Canadian brewer Molson Coors (NYSE:TAP) saw third-quarter results put on ice as its flagship Coors Light brand got another chilly reception in the Great White North, with volumes falling at a high single-digit rate. Even though other brands did well, and the brewer beat analyst expectations overall with profits of $268.1 million, up 7.7% from the year-ago period, GAAP profits from continuing operations plunged 39%, suggesting there may be deeper problems for Molson Coors.
The brewer says it was under pressure to be promotional in the quarter, yet had fewer "impact promotions" than its rivals did; but Molson was also under the gun to keep a lid on prices. As it noted during its conference call, "When you have the biggest brand in the market, that can have a greater impact than if you're a smaller brand."
The Canadian business saw its underlying pre-tax income tumble 13.3%, to $130.6 million, as lower volumes hurt performance, with sales to retailers dropping 3.3%. Molson blamed higher taxes, a weak economy, and an all-out push by the competition for the disappointing result, but there's more trouble brewing up north, too.
Molson also announced that Anheuser-Busch InBev (NYSE:BUD) decided to terminate the agreement that the two had for Molson to distribute Bud's Modelo Group brands in Canada. While A-B will pay Molson a $16.3 million early breakup fee, Molson is still struggling to retain its agreement with SABMiller, which is trying to end their relationship in Canada because of falling sales.
The deal with Bud was supposed to run through January 2018; it will, instead, end four years early. While there are costs involved in the agreement that Molson would reimburse Anheuser-Busch for, it will lose the equity investment income it currently enjoys. While it generally realized around $12 million to $15 million in income annually, it also had costs that ate up a good portion of that. The breakup fee it's getting from Anheuser-Busch is essentially covering that lost income, so Molson says it has no objections.
There likely won't be any antitrust concerns, either, with Anheuser-Busch taking back Modelo as there were here in the U.S. when it was forced to give up rights to the brand to Constellation Brands in exchange for gaining regulatory approval to complete the sale.
While Molson continues, as it did last quarter, to blame bad weather, at least partially, as the reason for the brewer's slack sales, there seems to be a deeper current at play, one that has implications far beyond just Molson Coors. Drinkers, it seems, may be "getting tired of the taste" of light beer.
The market researchers at Consumer Edge Insight say that drinkers are looking for more flavor, and are turning increasingly toward craft beer and ciders to find it. While that helps explain Molson's successful launch of its own craft beer, it underscores why Boston Beer has captured the lion's share of the cider market, and is witnessing renewed appreciation for its signature Samuel Adams brand. The Brewers Association, though, also found an industrywide 15% increase in dollar sales, and a 13% jump in craft brew volumes.
But drinkers are also going beyond just beer for taste, with wine and spirits also enjoying more success, or so says a recent Gallup poll, though it's borne out by the results of vintners and distillers.
With Molson anticipating further consumer weakness (though its fingers are crossed with the start of the hockey season), and continued macroeconomic headwinds, investors shouldn't expect the brewer to tap a keg of growth anytime soon. Volumes have been on the decline for the past three years and, though it may get some traction from its new product introductions, the brewer doesn't seem to have enough else on tap to offer up a heady opportunity.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.