Constellation Officially Became a Big Brewer Yesterday

FILED JUNE 7, 2018

Dear Client:

As the news spread yesterday that Markstein Beverage has agreed to sell their Constellation Beer brand portfolio to Reyes in North County San Diego under pressure from Constellation, the beer distributor Trust Antennae -- those spidey senses distributors have when a supplier gets big enough to jump the trust shark -- went into collective overdrive. After all, this was not some back-country transfer among tiny distributors in Appalachia (no offense to my friends in W. Va).

This is California, and the Markstein family is a legendary and respected beer distributor family in the state. In fact, Markstein president Travis Markstein was chair of the NBWA, and his brother Hayden Markstein was chair of the Constellation distributor panel.

So what gives? Constellation Beer's chief commercial officer Bruce Jacobson told BBD they "anticipated some risk in San Diego because of our continued volume growth, and the presence of an ABI branch in South County ... we just felt like there was a situation that could create a transition in that marketplace we'd have to be reactive to..." So they chose to be "proactive" instead.

What that translates to is: In the event the Marksteins sold their business in San Diego to the adjacent Anheuser-Busch WOD to become a branch themselves, Constellation didn't want to be sitting on their heels. I get that. But regardless, even if Markstein were to sell to ABI, Constellation would have the option of moving their brands to Reyes anyway.

So it begs the question: Why would Constellation threaten to terminate a distributor with not even two million cases in STZ sales, who literally built their business in S. California -- Markstein was "one of their very best performing wholesalers," as Constellation itself admitted to Markstein chief Travis Markstein -- and go through the inevitable disruption in one of their highest share markets at the beginning of summer? It's almost like STZ engineered it for peak disruption. It's not like Markstein is underperforming in overall share or performance compared to their competition.

SIDEBAR: Markstein is keeping their Constellation business in Northern California, and indeed is buying part of a distributorship in Chico, CA which sells Constellation brands. They also will continue selling A-B and Sierra Nevada products in San Diego out of their San Marcos facility.

MARKSTEIN DIDN'T SEE IT COMING. In an internal memo sent to employees and obtained by BBD through nefarious back channels, Travis Markstein writes that, "In late April, our partner of 23 years, Constellation Brands notified me of their intent to terminate our partnership here in North San Diego."

Ed. Note: We've heard that this message was delivered by none other than Bill Hackett. If Bill is visiting your distributorship… maybe hide in the keg cooler.

The note continues: "While Constellation admitted that Markstein Beverage Co was and continued to be one of their very best performing wholesalers, they insisted a change in distribution was necessary to align with their long term goals. This news came as a complete and utter shock and while we believe Constellation did not have a contractual or legal right to terminate…. [we] felt that a prolonged legal dispute was not in our best interest."

So how much? The DOJ decreed that Constellation couldn't go below 6X Gross Profit when buying their brands from an A-B branch, so that generally has been the floor when STZ brands trade. We estimate the price at $70+ million, and while that seems like a lot of money, it pales in comparison to losing the brands into perpetuity. [Markstein reportedly used the general Cali franchise law to negotiate better terms].

NOW EVERYBODY ON HIGH ALERT: "TRUST HAS LEFT THE BUILDING". But here's the real cost of this news to Constellation -- something they can't put a price on: losing the complete and utter trust of distributors that Bill Hackett and Co. had built for over 25 years.

Greater Constellation didn't build this beer business, they virtually inherited it. And now distributors are already saying that they have "big brewer-itus" and acting like wine and spirits producers, who terminate and re-assign distributing rights as "almost a daily occurrence for them." As one beer (and wine) distributor put it, "Trust has left the building." It's hard to put a market cap delta on something as nebulous as trust, but ask A-B and MC how it's worked for them once they started messing with their networks.

At BMI's spring conference last month, Bruce Jacobson was asked whether Constellation "will continue their past history of not terminating distributors without cause?" As one attendee told us later in the day, Bruce did a little jig around that question. As Bruce said: "I'm not going to say with or without cause, I don't think it makes sense to answer a question like that."

Another major Constellation distributor told us last night: "We now know that if the Markstein's can get bullied into selling, then we all are vulnerable….. What does that do for our trust of them? And what does it do for our people's dedication to execute for them? Markstein will no doubt have to lay off people who built that brand for years."

Another distributor put it more bluntly: "Constellation just handed AB a huge gift in June…. Markstein will push [Michelob] Ultra down their... throats."

OUR TAKE. I've been in this business for nearly 30 years, and whenever a beer supplier gets in dire straits, or even more so when their trends are through the roof like Constellation's are, they curiously do the same thing: Try to jack with their distribution network. In both cases, it's almost always a disastrous strategy, but not just because of the inevitable short-term disruption.

It's because once you lose the trust of your distributors, they will find another product to compete with yours. Constellation itself is somewhat a product of distributors' distrust of Miller and A-B in the late 90s and early 2000s.

Is Constellation happy that they protected a few cases from an A-B branch which has been there since 2001? If so, they maybe do not recognize that the consequences of their actions go way, way beyond San Diego. They are in danger of giving away their second most important asset behind the equity of their brands: The trust of their "other" distributors -- those distributors who are not Reyes.

Forget A-B, is it Constellation that's the true catalyst of consolidation in the wholesale beer business? Or is this just a one-off in San Diego? Your thoughts?

BEERNET EXTRA. To read Travis Markstein's entire letter to his employees, click here:


Molson Coors is buying Clearly Kombucha, a non-alcoholic fermented tea beverage, the company announced Wednesday. They'll house it under the Tenth and Blake umbrella.

Why there? MillerCoors comms chief and Tenth & Blake president, Pete Marino, told BBD he believes it will "operate in a similar fashion" to their craft partners. The brand is still in the "nurture" stage, he thinks.

In an announcement to partners, he shared that they're still "developing specifics" around the brand's integration and expansion plans for the brand and look forward to sharing more details soon, with possible new markets and retail outlets as early as this fall," he wrote in an announcement to partners. The acquisition was identified by TAP Ventures, Molson Coors' investment arm.

For the uninitiated, kombuchas are basically fermented teas that are supposed to be really good for you. They taste sour, and c-stores and grocers charge a ton of money for them, but even broke Millennials seem happy to pay. They are disgusting, so naturally Millennials love them. They usually have some residual alcohol but most are effectively non-alcoholic; there are boozy versions, too.

The California-based brand currently high spots mostly in the West: California, Colorado, Montana, Oregon, Texas and Washington. But an email about the acquisition foreshadowed further rollout. Pete promised more details soon about the launch and promised "possible new markets and retail outlets as early as this fall."

That's really all you need to know at this point, except for this: Will it get some sort of beer-like franchise protection? Otherwise, some distribs have questioned whether it will be worth focusing on. Recall that after A-B distribs lost Monster to the Coke purchase, en masse terminations resulted in 1X GP as remittance.


Imported volumes were up 10.4% in April, the highest they've been so far in 2018, Beer Institute economist Michael Uhrich reported. (The comps were quite soft -- April 2017 import volumes were down almost 8%.) YTD import shipments are up 4.6%.

Mexican import shipments were up 18% for the month, bringing the YTD trend to just under 10%. Dutch beer is down double digits. Belgian beer had a fantastic month, up triple digits, and almost 50% YTD. Canadian beer is up about 2% for both periods; Irish beer is down almost 50% for the month but up 5% YTD, and German beer is down double digits for the whole year.

So we've got some major tailwinds. Then, too, "the recent trend towards depreciation of the U.S. dollar against other major currencies has begun to reverse," Michael said. "If it continues, this change should relieve some of the downward pressure on import demand caused by the dollar's depreciation."

Until tomorrow,

Harry, Jenn, and Jordan

"I'd like to live like a poor man �" only with lots of money."
- Pablo Picasso

---------- Sell Day Calendar ----------

Today's Sell Day: 5
Sell days this month: 21
Sell days this month last year: 22
This month ends on a: Fri.
This month last year ended on a: Fri.
YTD sell days Over/Under: 0

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