AB-InBev likes its craft brewers small in territory but big in cache
The rumour mill about some well-established craft breweries looking to “change ownership” is swirling like a tornado. The Elysian and 10 Barrel sales to AB-InBev in the space of a few months have made craft beer consumers exceedingly worried about their loyalties.
What if there are plenty more around, who have already secretly put up a “for sale” sign? On Twitter it was recently suggested that in water-stretched California many brewers could have put themselves up for sale, fearing that their breweries and businesses will eventually run dry.
If I have read AB-InBev’s recent purchases correctly, there is a pattern behind them. They seem to go for “virgin brands”, by which I mean craft beer brands with a great reputation in the beer community, which are also strong in their core market but have not expanded much beyond it.
Why? Because in the U.S. market success depends on distribution. It’s the distributors who ultimately make or break a brand.
For example, Jim Koch, who founded Boston Beer, relies on about 400 distributors across the country to sell his beer. Although distributors are nominally independent, they are still aligned through licences with either of the big brewers for the bulk of their beer sales. Then there are distributors whose main business is spirits or wines.
Craft brewers cannot be too choosy when deciding on distributors. They need to get into all of these “houses” if they want to sell their beers. The bigger a craft brewer becomes, read the wider its beers are distributed, the more complex its distributor network. In the end it will consist of AB-InBev, MillerCoors and other alcohol distributors.
It’s the beauty of smaller craft brewers that they don’t have a complex distributor system yet. Because once the brewer is taken over by AB-InBev, its distribution system will need to be untangled (a costly, time-consuming and, in most cases, unsuccessful process) so that AB-InBev can mainstream the brand and brew it in its breweries closer to the predominantly AB-InBev-aligned distributors. That’s how AB-InBev will grow the brand and turn it into a success: through production efficiencies and in sync with its friendly distributors.
It’s this fact which made Chicago’s Goose Island, Long Island’s Blue Point, Oregon’s 10 Barrel and now Washington’s Elysian such attractive targets for AB-InBev. They can more easily expand them into a new territory and make them part of the portfolio of AB-InBev’s distributors, than say – hypothetically – Boston Beer’s Sam Adams. If AB-InBev had bought one of the big craft beer brewers, it would have faced the prospect of being stuck with hundreds of non-aligned, if not to say unfriendly, distributors.
In terms of distribution, Goose Island was only strong in the state of Illinois, Blue Point in New Jersey and New York, 10 Barrel in Oregon and Elysian in the Northwest. That’s, in all, less than a dozen states. In actual sales they had not yet ventured far beyond their core territories, while their reputation had already far proceeded them.
Given that AB-InBev has deep pockets, many more craft brewers could fall into its hands. If craft brewers would like to play the acquisitions game, they only need to make their brand a regional stellar performer and they may attract the attention of AB-InBev.
Transaction details are an industry secret, but if we consider Goose Island’s price – slightly under USD 40 million – as a benchmark, we are probably not far off Blue Point’s, 10 Barrel’s or Elysian’s going rate. When AB-InBev bought Blue Point last year, it paid allegedly somewhere between USD 18 million and USD 24 million. Blue Point’s 60,000 barrel capacity is in the same ballpark as Elysian’s annual output.
That may seem much – and undoubtedly these smaller craft brewers are worth far more on a per hl base than a larger craft brewer –, but for AB-InBev the reward potential from those millions is well worth taking the risk. In North America alone they made a profit of close to USD 6 billion (EBIT) in 2013.
That’s one of the reasons why these three shining examples of craft brewers have been sold to AB-InBev, rather than to other brewers or private equity. Due of its joint ownership, MillerCoors appears to be much more restrained when it comes to acquisitions. Boston Beer does not have this issue but has not done any deals either. Mr Koch is probably far too shrewd and knowledgeable about the U.S. beer market to want to have to deal with the ensuing distributor concerns. Instead, less than two years ago, he launched a hard cider, Angry Orchard, on which he makes big money, I hear, because he is building the brand himself with his loyal distributor network.
There have also been transactions between U.S. craft brewers and international non-major brewers. Boulevard was sold to Belgium’s Duvel Moortgat and Founders to Spain’s Mahou. Alas, there are not that many cashed-up foreign brewers around who are prepared to make a gamble on a U.S. brewer if they cannot see extra benefits from such an acquisition.
As to private equity and strategic investors – they are finally finding takers among craft brewers looking for capital to grow. Since last summer, SweetWater Brewing of Atlanta sold a stake to TSG Consumer Partners, Southern Tier Brewing in upstate New York sold a stake to Ulysses Management, and Uinta Brewing of Utah sold a majority share to the Riverside Company.
The trouble with outside investors is – if “trouble” is the right word – they don’t bring any inside knowledge of the brewing industry with them. They depend on the craft brewers’ knowledge to grow their investment. What is even more troubling is that eventually they will want to go for an exit. That will mean another sale. Who to? Most likely to another set of private equity suits with a similar agenda.
In this respect, AB-InBev will appear like a much safer bet to many craft brewers because they have proven that they can make an investment work.
To an outside observer like me, it seems that there is a rift going through the U.S. craft beer industry right now as brewers look for capital to fund their development while its founders want to get out.
So the issue is not a narrow one (“Will AB-InBev buy another one?”). It is a much wider one: how will the continuing change in ownership shape craft beer’s future identity? Can craft beer continue to be a business of independent local operators with close relations between workers and management and constant, fundable growth? This is really the burning question.
