A-B Fronting New Wine & Spirits Wholesaler Agreement

Dear Client:

Back in 2006, then Anheuser-Busch chief August Busch IV told a packed crowd at our Beer Industry Summit that they were committed to seriously getting into wine and spirits.  Never happened, (unless you count Jekyll and Hyde).

In a bid to aggressively grow their “beyond beer” portfolio to a billion dollars by 2027, and in the wake of investing in Swish Wines and Cutwater Spirits, A-B is rolling out a new wine and spirits wholesaler agreement which they are calling the Pestalozzi Agreement (named after the street their St. Louis HQ sits).

AGREEMENT IS MANDATORY. The red network in Florida has already received the agreement, we hear, while others have not as top A-B executives prepare a road show to explain the new agreement to distributors. While some have already signed it, other wholesalers aren’t happy with some provisions, and view it as “one-sided.”  Still, A-B has reportedly said that if you want these new brands, you gotta sign the new agreement.

DIFFERENT THAN BEER. Recall that wine and spirits distributors typically don’t enjoy franchise protections beer distributors often do, and as such many wine and suppliers have wholesaler agreements which are less agreeable to wholesalers than standard beer industry agreements.  A-B is telling wholesalers that this agreement, which is the umbrella agreement for all of their wine and spirits brands, including newly purchased Cutwater Spirits, is better than the norms in the wine and spirits world. But it ain’t a beer agreement, according to sources.

Indeed, we’ve learned A-B hired a consulting firm to poll wine and spirits professionals to learn what are the norms for contract expectations, from termination valuations to exclusive territories.

FIRST YOU GOTTA GET A LICENSE.  As such, in a memo encouraging wholesalers to get wine and spirits licenses where legal, A-B’s vp of wholesaler development Bob Tallet says, “we see the opportunity for wine and spirits to contribute to that objective. After all, the opportunity is significant. The US beer category generates over $100B in annual revenue, but the total alcohol beverage industry generates $240B!”

Stay tuned…..

HUSA Q1: BEER VOLUMES DOWN MID-SINGLES

Heineken USA reported in the wee hours yesterday, with the following update for its Q1 US trends: Beer volumes down mid-single digits, which you can clearly see in scandata. It’s actually an improvement from last year.

Globally, Heineken N.V. volume was up was 4.3% organically, with brand Heineken volume up more than 8%, seeing double digit growth in Africa, Middle East & Eastern Europe and the Americas (but obviously not in the U.S.).

BOSTON Q1 SHIPMENTS RIP, UP 32.5%: ON THE CALL, MANAGEMENT SAYS SELTZER IS THE REAL THING

If you’re a Craft Business Daily reader, you know that yesterday Boston reported a pretty swank Q1. Depletions were up 11%. And since they shipped a whole lotta Truly very early this year to avoid summer out of stocks, Boston shipments were up 32.5% to 1.1 million barrels, driving net revenues up 32.1%.

They changed some outlook after the quarter: Shipments and depletions trends were revised up, to between 10% – 15% growth. Meanwhile, full year gross margin targets are between 50% to 52%, down from the previously communicated range of between 51% and 53%. That’s partly due to the breakaway success of Truly, a success that comes at “a higher incremental cost due to the increased usage of third-party breweries, which is negatively impacting our gross margin expectation for the year,” said CEO Dave Burwick, in the earnings release.

Naturally, much of yesterday evening’s call focused on Truly. (Truly and White Claw together comprise about 80% of the category, in scandata.)

Boston seems pretty comfortable about having Twisted and Truly as its twin jet engines, even as Sam Adams has had it tough. Still, founder Jim Koch points out:

“With the wholesalers, Sam Adams continues to be the lead craft beer. We’re not really losing to someone who is going to replace Sam Adams. We’re losing share to the other 7,000 craft brewers.” Craft grew 4% last year, but the number of brewers grew by “something like 13% or 14%. The category is “losing to fragmentation,” says Jim, “which continues to make Sam Adams — the category leader with the largest volume — an important brand to [wholesalers].” In the end, he thinks tested brands like Sam Adams are better prepped to endure a shakeout.

BUUUUT BACK TO TRULY. Lots of speculation surrounds: just how big Truly could be; margin considerations; and Boston health after seltzer growth eventually slows. Sam Adams is still not growing (though they’re trying to change that with new packaging et al.; they also reformulated Summer Ale).

One analyst suggested that, at least historically, beer brands were more “valuable” than FMBs.

Jim answered that “almost philosophical” question by musing: “Turns out that some FMB brands have been quite enduring.” He cited, naturally, Twisted Tea, but also “Mike’s Hard Lemonade, Smirnoff,” and even the Lime-a-Ritas have had ups and downs.

Another analyst worried about long-term staying power, and tried to compare seltzer to the quicker “boom bust” cycle of hard soda.

HARD SELTZER, NOT HARD SODA. “We don’t see this as following the hard soda path,” Jim stressed. He offered several reasons: “One, that was driven by trial — not much repeat. We had Coney Island hard root beer, so we went through that. … And it also ran against consumer trends, because it was loaded with sugar and loaded with calories. When that info started to become more prominent, the category went away.”

Then, obviously: “hard seltzer is very much riding a very strong, powerful trend” in beverages of all kind: “heath and wellness; less sugar; fewer calories; more drinkable. So we see it as very much an expression of powerful consumer trends that have come to alcoholic beverages.”

TRULY MATH: EVEN SLOWED GROWTH = LOTS OF NEW CASES. Jim continued: “We’re also encouraged by the fact that despite this almost crazy growth – we’re looking at a category that’s almost tripling – yes, the growth rates will come down, we’re absolutely certain of that. But as they come down, they’re coming down on a bigger volume base. So the incremental volume from the category will not drop as fast as the growth rates. … That’s why it may well continue to more than offset whatever is going on with craft beer. Because if it triples in volume and the growth rate goes down to 50%, that’s still a lot of new cases.


“So we see this category as having legs. We don’t know how high ‘up’ is. But we were frankly a little surprised at how strong it has continued through January/February/March, when we thought, ‘it’s winter, it’s gonna slow down.’ It didn’t.”  

Truly is much more a blessing than a curse, of course, but it does hurt gross margins a bit because Boston has to support its production with co-packers.

So how much Truly could they make in-house in the future?

“That’s a good question,” Jim told the person who asked.

“Frankly, we didn’t anticipate the continued growth rate being as strong as it is, so we’re doing more co-packing than we thought,” he said. They anticipate that will go down in the last four months of the year: “It’s a seasonal product, it peaks [in summer].”

And yet, “even with our co-packers, between us, we don’t have enough capacity to meet the projected demands for those months as it happens, so that’s why we’ve got all this inventory out there that we believe will get us comfortably through the peak.”

NEED A SUMMER JOB? CALL BOSTON BEER…. But they do have some levers that should help Truly’s margin impact, going forward. Jim says: “The vast majority of hard seltzer for us is in variety pack. We are semi hand packing that now. [Ed. note: Wow.]

“But in May, we’re bringing on a large, automated variety pack line that will take a significant piece of the direct labor out of that operation. We literally have hundreds of temps at our brewery in Pennsylvania … every day. To do, among other things, the packing of these variety packs. So it’s ugly. And we’re automating that. And we have purchased a big piece of the equipment for a new can line. … So that will go in, but it will be too late to get this peak, but we’ll have that for peak of next year. And that will give us the capability of bringing in house a lot of production that’s not in house.

“My hope is, we’re doing just as much contract production next year because we’ve underestimated the volume again,” Jim said.

By the way: CEO Dave said they’re seeing that more than half the volume for seltzer is coming outside of beer. But, they also see it coming out of light beer.  

So while some analysts continue to wring their hands about lack of growth in the Sam Adams franchise at the moment, Jim’s accepted it, and happy that they can actually still grow.

“A lot of what’s driving our total depletions is, we’re getting bigger in tea and hard seltzer, which have the strongest growth rates,” he said, answering a question about April scandata direction (note: management said Nielsen doesn’t seem to capture Tea growth super accurately “for whatever reason”).

“So, Sam Adams will always be at the heart and soul of the company, but we have evolved our portfolio and our mix, to a point where we can deliver nice double-digit growth without Sam Adams contributing to it,” said Jim. “It’s just a fact of life at this point that our portfolio is able to grow double digits, despite some of the softer trends in craft beer.”

Until tomorrow,

Harry, Jenn, and Jordan

“You know, I’m sick of following my dreams, man. I’m just going to ask where they’re going and hook up with ’em later.”  -Mitch Hedberg

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