Supplier Report Card for 2013

FILED JANUARY 15, 2014

Dear Client:

We recently got our hands on the newest set of IRI data from Morgan Stanley that covers the 52 weeks ending December 29. So how did we do? In 2013, spirit sales outpaced wine and beer with an 8% increase for the year. though wine wasn't far behind at 6% growth, while beer lagged significantly at 3.3% growth. In terms of volume, wine was up 2.3%, and spirits jumped 5.8%.

SUPPLIER WINNERS AND LOSERS: For the most part, the smaller suppliers delivered higher sales growth than their larger counterparts. Sazerac, for example, may not be able to play under the radar much longer as its sales growth (20%) was heads and tails above the rest of the spirits companies in all IRI-measured channels. Constellation Brands' spirits sales were up nearly 13%, Campari's were up 9.1%, followed closely by Beam's at 9% growth, Brown-Forman's were up 8%, Pernod Ricard's were up 4.8%, Diageo's were up 4.2% and Bacardi's grew 1.2%.

Volume trends remained largely in line with sales trends. Constellation's spirits volumes were up 13%, followed closely by Sazerac and Campari up 11.5% and 10.4%, respectively. Though we should note, Sazerac was the only supplier to increase the amount of product sold on promotion for the year. Meanwhile, Beam's volumes were up 7.5%, B-F's were up 5.7%, Pernod's were up 1.9%, Diageo's were up 1.2% and Bacardi's were almost flat at 0.1% growth.

Wine supplier trends were exactly the opposite as the biggest suppliers delivered the biggest gains. EJ Gallo Winery's sales jump 5.5% for the year and Constellation's delivered a 5.7% increase. Casella Wines grew sales 3.7%, Sutter Homes Winery, which is owned by Trinchero Family Estates, increased 2.8%, while the Wine Group delivered a 0.6% increase.

In terms of volume, Constellation was up 6.3%, while The Wine Group was down 3%. The other wineries fell somewhere between the two, Gallo volumes were up 1.7%, Sutter Home volumes up 0.5% and Casella volumes up 4.8%.

BRAND WINNERS AND LOSERS: In line with category trends, many of the big brands in brown spirits delivered the highest sales growth for the year.Maker's Mark (16%), Jim Beam (11%), Canadian Mist (33.5%), Black Velvet (14.3%), Crown Royal (11.4%), and Jameson (25.8%) all delivered robust double-digit growth.

Svedka (12%) and Pinnacle (23.4%) led growth in white spirits, as Grey Goose (1.6%), Smirnoff (3.1%) and Absolut (0.8%) brought in modest gains for the year.

Other spirits that didn't quite hit double-digit growth include: Jack Daniel's (5.5%), Southern Comfort (2.7%) and El Jimador (8.6%), Bacardi (5.1%), Captain Morgan (3.3%), Sauza (5.8%), and Malibu (3.4%). Tequila trends were mixed. As noted above, El Jimador and Sauza fared well for the year, but Cazadores' sales dropped 5% and Jose Cuervo was down 6.6%.

Notably, Pinnacle vodka, Crown Royal and Malibu were the only three major spirits brands to increase the amount of products sold on promotion in 2013.

All said and done, 2013 was a good year for wine and spirits off-premise. Things slowed a bit in the fourth quarter, but we expect them to pick back up at the beginning of 2014. Any thoughts or commentary to add to the report card are welcome. Email me at emily@winespiritsdaily.com

6TH CIRCUIT REINSTATES KY LAW TO BAN WINE AND SPIRITS FROM GROCERY AND C-STORES

You may recall that a Kentucky retailer sued the state in 2012 over the long-standing law that prohibits grocery and convenience stores from selling wine and spirits, but allows drugstores the privilege. District Court Judge John Heyburn struck down the law (see WSD 08-15-2012), but the case was appealed in the 6th Circuit (see WSD 11-06-2013 ). Today, the 6th Circuit judge handed down an opinion reversing Judge Heyburn's decision and upholding the Kentucky law.

BACKGROUND: Under Kentucky law, drugstores can sell wine and spirits, but grocery stores and gas stations cannot. After several failed attempts to overturn the law in the state's legislature, Maxwell's Pic-Pac and the Food with Wine Coalition (primarily made up of grocery, supermarket and c-store operators) decided to sue the Kentucky Department of Alcoholic Beverage Control.

District Court Judge John Heyburn agreed with the plaintiffs and struck down the law based on the Equal Protections Clause. In his ruling he wrote that he understood why the State might want to limit accessibility to alcohol to prevent abuse, but "it does not explain why a grocery-selling drugstore like Walgreens may sell wine and liquor, but a pharmaceutical-selling grocery store like Kroger cannot. This distinction would seem to have no relationship whatsoever to the control of higher-proof alcohol sales or the abuse of these products."

Judge Heyburn then put the enforcement of his ruling on hold to prevent any legal confusion before legislators had a chance to fix the law. However, lawmakers did not pass any legislation.

THE 6TH CIRCUIT RULING: In the appeal, the state argued that the law reduces access to high-alcohol products, which provides the rational basis for having it. The judge agreed, adding that the grocery stores faced a "high burden to convince us otherwise."

He continued: "[t]he general rule is that legislation is presumed to be valid and will be sustained if the classification drawn by the statute is rationally related to a legitimate state interest." In fact, he says the state "indisputably maintains a legitimate interest" in reducing access to high-alcohol products.

"We conclude that reasonably conceivable facts support the contention that grocery stores and gas stations pose a greater risk of exposing citizens to alcohol than do other retailers. A legislature could rationally believe that average citizens spend more time in grocery stores and gas stations than in other establishments; people typically need to buy staple groceries (for sustenance) and gas (for transportation) more often than items from retailers that specialize in other, less-frequently-used products."

The grocers also argued that the law is "void for vagueness," under Kentucky's separation-of-powers principle and the due-process clause. The judge determined that claim lacked grounding, and as such, reversed the decision.

To read the ruling in its entirety click here.

A DISSENTING OPINION ON THE BEAM ACQUISITION

You'll recall the announcement Monday that Japan's Suntory Holdings has agreed to purchase Beam Inc. Most analysts we've heard from have said there is a possibility that a challenging bidder would reveal itself, but it's not likely (see WSD 01-14-2014).

However, Liberum analyst Pablo Zuanic has taken a different view. "Conventional wisdom has it that no rival bids will emerge for Beam," Pablo told The Guardian. "We disagree." A bid from Pernod Ricard would be a bit of a stretch, he says, but a Diageo-led consortium bid "is quite possible."

"The international premium spirits business is about brands first, and about building scale and distribution muscle for those brands. So if one of the two leading Bourbon companies comes up for sale and one believes in the export potential of Americana, then Diageo and Pernod should bid," he continued.

WSD BRIEFS:

CALLING ALL HANDS. Every year we strive to be a better publication, but we can't do that without your guidance. Please take a minute to fill out this short 5-question survey and let us know how we did in 2013. And don't hold back because it's completely anonymous.

TUTHILLTOWN SPIRITS, maker of Hudson whiskey, has appointed Richard Lindsay its first ceo, effective immediately. Previous to appointment, Richard was a consultant and certified public accountant providing business advisory and valuation services to members of the craft distilling and brewing industry. Though he began his career in the industry at Boston Beer Company where he eventually worked as cfo. T

CLASS ACTION LITIGATION FIRM Finkelstein Thompson has launched an investigation into the Suntory-Beam acquisition.The investigation will determine whether "Beam's Board of Directors breached its fiduciary duty in failing to maximize consideration to shareholders, the potential unfairness of the consideration to shareholders, the process by which the Board considered the transaction, and potential conflicts of interest among the Company's Board members," according to a release from the firm.

JACKSON FAMILY WINES HAS HIRED Tony Rynders as the consulting winemaker for the family's recently acquired Zena Crown properties in Oregon. He will work with winemaker, Shane Moore, to produce high-end pinot noirs under the Zena Crown label. The first Zena Crown wines will be released in early 2015.

THE HENRY WINE GROUP HAS TAKEN ON the distribution duties for Mezcal Vago. Mezcal Vagos offerings include: Espadin, Elote, Cuixe, Mexicano, Tobal√° en Barro, and Ensamble en Barro. Mezcal Vago is currently in the launch phase of its product and will be making significant appearances at events in New York, Washington and California in the coming months.

SAN ANTONIO-BASED RANGER CREEK DISTILLERY is releasing its third installment of the Small Caliber Series: .44 Texas Rye. The 100% rye whiskey retails for approximately $35 and is only available in Texas.

Until tomorrow, Emily

"To avoid criticism say nothing, do nothing, be nothing."
-Aristotle

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