A-B, CBA Renew Vows with Distribution, Contract and International Plays

FILED AUGUST 23, 2016

Dear Client:

Anheuser-Busch and CBA have just renewed their vows. Nay, they've enhanced them: Besides extending their master distributor agreement through 2028, CBA's 25 cents per case fee will not go up after 2018 (as had been slated) in the deal.

Beyond that, there's also a new contract deal for 300,000 barrels worth of CBA brands to be brewed at A-B facilities, and a new Kona-led international distribution partnership.

CBA remains independent from further takeover in this whole deal, with ABI at about a 32% stake in the company.

More:

MASTER DISTRIBUTOR AGREEMENT. CBA and A-B have extended the current fee structure of their existing master distributor agreement for 10 additional years, through 2028.

"The major change there is that the 'fee cliff,' as we like to call it, goes away," said Andy. So the fees will remain at 25 cents a case [instead of going up], which is a huge win for us. It enables us to reinvest back into the business in a way we wouldn't be able to" otherwise.

That's "good for wholesalers" as CBA will "be able to bring more resources to bear in key strategic markets."

And if you're wondering about DOJ stipulations that have sought to curtail ABI's distributor incentives because of MegaBrew? "None of this agreement relates to changes in incentives to wholesalers," A-B's High End president, Felipe Szpigel, said.

This "doesn't give us any 'super rights'" or "any preferential treatment," Andy added.

CONTRACT BREWING AGREEMENT. Also: under the terms of a new contract brewing arrangement, CBA and A-B will work together to transition up to 300,000 barrels of volume into A-B breweries. This agreement will support CBA's "ongoing brewery footprint optimization and enable both companies to realize additional operational efficiencies." And yes, it will help CBA free up space because they are still shopping.

As their business evolves, "the future becomes clearer," said Andy. Shifting that 300,000 barrels to A-B facilities gives them "more flexibility": For one, "it lowers our margins," because of their synergies.

"But it also affords us more opportunity to go out and get more strategic partner brands. And to have more flexibility on how we dynamically source between our breweries."

(CBA has broken ground on the brewery in Kona, and their Portland brewery expansion is in the works; they'll transition beers out of Memphis's City Brewing into ABI breweries.)

NEW INTERNATIONAL DISTRIBUTION AGREEMENT. Finally, A-B and CBA have reached a new international distribution agreement. It builds on CBA's recent distribution arrangements with A-B, which launched Kona in Brazil and Mexico, "and creates opportunities to accelerate the growth of CBA's craft portfolio in additional international markets," per announcement.

This strategy is "Kona-plus," as with the rest of their business. That brand is already "the lion's share" of their international business. "It's a brand that resonates in a lot of countries, because of the imagery and heritage of Hawaii," Andy said.

As for the other new global markets? Andy characterized them as "incremental from where we started" (they have some beer abroad with the Heineken alum-led deal, Craft Can Travel). Future markets will include "international markets where we think there's some effort ABI can leverage because of their local infrastructure there."

A SLOW BURN. But "growing international markets is a pretty erratic growth path," Andy acknowledged.

That said, "we've agreed to a structure for the next three years that allows us to work together in those markets to make sure we have resources we need to invest without having to worry about what we're getting back immediately for that."

Brazil, Mexico and Chile are initially promised, "but in a pretty methodical way." It's a "slow burn," a long-term play.

Felipe added that they'll be working over the next few months on plans but "you have to start with an agreement." But it's important because "we're seeing the development of the high end across the world."

More on how these plans benefit CBA financially after an analyst call this evening.

BEER BRIEFS:

MAUI BREWING ADDS ANOTHER MIDWEST MARKET. Maui Brewing Company made its debut in the Midwest earlier this summer rolling out in Indiana and Ohio. Now the brewer has announced it's tacking on another state in the Midwest: Illinois. Maui will enter into the market with Windy City as its distribution partner. Chicago residents will receive Maui's flagship offerings in the upcoming days and distribution will widen throughout the state in the weeks ahead.

BELL'S UPPER HAND BREWERY HITS MINNESOTA NEXT YEAR. Upper Hand Brewery, a division of Michigan's Bell's Brewery, has announced plans to rollout its entire portfolio in Minnesota at the start of next year. Minnesota marks the third market for Upper Hand, its current distribution footprint includes Michigan's Upper Peninsula and Northern Wisconsin.

Until tomorrow, Jenn

"The reason lightning doesn't strike twice in the same place is that the same place isn't there the second time." - Willie Tyler

2017 BEER SUMMIT EARLY BIRD PRICING - The Beer Industry Summit will be held at the Hotel del Coronado in San Diego Jan 29-30, 2017. Stay an extra day and get special discount pricing to attend the Wine & Spirits Daily Summit on January 31. Register and learn more here.

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