Scott Whitley Talks All Things Tenth & Blake

FILED SEPTEMBER 28, 2016

Dear Client:

Yesterday we gave you the lowdown on the big bets MillerCoors is placing on its premium, FMB, economy and super premium brands. Today, we bring you the latest happenings inside its craft and import division, Tenth & Blake.

Tenth & Blake has been fairly acquisitive as of late and it's forced some big changes inside the brewer's craft and import division. The chief of T&B, Scott Whitley, hopped on stage to update distributors on all of its recent activities.

THE SKINNY ON THEIR RECENT MARKETING MOVE. As you know, T&B just recently announced a big transition to move the marketing of Blue Moon and Leinenkugel's over to MillerCoors. Scott said the decision came about after realizing that they were going to land three new craft partnerships over the summer.

With three new brands coming on board, Scott told MillerCoors chief Gavin Hattersley that he thought it would be best to move Blue Moon and Leinie's to MillerCoors CMO David Kroll's team.

As Scott saw it, the move "would allow Tenth & Blake to realize the great promise of our new craft partner and prestige import brands, while also doing justice to our national crafts." It's his belief that the brands will "be better served by bringing the full weight and capabilities of David's team to the challenge."

MILLERCOORS' NEW "GROWTH ENGINES". So what do these three new craft brands bring to the table? "All three of our new partners offer Tenth & Blake highly complementary beers, and will be strong growth engines for MillerCoors in the years to come," Scott said. They also give MillerCoors a craft presence in three key regions.

FLAGS IN THREE KEY REGIONS. The deal with Terrapin "provides us with strong craft brands in the underdeveloped Southeast craft beer market," Scott said. While, the Hop Valley acquisition, "gives us a strategic partner with one of the strongest growth rates in the region - the hyper-competitive Pacific Northwest." And as for the tie up with Revolver, Scott said they're "really excited" about the brewer's "growth prospects, not just in Texas, but in the rest of the central region as well."

We haven't heard of any expansions on tap for the newly acquired breweries as of yet, but they're definitely in the works. "We're not going to be shy about moving ahead with expansions, but job one is doing them right," Scott said.

WHAT ABOUT SAINT ARCHER? Expansions are on tap, however, for T&B's first craft acquisition, Saint Archer as they've been "working diligently" to double the brewer's capacity.

The newfound capacity allowed them to introduce the brand in Las Vegas last month and the brand "already has 10 taps at the MGM, will be available at the Sports Book at The Cosmopolitan, and sold 1,000 CE's in its first five delivery days," said Scott.

They plan to take the brand even further, Scott said, with rollouts coming in Arizona, Oregon, and Washington this fall.

PERONI EXPANDING PRIORITY MARKETS. Scott then moved on to their imports telling distributors that Peroni is now MillerCoors' "4th best-selling brand in the on-premise in its priority markets of New York City, LA, and Miami."

In fact, Peroni is "up nearly 70% over the past five years, and velocities on key packs are approaching Blue Moon metrics." Scott said much of that growth is being driven by glassware, informing distributors that they'll "realize a 70% lift in accounts" where they place Peroni's glassware.

T&B will expand Peroni's priority markets next year from four to 11. They've"already laid some groundwork in Dallas," Scott said, "and we'll be adding San Francisco, Las Vegas, and D.C. to our priority list."

PILSNER BOOM "BODES WELL" FOR PILSNER URQUELL. As for Pilsner Urquell, Scott is very optimistic of the brand given pilsners are one of the fastest growing styles within craft, up 72% over the past year. "That bodes well for the original pilsner beer, Pilsner Urquell," Scott said. "Better yet, Pilsner Urquell sources its volume growth from both import and craft drinkers."

Scott once again encouraged distributors to pick up the Pilsner Urquell 4-pack cans, which are up 35% YTD.

WE MADE THE NECESSARY MOVES, NOW IT'S YOUR TURN. Scott closed his speech with a plea to their distributors.

"When you return to your markets this week, gather your management team together, and ask yourselves an honest question: Do we have the business model in place that we will need to build up-and-coming brands like Peroni, Pilsner Urquell, Saint Archer, Terrapin, Revolver, and Hop Valley?"

Scott and company have re-oriented T&B to do just that and he advised distributors to follow suit.

CONSENTS AND FRANCHISE LAWS, AKA: "I DON'T LIKE YOU, I DON'T WANT YOU, GO AWAY!" AND OTHER SALE CONSIDERATIONS

There are several pending -- and closed distributor deals alike -- where dissenting brewers have made potential distributor transactions more hairy (see for example the Yuengling question in Mississippi with the recent Rex Mitchell transaction).

So what's the supplier's ability to effectively say "yes" or "no" to a deal and brand transactions? "It depends," said distribution lawyer Drew Jaglom at an NBWA session this week. "You ve got to look at contracts and franchise law; read those together."

Standards differ. In some states, the supplier has "pretty much free rein" if the issue isn't covered in franchise law or the statute gives supplier a wide right of disapproval. Sometimes statutes say you can't transfer without suppliers' consent; others say suppliers can only withhold consent if they do so "reasonably" or considering qualifications of the buyer.

If a supplier has the right to consent or "to slow you down in practice, which they usually can do," there's usually "a pound of flesh extracted to get consent - more marketing spending, additional staff," etc. But sometimes a supplier wants a deal as much as you do, and "you can get a little benefit - a continued discounting program," etc.

If the deal is in the context of a termination, or pressure from supplier to sell, "it's a divorce. There are two kinds of kids - your kids," for whom keeping the supplier and the business is important. The other kids are the brands, and "what's gonna happen with those if supplier and wholesaler are at odds?"

There's "very often an opportunity for brand exchanges, where one can avoid losing gross profit, while getting the tax benefit of an exchange."

In fact this sort of deal is getting more popular: "It's a way to defer the gain on a transaction if there are other similar assets to acquire " brands or distributorships," like "ABI using proceeds from the Crown rights sale on WOD acquisitions" or "wholesalers' use of Monster termination proceeds."

That bleeds into another primary consideration:

CATS AND DOGS AND WHAT'S IT WORTH? Appraisals are important, even for "non-essential suppliers." They're the things of lawsuits, deal trip-ups, and taking the wind outta deals.

Drew's advice: "Look at your brand list, the gross profit lineup, and what they contribute, and you're gonna figure out who the essential suppliers are."

We know the essentials suppliers' "nay" could be dealbreakers.

But then you have the "cats and dogs." Those suppliers are not gonna kill a deal but help determine "what should the price adjustments be.”

But the problem you have is, the "standalone value of the brand may not be as great as the the value of the brand to the deal." Six times gross profit is not an atypical number for craft. It's lower for a major brewer. Ten times EBITDA is not atypical for buying a whole business.

But, if you take a small brand outta the deal, that gross profit is dropping straight to the EBDITA line. So if you've reduced gross profit by 10, that's a brand value of 60 … but an impact of 100 on the deal price based on the EBITDA multiple, say the guys. So figure out how to deal with those so the value of the deal remains where you want.

PAUL BERTUCCI TAKES OVER AS NBWA CHAIRMAN

Yesterday, Paul Bertucci, executive vice president of FEB Distributing Company, in Gulfport and Capital City Beverages in Jackson, Mississippi, assumed the role of chairman of NBWA.

Paul took the big stage and opened up with a little history on how he came into the beer business. Paul described how his family's business began in 1934 with just one brand of beer (Jax Brewery of New Orleans) and one truck. The company later acquired Budweiser, to which Paul (now a MillerCoors distributor) poked fun at the fact that "brands can and do transfer... Who knew?"

But times have changed and "this is not my grandfather's beer company," anymore, Paul said. Today FEB holds two warehouses and distributes more than 100 different brands of beer.

Paul then touched on the importance of industry relationships. "We value the relationships we have with suppliers like MillerCoors and Heineken. Those partners go back to the 1960s. And we have been partners with craft brewers Sam Adams and Sierra Nevada since the late '80s. These days we also deliver beer from around the world: Belgium, Italy, Germany, Ireland, Mexico, Japan, to name a few.

"While we build relationships with supplier and retail partners, we know that it's the consumer who really matters," Paul said. "And that's part of what makes distributors so important to this system. We know our local markets. Because I live and work in the same area, I know firsthand what local tastes run to: Boating. Fishing. And of course, SEC football." Sounds kind of like a Kenny Chesney song, Paul joked.

On a personal note, I met Paul actually at an NBWA meeting probably 15 years ago when he first became an officer, and he was one of my very early readers. It's great to see your old friends progress and become successful. Congratulations Bertucci.
Until tomorrow, Harry

"Americans will put up with anything provided it doesn't block traffic." - Dan Rather


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