Is A-B Panicking?

FILED APRIL 27, 2016

Dear Client:

That was the title of analyst Robert Ottenstein of Evercore's report yesterday over reports of heavy discounting by A-B so early in the summer ("buy two 12 packs of Bud/Bud Light, get one free").

Robert qualifies the report by adding, "We don't think so, but still a yellow flag" for competitors Molson Coors and Constellation.

He writes: "ABI's upcoming holiday promotions are somewhat wider and deeper than usual." But Robert stops short of saying this is a change in strategy, as that would "be completely counter to ABI's strategy, culture and message to investors and distributors from CEO Brito on down for past 7 years" and A-B "understands that competing on price would damage brand equity and harm profitability, as it did in 2005 (prior to InBev's purchase of A-B in 2008)."

Having said that, A-B's "share peaked in 2009, and the firm has made stabilizing share and profitably growing the top line a greater priority in recent years, including a new (additional) long-term incentive plan for some executives based upon total revenue. ABI is in quiet period (reports 1Q16 results May 4), but we suspect the message will be that the pricing promotions are tactical and intended to 'disrupt' consumer behavior."

And there is the "puzzling" discounting of Michelob Ultra, which is growing like gangbusters. Robert's theory is they are using Mich Ultra to hit back at Corona in some markets and he notes A-B "also did a similar promotion on Ultra in March of this year, putting prices in line with Budweiser / Bud Light for 10 days."

To us it's curious why A-B would conceivably start a price war so early in the summer, pushing the price button around Memorial Day and July 4th.

I gather it's to get early momentum at the beginning of summer to get those chain ads, while also garnering distribution in those independent accounts which choose to pocket this largess by A-B.

There's also some bundling of A-B's craft draft beer with premium on deep deals. As one large craft distributor told BBD: "It smacks of predatory pricing to me." Bottom line is A-B enjoys much lower fixed costs per barrel than any other brewer and so has that strategic lever to pull against their competitors.

Distribution is also a huge driver for A-B these days. It has jettisoned it's so-called "King of Distribution" (KOD) incentive with distributors in favor of a simpler SAP (Space Assortment Price) initiative. At first glance it just looks like a change in acronyms, as if it one doesn't work, the next guy just changes the name. But -- again using their Wholesaler Panel to sell the plan to distributors -- A-B has simplified the plan:

"SAP will focus on achieving distribution for core brands via the 15 highest velocity SKUs. SAP will be considered executed when at least 13 of these 15 SKUs are in a store. The goal will be to grow the number of executed SAP accounts by 20% at end of this year. Borrowing from this SAP methodology, there will also be targets for FMB products and High End brands," writes A-B's Wholesaler Panel chairman to distributors last week.

That's a lot of SKUs, and seems to be in line with their exclusivity program of crowding shelf space. But as one distributor put it, "I wish they'd compensate their field sales negatively on how much beer we'll have to bring back to the warehouse and crush."

Until tomorrow, Harry

"All you need to grow fine, vigorous grass is a crack in your sidewalk." - Will Rogers

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