Molson Coors North America Q1 Brand Volumes Up 0.4%, But U.S. STRs Fall 14% in April

Dear Client:

Reporting Q1 results this morning, Molson Coors chief Gavin Hattersley said Coronavirus has “disproportionately” affected them as a company.

Despite “mounting confidence and enthusiasm for our plans and for our brands” early in the quarter, the virus changed their landscape, obliterating the on premise. 

“Specifically, we estimate that approximately 23% of our 2019 consolidated net sales resulted from on-premise consumption, with approximately 17% of our North America net sales … coming from this important part of the industry, and in nearly all of our markets the on-premise business has been effectively reduced to zero.”

U.S. STRS DOWN 14% FOR APRIL. While pantry loading benefitted Molson Coors North America’s end-of-March STR trends, that didn’t last. Off-premise sales are good but they “do not expect” them to fully offset on-premise volume losses. 

“Specifically, for the first four weeks of April 2020, in North America, we estimate that U.S. STRs were down approximately 14%, driven by lower premium and above premium brand trends, with economy brand performance down approximately 4% in the four weeks. 

“In the U.S. we continue to see strong STR trends in the off-premise channel, but these trends are not fully offsetting the effective elimination of on-premise sales. We expect the negative on-premise trends in the U.S. to continue while social isolation continues to be practiced and expect that any increase in total off-premise volumes due to channel shifting will not be sufficient to offset the losses experienced in the on-premise. We estimate that this will result in negative trends in volume, net sales, and mix versus our prior estimates and expect these trends to continue at least through the end of the year and in particular in the second quarter.”

Like Boston Beer did last week, they declined to provide 2020 guidance in light of the ongoing pandemic as the market “remains too unpredictable.” 

KEG COSTS. Recall that Molson Coors was the first big brewer to detail a keg return program. That’s proven quite costly, as they said Q1 results “include aggregate charges of $50 million, inclusive of a reduction to net sales of $31.5 million for estimated returns and reimbursements through these keg relief programs, as well as charges of $18.5 million within cost of goods sold related to finished goods keg inventories that are not expected to be sold within our freshness specifications.” 

After sizing up the impact from the pandemic, the company shared first quarter highlights from its business in North America. 

NET SALES DOWN 7.4%. Net sales in North America dropped about 7.4% for the quarter, Molson Coors said, “due to financial volume declines of 7.8%, reflecting unfavorable shipment timing in the U.S., including brewery downtime associated with the Milwaukee tragedy, lower contract brewing volume, as well as estimated keg sales returns and reimbursements of $19.0 million related to the on-premise impacts of the coronavirus pandemic.”

NET SALES PER HL DOWN 1.3%. Then “net sales per hectoliter on a brand volume basis declined 1.3% driven by the estimated on-premise sales returns and reimbursements as well as unfavorable geographic mix driven by growing licensed volume in Mexico, partially offset by net pricing growth.”

BUT BRAND VOLUMES UP SLIGHTLY. Brand volumes, meanwhile, “increased 0.4% due to the favorable timing of trading days versus the prior year, as well as March pantry loading, particularly in the U.S., partially offset by market share declines in North America.”

More after the call. 

BANG INFURIATES DISTRIBUTORS WITH TANGLED TERMINATION

VPX Sports, the parent company of Bang, has a motto:  “Fuel your Destiny.” Well, after termination letters arrived at many of their distributors in the wake of Tuesday’s announcement of their distribution deal with PepsiCo — which was surprising to almost no one — the only thing VPX seems to be fueling is fury and exasperation. 

While Bang says the form letter they sent to many distributors claiming poor focus which seemed like a precursor to termination was a poorly-timed coincidence, we remind you that the letter specifically warned distributors not to take on the energy drink called C4.  Why? We’ll get to that — there’s a lot to unpack here. 

So their termination letter dispenses with the for-cause nonsense and just goes straight to the payout, which in the contract is one times gross, cash. However, VPX submits that instead of a cash payout, distributors should sign a new agreement for their other smaller brands, mainly Red Bull competitor Redline (a competitor to C4 … ahhh), whereby VPX offers a credit for the payout based on future sales of those small brands. But as one distributor put it, “You and I will both be in the grave before I get paid out.”  

Another irritant:  Not only did the termination letters arrive after the distribution deal with PepsiCo was announced (“which is insulting” as one put it), but VPX has largely handled it by proxy, with no human contact even by phone. And many distribs say the calculations VPX is using for trailing 12 months’ sales are low-balled.  While A-B distributors don’t hold any lasting love for Monster Energy after that infamous termination, many are actually pining for those days.  “At least Monster treated us with respect,” says one, echoing others. 

Another large distributor says he believes they will pay the cash rather than get embroiled in lengthy lawsuits.  “Most [fellow distributors] I talked to are happy to hand it over to Pepsi if they [VPX] pay us what is owed. It sucks, but we knew that getting into NA.”  

But what if VPX decides to fight to force a credit action?  Don’t worry, we got you covered from the bev-alc legal crème de la crème (though not legal advice).  

One prominent industry attorney told BBD:  

The contract [says it] ends when they pay, if the distributor provides the data when it gets the notice. So if they don’t write a check, the contract doesn’t end, and that opens the door to more damages. So chances in a lawsuit are good.

In other words, if VPX doesn’t pay the distributor in cash U.S. dollars, the contract is still in force and they are contractually obligated to continue shipping them product.  If they don’t, VPX is liable for damages later if they lose. 

Another industry attorney says VPX is likely to lose if it terminates and doesn’t pay up.  He puts it this way:  

If a distributor is in a state with either an applicable franchise law or fair dealer law (and there are some), Bang cannot terminate without notice, an opportunity to cure or good cause.  A desire on Vital’s part to ‘ally’ with Pepsi and distribute through its network is not good cause.  If such a law applies and Vital unwisely terminates, it is highly likely that the liquidated damages clause ($4 per 12 count case) is not enforceable and the distributor is free to recover the fair market value of the brand.  In addition, the venue provision requiring litigation in Florida is also likely not enforceable.

For other distributors, the existing agreement in section 3.3 provides that Vital must provide notice of its exercise of its “buyout” right.  The distributor must then provide monthly depletion reports for the purpose of calculating the buyout amount.  Thereafter, within 60 days of the notice, Vital must pay the buyout amount.  That is a cash payment, not credit.  Perhaps most significantly, the last sentence of section 3.3 provides that the distribution agreement is not terminated until the distributor is paid the buyout amount.  

Do the math, Harry, if the notice was not sent until the end of April, the distributor does not have to provide the monthly depletions until the end of May.  If Vital takes 30 days to make the payment, they cannot terminate the agreement until the end of June.  If they refuse to make the payment under the guise of applying a future credit, it is my opinion that they could not terminate until actual payment is made.  If they terminate unlawfully, the distributor can recover any and all damages that flow from the wrongful termination.

And yet another top legal eagle says that the original “form letter” may come back to bite Bang legally.  

I think that Bang’s sending of bogus ’cause’ letters to distributors without any connection to the facts …. can come back to bite them.  Judges and juries are people too.  If the facts are, in fact, what has been reported publicly, then in my opinion a trier-of-fact would likely take a dim view of Bang’s position.

And there you have it. The professionals have spoken. However it gets Banged out, distributors seem to be holding the cards.

Until tomorrow,

Harry, Jenn and Jordan

“Always laugh when you can. It is cheap medicine.”

– Lord Byron

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