"Craft Beer is Dead, Long Live Beer"

FILED APRIL 13, 2016

Dear Client:

Earlier this year it seemed like Anheuser-Busch would plant their flag in the South by acquiring Cigar City. Cigar City has since found a fit with Oskar Blues Holding Company. But it didn't take long for A-B to announce another conquest in the South.

With yesterday's addition of Devils Backbone to The High End, Anheuser-Busch now has an outpost in craft's current hotbed: The Mid South was second highest for craft growth in supers last year per IRI (+16.5%). And now they're one step closer to owning a craft entity in every major region in the U.S., with the South Central/Southeast among the glaring holes.

Still, A-B will get pretty close to the Southeast with their new Virginia brewer's distribution footprint. Devils Backbone is available in five states and DC, including Virginia, Maryland, North Carolina, Tennessee, and West Virginia. The majority of their wholesale partners in these states are "weighted heavily towards Anheuser-Busch." In fact 90% of DB distribution goes through A-B wholesalers, founder Steve Crandall told us. That's convenient.

Devils Backbone produced 62,000 barrels last year. They'll do around 95,000 barrels this year -- but the brewer forecasted that output prior to yesterday's announcement. They currently have 150,000 barrels capacity "and will be buying more going into next year," so they'll "more than likely" enter new states.

About a year ago, the brewer completed a $7 million expansion where they installed a 120-barrel brewhouse, taking production capacity from 60,000 barrels to 90,000 barrels. There's "always the possibility" of brewing at A-B outposts though Steve said they currently have enough capacity to handle their output.

At one point the goal was to reach 250,000 barrels by 2020, Steve said, but that number could now increase.

FELIPE ON ROUNDING OUT THE HIGH END NATIONALLY WITH FLAVORFUL, FUN, SESSIONABLE BRANDS. But what specifically about Devils Backbone attracted A-B and complemented some of its other High End brands? High End President Felipe Szpigel outlined The High End blueprint for CBD on Tuesday. It's more than just regionality and taprooms (though that appears to count for a lot).

QUALITY. "It's a combination of things" that made Devils Backbone attractive to them: "First of all, the beer is amazing," of course, he said. That's table stakes. Then, too, there's the reputation: they've snagged brewpub/small brewer/midsize brewer awards several years in a row from 2012 on. That's all "critical." The second piece was "the connection they have to their home market."

A QUARTER OF THE WAY. They were "probably a quarter of the way [toward] their dreams of what they wanted to do," said Felipe, "and had built a great team and were open to work with us on making those dreams happen," from barrel goals to infrastructure build out.

But how would they add to existing High End brands? "We've got a portfolio of beers and brands that complement each other. And [Devils Backbone] has award-winning, sessionable beers -- starting with Vienna Lager," (which is Blue Point's flagship) but a lot of their innovation also "has that great balance between flavor and sessionability ... but also this fun, outdoors active lifestyle complements the portfolio of brands that we have already.

NATIONAL FOOTPRINT OF CRAFT BRANDS. "So you could very easily fast forward ... five, 10 years from now," and The High End will have "this amazing portfolio, nationally distributed, that complements each other; that doesn't sit on top of each other."

THE AREA. Besides A-B's roughly 45% of share of the Virginia market, again, this allows them to play in the growing craft segment with a local brewer.

Craft has a slightly higher share in Virginia, where it's 20.2% of beer dollars, compared to total U.S. xAOC (grocery, drug, mass, dollar, and some club), where craft represents 18.1% of beer dollars, per Nielsen. Still, the state is outpacing national craft dollar growth trends, up 17.4% for the latest 52 weeks, compared to Total U.S. xAOC market, which is up 15.3% with craft.

However, in nearby highly developed craft markets like the Northern Virginia/Washington, DC area, where craft is 31.6% of beer dollars, craft growth rates are beginning to slow a bit, up 12.4% for the latest 52 weeks, down from two years ago when craft was up 18.3% in dollar volume.

THEIR CRAFT STRATEGY. A-B has now purchased Goose Island, Blue Point, 10 Barrel, Elysian, Golden Road, Four Peaks, Breckenridge, and Virtue Cider. Now they will own Devil's Backbone. Clearly A-B is cobbling together a national network of regional and national craft brands that will likely end the year at around a million barrels, which roughly puts it in line with the size of New Belgium, (but growing faster).

While a million barrels is a drop in the bucket for A-B, it does provide a platform for their High End division to gain focus and traction in their distributors who carry competing craft brands. Several indie craft brewers I talked to recently seem uneasy at the prospect of going against A-B's ever-increasing portfolio of craft brands -- and most of them are growing.

In other words, last year and this year's craft deals have created a new category of craft brewer: Sugar Brewers: A craft brewery with a rich sugar daddy, whether that be A-B or Constellation or Heineken or private equity. As noted beer blogger Jeff Alworth put it, when marveling at the endless footnotes that are now required reading in the Brewers Association's list of the top 50 breweries (to make sense of it all), "Craft beer is dead, long live beer." Well said.

EXTRAS:

Jeff's post is worth the read: http://beervana.blogspot.com/2016/04/the-future-of-beer-is-hiding-in.html

If you don't get the historical reference of "The King is dead, long live the King," click here: https://en.wikipedia.org/wiki/The_king_is_dead,_long_live_the_king!

ABI SUBMITS OFFER TO EU REGULATORS IN HOPES OF AVOIDING "PHASE II PROBE" INTO MEGABREW

Anheuser-Busch InBev made an offer to European Union regulators last week saying it would divest of SABMiller beer brands "to win quick approval" for its merger with the company, per Bloomberg.

"This proposal concerns the European premium brand families of Peroni, Grolsch and Meantime and their associated businesses in Italy, the Netherlands, U.K. and internationally, excluding certain U.S. rights," ABI told Bloomberg in an e-mailed statement.

With ABI's offer now in hand, the EU has set a May 24 deadline to either approve the takeover or lengthen the investigation.

ABI is hoping its recent divestiture of SABMiller brands to Asahi Group holdings for $2.9 billion will get them their seal of approval in May and avoid "opening a so-called Phase II probe," which lasts at least four months.

Sanford Bernstein analyst Trevor Stirling, said he expects the "concessions" to include the Asahi sales. "I'm at a loss as to what remedies AB InBev can offer in terms of further divestments," he told Bloomberg over the telephone.

CONSUMERS EXPECT GAS TO GO UP, EVEN AS SOME SAY THEY'LL SPEND MORE AT RETAIL FOR OTHER PRODUCTS

Sixty-four percent of U.S. fuel consumers told a National Association of Convenience Stores survey that they expect gas prices to rise over the next 30 days. That's "an 11-point jump from a month ago and the highest percentage of Americans expecting price increases since May 2015," according to the NACS survey.

The good news? About 23% of respondents said that they will spend more money shopping for things besides gas over the coming month, "the highest percentage since December when consumer spending peaks for the holiday shopping season. More than two in five (42%) of consumers ages 18-34 say that they will shop more over the coming month."

But it has affected the economic outlook: 44% of U.S. fuel consumers currently say they are optimistic about the economy, down from 50% in March 2016.

It's not totally unexpected: gas prices usually go up in April as the petroleum industry transitions to produce and sell summer-blend fuels. Still the chunk of Americans that expect higher prices is the highest for April since NACS started these monthly surveys in 2013.

BEER BRIEFS:

UNITED BRANDS' MCALE'S UNVEILS NEW HARD SODA LINE. Yes, even more hard sodas continue to trickle into the marketplace. McAle's Brewing Company, a subsidiary of United Brands, has unveiled their new line of "hard crafted sodas" including Root Beer, Ginger Ale, Orange N' Cream and Cola. All of the offerings will clock in at 6% ABV and packaged in either 24 oz. cans or four-packs of 16 oz. cans. The new line is currently available across the country.

Until tomorrow, Harry

"There's a limit to how many times you can read how great you are and what an inspiration you are, but I'm not there yet." - Randy Pausch

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