Grokking A-B’s Pestalozzi Agreement Termination at 2X Gross

Dear Client:

As we wrote yesterday, A-B is fronting a new umbrella wholesaler agreement for all for their wine and spirits brands, like newly acquired Cutwater Spirits and Babe wines.  First off, if A-B distributors want to get in on this action, they gotta get a state wine/spirits wholesale license. Second, they gotta sign the Pestalozzi Agreement, which reads more like a wine and spirits agreement than a beer agreement, with a few departures.

In many ways it’s the same as a beer agreement.  Same Match N’ Snatch provision, no selling without permission… that sort of thing. But it differs in a few other key ways ….. And remember, there likely aren’t franchise laws to protect you with these brands.  

A few things that stuck out:

TRADE CHANNEL EXCLUSIONS.  One, if A-B finds that a route-to-market in a particular channel can be better performed by A-B, they can take over that distribution and pay the wholesaler 2 times previous year’s gross profit to compensate.  So if Walmart or Amazon comes a’calling and wants direct sales, A-B can take it over, where legal.

E-COMMERCE.  Also, A-B wholesalers would have “no rights to sell, deliver, or ship products” to e-commerce sites (like Amazon).  A-B would presumably take care of those orders. However, wholesalers can continue to service “inventory by a brick and mortar retail account in the Territory that does not act as a distribution center for other retail accounts, which also makes sales to consumers outside of filling E-Commerce Orders, and is otherwise being serviced with the Products by Wholesaler.”  (Like Whole Foods).

NOT EVERGREEN.  After signing, the agreement basically lasts for three years, and then can be automatically renewed yearly unless terminated.  If A-B decides not to renew, for any reason, it will pay the wholesaler 2 times gross profit.

TERMINATION.  If termination occurs for cause, termination is termination.  If “for convenience, for any or no reason”, then A-B pays, again 2 times GP.  

The agreement is “construed, interpreted and governed by the laws of the State of Missouri,” which you may recall has experienced some setbacks when it comes to wine and spirits wholesaler terminations (search our websites for Major Brands).  

PLUS…. They want you to have a separate sale team for w&S, and there’s no guarantees to getting line extensions. And the marketing fee is steep:  7.5% of GP for first year and 5% GP thereafter.

So… to sum up:

-Exclusive territories:  Yes

-e-Commerce included:  No

-Military/Airports included:  No

-Contract Renewal:  3 yrs, 1 year renewal, 2x GP if no renewal

-Termination with cause:  zilch

-Termination without cause:  They pay 2x GP

-Match and snatch:  Yes

-Under Missouri law:  Yes

-Alternate route to market by A-B to a channel:  They pay 2x GP

-Future line extensions auto-included:  No

-Sales and Marketing expense:  Year 1 7.5% GP, 5% GP after

-Separate sales team:  Yes

BOTTOM LINE.  So the agreement isn’t particularly egregious at face value from a wine and spirits standpoint, if there were franchise laws. But most states have no protections for wine and spirits, and so A-B distributors may, in the end, face another Monster Energy situation if there’s a breakout success and the brand is sold to, say, a Diageo.

It ain’t a beer contract — the e-commerce and trade channel provisions could end up being a big issue in the future. But that’s a risk A-B distributors may be inclined to take, like they did with Monster.  It’s like the old adage says: It’s better to have loved and lost, than to have not loved at all.

BUD LIGHT LEMON TEA HITS NEXT MONDAY, COMPLETE WITH INGREDIENTS LABEL

Just like Bud Light, Bud Light Lime and Bud Light Orange, new Bud Light Lemon Tea will include an ingredients label prominently displayed on the packaging, (Note that it is a new brand, so labels, packaging, and its formula are new).  It will start arriving on store shelves next Monday April 29 and will have full 360 ad support on TV, digital and more this summer.

We first reported last year on the imminent brand. What is it? Just what it sounds like: a light lager brewed with “real lemon peels and aged over real black tea leaves to give the beer its distinct flavor profile.” The seasonal offering will be available through September. It’s 142 calories.

More on how A-B is bringing these new brands to market below.

A-B’S NEW INNOVATION MANTRA: OODLES OF MISSES FOR SOME BIG HITS

Yesterday A-B hosted an event for media that showcased their big innovation plays, from national just-launched forays like the Bud Light Lemon Tea (which, actually, really tastes like tea) and Strawberry Lemonade Naturdays (which is so far, says the team, the top beer innovation this year) to more regional, potential scale-ups, like a 100-calorie, 3.5% ABV “honey alcohol beverage” dubbed “b.” It’s a cause-driven brand (which largely sits on the wine shelf), meant to help save the bees via percentage-of-sales donated. It’s piloting in New England (Boston and more).  

Other things we saw: A RITAS Spritz line, with half the sugar of the flagship, and 6% alcohol; a 4-%5% ABV hard green tea and coconut water line, dubbed LQD, fermented from green tea and coconut water, piloting in California and parts of the Pac Northwest (it came out of 10 Barrel).

These and their better known innovations — Bud Light Orange was the top innovation in beer last year, which even surprised them, said VP marketing innovation Jake Kirsch — are being driven and informed by three trendy directives: premimization, health and wellness, and purpose-driven brands, which is driven basically every CPG category, said Jake.

Their new approach to piloting innovations, is called Apollo. They’re taking more shots, says Jake.

It’s “almost like a VC mindset … If we can get one or two right they’re gonna pay for the other 150.”  

But these innovations also represent a step change in how A-B is going about its business in general, they say.

CMO Marcel Marcondes said they’re changing as a company. “Not just a leader, but leading.” They’re not just chasing market share, he says, but growth.  

Innovations are turning around much quicker; where it used to take 2 years, it’s now 6, even 3 months.  They’re talking to “thousands” of people a night via new technology, and leveraging insights against solutions.

Indeed, VP Beyond Beer Chelsea Phillips pointed out to us that the last time they had this many big innovation moves was 2012, when juggernauts like Ritas and Bud Light Platinum burst on the scene.  

A few other interesting propositions included an imminent (July) launch of Bon & Viv’s “Classic,” an unflavored play (which sounds akin to White Claw Pure) that’ll hit in package – but is also a draft play. They’ve figured out how to do seltzer on a draft line, says Chelsea.   

There’s more we can’t talk about yet, too. Rest assured, A-B is invested in throwing a lot at the wall to see what sticks.

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ED. NOTE:  Many thanks to Bernie Schroeder, Steve Harris, and the rest at the New York State Beer Wholesalers Association for hosting me in beautiful Naples, FL for their annual business meeting. It’s because of local and regional meetings like this that remind us of what is important about this business.

Incidentally, if any other beer industry organizations are interested in having me (Harry) speak, just ask.  I do not charge a fee other than lodging. Ping me at hs@beernet.com and let’s see if our schedules are a fit.

Until Monday,

Harry, Jenn, and Jordan

“My belt holds my pants up, but the belt loops hold my belt up. I don’t really know what’s happening down there. Who is the real hero?”

-Mitch Hedberg

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