Top Trends Shaping the Beverage Alcohol...

Top Trends Shaping the Beverage Alcohol Market

April 27, 2016

Agenda

I. LRB Industry Trends

II. Beverage Alcohol Trends

III. Beer Segment Performance

IV. Alternative Beverage Alcohol


Liquid Refreshment Beverage Headlines

LRB Industry Trends

Liquid refreshment beverage market grows for second consecutive year in 2015 after flat performance in 2013

Carbonated soft drinks experience another modest sales decline in 2015

Bottled water continues its solid growth trend led by single-serve water segment

Niche categories continue to outperform traditional mass-market categories

Wine and spirits lead alcohol growth in 2015, and beer experiences slower growth performance

Key Trends of U.S. LRB Industry

U.S. Total Beverage Market 2010 – 2015P

P: Preliminary Source: Beverage Marketing Corp.

0.8%

0.0%

1.5%

-0.1%

1.1%

1.6%

2010 2011 2012 2013 2014 2015(P)

Vo

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The U.S. beverage market has experienced overall mixed performance since declines during the recession, but has now achieved back-to-back years of growth

• Growth accelerated in 2015 over 2014

-5-

LRB Industry Trends

-1.5%-1.1%

18.5%

8.9% 8.7%

5.7% 5.5%

7.9%

CSDs Fruit

Bevs

RTD

Coffee

Energy

Drinks

RTD Tea Value

Added

Waters

Sports

Bevs

Bottled

Water

Vo

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The U.S. Liquid Refreshment Beverage Market - 2015P

In general, traditional mass market categories have struggled while niche categories have experienced growth

• Bottled water is the primary exception of a mainstream category that has thrived

P: Preliminary Source: Beverage Marketing Corporation

-6-

LRB Industry Trends


Volume Share of Stomach by U.S. Beverage Segment – Billions of Gallons 2010 – 2015P

23.3% 20.4%

14.8% 19.0%

10.8% 10.5%

10.0% 10.8%

10.6% 9.2%

6.0% 6.1%

6.0% 5.0%

2.1% 2.4%2.1% 2.2%

0.6% 1.0%0.8% 0.7%

12.9% 12.7%

2010 2015(P)

CSDs

Bottled Water

Milk

Coffee

Tea

Fruit Beverages Sports Bev

Wine/Spirits Energy Drinks

Value-Added Water Tap/Others

Beer

100% = 59.3 100% = 61.7

Over the last five years, bottled water has increased its share of stomach by more than 4 share points, capturing the undisputed #2 position

-7-

LRB Industry Trends

Th

ou

sa

nd

s o

f S

KU

s

New Beverage Product Introductions 2001 – 2015

Source: Beverage Marketing Corp.; Mintel

New product introductions have mostly been on the rise after declining in 2009 due to the recession in the beverage industry

1.7 1.6

2.0

2.9

2.6 2.6

3.2

3.8

2.7

3.94.0

4.4

4.74.5

4.3

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-8-

LRB Industry Trends

Ca

lori

es P

er

Ca

pit

a P

er

Da

y

U.S. Refreshment Beverage Calories Per Day 1990 – 2015P


212.5

251.6263.0

243.7 238.0230.3

222.7214.8

210.1 205.7 202.3197.9 196.5 196.5

1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015P

Despite negative publicity on CSDs and other full-calorie refreshment beverages, caloric intake from refreshment beverages has been steadily declining over the last decade

• The growth of bottled water and lower-calorie options have contributed to the caloric decline

-9-

LRB Industry Trends

Key reasons for reducing CSD consumption:

o Health

o Variety

Legislation and messaging from government and regulatory agencies

Tax threats aimed at reducing consumption

Negative commentary from medical studies and other organizations

Steady drumbeat of negative press

Consumer health and variety demands negatively impact CSD consumption. CSD category performance is further impacted by other external factors that contribute to consumption declines

-10-

Reasons for Continued Decline in CSD Consumption

LRB Industry Trends

Agenda






Total beverage alcohol growth was led by spirits in 2014, while wine growth declined and beer returned to growth

Beverage Alcohol Market Shipment Growth 1990 – 2015

% C

ha

ng

e

Source: Beverage Marketing Corporation, Beverage Information Group/Adams

Beverage Alcohol T rends

Key Trends in the U.S. Beverage Alcohol - Wine

• Premiumization continues as volume has slowed but value rose up 6%; business was robust for wine >$10 per bottle and even more so for wine >$15

• Sparkling wines continue to be hot as they are no longer seen as limited to celebrations

• Rosés continued their rapid growth amid strong demand as larger wine companies were increasingly importing it from France or starting domestic programs of it

• Other wines that continue to drive volume are red blends, Cabernet Sauvignon, Chardonnay, Sauvignon Blanc and Pinot Noir

• Millennials were seen as more of a factor in the wine market this year as attitudes toward wine continued to shift, with wine increasingly seen as a casual social beverage and accessible • The announcement that Starbucks would make wine available in 2,000 locations was seen as confirmation of this trend

• Millennials are also driving experimentation and willingness to try a lot of different wines and not like older wine drinkers who tended to be brand loyal

The U.S. wine market’s steady growth in 2015 slowed in 2015 to +0.6% in case volume

Total U.S. Wine Market 2011– 2016P

Mil

lio

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f 9

L C

ase

s

Source: Beverage Marketing Corporation


Volume Performance

Year % Growth

Rate

2012 +2.2%

2013 +1.4%

2014 +1.1%

2015 +0.6%

2016P +0.7%

Key Trends in the U.S. Beverage Alcohol - Spirits

• Premiumization continues to be present in spirits, although it has moderated some shifting to whiskey and to a lesser degree craft spirits across the categories

• American whiskey is still the hottest category in spirits, as interest in single barrel, rye and flavored whiskey liqueurs continue to resonate well

• Craft spirits, although small, is beginning to gain momentum with about 700 distilleries and 1% market share

• In vodka, flavored vodkas remain weak, affecting once fast-growing brands that depended on them such as Pinnacle; consumers appear to be favoring premium and to a small extent craft vodkas to flavored

• Tequila, Cognac, and Irish Whisky continued to perform well in 2015

• Interest in RTD cocktails and participation in the so-called alternative beverage alcohol space with FMBs, hard cider and sodas is on the horizon for spirits producers

Spirits growth increased slightly in 2015 to 1.7%

Total U.S. Spirits Market 2011– 2016P


Mil

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f 9

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Volume Performance

Year % Growth

Rate

2012 +3.1%

2013 +1.3%

2014 +1.3%

2015 +1.7%

2016P +1.7%

The higher-end spirits continue to outperform since the great recession, although, the high-end has outperformed superpremium slightly in the last two years

Source: DISCUS

U.S. Spirits Market by Price Tier %

Vo

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2008: Clear Trading Down in Spirits

% V

olu

me

Ch

an

ge

2014: Superpremium Slows

% V

olu

me

Ch

an

ge

2012: Trading up Slows


% V

olu

me

Ch

an

ge

2015: High-End & Superprem. Gain

0.1%1.0%

7.1% 6.5%

Value Premium High-End Superpremium

Key Trends in the U.S. Beverage Alcohol - Beer

• Growth within beer continues to be from the high-end to include FMBs, craft, superpremium and international brand beers

• The two largest brewers continue to play in the FMB, cider and craft beer space through innovation and acquisition

• All the major players to include AB-InBev, MillerCoors, Constellation Beers and Heineken USA are focused on addressing the minority consumer

• Interaction with wine and spirits remains high as blurring continues between beer, wine and spirits

The U.S. beer market saw its 3rd decline in volume in five years as volume fell -0.3% in 2015; beer is projected to grow slightly in 2016 with 0.3% attributed to the leap year

Total U.S. Beer Market 2011 – 2016P



Mil

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-oz C

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Volume Performance

Year % Growth

Rate

2012 +1.3%

2013 -1.2%

2014 +0.6%

2015 -0.3%

2016P +0.7%

Agenda






2015 U.S. Beer Market Highlights

Beer Segment Performance

• The U.S. beer market declined an estimated 0.2% in 2015 and is projected to be up 0.7% in 2016

− Domestic beer shipments decreased an estimated 1.4%

– International brands are estimated to have grown 6.2% in 2015

– Constellation Beer portfolio significantly outperformed total market in 2015

– ABI , MillerCoors and Heineken USA all declined; however Heineken’s trends improved

• Craft beer continues to grow double-digits, but has slowed over past 4 months

• Continued declines within mainstream and value segments; continued growth in super-premium and the high-end segment accelerated growth

• Constellation Beer remains clear leader in beer market performance in both, volume, absolute growth and share gains

• A-B InBev continues to focus against the high-end segment through innovation while striving to expand its presence in Craft segment, around FMB’s and increased focus against Ultra and Stella

• MillerCoors trends around premium light portfolio continues to improve with volume performance flattening while high-end growth has slowed and value brands declines accelerating

• Heineken’s core portfolio continues to decline with exception of Dos Equis, Tecate Light and Strongbow; although brand Heineken trends have improved significantly

ABI and MillerCoors continue to struggle with share losses beginning to accelerate

• ABI/MillerCoors lost 10 share points and, together, represent about 70% of the U.S. market

* Constellation Beer shipment numbers adjusted based on US Department of Commerce reports Source: Beverage Marketing Corporation; Company/Industry Reports

2009 2015

Market Players Point

Change

ABI -6.2

MillerCoors -3.8

Constellation Beer* +2.3

HUSA +0.1

Pabst +0.2

Craft +4.5

All Other +0.9


U.S. Beer Market Share by Supplier 2009 vs. 2015

U.S. Beer Market Share by Segment 2009 vs. 2015

FY 2009

Segment Point

Change

Value Brands -4.8

Mainstream -8.5

Super-Premium +2.1

High-End +11.2

FY 2015

Note: High-End segment includes International Brands and Malt Alternatives Source: Beverage Marketing Corporation

Premiumization has affected the U.S. beer market greatly in recent years as the high end, fueled by Craft and FMBs, has grown to nearly 30% of the total beer market


International Beer Trends

Craft Beer Space

• Some European brands, Belgian beers especially, are attempting to ride the wave of craft beer by playing in the same space and looking into acquiring craft brewers

Focus on Minorities

• Both Heineken USA and Constellation are focusing on minority customers in the U.S. with their core portfolio

Mexico & Belgium

• Outside of Mexican and Belgian brands, there is not much growth of international branded beer in the U.S. market

International beer brands are aggressively chasing growth in the U.S. in the forms of targeting the craft beer space, minority consumers and with sweeter FMB offerings

Entering FMBs

• International beer brands are entering the FMB space with offerings that either play up the ethnicity and/or flirt with the spirits drinker seeking a sweeter beverage though with limited success



Import beer has grown to a 15% share of total beer mostly on continued strength of Mexican brands

U.S. Import Brand Segment Wholesale Volume 2010 - 2015

+7.0% +1.3% +1.5%

10-15 CAGR +3.0%

-0.7%

Mil

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-oz C

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s +6.2%


14.3% 13.1% 13.1% 13.5% Percentage to Total Beer

13.3% 15.1%

Craft Beer Trends

Micro-brewery Growth

• The number of craft breweries continues to climb, now numbering around 4,300

Variety and Flavor

• Consumers, as in other food and beverage categories, have sought out both variety and richer flavor that craft beer provides

On Premise Buzz &

Experience

• Craft continues to steal the spotlight in on-premise with its variety, flavor and style aspects, BMCSA estimates on-premise accounts for around 40% of volume in the U.S.

Craft beer has grown overall due to customers seeking out more-flavorful, higher alcohol and variety in their beer consumption experience among other things

Higher Alcohol

• Though not all, a hallmark of some craft beer styles and brands is a considerably higher APV that consumers are willing to pay a premium for similar to FMBs and some European imports

Buy Outs • Craft brewers are increasingly becoming targets of acquisitions by both the major domestic and foreign brewers



There were some signs of slowing in the on premise in 2015 as the largest brands struggled somewhat while smaller breweries drove the growth

Craft Beer Segment Wholesale Volume 2010 – 2015

+13.5%

+10.0%

+13.5%

10-15 CAGR +12.9%

10.1% 6.2% 7.0% 7.9% Percentage to

Total Beer 8.9%

+11.9%

11.3%

Mil

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s +12.8%


Agenda






Evolution of “Alternative” Beverage Alcohol in the U.S.

FMBs have been part of the marketplace that offers sweeter and more flavorful options to traditional beer, wine, and spirits that began in the 1970s

Broadening Wine & Spirits Accessibility Broadening Usage Occasions Widespread Blurring Between Categories

1970s 1980s 1990s 2000s 2010s

Fortified Wines Wine Coolers RTD Cocktails FMBs FMBs & Flav. Beer

• Boone’s Farm • Asti Spumanti

• Bartles & Jaymes • Seagram’s

(Moved base from wine to malt)

• Bacardi Breezer • JD’s Country

Cocktails • Tropical Freeze

• Mike’s Hard • Smirnoff Ice

(Blurring lines between Malt beverages and Spirits while leveraging beer distribution network)

• BL Lime’s Ritas • Redd’s Apple Ale • Not You Father’s… • Coney Isl. Root Beer

White Zinfandel Fruit Flavored Wines

• Arbor Mist • Wild Vines

FMBs

• Four Loko • Sparks

(Caffeine/Energy)

Flavored Wines

FMBs Zima

> 45 Female < 45 Female < 35 Female < 25 Female < 45 Male & Female

Common-ground: sweeter flavored, masked alcohol, easy to drink, conveniently packaged alternative beverages

Alternative Beverage Alcohol

Hard Cider

• Angry Orchard • Strongbow

S/S Cocktails

FMBs continue to grow as the segment continues to rotate from the Ritas to flavored beer styles to hard soda

Current Trends in FMBs & Flavored Beers

Q1

• Once again the FMB category is rotating as “hard soda” becomes the next hot segment

– “Not Your Father’s” line

– “Coney Island” line

– “Best Damn” line introduced by ABI in 2016

• Flavored beer continues to expand following the success of Redd’s

– Bud Light Apple

• Shandys and other more traditional flavored beer styles showed signs of slowing in the 2nd half of 2015

• The Bud Light Lime Rita surge moderated as Bud Rita line declined 30% in 2015; ABI launched Splash a lower alc version to help renew sales



The slowdown in FMB growth over the last two years was related to the slowdown of the largest brand family, Bud Light Lime’s Ritas; though Mike’s and Redd’s continue to show growth

U.S. FMB Segment Wholesale Volume 2010 - 2015


+10.5%

+9.0% +12.4%

10-15 CAGR +14.2%

+35.2%

Mil

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-oz C

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+6.2%

4.1% 2.3% 2.4% 2.8% Percentage to Total Beer

3.7% 4.3%

Source: Beer Institute

After seeing dramatic growth in recent years, hard cider slowed remarkably in 2015, driven by a slowdown in the largest brands

Hard Cider Segment Wholesale Volume 2010 - 2015


+54.0%

+20.2%

+75.4%

10-15 CAGR +43.4%

+69.0%

Mil

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+10.6%

Although the category appears to be slowing, hard cider has made its way into the flavored, local and organic

movements with new products coming out that reflect ideals similar to craft beer


A small part of the spirits market, prepared cocktails have declined in recent years due to a combination of regulations, multi-serve packaging and loss to single-serve FMBs

Prepared Cocktail Segment Wholesale Volume 2010 – 2015

-7.7%

+3.2% -3.4%

10-15 CAGR -4.5%

-10.0%

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-Lit

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Ca

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-4.0%


A small growing part of prepared cocktails is the single-serve packaging that is expected to continue to grow as the economics become more favorable and regulations

regarding spirits-based beverage loosen

Top Trends Shaping the Beverage Alcohol...

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