have created quite large distributorships (think Stone in SoCal). Not only that, traditional red and blue-silver distributors have aggressively created beer distribution companies outside of their major brewer territories. Instead of dogs and cats fighting, we now have dogs fighting with dogs, cats fighting with cats, and in some cases, dogs and cats living together. Think L. Knife, think Ben E. Keith and L&F in Texas.

SIDEBAR: Not only that, Constellation Beers, which a few years ago took to calling their distributors the "Gold Network", somewhat presumptuously I thought at the time, may have a point today. In more than a few markets, Constellation has become several distributors' largest supplier in revenues and/or GP.

THE ARIZONA EXAMPLE. Let's take the example of Arizona, which obviously has become very a propos this week. In the red network, you had Golden Eagle of Tucson at 9 million cases a year and Hensley in Phoenix and 20 million cases, both A-B distributors in their respective territories, who were also selling outside their A-B territories against each other with craft and non-alcs. A craft brewer entering Arizona could go with either one, or both, or go with blue-silver MillerCoors/Constellation distributors Crescent Crown and Finley et al, or go with some patchwork combination of them, (or with a wine and spirits house). The combinations were starting to get endless and infuriatingly complex, as it has in many -- nay most -- markets across the fruited plain.

Now that Hensley has agreed to purchase Golden Eagle, it simplifies things a bit in Arizona, because Hensley will essentially sell A-B and their craft brands across the entire state (aside from two rural A-B distribs yada yada -- let's not split hairs).

Here's the thing: This would seem to give Hensley an advantage in attracting craft brands. But the Crescent Crown/Finley et al network is also very strong. In truth both networks consist of excellent operators and have comparable market shares and strong leadership. Bob Delgado and Andy McCain at Hensley, and Bubba Moffett (speaking at the Summit btw) and Joe Controneo at Crescent Crown - are all strong beer men with vast experience and resources who "get it". I know them all, and we've all been friends and yet also bickered heatedly and generally just do what beer people do at the end of the day, which is drink beer and be friends.

ANOTHER SIDEBAR: Bob Delgado and I actually were both by sheer coincidence investors in a melon farm in Mexico (which did quite well surprisingly). Joe Controneo and I have come to near fisticuffs in a Houston hotel lobby bar only to later become fast friends through our time at Coors' old KEG meetings. Andy McCain's roommate in college is one of my best friends. And Bubba Moffett and I both attended the University of Texas at the same time and chased the same girls only to, again, ultimately become friends in the industry. The world is small indeed.

In years past - if you were a supplier - you'd assess each distributor networks' relative strengths and weaknesses and maybe consider the relationship and cultural match and make a damn decision. But today there are other factors in play. Many more factors, it turns out.

I sat with my friend Dennis who owns Barrios Brewing in Tucson this week over beers and a delicious Sonora Dog (which barked outlandishly the next morning). Barrios is currently distributed statewide by Golden Eagle. I said (more as a statement than a question), "I suppose you're going to make the transition to Hensley." He looked at me quizzically and said, "Well actually I haven't made a decision yet." I was surprised, and said so, because the transition to Hensley would be relatively seamless as they will still operate out of Golden Eagle's Tucson warehouse which is a stone's throw away from his brewery, with many of the same people. I asked him if he had a problem with Hensley. He said no. I asked if he had some kind of special relationship with Finley or Crescent Crown. Again, no. Then what was the issue? Two issues, actually:

1. Four Peaks, the largest Arizona craft brewer which is now owned by A-B, is distributed by Hensley. "How can I compete in the same house for focus with a larger, A-B owned craft brewer?" he asked (paraphrasing). And…..

2. He said he believed that there was better than a good chance that Hensley would be purchased by Anheuser-Busch as a branch in "18 months to two years." This belief, I found, is widely held at least in AZ beer circles. I personally can't attest to it one way or another. A major beer consultant I had supper with last week said he didn't think A-B would be interested in Hensley - too big. Another AZ beer exec said it's a certainty, "now a nice package tied up with a red bow to deliver to the brewery [A-B] once the SABMiller deal is done." Who knows? Regardless, this craft brewer is very concerned about it, and doesn't want to get, in his words, "kicked to the curb in two years."

Which brings me to another preconceived notion we as an industry have often held: that small craft brewers are business noobs who don't know their bunghole from a hole in the ground. Still true with some craft brewers, but increasingly not true. This dude in Tucson knew the current landscape perfectly -- knew the pros and cons of each distributor network decision, knew the political landscape in the state, knew that maybe he'd make more money selling 20k barrels a year than 50k barrels due to cost of adding capacity and the whoring out you'd have to do to sell the extra beer to fill that capacity, and was talking with me about beer business strategies that you would normally hear from a top chain analyst at MillerCoors or Heineken.

He knew he had to get scale in IRI/Nielsen in his home market so that neighboring market chains would put him in the set, and sometimes that means taking a temporary hit on price for a SKU just to get in the scan data set. And maybe buying a used refrigerated trailer to use both as extra cold storage and to move beer to PHX where he has tiny share but hopes to grow. And many other strategies he had obviously been grokking for awhile. This in addition to describing in detail how it took six months to get a grapefruit IPA just right and how difficult it was to formulate a new nitro coffee mocha beer (which was excellent) - (beer nerds, I may have some of these details wrong. I was just there for the conversation and beer and wasn't exactly taking tasting notes. Cut me some slack before you flame me on Twitter).

He left me with five taster beers in front of me so he could meet with a bar owner across town to try to sell-in two tap handles. Maybe he's not the norm, but I increasingly see even small craft brewers having a much better understanding of how this game works than in the past. Plus, they are increasingly not just packaging craft brewers, but they are bar/restaurant owners too. And that's another big change.

AN EMAIL FROM JULIA. I recently got an email from Julia Herz at the Brewers Association who pointed out to me that when I'm citing IRI or Nielsen or GuestMetrics beer sales trends, that I should periodically note that there's a significant amount of unreported beer being sold through breweries' tap room and brewpubs. We don't really know how much beer is being sold through this tough-to-track channel, but what we do know that is material and growing very quickly and is becoming legal in more states each year. On-premise sales at breweries are a big deal and certain to get much bigger, particularly as big brewers get into this game in a big way.

FUZZY TIERS. A-B has bought six craft breweries recently, most of them with one or more brewery taprooms. They are certain to purchase more this year. MillerCoors has been behind the eight ball, but we suspect they'll attempt to play catch-up later this year. And with Constellation, Heineken, Pabst, private equity, and who-knows-who-else aggressively buying up craft brewers or ply them with crazy money, what's going to happen to the independent craft brewer who is not a super local nano-brewery or a pure brewpub? I'm not saying it's Armageddon for those guys, will become increasingly difficult to get shelf space and tap handles as America becomes more chain-izied by the minute.

I would prefer if you didn't comment on this brilliant diatribe because I'm busy preparing for the Beer Summit. But if you must, you know where to find me: hs@beernet.com

NEW HEINEKEN CAMPAIGN SHOWS MODERATE DRINKING IS 'IN' AMONG MILLENNIALS

Heineken has unveiled their new integrated global marketing campaign "Moderate Drinkers Wanted." It's the third installment in their "long-standing commitment to use its flagship brand to convey the 'Enjoy Responsibly' message," which was featured on more than 8 billion bottles and cans in 2015.

"Moderate Drinkers Wanted" points to research that shows legal drinking age adults prefer to drink responsibly. Heineken recruited the "behavioural insights agency" Canvas8 to survey 5,000 21-35 year-old premium beer drinkers in five countries. Here's what they found:

Three out of four millennials limit how much alcohol they drink on the majority of their nights out. Close to 40% of millennials said they dial back their alcohol consumption "every single" time they are out. One way to do that is to switch to beer. I like this.

Nearly 70% of millennials said the "primary motivation" in toning down their alcohol intake is to avoid loss of control. Over a third of those surveyed said they have experienced "social shaming" after a photo of them appearing inebriated surfaced online.

Pretty much every millennial (97%) feels getting tanked is not going to do them any favors in finding someone and falling in love. An overwhelming amount (88%) claim responsibility for how their life turns out. More than seven in ten millennials believe they have a better quality of life when moderating their behavior. And close to 70% of the respondents feel they have to work harder for career success than their parents.

"This study shows responsibility is becoming an active - and attractive - choice for a motivated generation who want to stay in control," said Nuno Teles, CMO, Heineken USA. "Drinking responsibly enables millennials to shape their own reputation and to make the best of every opportunity that comes their way."

The brewer will launch a TV spot corresponding with this campaign, which you can view here. https://www.youtube.com/watch?v=5A4v3vyHWOU&feature=youtu.be

The commercial shows a number of women fed up with their male dates, who are fading on them likely due to overindulging. As the women ditch their dates they sing Bonnie Tyler's Holding Out for a Hero in unison. We find our male hero at the end of the spot when he declines another Heineken at the bar. (He should be declining a martini or shot).

BEER BRIEFS:

ABI BOND SALE SECOND-LARGEST ON RECORD. Anheuser-Busch InBev planned to sell around $30 billion worth of bonds yesterday morning, but by Wednesday afternoon investors had "snapped up $46 billion in bonds" from the brewer, per Wall Street Journal. ABI's corporate-bond sale was the second largest on record, falling behind the $49 billion bond-sale by Verizon Communications Inc. in September 2013. "Orders totaling more than $100 billion were placed for the bonds," according to the report. And there could be more to come. "Investors said ABI could seek to sell more bonds in foreign currencies overseas, such as British pounds or euros, to help pay the rest of SABMiller's price tag," per WSJ.

THE BEER SUMMIT is SOLD OUT. Check out the agenda here: https://docs.google.com/document/d/1uPFuMLSO8c8TA-fHUkd51X63pEk1JUngecYs8lbbCOo/edit

Until tomorrow, Harry

I think there is a world market for maybe five computers."
- Thomas Watson, Chairman of IBM, 1943

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