2016 will go down as 2d consecutive year of exceptionally robust M&A activity in the craft beer biz, with another 25-30 deals likely by year-end (already about that much by our count). And it ain't slowin' down yet. "I think it will be as robust" in 2017, said First Beverage Group's Bill Anderson on panel during California Beer and Beverage Distributors (CBBD) annual mtg; meaning "I think there will be 25-30 in this next period.... Obviously it can't go on forever at that clip," but "there are still a number of jewels out there that are showing very strong growth" and "as long as there's this much change and disruption and innovation I think you'll continue to see the M&A cycle be very healthy." Gotta note, Bill is 2 for 2 in predicting the deal landscape in consecutive years, so he's got a pretty good track record and a very direct line of sight into both the buyer and seller universe with First Beverage.

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.  

Here's a new twist on continued collaboration between small brewers and tourism/economic development groups: look out for Music City Light, a new brand launching in Nashville next week. The light beer brand is brewed at Mantra Artisan Ales for new Music City Beer Co, run by handful of area restaurateurs and country music manager, "co-branded with the city and promoted by the Nashville Convention & Visitors Corp (NCVC)," according to the Tennessean. "From a brand standpoint, it's much more than the beer," CEO Amy Millslagle told paper. She's manager of musician Phil Vassar, who will assist in launching brand along with his new album. And he's just "first country music artist who will be featured on the company's six-pack boxes," wrote Nashville Biz Journal. The co seeks "to be the Wheaties box for music," co-founder Quinn O'Sullivan said, with featured artists rotating every 6-8 weeks. The co's focused on experiential marketing, including contests and events largely targeted at tourists visiting Music City. Indeed, it's already got an airport location lined up thanks to work with NCVC, whose CEO Butch Spyridon is "an extremely close partner in the endeavor," Millslagle told NBJ. They'll look to expand distribution to a couple of cities "where the Music City brand makes sense," she added, like "a Las Vegas country music bar."     

Maine Beer Co's reputation reaches a fair amount further than its volume output already, and even though it announced a massive expansion of its Freeport brewery (see Aug 2 issue), don't expect its popular IPAs to suddenly appear up and down the eastern seaboard. Most of the 20K+ sq-ft the co will add to current 6000 sq-ft facility will be used to improve the visitor experience, according to Portland Press Herald. On Wednesday, the city approved the project, which includes plans for a bigger tasting room, outdoor seating and a lot more parking. "The expansion will allow the company to boost production, but the aim of the project is to give customers and employees a better experience," the paper summarized comments by spokesperson Jesse Weyl.  

Just as Brooklyn Brewery builds out new Navy Yard home base in its namesake NYC borough, it's still working to make final choice on a site to build a much larger production facility in or around the city. Recall, spots on Staten Island have been discussed for quite some time. But yesterday, Brooklyn went public with proposal for another site, upstate a couple hours in Orange County, at small Stewart Airport, CEO/co-owner Eric Ottaway wrote on company blog. Location that's owned by Port Authority has "plenty of space," he wrote. Build-out of initial 250K sq-ft facility likely to cost about $80 mil, according to Times Herald-Record. Plan awaiting Port Authority approval involves 60-yr lease of near 19 acres that have never been developed. Brooklyn has 60 days to look further into site and back out of deal if it doesn't meet all its needs, paper wrote. But after long process, could be the co finally nearing the end of this stage. It expects to make "final choice of location by the end of this year," Eric wrote. Note that at same time, "we continue to develop and expand our family of sister breweries around the world," and co has "a couple more on the way." Finally, even after Brooklyn's recent sale of 24.5% stake to Kirin, frequent int'l partner Carlsberg "further strengthened our long-standing cooperation" with the US co, CEO Cees 't Hart said during 3d qtr earnings call this week, just-drinks reports. Carlsberg already brewing Brooklyn Lager in Sweden.    

Even as anti-establishment sentiments won over in presidential election, plenty of incumbents will continue on in Congress next session and key supporters of biggest piece of beer/alc-bev legislation among 'em, a couple of industry trade orgs remind. "All of the original sponsors of the Craft Beverage Modernization and Tax Reform Act (HR 2903/S 1562) won reelection," federal affairs manager for Brewers Assn Katie Marisic wrote this week. Recall, that bill cuts federal excise taxes paid by brewers of all sizes as well as other alc bev manufacturers. A pair of Congressmen who some thought would have tougher time in re-election bids and were top Republican cosponsors of CBMTRA, Missouri Senator Roy Blunt and Minnesota Representative Erik Paulsen, "prevailed on election night" and will return to support the bill, Katie wrote. Democratic supporters of small brewers, Senators Ron Wyden of Oregon and Michael Bennett of Colorado were also re-elected. And while many expect little activity during lame duck session of Congress that starts in about a month, folks at Distilled Spirits Council "are actively advocating for consideration of" CBMTRA "before year's end," prexy/CEO Kraig Naasz wrote this week. In the states, co-owner/founder of Portland-based Rising Tide Brewing, Heather Sanborn, won her bid to join the Maine House of Representatives, Katie noted. Heather opened Rising Tide with husband Nathan in 2010, currently acts as director of business ops and has also served as prexy of Maine Brewers Guild.         

Split between small brewers orgs in Colorado earlier this year now officially patched up, as members of Craft Brewers Guild and Craft Beer Colorado voted to join back up as one trade association. "Merger" announced by group unites indie brewers in Colo behind "one voice," which will keep older CBG name. But board will include 5 members from each org, significantly expanding voices guiding it. An eleventh board member to be appointed too, per Westword report. And first task will be to find new exec director, following departure of longtime leader John Carlson, apparently a necessary precondition for groups to come together. Recall, another key step was ensuring state breweries acquired by larger industry members could not be a part of the org, taking guidance on membership from national Brewers Assn. Of course, so far that only bars Breckenridge, which joined AB-owned High End last year. Interestingly, CBG voted to take that step over summer, stripping Breck of voting rights, but newly merged group will apparently use bylaws written for Craft Beer Colorado, Westword wrote. Recall, some of largest in-state craft brewers splintered off to form that group, whose board included some of best-known names in Colo craft advocacy: New Belgium's Kim Jordan, Odell's Wynne Odell, Left Hand's Eric Wallace and others. Again, they'll be back on newly-combined CBG board. Group already focused on 2017 legislative session, so stay tuned.

Just before Valentine's Day of next year, New Belgium will kick off sales in its 46th state, Massachusetts. NBB went with 4 AB distribs: Girardi, Seabord Products, Williams and L Knife and Sons. L Knife and Seabord are Sheehan Family Cos, as is craft-focused Craft Brewers Guild, which will carry NBB in Boston. It also chose MC distrib Atlas in middle of state.

October turned out not quite as tough as September for craft segment, which grew at a slightly faster rate in IRI multi-outlet + convenience data for 4 wks thru Oct 30 than during prior 4 wks. Craft $$ still up just over 8% yr-to-date, cases up about 5%. Note that 4- and 12-wk trends still less than half that, so slower pace of growth continuing. But it's not softening further.

Hard Soda Softness Depresses Recent Craft Trends by More Than a Point Remember last year, when massive intros of Not Your Father's and Coney Island Hard Root Beer, both counted with craft segment by IRI at the time, made craft growth look bigger in scanned retail data? IRI pulled out NYFRB as part of its restatement at beginning of 2016. But all Coney Island brands remain counted with craft, including hard sodas, arguably a better fit with FMBs. And recall that Coney Island Hard Root Beer not anywhere close to cycling launch. It's now down yr-to-date, -0.8% by dollars thru Oct 30 in MULC. That means that it sold more during first few months of sales last yr than during 10 months of 2016. The brand's down about 80% for 12 wks thru 10/30. So it's contributing to slower overall craft trends in retail data recently. Pull out CIHRB and craft trends jump by over a point: craft $$ +5.3% without it (vs +3.9%) and volume +3.2% (vs +2.1%) for 12 wks.

Recent root beer drop-off wreaks even more havoc on Fruit/Veggie/Spiced style IRI tracks. All in, F/V/S craft volume down 19% for 12 wks thru Oct 30 in MULC data. But pull out CIHRB and the style's up 19%. That includes other hard sodas, including those from Boston Beer's Coney Island family (mostly incremental since they launched after root beer) and other craft brewers. But there's a lot more fruit beer out there in general these days, much of it growing quickly.

Seasonals Still Struggling, Issues Deeper Than Declining Top Brands That sharp decline of total F/V/S beers is one of just two double-digit declines seen among top-20 craft styles recently. And the other is much bigger. Craft seasonals down 12.5% by $$ for 12 wks in IRI's MULC channel. Volume declining at steeper rate, natch: down over 15%. Struggles of a handful of biggest seasonal brands contribute most of that overall decline. Both Sam Adams and Sierra Nevada seasonals down in mid-teens for 12 wks, basically in line with style overall. But Blue Moon seasonal down about 20%, Leinie Shandy seasonal down more than 25% and Shock Top seasonals down by almost half (45-47%). Note that Shock Top isn't quite #5 seasonal brand (Bell's is bigger and growing, for example). Still, these 5 represent about 1/2 of craft seasonal sales, collectively down about 20%. However, they don't make up all of total seasonal style's decline. So other smaller seasonals struggling too.

4 Big IPAs Drive Growth, 4 Others Hold It Back Nope, can't talk about craft styles without digging into IPA: total craft IPAs up 22% for 12 wks by $$ in multi-outlet + convenience channel. That's about 5 points slower than YTD trend. Top style still gained over 4 share of craft $$ for 12 wks to about 29 share.

Biggest IPA brand remains Lagunitas IPA, $$ +19% for 12 wks. During recent periods it's bigger than Sam Adams Boston Lager, #7 craft brand overall in IRI data. And it's gaining on Fat Tire and Shiner Bock. Three more big IPA brands growing even faster. Goose Island IPA $$ now up 54% for 12 wks (vs +91% YTD). Founders All Day actually bigger that Goose by volume and growing faster, $$ +67% for 12 wks (vs +83% YTD). Bell's Two Hearted +36% too (vs +40% YTD). These 4 brands represent about 17 share of total IPA $$ and over 19 share of IPA volume. But they're almost a quarter of the style's $$ growth and about 29% of volume growth. Compare that to 4 other big IPAs all declining this yr: Sierra Nevada Torpedo ($$ -2% for 12 wks), Sam Adams Rebel (-19%), New Belgium Ranger (-17%) and Redhook Longhammer (-15%). Those 4 brands collectively over 11 share of IPA $$ and losing ground quickly. So top 8 IPA brands in IRI data are over 28 share of IPA. Other IPA brands collectively up 27% for 12 wks and gaining share of craft's biggest style.         

Ballast Point has "3 big bets" with new brands launching in 2017, recently appointed prexy Marty Birkel shared at California Beer and Beverage Distribs annual mtg yesterday. No new Sculpins, Dorados, or Keels this time around, but new Manta Ray Double IPA will be "approachable" while still reaching 8.5% ABV; Bonito Blonde is a "sessionable Blonde beer" that's "white space for us" (Editor's note: clearly positioned as a Firestone 805 fighter); and Sea Rose Tart Cherry Wheat is playin' off emerging sour trends. In fact, Ballast also plans to build a small sours facility in Calif that's already "underway," Marty shared. Then too, Ballast will start bottling its "very innovative and different" limited release nitro brew, Red Velvet. It actually "looks" and "tastes" like red velvet cake, said Marty, and bottle is wrapped in artistic label developed by in-house artist. These are all brands that "came out of small batch trial and tasting rooms" and have been "validated by consumers." They're "very different from what we have in our portfolio currently," so net-net, Ballast "very confident."

Marty echoed Constellation CEO Paul Hetterich's thoughts about shifting into more prominent position within beer's high-end segments altogether (as reported in yesterday's INSIGHTS Express). Constellation recently passed AB to have highest $$ share of the high end (at 25 share) and 100% of its biz in high end, Marty showcased. And specifically in CA, high-end segments represent much higher % of total sales: 49% of volume and 62% of $$ vs near 35% of volume, 47% of $$ nationally. "Is that reflected in the way you're running your business?" he asked. As biz gets increasingly crowded and complex "we all have to think differently on how we manage our business." And Constellation is "well positioned to capture these opportunities."

Headed to 1.6 Mil Bbls of Capacity; Sculpin Slowing in Grocery; Ballast +30% Plus in CA On-Premise Constellation clearly helping boost Ballast's capacity too. It just finished expanding capacity at original brewery to about 800K bbls and will open new Roanoke, VA facility that will double capacity to 1.6 mil bbls, as CLSA analyst Caroline Levy and team wrote following visit. "We think Ballast can easily grow into this capacity," per report. That's even tho Ballast finished last yr at less than 300K bbls and is on its way to about 400K bbls this yr and CLSA sees "signs of a shakeout in the craft beer industry (hard to see new craft successes)."

For CLSA, high-profile departures of founders and longtime senior execs at Ballast "not a concern." Caroline also took oppy to note craft's and Constellation's strength in Ballast hometown San Diego. Craft went from 17 to 32 share of beer $$ in San Diego, CLSA reports. And Constellation (including its imports) now #2 supplier there at 21 share vs AB's 24. At same time, overall beer growth might be seeing "a sharper slowdown" in San Diego "than the US average," according to report. "We attribute the overall slowdown to the shakeout in the craft beer segment," CLSA wrote. Recall that craft segment was still up 18% by $$ in San Diego foodstores thru July 10, according to IRI data presented by Dan Wandel during Brewers Assn Power Hour (see Sep 1 issue). More recently, top Ballast brand Sculpin IPA has been slowing nationally. It's still up 27% by $$ yr-to-date in national IRI foodstores. But up 13.6% for 12 wks and just +6.7% for 4 wks. Yet gotta note, in harder to track on-premise, Ballast depletions in state of CA growing in the 30% range, shared prexy Marty Birkel separately at CBBD mtg. And Sculpin remains "number one priority." There's been "no slowdown" in velocity and "consistent" distribution growth these last 3 mos vs rolling 12 mos, he added.

Constellation Sees Craft Growing 8% Per Yr; Seeks 10-12 Share of Segment Interestingly, Constellation forecast craft growing from 330 mil cases and 12 share of beer to 500 mil cases and 15 share of beer overall for next few years at investor day held earlier this week. That amounts to a little more than 8% growth per yr for segment, which probably slowed to a bit under 8% in 2016. To build Ballast up to 1.6 mil bbls implies many years of very fast double-digit growth inside of slower moving segment. Constellation Brands Beer Division prexy Paul Hetterich gave ways it will grow Ballast Point: "aggressively drive distribution," "collaborate with import commercial team in key markets," "continue innovation leadership," "drive velocity through increased consumer awareness," i.e. digital/trade mktg, "leverage STZ resources" like "insights, procurement, national accounts." Constellation seeks to get "10-12 share of craft over time" and Ballast "will be the centerpiece," said Paul. The rest will come from a mix of "organic initiatives" which will "selectively seed 'Mexican inspired' brands," such as so-far small Tocayo (partnered with chef Rick Bayless, brewed by Two Brothers) and more m&a. Constellation seeks "the next Ballast Point, the next Lagunitas.... They're out there," said Paul. Presentation slide said "on the horizon...possible venture stake in up & coming brands with national potential."

Fallout of manufacturers blurring lines by producing multiple beverage types seems to have snuck its way into trademark arena once more. Recall that many small brewers pushed back hard against rulings by US Patent and Trademark Office (USPTO) and/or Trademark Trial and Appeal Board (TTAB) that barred them from holding trademarks for words or symbols already in use by wine or spirits makers, even if those products tracked differently by agency. The issue's caused repeated headaches for multiple small brewers without much relief. Recently, Calif's Tap It Brewing successfully defended its opposition to an energy drink company's attempt to trademark its use of the word "tap," according to write-up of decision at TTABlog. In this case, TTAB found that Tap It's beer trademark may be "weak," but that energy drinks are closely related enough goods that the marks would likely cause confusion. Indeed, Tap It's opposition included evidence that "a relatively large number of third parties have registered or used the same marks for beer on the one hand and sports, energy or soft drinks on the other," and further, that a number of brewers now make non-alc sodas. Because of that and because both beer and energy drinks are sold in grocery stores, liquor stores and bars, the Board upheld Tap It's opposition.