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Industry update – Feedback from Beer Industry Summit

Nomura:

Edward Mundy – NIplc

January 13, 2015

Beer Industry Summit conference feedback

We have just attended the Beer Business Daily annual Beer Industry Summit in Florida. We detect a positive mood in US beer with improving momentum seen at the end of 2014 likely to continue into 2015 given easy comparatives, consumer confidence on the up and benefits from lower gas prices. In our outlook piece, 8 January, we upgraded ABI (Buy, TP EUR 105) and Molson Coors (Buy, TP USD 85) given exposure (c.40pc and 50pc respectively) to an improving US dynamic. We also have a Buy on Boston Beer Co (Buy, TP USD 320) given its exposure to the fast growth craft industry.

US – early signs of recovery in the on-trade

The on-trade accounts for approximately 30pc of industry volumes. Per Guest Metrics, Q1 2014 overall traffic (food and beverages) in the on-trade was down -2pc given poor weather with Q2 down -1pc, Q3 slightly positive and Q4 positive with December +1pc due to easy comparatives and benefits from gas prices coming down.

Nomura comment – We believe that the on-trade is benefiting from improving consumer confidence and we would expect this better momentum to be visible into 2015 given lower gas prices, an easy basis of comparison in q1 as well as the benefits from an earlier Easter.

Premium Lights – declines starting to moderate?

There are some early signs that premium lights are seeing better performance in the on-trade. Per Guest Metrics, the craft beer segment took 1.9pc share of beer in the on-trade vs premium lights -1.9pc in 2014; in December craft share gains in the on-trade moderated to +1.2pc with premium lights losses also moderating to -1.5pc. Bob Gulley, Director of Beer, Wine and Spirits at The Pantry (the leading convenience store in the south west) sees premium light beer as critical for his business – “Lights are the Mortgage beer (pays for the mortgage) and craft/imports pay for the boats”.

Nomura comment – we would view this improving trend for light beer as broadly positive for ABI and TAP as it raises the question of whether the core blue collar mainstream beer consumer is likely to benefit more from lower gas prices than the more affluent craft consumer. We also believe that Miller Lite has seen continued strong momentum into Q4. Note, despite some signs that premium light declines are starting to moderate, we expect ABI and MillerCoors to underperform US beer (we estimate flat volumes vs market +1%) given their under-exposure to the faster growth craft and imports category.

Recruitment of Millennials – single most important strategy for ABI

Lucas Herscovici, vp of consumer connections ABI, provided an update on the company’s digital strategy. Per Lucas, the recruitment of Millennnials is the single most important strategy given that consumption habits are formed during consumers’ mid-20s. Between 1983-93, beer’s share of throat with the younger generation was 85pc vs 2003-13 72pc. It is interesting to note that the average millennial checks his/her smart phone 150 times a day, sends and receives nearly 100 messages a day and checks his/her Facebook wall 15 times a day. With five times more trust in social media than traditional media, ABI is focused on connecting with millennials through digital, experiential marketing and optimising media channels.

Nomura comment – Market share losses on the Bud Light brand appear to be showing some signs of moderation. This partly reflects the launch of the 25oz can and 16oz aluminium bottler, but also stronger activation over the 2014 summer period with the “up-for-whatever” campaign, which focused heavily on digital marketing (we believe that less than 10% of the content was available on TV). Per Forbes magazine (7 October 2014), the “up-for-whatever” campaign “knocked it out of the park” when engaging with consumers.

Innovation – spirits doing a better job

Tom Cardella, former CEO of Tenth and Blake (MillerCoors high end unit) indicated that a key element of spirits share gains over the past decade owes to spirits being better on innovating and marketing and understanding what the consumer wants. In particular, Tom argued that beer needs to do a better job at laying on better merchandising for retailers.

Nomura comment – since 1999, beer’s share of total alcohol has fallen from 56% to 48.3% in 2013, while spirits’ share has risen from 28.2% to 34.7% (source Discus). We believe that spirits’ share gains are largely attributable to high levels of innovation and marketing, along with greater access to markets (e.g., Sunday sales). We see beer companies becoming smarter at playing in “near beer” with the launch of the Ritas (close to 1% share of US beer) and growth of the Redds franchise.

Craft – positive outlook for growth but competition tough

We see a continued positive outlook for craft beer with significant excitement in the category; however, this makes the craft segment competitive. Per JB Shireman (First Beverage Group), the large suppliers are bringing more diversified and higher margin portfolios to distributors. The small players (e.g., brew pubs) are continuing to come to the market which leaves makes it more challenging for the middle ground craft players.

Nomura view – a key question for the Boston Beer Company, we believe, is the extent to which exceptional growth in nonbeer craft products Angry Orchard and Twisted Tea has masked a slowdown of growth in beer. Over the medium term (2014-17E), we see a better balance between cider and beer growth, with each sub-segment broadly contributing equally to group growth. The company overall has a strong record of spotting growth opportunities in craft beverages, which can offset increased competition from new entrants into craft beer.

Cider – no sign of slowdown

The cider category is showing no sign of slowing down in the on-premise. Angry Orchard (Boston Beer co) is still driving the growth here. Some commentators viewed cider as more of a Flavoured Malt Beverage (FMB) rather than craft product. Tom Cardella, ex-CEO of Tenth and Blake, indicated that 60% of Crispin distribution was lost when it was transitioned out of the ABI network into MillerCoors network. We would highlight a similar phenomenon with Vermont Hard Cider sales, when distribution was changed following C&C Group’s acquisition.

Nomura view – in our initiation report on Boston Beer Company, we estimated that cider accounts for under a third of 2014 group volumes. After significant growth since launch in 2013, we see cider growth normalising at around 20%. This could appear conservative given the continued momentum of the brand.

Legalisation of marijuana – not a threat so far

JB Shireman (First Beverage Group) highlighted that it was still too soon to assess the impact of legalisation of marijuana in Colorado and Washington. Trends for craft beer in Colorado remain strong. It is possible that Oregon and California could be the next steps for greater regulation of marijuana (note marijuana is available for medicinal purposes in California).

Nomura view – we do not see the legalisation of marijuana as materially impacting the beer category. We would highlight that the black market in those states where it has been legalised was large, therefore regulation is unlikely to change consumer habits materially, we believe. We see potentially greater competition from marijuana in candy, cookies and brownies; however, there are complications here given age restrictions.

E-commerce – likely to become more meaningful

Andy England, CMO of MillerCoors, highlighted that 39pc of books were bought on-line in 2014 vs 2pc of groceries. He sees the proportion of groceries sold on-line rising, potentially, from 2pc to 10pc over the next five years with on-line purchases of beer also rising.

Nomura view – we would highlight a number of start-up companies (e.g., brewdrop, drizly, saucey) where consumers can buy alcohol on-line, with retailers responsible for delivery to customers. With the website acting as the middle-man between supplier and retailer, this could blur the line for the three-tier system.

Constellation brands – in good growth

Jim Sabia, CMO Constellation Brands Beer Division, highlighted the company’s continued strong growth prospects to Hispanic and the general market. We see an opportunity for increased pack size variety into cans and draught and an on-going penetration opportunity for the Modelo Especial brand.

Fragmentation in spirits – could this start to look like craft beer?

Per Guest Metrics, craft spirits had a 6.1pc share of spirits in the on-trade in 2h14 vs 4pc in 2h13. Titos is driving the share gains in craft spirits. Fireball (not classified as craft) continues to show strong momentum with share gains equalled to the gains of the next 30 top performing brands combined in spirits.

 

Nomura view – we see subdued near term reporting for Diageo (Neutral, TP GB 1920pc) with underperformance in the US and risk of earnings drift from continued destocking in emerging markets. We prefer investment in Pernod, where we see scope for positive earnings momentum from cost cutting and favourable currency as well as a management story with Alexandre Ricard taking over as CEO from the beginning of 2015.