Lengthy interview with Lagunitas founder Tony Magee in local Santa Rosa Press Democrat included several choice Tonyisms and a bit o' news too. "Some people have had the idea that I sold out. The truth is I bought in," Tony told paper. "I really haven't worked more in the last five years than I have in the last year. Now there are so many of these doors whose knobs have been unlocked. My job is to move the brewery into all these doors." Tony is "brimming with ideas and plans to grow the business of craft beer both domestically and internationally," Press Democrat wrote. "I feel that our job at Lagunitas is to take over Heineken," he said. "They laugh a little bit nervously when I say it… I don't mean ever sitting in the big seat, but kind of infiltrating its culture," he added. Meanwhile, Lagunitas will get two London pubs and build a European brewery "likely in the" UK, Tony said. In UK, Heineken owns a couple thousand pubs, two will be turned into Lagunitas pubs. And in European Union,"we'll build at least one brewery. Heineken will build it for us to our specifications, using our equipment suppliers. We still have to chew our own food, so we lease it from them. It's not as if here's your rich uncle." (Note this article appeared in an issue of INSIGHTS Express yesterday.)

As for his recent deals to buy stakes in smaller US craft brewers (Independence in Austin, Southend in Charleston and locally "beloved" Santa Rosa brewery Moonlight), Tony said: "I want to do a lot of them. I think the biggest brewers in the country to some extent have treated the United States as it's one place. It never was. It's increasingly less than one place. There's a rising regionalism." Asked if Lagunitas would "ever enter that space" if marijuana legalized in Calif, Tony responded: "I'm not a farmer…. I'm not going to step in and try to capitalize on it. I will be a good customer."

Meanwhile, Lagunitas maintains strong growth in US even as craft slowed. Up 464,000 cases, 22.6% in IRI multioutlet + convenience yr-to-date thru Aug 7. That growth represents 12% of 3.75 mil cases craft up overall, but 9% of $$s. Lagunitas IPA is still over half of biz in scans and it's up 213,000 cases, 18.5%. L'il Sumpin Sumpin still on a tear. Up 166,000 cases, 50% and almost 20% of Lagunitas biz.  

Craft is a bubble" pieces may not have been published quite as often over the last few years as brewery permits were issued by the TTB (6,080 by the end of 2015, by the way). But it sure feels like it. So Bart Watson, economist for the Brewers Assn, penned another post to combat the notion that the number of small breweries in the US somehow represents a bubble. He acknowledges that overall growth is slowing and the future will not be the past. But a bubble, or as Bart explained, "a level of investment or asset price increases that isn't fundamentally tied to demand?" Not quite.

Instead, "supply," as defined as the number of US brewers, has tracked "demand," in Bart's scenario defined as craft production, pretty closely, at least over the last 25 years or so. Bart indexed both of those measures to 1990 and the resemblance of the growth curves is quite striking. Of course, those aren't the best possible metrics for supply/demand, strictly speaking, which Bart also knows. And again, past success "doesn't mean that growth will last forever, and all signs point to a future with slower growth in demand." He also offers words of caution for folks who think small-time brewing is a "can't miss bet." But the housing bubble of a decade ago or so is simply not analogous to current craft stats, Bart argues, reminding "a slowdown isn't a bubble bursting."

About that slower growth coming, though. Bart shows average incremental volume gains per production brewery (excluding brewpubs, "a different beast entirely") since 1990 too, which rises way up in the mid-90s before plummeting quickly and then rising slowly again. But it never gets quite as high as it was in the early 90s, considering huge growth in the number of super small breweries. Average incremental bbls per brewery varied a bit between 1,000-2,000 bbls since 2005 and held pretty steadily at about 1,500 bbls since 2010. Last yr, it dropped below 1,000 for the first time in over 10 years. "2016? We'll see," Bart notes, "but early reports are a more mixed bag." That number "is certainly going to drop," he thinks. All signs point to growth that's hard to attain, so Bart encourages brewers to closely examine their biz models. Not a bad idea as pressure builds within the crowded segment. We also note a handful of clips from recent days, which suggest some possible pressure release valves, like committing to an uber-local biz model, sharing resources and capacity and more.  

AB and Craft Brew Alliance significantly expanded agreements between them on 3 fronts. They will: 1) extend existing "Master Distributor Agreement" for 10 yrs until 2028; 2) allow for AB to contract brew up to 300,000 bbls of CBA brands; 3) ABI will sell CBA brands more extensively internationally, getting "exclusive" in countries where CBA doesn't already have agreement. This is a "natural evolution," CBA ceo Andy Thomas told INSIGHTS, but "pretty progressive" at same time, since it's so multifaceted. Extending the distribution agreement eliminates "uncertainty" that CBA could go off "distribution cliff" when existing agreement ended in 2018, Andy added. What's more, deal remains under current fee structure.

Meanwhile, AB facilities will gradually brew up to 300,000 bbls of CBA brands, which "affords us a ton of flexibility," said Andy. Likely to be "full 18-month ramp up" as the companies "match breweries to brands." CBA looks to "transition" out of Memphis and "rationalize" (i.e. sell) its Woodinville brewery. Recall, Pabst brewing Rainier brand there and has option to buy. And there will be synergies, as AB ships product made at common breweries to common distribs (expect those to be quantified on conference call later today). Portsmouth still will play "pretty strategic role" as per CBA's existing contract brewing "partnerships" with Appalachian and Cisco, according to Andy. And importantly, these expanded commercial agreements between CBA and AB contain what Andy called "guardrails" and "protections" should AB and CBA either expand or diminish their partnership, i.e. both apparently remain possible in rapidly changing environment.

CBA "expected to gain significant financial benefits from these commercial agreements that will allow the company to continue investing in its growth strategy," according to release. AB also "positioned to benefit directly from those gains" because of new oppys for "international distribution system, U.S. wholesaler partners and, breweries." It's a "win, win, win," said Andy. Recall, CBA reported much better 2d qtr with shipments up 4.5% and depletions up 3%, but recent periods rough in IRI multi-outlet + convenience. Volume down 6.7% for 4 weeks thru Aug 7, almost 6% for 12 weeks. On call earlier this mo, CBA reiterated that it expects shipments up 1-2% in 2016.  

Year-old law change in Illinois opened door for brewers to start delivering their beer directly to consumers, as long as local laws allow it. So at least 3 brewpubs already sending out growlers or packaged beer, including Burnt City, Piece Brewery and Pizza and Half Acre, according to Chicago Tribune report yesterday. Burnt City was first to get it started back in June, and recently almost 3/4 of its total delivery orders include beer. That's as the practice seems to be attracting new consumers, according to Half Acre co-founder Gabriel Magliaro. Those brewpubs currently using third-party services like GrubHub, while Piece doing it all itself, seatbelting growlers into delivery cars and sometimes getting 'em to drinkers' homes within 10 mins if biz at the pub is slow. Not bad.  

Fewer brewers and beer related cos made the list this yr, but still 7 were included in new Inc Magazine's 5000 fastest growing privately held companies, including 4 breweries, 1 indie distrib, 1 cidery and 1 co that sells used wine & spirits barrels for aging. (Editor's note: last year there were 9 brewers on list.) Recall, Inc 5000 looks at fastest 3-yr revenue growth trends among privately held cos, yet list is not all inclusive since it requires cos to apply.

Some of the usual cos made the list again, including both Stone Brewing and New Glarus, each of which have made it every year since 2007. Stone revs grew another 17% to a whopping $217.1 mil in 2015, over 7 pts ahead of its volume trend and up more than double (+110%) for 3 yrs. Impressively, that makes Stone the 135th largest company overall (in terms of annual revenue) out of 5000 listed. New Glarus revs up 29% to $53.1 mil in 2015, over 15 pts ahead of 2015 volume trend and up 69% for last 3 yrs. Figueroa Mountain made list for second consecutive year with revs up 285% to $6.9 mil in last 3 yrs thru 2015. However that's up just 11.3% vs 2014. Oddly, that's even as Figueroa volume zoomed up an estimated 81% to 19K bbls in 2015, according to Brewers Assn. It was up 40+% to 15,110 bbls in home-state CA alone. Could be that switch from self-distribution model to distrib networks markedly slowed revs.

Meanwhile, fast growin' MN brewer Surly made it back on Inc 5000 list for the first time since 2011; it grew revs 271% to $29.8 mil in 3 yrs thru 2015 while growing volume about 3X to 62K bbls in same time, per BA stats. Remarkable Liquids, an indie distrib in upstate NY was actually the 36th fastest growing company on the entire list; up 6187% to $7.4 mil in 3 yrs, after opening in 2012. MA-based Downeast Cider House also high on the list at #63 fastest growing; up 4216% to $6 mil in 3 yrs. And interestingly, Rocky Mountain Barrel Co outta Wheat Ridge, CO, which sells used wine & spirits barrels primarily to craft brewers for barrel aging, made the list. It's up 1692% to $6.1 mil in 3 yrs thru 2015.  

Director/genl manager of Wisconsin-based Potosi Brewing, Dave Fritz, testified before pair of US Senators this week, relaying familiar views of current and potential laws' impact on small brewers. Hearing called "From Crop to Craft Beer: Federal Regulation's Impact on America's Food and Agriculture" held in Dubuque on Wednesday with Senators Joni Ernst of Iowa and Ron Johnson of Wisc, a member and chair, respectively, of Senate Homeland Security and Governmental Affairs Committee. Fritz's testimony touched on new FDA menu labeling rule, which "will be very costly to craft breweries," he noted. "If Potosi wants to continue providing beer to chain restaurants, we would need to spend an estimated $1,000 per style of beer," he argued. Yet Fritz also encouraged "transparency in labeling," suggesting that perhaps gov't should have "all brewers" call out "ownership of beer brands" on labels. He reviewed successful change to proposed FDA rules on spent grain and then plugged current Craft Beverage Modernization and Tax Reform Act. Measures in that bill, which lowers federal excise taxes for brewers, "would have saved us approximately $20,000 in 2015," Fritz said, and based on current production expectations the bill would save the co $40K this yr and $63K next yr. In summary, craft brewing in the US "has thrived because of a light regulatory touch, and we risk swamping that success if we hit the regulatory throttle too hard."  

One brewer pulled distribution to focus on taproom sales, another switched from production license to brewpub license to sell more beer on-site and count 2 separate lawsuits against Texas Alc Bev Commission. All due to current license structure in Texas. This week, Grapevine Craft Brewery, outside of Dallas-Fort Worth, decided to pull its beers out of distribution, choosing instead to sell all beer on site at its tasting room and beer garden, according to Fort Worth Culture Map. But that news got a bit twisted as it, well, went through the grapevine. Texas retailer Spec's incorrectly tweeted that the brewery was closing. Not so. "It just doesn't make financial sense for us to continue distributing our brands at a loss," owner Gary Humble wrote to clear up the confusion.

That happened about the same time that San Antonio-based Branchline Brewing announced that it switched from a production brewing license to a brewpub license, per SA Biz Journal. That's because brewpubs can distribute, thanks to a 2013 law change. But production brewers barred from selling beer for off-site consumption, since bill to change that failed during 2015 session, as prexy Jason Ard explained. Recall, that is the subject of another lawsuit against Texas Alc Bev Commission (separate from one that had hearing on Monday, see last issue), in which Grapevine joined as a plaintiff with Deep Ellum (see CBN vol 6, no 73 and 74, from last Sep). That suit alleges "arbitrary" and "unconstitutional" distinctions between different kinds of beer producers and different kinds of alc bev producers.  

Being a part of AB's High End biz unit may come with access to additional resources, but it also comes with need to combat backlash among the consumers, retailers and distribs who immediately feel slighted and turn their backs on acquired brands. To that end, AB brought founders/leaders of Breckenridge, 10 Barrel and Golden Road together for a tap takeover in Denver this week and pair of interview's in the city's Post and Biz Journal. Clear themes recurred across the conversations: the large parent company isn't forcing the small brewers to cut costs, instead investing heavily in innovation, quality control, safety and more. Indeed, besides lambasting by drinkers online (which hit 10 Barrel hardest, "we got hammered," founder Garrett Wales told the Post), each reported "immediate lost sales from wholesalers that dropped their breweries," the Post wrote. In fact, just 18% of Breckenridge's distributors were in AB network at time of sale, which caused "significant problems," according to Biz Journal story. That's now 70%. And 10 Barrel's brewpub sales dipped by double-digits during first 6 mos following its announcement, "before they began to recover."

"Nothing's being forced down our throats other than the mandates that we stay innovative," Breckenridge prexy Todd Usry told the Denver Biz Journal. For example, while "an expansion strategy is probably a year away" for Breck, per Post, it's already "starting to create sour beers," putting in a new facility focused on experimental beers and expanding its line of canned nitrogenated beers to include a pumpkin spice latte offering this fall, per DBJ, all thanks to new capabilities following AB ownership. Revs up 30% so far this yr at the co's relatively new brewery and restaurant in Littleton. "We've never innovated more than we do now," Todd told the paper.

Other changes since these 3 joined AB? "The raw materials sourcing is just a different world now," Todd said to Denver Post. The group will soon head to AB's Elk Mountain Farms in Northern Idaho for hop harvest. "From a quality perspective, your lab changes overnight," Meg Gill of Golden Road noted. And while innovative ideas for new beers may have existed before, co's like hers "lacked execution and the resources."

The trio also stressed differences between the resources provided by AB and cash infusions they could have gotten by doing deals with financial institutions. The topic came up "several times," for the Post, which relayed notion that "a bank or other investors" may be "unconcerned with keeping the people who made the beer good to begin with." So as they work to change perceptions of their companies, they're hoping to take these conversations to other cities with more tap takeovers as a sort of "founders road show," they told both papers. "It's a blessing and a curse to have people take such ownership in your industry, and in your company," Todd told the Post. That comment, of course, underlines the difficulty these craft leaders and others face: drinkers do feel "ownership" of these companies. So not so simple to break the news that they are not, in fact, owners, who do not need to be consulted about such decisions and certainly won't get a cut of purchase price.  

Duvel Moortgat USA appointed "longtime company veteran" Jeff Krum as "president of Duvel Moortgat USA, Boulevard Brewing Company and Brewery Ommegang," co announced earlier this week. Jeff initially joined Boulevard in 1994 "serving as chief financial officer for 20 years before transitioning to vice president of corporate affairs for the combined companies in 2014." He replaces Simon Thorpe, who "will continue in an advisory capacity through the end of August." Simon served as Duvel USA's prexy since 2009; previously worked for InBev USA (prior to ABI) as global M&A veep and headed Labatt USA before then. Indeed, Simon played key role in Duvel's M&A strategy in US to this point, helping build top-10 US craft brewer with Boulevard, Firestone Walker and Ommegang, plus Belgian imports.

As we noted in our INSIGHTS Express letter yesterday, Simon's departure follows in wake of top exec team abruptly leaving Ballast Point/Constellation. Simon not only brought M&A experience from his InBev role, but also a sharp focus on high end of the high end and margin implications of that niche. Indeed, among handful of lead voices in craftland, Simon among most articulate on wide range of topics. Back at our 2012 High End Conference, Simon spoke about importance of consumers' "luxury expectations," connecting high end craft beer to upscale coffee choices, smart phones and other products spreading beyond urban centers. At same mtg, he pointed out that gross profit earned by distribs on just 6 cases of Duvel required 25 cases of mainstream beer, and 16 cases of craft. Even then, highest end of craft was growing faster in scan data than big-volume craft brands, a trend consultant Bump Williams cited again in recent missives to clients.

Simon on Resets, Valuation, Winners & Losers Last yr, Simon among first to note that "pivotal resets" coming at retail that would "force a number of brewery brands out of the equation," referring to brands without "viable rates of sale." That's happening and will continue with next reset, we keep hearing. Earlier this year, Simon elaborated to CBN that retailers leaning toward "more regional sets" with more emphasis on local, natch, but he also saw increasing simplification down the road and need for "enduring" brands as well. "Winners and losers" are emerging, Simon said, and ain't that the truth as scan data now showing month by month.

Finally, Simon's M&A experience gave additional resonance to his blunt description, in wake of Lagunitas, Ballast Point and other craft deals, that "valuations are ridiculous" and "it's hard to see how they're ever worthwhile." That may have changed already, as MillerCoors prexy Gavin Hattersley told us recently that "valuations are coming down," noting each deal MC makes has to be a "win-win" since "paying too big a multiple makes it difficult to get a decent return."

Change comes as Duvel Moortgat US biz strugglin' a bit. After fast start, DMUSA trends slowed markedly to volume up 4% and $$ up 6% thru Apr (see May 9 issue). In more recent scans, DMUSA volume actually down 1% and $$ up 1% YTD thru Aug 7. Boulevard brand family sales down 2-3% in foodstores thru Jul 10. Tho keep in mind, several of Boulevard's new mkts this yr aren't scan states. But Firestone, counted separately, still flyin', $$ up 53%, volume up 62% thru Aug 7. If included in total DMUSA biz, co growin' strong double-digits and would be 10th largest IRI-defined craft vendor, ahead of Deschutes.  

Green Flash and Alpine combined biz up 24% thru first half of the yr, Green Flash founder and CEO Mike Hinkley told CBN. Recall, last yr Green Flash/Alpine grew similar rate to 82K bbls including about 10K bbls from acquired Alpine brands. So if co continues at this pace it'd pass 100K bbls this yr. However, co "really can't grow anymore right now" due to capacity constraints. At San Diego facility, 100K bbls/yr is "max capacity through the building," but because of "other bottlenecks" on "shipping and receiving" end, it's "probably running at 90K barrels a year," Mike explained. And Alpine's brewery is tiny, only capable of brewing 1500 bbls a year. So 100K bbls/yr Virginia Beach brewery, coming on line in November (see last issue), will certainly "take some of the load off" San Diego. Then Green Flash will begin working on "moving shipping and receiving and our cold room" etc. at San Diego facility to "another site" so it can run at full capacity.

VA Brewery will also give co ability to "stabilize our pricing." Admittedly, Green Flash pricing "got a little wonky" over the yrs, said Mike. So especially in certain east coast mkts, could see 10-15% drop in price once VA's operational - theoretically taking $12 6pk to $10.49, he used as an example. East coast is already 30% of Green Flash sales and is "fastest growing region" with depletions up 38% thru Jun. "Expect that to accelerate more" once co "able to pass on the freight savings." Already 4 of its top-6 mkts are in the east coast, including VA, PA, NY, and MA. Tho CA still #1 by good margin, natch.

Green Flash Evolution thru New 6pks, Brands & Cans tho Flagship Still Solid Too Since Green Flash launched 6pks and acquired Alpine, its biz has "changed drastically," Mike acknowledged. In 2014 it was likely the largest brewery without a 6pk, draught was still 55-60% of total biz and bottles were split about 50/50 between specialty 4pks and 22oz bottles. About 18 mos ago, co released new (at the time) Soul Style IPA in 6pks for first time, and it took off. So Green Flash launched flagship West Coast IPA 6pks last Jun, followed by new Tangerine Soul Style IPA and Passion Fruit Kicker (fruited American wheat ale) in 6pks this Jan. Then this May, Green Flash also launched cans for first time, tho still "totally early days" since Green Flash "doesn't even have canning equipment" yet. It's using a mobile canning service, starting with new Jibe Session IPA, Passion Fruit Kicker and Sea to Sea Zwickel Lager and just "canned our first Soul Style yesterday." Similar to Lagunitas' Tony Magee, Mike "never thought we'd do it," but as market becoming more and more accepting of cans, he recognized that "it's really cool to be part of those occasions." Altogether, "we're just getting started in the retail chain business."

West Coast IPA is still Green Flash's #1 brand and it's "still growing. Our flagship is strong," said Mike. But now 60% of all the beers it sells, (potentially 50K bbls this yr, he said) "are beers that we introduced in the last two years," whether thru new innovations or Alpine acquisition. Soul Style IPA is already Green Flash's #2 brand and impressively, Alpine Duet IPA is already #4 companywide. While Green Flash and Alpine have their "own identity" internally they "don't really look at it as separate."

On Premise "Tough" But Still Doing Well at Home and Where There are Reps On premise is "tough right now," natch, but San Diego "absolutely rocking for us," said Mike. San Diego draft biz getting big extra boost from Alpine's flagship Duet IPA - Duet draft is around half of all Alpine sales. And Green Flash is hometown distrib Crest's 5th largest draft brand in-house. In general, "markets where we have a rep and do all the right things, our draft is doing really well," but co doesn't have "enough representation," Mike admitted. So while Green Flash is available nationally, it's prioritizing top-20 states where it does 90% of its biz.

Biggest Concern is Consolidation, Being "Outgunned" by Larger Cos with More Resources If there's one thing Mike and co are concerned about, it's consolidation and resources, Mike thought, noting that it's currently "being outgunned a little bit" by cos that can hire more feet on the street and ultimately put more $$ behind their brands. However, Green Flash just hired 3 more reps now up to 31 total. Interestingly, instead of putting them in mkts without any reps, co decided to put 'em in existing mkts Dallas, Philly and NYC, to "dig down deep" and "keep fighting where we're strong," said Mike. Recall, Green Flash has now been natl brand for 1 and a half yrs and counting so it's still figuring how and where to best allocate limited resources.

"A Lot of Run Room" and "Demand Everywhere" for Alpine Since Alpine acquisition, Green Flash rolled out Alpine into each of its top-20 mkts and "numbers are all really good," said Mike. There's "demand for Alpine everywhere" but so far the brands doin' particularly well in "established [craft] beer markets" like CO for instance, that "knew about Alpine but didn't really have access to the beer." Right now "we just make as much as we can squeeze into the schedule," said Mike, and co expects to hit 12K bbls of Alpine this yr. The "only place" that it can keep Alpine 100% in stock is home-state CA where still 2/3 of its brews are sold. "We try to pay really close attention" to top-20 states with Alpine but still havin' "hard time" based on cap constraints. So "just gotta be smart about where we ship the beer." But there's "a lot of run room to start filling in the map" and "sending Alpine to more territories."

"Long Term Plan" for a Midwest Brewery Too; Go Natl by Being "Regional in A Lot of Places" Green Flash has "long term plan" to build a brewery in the Midwest, Mike confirmed with CBN. Even with Virginia Beach brewery, "eventually we're going to bump up against" capacity again. So Mike and co would "like to be in the Midwest" and "get regional pricing" there too. But after making "PR mistake" by talking about Virginia Beach brewery too far in advance, "I'm not going to make any announcements…until the right time," said Mike. Ultimately "our goal is to be national." And while "that's looking harder and harder," strategy is to be "regional in a lot of places." Gotta note, that seems to be a popular mindset among large and craft brewers alike. There are different versions, but Boston Beer's Alchemy & Science, Lagunitas, Oskar Blues, Atwater (to name a handful) as well as ABI and MC all taking similar regional approaches to establishing further natl craft roots.