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Meanwhile, another set of election results just came in: Brewers Assn will seat some familiar faces to its board early next year. Among those re-elected are Rob Tod of Allagash (current board chair), Eric Wallace of Left Hand, John Mallet of Bell's and Cyrena Nouzille of Ladyface Ale Companie. Sean Casey of Church Brew Works also elected to represent pub breweries. All will serve 3-yr terms.
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Meanwhile, Deschutes will fill out rest of VA with Reyes' Chesbay Dist starting Jan 2017, per release. Deschutes will start with 6pks, draft and variety pk and hinted at inclusion of "their newest year-round brand," to be announced next mo. Chesbay will cover Tidewater region of southeast VA including Norfolk, Suffolk, Chesapeake, Hampton, Portsmouth, Virginia Beach, Newport News and Williamsburg.
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Plenty other co's looking to open more brewpubs across US, including those acquired by largest players. Next example: Golden Road Brewing "beer garden and restaurant" planned for midtown Sacramento, the Sacramento Bee reported late last week. New spot will include small-batch brewing system, according to plans submitted to the city. The AB-owned brewery already operates 3 retail locations at original facility, in Downtown LA and at planned brewery location in Anaheim.
In Arizona, Mother Road Brewing announced plans to open a new location nearby in Flagstaff to boost capacity to about 20K bbls, about 5X the current 4000 bbls it has space to turn out. It's about to celebrate its 5th anniversary, while hoping to keep costs of expansion to about $1 mil. It'll move current 15-bbl system, new canning line and lab equipment to new location, which will free up more space to visitors at original spot. Following expansion, Mother Road plans to launch 3 new brands and expand distribution beyond Arizona.
Trio of Upstate NY Expansions; New Orleans & Alabama, Too Breweries growin' all over. But handful of clips turned up from upstate NY this week. Community Beer Works of Buffalo plans to expand from its nano roots into much bigger 14K sq-ft facility where it'll be able to brew 3500 bbls/yr off the bat and up to 15K bbls eventually, Buffalo Biz Journal wrote. Last yr, it produced just over 600 bbls. In Auburn, outside Syracuse, Prison City Brewery & Pub will double space to just 1000 sq-ft, expanding production from a few hundred barrels to just over a thousand, CNY Central reported. In Ithaca, Hopshire Farm & Brewery plans to add 2500 sq-ft in two phases, first to make more space for visitors, second to double its modest production, per Ithaca Times. Down south in New Orleans, Urban South Brewery is adding a bunch of tanks to double its brewing capacity (still pretty small: total fermentation space will near 500 bbls at a time after addition), according to Best of New Orleans. Then out in Alabama, small Folklore Brewing and Meadery got approved for $70K grant to add an additional 3500 sq-ft "to increase production and add a canning line," the Dothan Eagle reported.
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Meanwhile, Tenth & Blake sales team "reduces in size as we increasingly leverage craft partner sales teams. Moving forward, Tenth and Blake sales will complement and cover gaps where needed," sez Scott. And "five RSDs will shift to four Craft & Imports Business Development Directors." But it'll add two "Finance Analysts" assigned to Hop Valley and Terrapin that report to T&B Finance Manager Karen Theis, who then reports to recently appointed Senior Director of Finance, Strategy and Craft Partnerships, Mike Sikorski. All in, "this restructuring will give us the opportunity to shift resources into marketing support of our craft brewers" and "will better position us to deliver long-term growth" across the board, said Scott, echoing comments made at fall distribs mtg (see Sep 28 issue).
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11/18/2016
LA Downtown/Arts District Now a "Craft Beer Hub"; Orange Cty Whole Foods Doubled Craft Offerings
Separately, tho plenty still talkin' about chain retailers tightening up space for craft, especially long-tail offerings, lookin' like Whole Foods going opposite direction, at least sometimes. Recent remodel of Tustin, CA store includes more space for craft, allowing it to double brands available there to 800, according to Orange County Register. Note that bigger part of remodel was expansion of restaurant/bar locations on-site. Whole Foods' focus here is just another twist to growing line-blurring across tiers, especially at retail, this time blurring distinction between the on- and off-premise arenas.
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11/18/2016
Lagunitas & Firestone Top Craft Vendors in LA Scans for 12 Wks; Firestone 805 is Top Craft Brand
What's more, Firestone 805 Blonde (+65%) passed Lagunitas IPA (+16%) to become largest craft brand in LA scans for 12 wks. It's now over 80% of Firestone's total sales and more than all of co's growth here. That suggests some other aspects of Firestone portfolio not so hot. But don't think anyone's complaining about 40%+ growth in the largest scan mkt. If you're usin' IRI craft definition, Blue Moon Belgian White (-14%) still just barely ahead of 805 for 12 wks, but it's sharply declining here. And both Firestone 805 and Lagunitas IPA over $1 mil in sales ahead of next largest craft brand, Sierra Pale Ale (+0.6%).
Calif-based brewers make up most of the rest of top craft beer vendors in LA scans. Hangar 24 (+7%) is only other one not mentioned above that's over $1 mil in sales for 12 wks thru Oct 30. Alchemy & Science (see above), Karl Strauss (+14%), Bear Republic (+115%), Anchor (+25%) and Coronado (+52%) all up strong. Deschutes was the only other out-of-state brewer in this list of top LA vendors, and it was flyin', up 66% for 12 wks, ahead of Bear Republic. Editor's note: keep in mind, Ballast Point is included in Constellation's total and Golden Road included in AB total; for reference, Ballast finished 2015 just ahead of Hangar 24 in LA IRI foodstores and Golden Road was ahead of Anchor. (Read on for more notes on local growth and more craft at retail in metro LA area.)
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11/18/2016
n Craft "Plateau," Bell's Up Double-Digits Overall and At Home; "Quality" Responds to "Local"
Larry sees "still a lot of run-room out there for craft beer," but thinks the segment may be experiencing a classic "business 101" moment, when "that curve finally starts flattening out a little bit." Part of that is "a constipation of seasonal and specialty beer out there in the marketplace," both "at the wholesale level" and "retail level," Larry said. That's making some "a little nervous." Other comments about widespread issues with old beer turned up during multiple presentations and off-stage conversations at the event.
"Quality" is the New "Local," Larry Sez, as Distribs, Retailers, Consumers Wise Up Larry highlighted a couple other potential quality watch-outs for craft, including fact that, for some ingredients, brewers have a "limited number of suppliers." So just one of them experiencing a potential dip in quality "could have an impact on a lot of craft players." He also briefly discussed the spate of recent craft recalls, even noting the "possibility that some of those recalls could be related." (See below for side note on the importance of information sharing within craft community to combat widespread quality concerns.) "You've had a craft industry that has gone fast and furious" for a few years, Larry said, reminding that not all market entrants concern themselves with these issues. And so some that aren't may "exit" sooner than others. But he and Laura continue to build their biz looking long-term, and how to ensure the brewery and the brand stay strong 50, 100 years out, he said.
Interest in quality is on the rise across all tiers, Larry and Laura commented. A retailer recently shared that he tells small brewers trying to get on tap that "if you don't have a laboratory, we're not even going to consider it," Larry shared. That's increasingly true for distribs too, Laura added. When she asks them about what they seek in new brewery partners, "a lot more, the answer is quality." Growth can't be achieved "just because craft is cool anymore," she said. Craft "can't just get by on the fact that it's something different." Further, "we're competing against the world's biggest breweries," Larry said, "and they know how to make quality product." But "the other end of this competition that we're fighting," Laura added, is all the tiny local brewers. And "the word 'local' is synonymous with the word 'quality,' I don't know if you guys knew that," she said sarcastically. Indeed, "2016 dawned with the mantra 'local, local, local,'" Larry said. But in "2017, we start really seeing the mantra of 'quality,'" he thinks; as retailers and consumers "get better educated, quality's going to come into focus a whole lot more."
Mil-Bbl Brewery Showcases Quality; Retail, Distrib Expansion, Brand Building "This is why we love people coming to our brewery," Larry explained about importance of quality: "come see our laboratory," he said, "that's a sales tool for us." That brewery could eventually produce about a million bbls per yr, fitting co's philosophy to "build one great, efficient brewery and sell from there." Taproom and retail remains "small" piece of Bell's biz, but is changing with rise of beer tourism, Laura shared. The staff pours a whole lot more sampler trays than when she tended bar Saturday nights. "People want to believe that their beer comes from a beautiful place," Larry reminded, citing Fritz Maytag and noting importance of providing a memorable visitor experience. Both that and the homebrew supply biz that Larry started before the brewery which the co still runs helps build brand and "allows us to have great social interaction with our community, host different events and be a good corporate citizen to the place that we conduct business," Larry explained.
That's especially true as Bell's expands its reach. The co opened up distribution to 7 new states this year alone, a process Laura led. "All of them are doing well," she said, before reminding that her "expectation is not that we see our name in lights" in a new market, and be "everywhere all at once." Instead, "our goal," is to "take a slow, responsible approach," since "we know that growth doesn't happen overnight." Sure, adding new markets means "some added volume," but "where we really start to see the benefits," Laura maintained, is "in that two, three, four, five years" down the line, digging deeper and "transitioning from not just the cool-kid craft bars." Bell's still has "a relatively small footprint for a brewery our size," Larry noted, using "more what I like to call a 'beer model' than a 'wine model,'" to "drill deep down the market and do the A, B and C accounts." We'll have plenty more from Larry and Laura next issue.
Quality Sidebar: Bell's head brewer (and recently re-elected member of Brewers Assn board, see below) John Mallet posted to BA forum in mid-October, responding to an uptick in comments and anecdotal reports of over-carbonated beer and exploding bottles. That's an issue Larry also alluded to during our Seminar as a big issue for distribs and retailers, noting a Binny's buyer from Chicago who recently told Larry that he hears of an exploding bottle or can at a store "every other week." John's post shared learnings about a form of yeast that's closely related to brewer's yeast, is often difficult to detect but can cause problems as it becomes active again after beer leaves the brewery. That activity can lead to changes to the flavor or quality of the beer, but also over-carbonation that causes packaging issues. John shared how Bell's identified the problem and offered possible corrective behaviors. His description underscores the importance of knowledge sharing to the broad success of small brewers, especially when combatting the kind of scenario Larry mentioned to at our conference. No doubt, an incredibly competitive marketplace (like craft) can magnify the smallest hiccup.
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Interestingly, craft segment's overall slowdown in growth has "affected the M&A landscape in marked ways just in the last 6 months," Bill thought. There's "quite a bit of anxiety on the seller's side," that's "generating more discussions," and "now buyers are taking their time, they're getting more picky and they're negotiating harder." So valuations are "start[ing] to dip; you are seeing processes take longer; and you're seeing a reshuffling of the buyer universe" as "some of the bigger strategics" are getting closer to "their fill." But that's not to say it's shifted completely to a buyer's market. Valuations on avg still in the 15-20X EBITDA range compared to up to 25X previously. In "any other category you could think about," that's still very healthy. Ballast Point "was clearly the peak in this cycle," and tho "we may come back to that someday," brewers now have to "get Ballast Point out of their head" and "be realistic" about their value, he advised.
New "Wave" of Buyers Comin'; Intl Buyers Interested in "Investments of Scale"; PE "Waiting for Their Moment" There's "a wave" of new "buyers and investors that've yet to come into the US market," and have "waited on the sidelines" up to this point. Both AB and MC have clear, "deliberate" strategy for "key regions" where they either "needed to be" or "where their core brands were not succeeding," but both getting closer to their fill, Bill thought. So other domestic strategic buyers like North American Breweries (owned by FIFCO) and Pabst, as well as Constellation and Heineken likely to strike deals again (at some point). And "there are several more European brewers beyond just Mahou and Duvel," as well as Asian brewers, "that are certainly looking." International buyers are lookin' "to make investments of scale," which is why "many" were interested in New Belgium "when they were going through their process"; not a 20K-bbl brewer, but "a craft brewery of size that would make a big difference to a non-US brewer coming into the US marketplace."
Then too, there are still plenty more private equity firms that have been "waiting for their moment" to enter biz. In fact, First Bev recently heard from another firm that was lookin' at 3 different craft brewers, Bill shared. Since PE "couldn't compete with the big strategics on valuations" and "not really bringing much to the equation" in terms of "efficiencies," they've been waiting it out. But there are already "more…than I would've imagined" in the biz, he said, referencing Dogfish and Stone as particularly unexpected candidates that have formed PE partnerships. "I think private equity gets hit with the label that they're short term holders," with 3-7 yr investment windows, "but that's not the case for all." That's one of the reasons why family offices are "so appealing: they think of their money as sort of 30- and 40- and 50-year money," and typically "don't have any outside shareholders."
More Craft on Craft Deals; Spirits on Craft? "I think we'll see more craft on craft deals" too, Bill stated. Previously "there wasn't much in the way of M&A DNA on the teams of these craft breweries," he reiterated, and they were "busy" with "own portfolio[s]." But "I think that's changing now." They "see this as a way to bolster growth and re-energize the culture," and it "may be that they'll pursue the same strategy" as ABI, i.e. "going to the markets where their core brands are weak and picking up a very exciting, vibrant high growth brand." Gotta note, this year we've seen Lagunitas emerge with a clear M&A strategy, Stone's formation of True Craft, continuation of Oskar Blues/Fireman Capital and Artisanal Beverage Ventures (Southern Tier & Victory), additional deals fueled by PE $$ and several tiny craft on craft deals in various states. Previously, Craft Brew Alliance, Green Flash/Alpine, Boston Beer's Alchemy & Science unit, and Long Trail/Fulham Group (Otter Creek, Shed) were some of main examples of craft on craft M&A in US. Interestingly, Bill hasn't seen non-alc cos lookin' to come into the space, but "we've seen spirit companies looking at craft breweries," Bill acknowledged during Q&A. "You'll continue to see some confluence of spirits and beer buyers," he thought, pointing to several craft brewers that have already started spirits lines and the similarities between craft beer and craft spirits. And for cider, "I don't think it's going to be a vibrant area for M&A activity," but could see a handful that do deals over the next 3-4 yrs (recently Seattle Cider Co sold to Agrial).
Expect More Creative Deal Structures for Minority Stakes; Path to Control Approach "There is no set path" to what the "structure" of these next wave of deals will look like. But "I do think the minority investment idea clearly below the BA guidelines is a smart one," said Bill, specifically referencing recent Kirin/Brooklyn deal. "I think you're going to see it across the board": most strategics want 100% to "bring all of their synergies." But "family offices, Private Equity firms and international brewers will be much more creative in looking at minority investments." Some of these "may have a path to full control, and that's a very smart approach," he added, since brewers "can take quite a bit of money off the table at a healthy valuation, have the resources and support of a large partner," and "can space out the time period from investment to exit" over longer period of time.
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