Distinguished Brands International: Street Talk Vol VI Issue 13

INDUSTRY – A study was released recently by Morgan Stanley analysts Michael Steib and Eveline Varin after asking 2500 U. S. households about their beer consumption habits, spending trends and brand preferences. Not much of a surprise on the key results – personal income is still under pressure and still has a predominant effect on drinking habits.

Drinkers continue to cut back from off-premise drinking. More than half surveyed stated they have less money to spend this year than last, so they are going out less and reducing the number of drinks they have. Other reasons surfaced for people cutting back on beer consumption such as dietary changes (28%) and health concerns (18%). So overall, beer was not perceived as an expensive luxury. However, the survey did show price as a factor when deciding what brands to drink.

For example, imported beers were seen as higher quality for less of a value as compared to domestic beers. This could explain the recent dramatic drop-off of imported beers. All told, Morgan Stanley says the U.S. beer market remains one of the most stable beer markets globally, but is not immune to the problematic economy. They are predicting that total beer sales (measured in liquid) will decline roughly 2% in 2009. The U.S. is representative of 42 percent of earnings for AB-InBev (before interest and taxes) and 14 percent for London-based SABMiller.

BUFFALO, NY – After New York-based private-equity firm, KPS, bought Labatt USA last winter, many feared that the U.S. headquarters located in downtown Buffalo would be relocated. KPS vowed that would not happen and it seems they are keeping their word. Labatt USA has 20 people working out of the downtown Buffalo office. Richard Lozyniak, CEO of North American Breweries, Inc (the KPS affiliate that owns Labatt USA and High Falls Brewing Co., LLC), stated Labatt USA is expected to hire 16 more people in the downtown Buffalo office to focus on sales, marketing and administrative support. That means that half of the company’s total workforce will be based in Buffalo. Lozyniak said. “Buffalo is absolutely critical to Labatt’s future in the United States.”

The Buffalo Niagara region accounts for 3.3 million cases of a total estimated 21 million cases sold of Labatt in the U.S. each year. It was also listed as the ninth most popular beer in the country by Beer Marketers Insights.

DELAWARE – House Bill 193, which would allow Delaware supermarkets to sell beer and wine, has been tabled by a House committee. One objection was the concern of how to keep alcohol away from minors. Another objection was the cost to the state for enforcement. The Division of Alcohol and Tobacco Enforcement stated it would have to hire 12 new agents at a cost of $700,000 in order to enforce the bill. Lastly, other legislators opposed the bill because they claimed it would take customers away from the package stores which could potentially drive the small business owners out of business.

If the bill had passed and signed into law, it would have made Delaware the 46th state to allow the sale of beer and wine in stores other than package stores. In addition, with the hefty licensing fees, $100,000 for the first year and a $5,000 biennial renewal fee, the bill could have brought in nearly $10 million the first year in additional revenue.

EUROPE – It has been well reported that AB-InBev has been selling off assets in order to reduce the debt taken on after the $52 billion take over of Anheuser-Busch last year. What’s next on the for sale list? AB-InBev will be putting its Central and Eastern European operations up for auction. This will include 11 breweries that cover 7 countries, Bulgaria, Romania, Hungary, Croatia, the Czech Republic, Serbia and Montenegro. Total combined production is 329 million gallons of beer per year and together they employ 6,000 people.

The sale is predicted to get AB-InBev about $2 billion. It is thought that some interested parties could be rivals SAB Miller and Heineken. However, Heineken has already stated its focus in 2009 will be on cutting debt and costs due to its part-acquisition of Scottish & Newcastle last year and though SABMiller has more funds, its strong position in some markets, such as Romania, could cause competition issues. Of course, there are still private-equity firms like Kohlberg Kravis Roberts & Co., the private equity group that recently bought A-B InBev’s Oriental Brewery for US$1.8bn, Warburg Pincus, Cinven, TPG and CVC Capital Partners who have reportedly been taking some interest as well.

AB-InBev already raised nearly $700 million by recently selling a 20 per cent stake in China’s Tsingtao brewery to Japan’s Asahi, and raised another $100 million from the sale of the American brewing and distribution business of the Canadian beer brand Labatt. A spokesman for AB InBev declined to comment.

MILWAUKEE, WI – In efforts to tap into the ever increasing wheat beer segment, Anheuser-Busch will be introducing a wheat version of Bud Light this fall. Bud Light Golden Wheat will use unfiltered wheat, orange and coriander to give it the new twist. It is the second extension of A-B’s most popular brand, the first being Bud Light Lime. Look for the new Bud Light Golden Wheat to be on shelves in early October.

DELAWARE – Delaware state law makers introduced two bills in early June that could increase state revenues. One could raise taxes on alcoholic beverages while the other could change the licensing fees for businesses that sell alcoholic beverages. The first bill proposes a tax hike of two cents per 12 ounce beer, three cents per 5 ounce glass of wine and 15 cents per bottle of liquor. It is projected these tax hikes would bring in $5.3 million dollars in additional the first year. A second bill would change licensing fees and would also have those businesses with Sunday alcohol sales pay an additional fee in order to continue selling alcohol on Sundays. This bill is projected to generate an additional $600,000 in annual revenue. If approved the bills would go into effect September 1st.

CALIFORNIA – A new Zagat survey found that Bay Area consumers are falling in line with other major market trends in dealing with the recession. The survey was conducted with 2,200 consumers who reported they go out 1.8 times per week, consume 2.9 drinks, and spend $40.08. According to the survey, 48 percent of those polled said they go out less; 34 percent claim to be more price conscience; 30 percent are going to cheaper spots and 27 percent aren’t ordering as many drinks.

JAPAN & AUSTRALIA – Kirin Holdings recently received the official approval from Australia’s Foreign Investment Review Board to take over the Australia’s second largest brewer, Lion Nathan, Ltd. Kirin had already agreed in May to purchase the 53% of Lion Nathan, Ltd it did not already own; however, Australian regulations require government approval when local companies are being bought out or taken over by overseas companies. The cost is estimated to be $2.5 billion. Both brewers are expecting to close the deal by October 2009.

UNITED KINGDOM – Jon Collins, chief executive of market analyst group CGA Strategy, says the number of pubs closing has now reached more than 50 per week. This is well above the previous peak estimate of 46 per week. CGA tracks the pub closure rate on behalf of the British Beer & Pub Association. At 53 per week, the pub closure level would equate to about 2,750 per year – almost 5% of the UK pub market. The number of pubs shutting their doors has escalated to the current, alarmingly high level as the pub industry as encountered what has been dubbed the “perfect storm” – a potent cocktail of rising costs coupled with an extremely challenging trading period.

U.S. & MIDDLE EAST – MillerCoors is donating 8,000 cases of beer that will be shipped to U.S. troops in the Middle East in time for the Fourth of July. The donation is being made as part of program launched by Pizzas 4 Patriots, a nonprofit organization created to support service men and women that is in its second year of delivering food and beverages to the troops overseas.

IRELAND – Diageo Ireland, owners of Guinness and several other international brands, announced it will cut 107 jobs (5%) of its 2,000 Irish workforce as part of a cost-cutting exercise. The majority of cuts are expected to be made the, mostly in back-up services such as sales, marketing and business support, and it is thought that the production area will not be affected at this time. Management said that cross-border trade has affected sales while worldwide beer sales have also been falling due to the global downturn. Diageo’s Irish chairman Brian Duffy said the decision to cut jobs was extremely hard, but was necessary to maintain a sustainable and competitive business in Ireland.

On the other side, is Guinness staff union general secretary, Sean Mackell, is condemning the proposed job losses. He calls them “unnecessary” since the group made profits of €200 million last year and €1 billion in the past four years. When the job cuts come before the Labor Relations Commission, Mr. Mackell said he would be fighting to get the best possible redundancy deal for his members.

INDUSTRY – Diageo signed a deal with French-based Marnier-Lapostolle to distribute the group’s Grand Marnier liqueur across Europe. Diageo will distribute the brand in 61 markets across Western and Eastern Europe. Diageo will start distribution in 26 markets, including Germany and Spain, on July 1st. Diageo will start distribution in France and an additional four markets in 2009. Pan-European distribution is expected to start when existing contracts start to expire over the next three years. Financial details were not disclosed.