Senators to DOJ: Beware ABI-SABMiller Deal

FILED APRIL 22, 2016

Dear Client:

You'll recall that last December, Senate Judiciary Antitrust Subcommittee leaders Amy Klobuchar (MN) and chairman Mike Lee (UT) held an Antitrust Subcommittee hearing on Anheuser-Busch InBev's proposal to purchase SABMiller for over $103 billion. The hearing examined how the proposed merger of the world's two biggest beer producers would impact competition and consumers in the US.

Well, yesterday the two Senators sent a letter to the Department of Justice outlining their concerns about the deal:

"We are concerned about any consolidation in the beer market that would make it harder for small brewers to make their products available to consumers, and in particular any significant increases in the acquisition or control of distributors by large brewers," wrote the lawmakers. "The Department of Justice must be confident that the merger does not alter the incentives or abilities of ABI or MillerCoors to foreclose craft or import brewers' access to distribution. If the Justice Department has concerns with the merger, we urge careful consideration of conditions to ensure adequate protections for competition and consumers."

They conclude: "It is important to ensure that the statements made by Carlos Brito and Mark Hunter ….. Accurately reflect the framework and impact of the merger. If the Justice Department has concerns with the merger, we urge careful consideration of conditions to ensure adequate protections for competition and consumers."

Last week we reported that ABI made considerable concessions to the South African government to retain employees, a deal which garnered quite a lot of derision from former employees of A-B here in the States, who took to Facebook in droves intimating that there are other ways to get attrition.

A-B'S TAKE. A-B released a statement in the wake of the senators DOJ letter:

"Our proposed combination with SABMiller is about our ability to serve new markets around the world, not the U.S.," per Marianne Amssoms, the global VP of communications. "As a result of this transaction, we do not expect any change to the already highly competitive U.S. beer market, our wholly owned distributorships (WODs), or our commitment to distribute approximately 10% of volume through our WODs. We continue to work with the Department of Justice, and expect our transaction to close in the second half of 2016."

PABST PIVOTS BIG TIME TO THE HIGH-END

Your editor never likes to toot his own horn (except almost always), but we called it on this one: A couple of months ago we brought attention to Pabst's "transfermentation." And wouldn't you know, the theme of Pabst's distributor meeting this week was just that. Well, not exactly, they failed to use our innovative new word, but they confirmed that they are indeed transforming.

This much was clear when Pabst chief Eugene Kashper scrolled through a few slides detailing Pabst's progress since he's been at the helm. Let's walk you through them real quick.

- Pabst grew revenue 21% last year according to Nielsen and the company is up 29% YTD this year. These figures position Pabst as "the fastest growing major supplier," according to Eugene.

- Pabst has gained 0.3 share of dollars this year. Eugene labeled it, however, as growing half a share point. "We like to round up at these events," he joked.

- Since Eugene has been at the helm they've grown their workforce from 250 to 444. "That's a big step for us," said Eugene. It's still "a small starting point for our organization," he admitted, "but we're trying to build a platform that can produce anything and can execute in the marketplace."

- In 2014, "virtually 100%" of Pabst's revenue was in the below-premium space, Eugene said, "as of last year 25% of our revenue was high-end." In three years, they expect over 50% of their revenue to come from the high-end.

The "transformation" of Pabst is really epitomized in that last bullet point. Eugene's vision for Pabst is to be a lead high-end supplier. They plan to get there with a one-two punch of unearthing old recipes and partnerships, Eugene told BBD.

DIGGING IN THE VAULT TO GET THERE. "It's heritage innovation to premiumize our portfolio and go into the high-end with some of these iconic brands that we have and some of these authentic recipes that have a great look and feel in our archives," said Eugene. We already see this strategy playing out with the brand Old Tankard Ale and pretty soon they'll launch their Heritage Lager. On top of that, Pabst has above premium versions of Ballantine, Rainier and Stroh's sitting in the pipeline.

PARTNERING TO GET THERE. Pabst wants to continue to build out their portfolio in "new product segments," like they've done with Small Town Brewery and Vermont Hard Cider; as well the import segment, (i.e. Tsingtao). And "certainly we want to participate in the craft beer segment, with the right partnership," said Eugene.

WHAT DOES THE RIGHT PARTNERSHIP LOOK LIKE? "It has to be the right cultural fit and they have to be people who are not just looking for a check - the biggest check to get out," said Eugene. "Because we don't think that that's really best for the health of a brand that somebody founded and built and put a lot of blood and sweat into. For us to just kinda take it and say 'we're gonna do better with it for the long-term.' We think that's overly arrogant."

"So we really are looking for people, who want to participate in the upside of getting their brand into every account with the right support behind it and to partner with us. So that's what we're looking for both in the import side or in a craft beer situation."

WHERE DOES THIS SHIFT LEAVE PBR? With all this talk of shifting into the high-end, we had to ask if Pabst Blue Ribbon would remain a top priority for Eugene and company? "Oh it's still a top priority," Eugene said, "because in the end PBR is our flagship and the Pabst family is our flagship."

"So when we premiumize the Pabst family, for instance we do a pre-prohibition Pabst heritage lager using an 1886 recipe brewed with the grits the way they used to and we put that at a higher price at six-pack glass. That's got to create a halo effect and help the main brand and help us grow the main brand and put us in the conversation really as a great American brewer. As opposed to just having PBR next to purely commoditized sub-premium brands somewhere at the end of that aisle. We want to put those products together and get our shelve to really tell the story of what Pabst really is, which is a great tradition of quality, innovation and just a wonderful American story."

PABST: A 172-YEAR-OLD STARTUP AND UNDERDOG BREWER. Throughout his presentation, Eugene commonly referred to Pabst as a "172-year-old startup" and an "underdog brewer." The comments received a roar of applause in the Pabst Theater, but it was a different story on the interwebs with some saying 'hasn't Pabst has been a top ten brewer since WWII'? We asked Eugene for a response to the retort and here's what he had to say:

"Our competition, you know, A-B InBev is over 100X bigger than we are. So yes we have the scale to potentially compete in some situations where we're not a craft brewer that borrowed money from their relatives to start a little brewery - we're not trying to present ourselves that way. But in the battle against these big brewers like a Constellation or a MillerCoors, even if you take their U.S. business - we're 10X smaller, if you include their international business, you know, we're 30-40X smaller. So really our resources are not comparable, but we think we can do a lot more with the resources that we utilize just by having the greater passion for these brands in the organization and really doing things differently, doing them our way and partnering with people."

JIM ON SLOWER INNOVATIONS, ABI ON Q1 EARNINGS CALL

As Craft Business Daily reported yesterday, Boston Beer reported Q1 results that worsened from prior quarters. Depletions for the quarter were down 5%. And their full-year depletions and shipments outlook estimate was revised down, to between minus 4% and up 2%. Net revenues were down 5% in the quarter, "mainly due to a decline in core shipments of 6%, partially offset by price increases."

On the call, CEO Martin Roper and founder Jim Koch fielded questions on competition, Anheuser-Busch, and their slow-growing innovations. Everyone seems to still be expecting the next Rebel IPA. But will there be one?

NITRO WON'T BE REBEL IPA. One analyst probed into Sam Adams innovations' slow start. Jim started with their new nitro series, which he called "very innovative." Still, it likely won't build momentum "as fast as something like a Sam Adams Rebel IPA did, because that was a major new entrant from the number one craft brewery in a well-established and growing category. The nitro project is different: It's entering into one of the few large areas of white space out there." So it's "really too early to tell where that will go."

ON DEPLETIONS GUIDANCE BETWEEN DOWN 4 AND UP 2. Speaking of forecasting: Martin said for them to hit the top end of their depletions/shipments guidance, "we'd be looking to modify and stem losses on Sam Adams and Angry Orchard by the second half … and see continued success and growth in other brands and other new product launches," which "obviously requires the turn of a trend." It's hard to balance that against comps trends. He can't guarantee they won't change the range, either.

ON COMPETITION FROM ABI. Prompted on "competitive disadvantage" wrought from "big breweries gobbling up a lot of local brands," Jim estimated that ABI has had "eight or nine craft beer acquisitions" in the last couple years. "At least so far, the arc of growth of those acquisitions hasn't really changed that much as a result of the ABI acquisition," Jim said. "They seem to be building a portfolio of strong regional brands rather than national brands." But he "doesn't have a crystal ball" as to where those brands will get prioritized in ABI's current portfolio.

Later he was pressed on how much volume Boston moves through A-B wholesalers. "We halettve a relatively small share of A-B distributors," Jim said. "I've always been very concerned about the greater ability of Anheuser-Busch InBev to influence their distributors, because they often have 90-plus percent of the gross margin generated in an A-B wholesaler."

But "if I had to guess, it's something like 10%-15% of our volume is [through] A-B distributors. And probably equally important, if we're in an A-B distributor now, that's going to be an A-B distributor that is probably not as dependent on A-B as the average one in their network is; and that's also gonna be an A-B distributor that's had our brands for 10, 20, even 25 years. So they have a history of operating independently and doing what's best for their business rather than responding to pressure from A-B."

More in CBD.

ANOTHER SLOW SHOWING FOR BEER IN LATEST GUEST METRICS

It's the same old story in the on-premise. Beer sales continue to struggle, down 3.1% for the year, that's "particularly slow," said GuestMetrics Bill Pecoriello given the overall alcohol category was only down 0.6%.

Anheuser-Busch is down 3.2% and MillerCoors is even worse, down 5.4%. Much of this sluggishness is attributed to poor performances in premium regular and premium light, which are down 6.7% and 4.9%, respectively.

Premium plus sales were the only bright spot in the premium category, up 1.4% thanks to Michelob Ultra, up 6%.

The overall import segment didn't have a great showing, down 3%. But Mexican imports continue to be a bright spot, Constellation's specifically, the company is up 8.8%, with the majority of that growth coming from its top two dogs Modelo Especial, up a whopping 29%, and Corona brands, up 3.5%. Heineken's Mexican import - Dos Equis - didn't fare as well, down 4.2%. As far as European imports go, Stella Artois contributed the only solid showing in the note, up 3.7%. Otherwise Heineken is down 7% and Guinness is down 7.2%.

Even craft sales "dipped into negative territory," Bill said, down 0.8%, due to declines in several major brands - Blue Moon is down 3% and Sam Adams is down 13%. Goose Island and Ballast Point posted impressive performances, however, up 18% and 42%, respectively.

Cider's woes continues down 4.4%, and no one is feeling the hurt more in the this segment than Angry Orchard, down 14%, which in turn is having a negative impact on Boston Beer's trends, down 13%.

Until Monday, Harry

"Yeah, everybody's got a bomb, we could all die any day. But before I'll let that happen, I'll dance my life away." - Prince

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