Distinguished Brands International Street Talk VOL VI Issue 10

FARGO, ND / NEW ORLEANS, LA — A New Orleans based Dixie Brewing Co. is sending 1,000 cases of beer to Fargo for a post-flood party. Mayor Dennis Walaker made a comment during the city’s flood fight this spring that he would buy everyone a beer after it was over. To help make that promise a reality, Dixie Brewing Co. will be sending 24,000 Dixie beers to Fargo. People will get a ticket and will be limited to one free beer. Dixie Brewing Co. went through its own flood tragedy back when Hurricane Katrina severely damaged the brewing company and looters stole the equipment. Ty McCaffrey, a spokesman for Dixie’s supplier, Distinguished Brands International, said the brewer is rebuilding, with the beer being temporarily brewed in Wisconsin.

HONG KONG – On May 8th it was confirmed that AB-InBev sold its remaining 7.01% stake in Tsingtao Brewery Co. Ltd. to Chinese private investor, Chen Fashu, for US$235 million. The sale is expected to be complete by May 27th. Last month AB-InBev already sold 20% of its stake in Tsingtao to Asahi for US$667million, and with this final sale, AB-InBev will cease to be a shareholder in Tsingtao. This deal along with AB-InBev’s agreement to sell off their South Korean Oriental Brewery to KKR (announced on May 7th), AB-InBev continues to demonstrate the company’s commitment to pay off debt incurred during the Anheuser Busch takeover last year.

BELGIUM/US/SOUTH KOREA – AB-InBev has agreed to sell Oriental Brewery (OB), South Korea’s second largest brewery, to an affiliate of Kohlberg Kravis Roberts & Co. L.P. (KKR) for us$1.8 billion. AB-InBev will grant KKR exclusivity to distribute specified brands in South Korea, including Budweiser, Bud-Ice and Hoegaarden. AB-InBev will also have the right to reacquire OB at pre-determined terms within five years after the deal closes.
Chief Executive Officer of AB-InBev, Carlos Brito, said: “This transaction allows us to unlock value for our stakeholders while preserving a mutually beneficial relationship through ongoing distribution agreements.

CALIFORNIA – The well known and dreaded “dime-a-drink” tax has been withdrawn from the California assembly due to a lack of support. The author of the bill, Jim Beall, says it needs more time to age. This suggests he may reintroduce it next year. AB 1019 was originally put on hold in the Assembly because it only had three members backing it. Beall didn’t have any additional luck in finding more support for it. So far the California wine industry has escaped the first tax increase since the early 990’s.

INDUSTRY – Are there possible signs of up coming price wars between the two largest beer companies, MillerCoors, LLC and AB-InBev, this summer? While consumers make like the deep discounts for their summer activities, the last time a price war happened back in 2005, it affected the entire industry. Large discounts carry the risk of obviously lower profits but without a significant growth in sales. MillerCoors was specifically created last year to steal market share from then Anheuser Busch. Research analysts feel a price war would be imminent if MillerCoors begins to gain market share from Budweiser. InBev would be forced to retaliate, so to speak, and what they do hugely impacts the market.

INDUSTRY – BrandZ 2009 Top 100 Ranking Report published in May reveals the brand value of the beer category has grown by 15%. Analysts explain the increase by the consumer consumption trend shifting from the on-prem to the off-prem. Bud Light was number one in brand value, with a year-on-year increase of 33%. Budweiser was second with a 13% y-o-y increase and Heineken followed in third with a 10% y-o-y increase in brand value.

JAPAN/PHILLIPINES – Kirin Holdings Company completed a deal in late April for partial acquisition of San Miguel Brewery, Inc (SMB) shares with intentions to acquire a total of 48.3% of SMB shares by the end of May. Total acquisition price is Php58.93 billion (approx. ¥117.9 billion).

INDUSTRY – Louis Glazer passed away Monday, April 27th at the age of 76. Louis was a prominent leader in the liquor industry. His career included 50 years at Glazer Wholesale Distributors where he served as President. He is survived by his wife of 55 years, LaRue Glickman Glazer, mother, Mollie Glazer, brother and sister-in-law, Jay and Harriette Glazer, son and daughter-in-law Larry and Harriet Glazer, and grandchildren Jason, Erica, Jacob, Ryan, and Alison.

ILLINOIS – Fortune Brands cut its quarterly dividend to 19 cents per share from 44 cents per share in order to raise more cash. The dividend cut will help the company save $150 million annually. Fortune expects earnings of 5 cents a share in the first quarter. The company also increased its 2009 target for free cash flow from the range of $100million to $200million, to about $400million, after dividends and capital expenditures. In a statement, chairman and chief, Bruce Carbonari said all of the company’s businesses performed at or above expectations during what would be considered the most difficult quarter of the year.

INDUSTRY – UBS recently downgraded Brown Forman to sell – despite industry speculation that Bacardi and Brown Forman are contemplating a merger. UBS doesn’t believe a deal is imminent. They feel Bacardi can’t afford it because their debt levels are too high to support a deal. Even though UBS understands the strategic rationale of the merger, it would allow the companies to better compete in the global spirits market,but UBS also estimates that Bacardi’s EBITDA would be approximately 5 times or $400 in cost synergies. Lastly, UBS feels Bacardi would most likely need to sell brands in order to purchase B-F and they don’t foresee many buyers in the industry at this time.

WASHINGTON – The Washington State Liquor Control Board just approved a significant tax hike on spirits. The new tax increase will raise the markup from 39.2 percent to 51.9 percent. It will go into effect August 1st and will remain in place until 2011. An example of how this will affect the industry, the state’s only distillery, Dry Fly Distillery of Spokane, sells a bottle of vodka to the state for about $15. The state adds about $15 to the price including markup and taxes, resulting in a shelf price of $29.95. The tax will add an extra $2 on the shelf.

HOUSTON, TX – Anheuser-Busch in east Houston is requesting that the Houston City Council for participation in a state funded program that could offer up to $3 million to help keep some 700 people employed. The out-dated brewery currently employs 713 people. A-B officials say they are considering either updating this one or expanding a new one in Fort Collins, Colorado, which has room to grow. Contrary to the concerns of some city officials, the person overseeing A-B’s request reiterated that the brewer never suggested that it would close the brewery, leave Houston, or cut jobs if their request for the aid did not come through. A-B released a statement stating they are not planning any job cuts or planning on moving any positions. The request for state money is solely to support capital investment in the Houston brewery.

HARTFORD, CT – Following a Superior Court ruling denying a temporary injunction, Connecticut beer distributors (and soda distributors) were told they will have to pay $6million in unclaimed nickel deposits to the state. The ruling supported the Attorney General’s argument that the state could seize the unclaimed deposits that the industry has kept as profit since a new law was passed last year requiring the distributors to turn over unclaimed deposits to the state. The state set up an escrow account within the Department of Environmental Protection to manage the unclaimed deposit fund. The beverage industry is still contesting the state’s overall plan to snatch up the unclaimed deposits to help the budget. It is still expected, however, that deep-pocketed Coca-Cola and Pepsi-Cola will be appealing the decision. $6million is the amount of unclaimed deposits that were collected from December 1 of last year to March 30. The state’s deposit-bottle law will expand on Oct. 1 to include water containers less than 3 liters.

INDUSTRY – Beer trade publication Insights Express reports that overall the European beer import segment is down 9% through April 19th. Heineken USA represents two thirds of the import segment and it is down 11.5%, even though it raised import prices more than 2% this year. Diageo’s Guinness USA is down 3.2%. MillerCoors’ Pilsner Urquell is down 19% and the Grolsch brand is down a whopping 60%. However, among these declining numbers is Anheuser-Busch. They are up 11% – obviously out performing the rest of the market. Leading their growth is Stella Artois brand with a 31.6% gain. A-B raised its import beer prices this year as well, but another difference may be that A-B is putting a lot of effort in expanding the U.S. availability of European brews from InBev now that the two companies are combined. Another key point is that A-B has put a lot of time and work into securing the distribution rights for beers like Stella and Bass. These efforts seem to be paying off.

DENMARK – Denmark-based Carlsberg Brewery had a 25% increase in net revenue in the first quarter of 2009. The brewer increased profit and gained market share in Eastern Europe and Asia.
Carlsberg beer volumes increased 34% to 22.6 million hl for the quarter vs. 16.8 million hl in Q1 2008. These increases can be partly attributed to the company’s focus on cost control, efforts to protect earnings and improving cash flow during 2009. These efficiency improvements were executed in Eastern Europe and have shown a direct link to positive improvements. These same initiatives will be implemented in Northern & Western Europe and benefits should be recognized throughout the year.

INDUSTRY – Despite all the economic challenges, domestic brewer sales volumes for 2008 were up 1.1%. Much of this increase was due to the growth in the craft beer segment with a gain of 5.8% in 2008, and the renewed interest in mainstream brands. The craft beer segment increased market share to over 4% in 2008. In addition, U.S. beers exported to other countries increased by 12.4% in 2008. Imported volumes declined 3.4% for the year. The Beer Institute is reporting that so far for 2009, volumes are down 1.8%. Industry experts are expecting brewers to focus on pricing versus volume gains for the remainder of the year, as well as focus on taking share from other alcohol beverages.

UNITED KINGDOM – The British Beer and Pub Association (BBPA) announced on April 28th, off-trade beer sales declined 11% and on-trade beer sales declined 6% during the first quarter compared to the same period of 2008. It is the third consecutive quarter that off-trade beer sales have fallen, suggesting that declines in the on-trade have spread to retail sales as the UK falls deeper into recession.
The trade body used its report to launch a fresh attack on Chancellor Alistair Darling, who last week used his Budget Speech to raise duty tax on all alcoholic drinks by an additional 2% above inflation in 2009. The trade body has warned that that last week’s duty rise, which made a pint of beer GBP0.05 more expensive, was attributed to the Chancellor “signing the death warrant” of the UK’s 56,000-strong pub sector. Up to 39 pubs are closing their doors permanently every week, the BBPA said.

AUSTRALIA – The Australian wine industry, after losing some momentum in popular export markets like the U.S. and U.K. over the last couple of years, is lobbying the Australian government to prevent wine being taxed according to alcohol content, like beer and spirits. Currently, wine is taxed under the wine equalization tax, 29% on wholesale value. Even without the added tax, the value of Australian wine exports are already falling -13.6% as trends show consumers trading down to even cheaper wines. The Winemakers Federation of Australia stated that even though the additional tax on wine would generate an extra A$630 for the government, it would cost roughly 5300 jobs, mostly in regional areas