OREGON RETAILERS AWAIT FATE OF FMBS

LUCIA MOSES

PORTLAND, Ore. -- Oregon retailers that have benefited from flavored malt beverages' popularity worried they'd face a ban on their sale after Dec. 31 if FMB manufacturers missed a deadline to conform with a state law governing the beverages' content.

Oregon bans the sale in grocery stores and other off-premise outlets of beverages whose distilled spirits content exceeds 0.5%. In 2002, federal testing revealed that most malt-based beverages exceeded that level. While FMBs' alcohol content, usually 4% to 6%, is similar to that of beer, and they're taxed as beer, most of their alcohol content comes from distilled spirits, the government said at the time.

In 2003, the Oregon Liquor Control Commission responded by giving manufacturers until Dec. 31 to reformulate or limit their sales to Oregon's state-run liquor stores.

Retailers have reason to be hopeful, though. The commission recently approved five reformulations of Diageo-Guinness' Smirnoff, which has a 25% share of the category. The other top-selling malternative -- Mark Anthony Brands' Mike's Hard Lemonade, with 9% share of U.S. FMB volume in 2003, according to London-based Datamonitor -- has expressed interest in doing so, a commission spokesman stated.

Of other brands, Anheuser-Busch already has reformulated its Bacardi- and Tequiza-brand malternatives, and Miller Brewing has indicated it would meet the Dec. 31 deadline to reformulate its brands, according to the commission.

"The malternatives are significant enough for the retailers, so they are pressuring some of the manufacturers to reformulate," said Dan Floyd, a lobbyist for the Oregon Grocery Association. "One large retailer told me malternatives make up about 20% of their alcohol business."

While that retailer may be the exception -- a beverage category manager for one national supermarket chain with a major presence in the state said FMBs account for about 5% of that retailer's beer category -- none wants to concede the revenue from malternatives sales and other items their buyers may pick up while in the store.

"The retailers are caught in the middle," said Gary Oxley, a lobbyist for Kroger banner Fred Meyer and Safeway in Oregon. He said his clients already are adjusting their malternatives inventory, mindful that come Dec. 31, "you don't want that inventory there."

Diageo isn't going without a fight, however. It recently filed a petition for judicial review with the Oregon State Court of Appeals seeking to invalidate the liquor commission's ruling, claiming the cost associated with reformulating would result in price increases. It also claimed the cost would reduce consumers' access and choice.

Malternatives, whose drinkers skew young and female, have helped to give the otherwise declining beer category a lift in recent years: Per-person spending on FMBs rose 19.5%, compounded annually, from 1998 to 2003. The run ended in 2003, when sales growth declined 12.4%, according to Datamonitor.

"The fact that it is a good-selling item has an impact," Dirk Davis, president of Unified Western Grocers' Northwest division, which includes Oregon, said of the segment. "It's good sales."

The category manager at the major retailer said if FMBs had to be pulled from shelves at the stroke of midnight Dec. 31, then fast-growing imports, microbrews and super-premium beers would likely take their place. Still, the manager saw some loss of sales as inevitable.

"It's going to change some things," he said, noting that while some brand loyalty is present in the category, the "frutti-tutti club" is "not afraid to try new flavors."