After "digesting change" in Q2, Craft Brew Alliance expects improvements all around goin' forward, including +4.5-5.5% shipments gain in 2d half of 2016 that would put co right in line with current guidance of +1-2% gain for the year, execs shared on quarterly conference call held earlier today. Second qtr was "direct result of 2 years of deliberate actions" and "this is just the beginning," said CEO Andy Thomas. One analyst thought that was potentially even a "conservative estimate" for 2d half, but Andy reminded that co is "cycling a Q4 that was artificially higher" in anticipation of Portland facility shutdown, and reminded that contract volume "softer" than expected. So that "temper[ed]" analysis a bit, tho Andy eventually acknowledged "it sure as hell better be" setting CBA up for a stronger 2017 and beyond.

CBA also set up for "optimizing operations" and "driving further efficiencies" after going thru several operational shifts in first part of the yr, said COO Scott Mennen. "Disruptive change" in Q1 led to "digesting the change" in Q2. Now "Portland is more efficient," which "positively impact[s] the results for the balance of the year." Full facility expansion will be "complete" by Q4. Woodinville, WA facility already "almost exclusively" contract volume with Pabst now as Redhook shifts over to Portland facility and eventual "divestiture of that brewery down the road" will provide projected 200 bps lift to gross margin. Portsmouth "driving improvements on the can line." And Cincy distribution center will "optimize redesigned supply chain." Keep in mind, Kona's facility still expected to be complete by Q1 2018; Redhook brewpub pushed back a bit, now expected to open in Q1 2017.

Kona Plus Working, Tho the "Plus" an "Ongoing Work in Progress"; AMB and Cisco are 4% of Mix This qtr showed "continued positive progression" of Kona Plus strategy, said CMO Ken Kunze. In fact, Kona "is performing at the upper end of the range" CBA forecasted, "probably a shade better than I would have banked on at this point," Andy admitted. CBA's "always been confident" about Kona but now "starting to see more tangible results." Led by Big Wave Golden Ale, Kona having success across the board after goin' fully natl summer of last year, yet core mkt Calif still providing key growth. Kona's CA shipments up 13%, with Kona Longboard as #1 craft lager, Island Hopper as #1 variety pk and Kona #6 craft brand family in-state, lookin' at Nielsen, Ken shared. And international oppys abound with Kona brand too. Total CBA intl shipments grew 50% for the quarter led by Kona, tho it's still a tiny % of total mix. Recent addition of Brazil seems to just be the beginning.

Then too, "financial benefit of our emerging business strategy began to be realized for the first time" with Appalachian Mtn and Cisco collectively contributing over 4% of total mix for the qtr, shared Ken. Cisco quickly became CBA's leading brand in New England ahead of Redhook which "immediately makes us stronger." And after strong start to new partnership with Appalachian Mtn, CBA has lofty goal for Appalachian Mtn to become #1 local craft brand in NC.

Admittedly, rest of the portfolio is still an "ongoing work in progress," said Ken. Widmer Hefe is "positive" for the year in homestate OR, but overall Hefe is primary reason for Widmer decline, according to SEC filing, as CBA retracts more Widmer volume from out-of-state. Recall, Widmer brand family down in Portland, OR IRI foodstores YTD too (see last issue). And Redhook remains "most impacted by evolution of the portfolio strategy," said Ken. Longhammer IPA and ESB declines drove volume down most. Now both Widmer Hefe and Longhammer IPA in danger of falling out of top-30 craft brands in natl IRI data this yr, down to #29 and #30 by $$. Omission "held off" MC's Coors Peak gluten-free entry, which is now "withdrawing [from] the market," Ken shared. So CBA looks at this favorably for OR and WA along with "number of program initiatives in the back half of the year." Yet volume still declined 8% for qtr and -12% for 1st half, "primarily due to lower demand for the Pale Ale style," per filing. And both Resignation and Square Mile Cider brand families declined, tho were more than offset by AMB and Cisco gains.

All in, Kona gains alone this qtr more than made up for rest of CBA portfolio declines. Success of Kona, AMB and Cisco allows co to be "tactically" more aggressive in some areas vs others, particularly in Northeast right now. But overall "I don't think we're changing our strategy at all," said Andy. In tuff craft environment that's "not getting any easier out there" by any measure, Andy and co feel "validated by our actions and results." Now co is "embedding sustainability…for periods to come."  

Still very early stages for a new proposed rule in Alabama, but beer lovers in Alabama ain't too happy about prospect of the state regulators collecting their personal info if they buy beer from breweries for off-premise consumption. Recall, AL passed law to allow small breweries to sell limited amounts of beer directly to consumers earlier this year. Late last month, Alabama ABC released proposed rules to further clarify requirements of both regulators and industry members to pave way for those sales and other changes. That includes some expected items, like process for getting permits for opening off-site tasting rooms or what's considered a refillable container (or growler). But it also includes odd requirement that breweries selling beer directly must not only keep track of volumes sold for tax reporting, but also that "off-premise sales reporting shall include the purchaser's name, address, telephone number, date of birth and shall be subject to verification by the ABC Board." If that proposal actually put on the books, it could certainly act as a deterrent to on-site sales. But consumer advocacy group there, Free the Hops, is up in arms over privacy implications.

The "nonsensical" proposal "represents an unprecedented, unnecessary and overreaching invasion of privacy," the group's prexy Nick Hudson wrote in statement on Free the Hops' website yesterday. Indeed, we can't think of (or find) another state ABC collecting this level of consumer info. Nick encourages its members and others to participate in current public comment period, mandatory before ABC board votes on these proposed rules, as AL.com wrote today. Public has 'til meeting Sep 7 to comment. For its part, Alabama Brewers Guild will also participate in comment period for this and other just-released proposed rules, exec director Dan Roberts confirmed for CBN. So note that this item may get nowhere. But it does highlight complexity of this particular moment in alc bev regulation. The growth of small beer, wine and spirits suppliers not only complicates industry relationships and operations. It also forces regulators into totally new territory at times, like when tasked with enforcing provisions that bar brewers from selling more than 1 case of beer to an individual per day. But note too that this is the same point in legislative and rule-making process when brewers in nearby Georgia were caught off guard by additional restrictions on tour sales and "souvenir" beer last year. In that case, critics immediately pointed to influence of distributor advocates on regulators, which so far doesn't seem to be happening here. Also unlike that situation, AL industry members and consumers will get to comment before anything is finalized. This proposal also reminds that a governor's signature is not always the end of the road.  

After huge increase in ad spend behind Shock Top in 1st half of this yr, AB could be looking for a new agency to work on the brand's marketing, Ad Age reports today. It's not official review, Shock Top veep Jake Kirsch told the paper. It's "simply having a few conversations with leading creative agencies." Recall, Shock Top's first-ever Super Bowl ad aired earlier this yr, a product of Anomaly agency. AB spent $21.6 mil on the brand's measured media support during just 1st half of yr, up from $2.5 mil for all of last yr, Ad Age wrote citing Kantar Media data. Yet that spend so far not resulting in big uptick in Shock Top sales, at least as far as off-premise sales concerned. In fact, just the opposite: total Shock Top brand family volume down 12.5% in Nielsen all-outlet + convenience data yr-to-date thru July 23, -20.8% for 4 wks. Lead brand Belgian White still soft, but volume off only 4% YTD in IRI MULC thru July 10.  

Ballast Point founder Jack White (same last name but no relation to Jeff) also left co he bought, built and sold for a billion late last week. In personal note to employees, he said: "It seems like yesterday that I opened Home Brew Mart with a hair brained idea that I would one day start a brewery. I had no idea how things would go or if it would even get off the ground . . . We have come a long way! In no way can I take credit for our success because I have been so lucky to meet and work with incredibly talented and fun people. Now it's time to proudly pass the baton and move on to another adventure." He added: "I am absolutely confident in your ability to take Ballast Point to even greater heights and will watch with pride as all of you keep killing it." Maybe so, but Jack's departure makes 4 of Ballast Point's key execs, including CEO Jim Buechler, chief commercial officer Earl Kight and chief operating officer/head brewmaster Yuseff Cherney that left last week. That's gotta be a huge shift in the culture; quicker and more of an overhaul than Constellation must have originally envisioned.  

Sierra Nevada named Jeff White its first chief operating officer today. Jeff joined Sierra in 2013 as systems integration director. Prior to that, he spent a stint at Tenth & Blake and before that 17 years at Boston Beer, including as chief operating officer. Beyond doubt, Jeff is the only exec ever to hold such a title at each of the top 2 craft brewers. (MC would argue Jeff has held key positions in each of top 3 craft brewers.)

Jeff called his new role at Sierra Nevada "an honor, a privilege and a dream come true," noting he "admired the company for a long time. Since joining, the people, products and culture have exceeded my already lofty expectations." Founder Ken Grossman pointed to Jeff's work on "organizational design and development….. With Jeff at the helm, we'll be able to make great strides forward." Coming off its biggest growth and best year ever in 2015, Sierra is facing a far more challenging year so far in 2016. So as this pioneering craft brewer looks to get to the next level, both in terms of organizational design as well as sales, how it evolves is sure to be a subject of keen interest within the craft community and beyond.  

>Following New Belgium's 26th annual company retreat with all 760 employees, co-founder Kim Jordan "reaffirmed" that NBB "will continue to operate as a fully independent, 100% employee-owned craft brewery and B Corporation," co announced today. "While the Board of Directors and ESOP trustee have a fiscal responsibility to keep an eye on capital markets," Kim stated, "we have found that our current capital structure serves our purpose and vision best. We are 100% employee-owned and we have all the possibility and potential that all of that really affords: to dream, to imagine and then to go out and 'do' in true New Belgium fashion."

This is significant, assertive language that essentially puts to bed prior deal talk floating about the industry since late last yr. NBB on the block, Reuters reported late last yr, citing unnamed sources. Kim responded then that "there is no deal pending at this time," but acknowledged "New Belgium Brewing's board of directors has an obligation to have ongoing dialogue with capital markets with the goal of making sure we remain strong leaders in the craft brewing industry." With talk still swirling even a couple month ago, CEO Christine Perich told CBN: "I don't really have anything new to say," but "we want to make sure we're well capitalized to compete" and process "not a lot different than what we've done in the past" (see Jun 16 issue). There was a deal book on NBB, multiple sources say, where co was lookin' for about $1 bil valuation from potential suitors. However close it came, with Kim's statement today, that seems to have ended. NBB moving on.

Meanwhile, NBB also touted both new Citradelic IPA as #1 new craft launch in IRI, as well as flagship Fat Tire "having just secured the status of #2 best-selling true craft flagship in the country," per release. So Fat Tire now larger brand than strugglin' Sam Adams Boston Lager, only behind Sierra Nevada Pale Ale, according to NBB. Indeed, in scans Fat Tire $$ sales and volume also just jumped ahead of Boston Lager in IRI multi-outlet + convenience data after big sales boost from new mkts had brand up low-double-digits for latest 4 wks and up mid-to-high singles for 12 wks thru Jul 10 (see Jul 21 issue). That put Fat Tire at #3 BA-defined craft flagship YTD in IRI, still well behind Sierra Nevada Pale Ale ($$ down 3% YTD) and just a bit behind Shiner Bock ($$ up 5% YTD). But for 4 wks Fat Tire $$ and volume ahead of Shiner Bock.  

After takin' big hit in Q1, when it temporarily closed Portland, Oreg brewery, Craft Brew Alliance made up most of lost ground in Q2. But volume trends still all over the map. Shipments of owned brands and "partnership beers" +4.7% in 2d quarter. Kona shipments up 24%, a full 6 pts ahead of depletions. Both Widmer Bros and Redhook families down double digits again, -16% and -22% respectively. So for qtr, Kona about 3X size of each of those brands. Omission volume dipped by 8% too. But addition of contracts with Appalachian Mountain Brewery and Cisco Brewers provided nice volume boost. CBA depletions +3% for qtr, up to flat for 6 mos. Shipments still down 1.4% thru first half. CBA still expects 1-2% shipments gain in 2016.

CBA also made progress financially during Q2. Net sales +6%, $3.7 mil for the qtr and +1.3% for 6 mos. That's in part due to fees from those partnership brands, CBA reports. Tho selling, gen and admin expenses still up 2% in Q2 compared to last yr, that spending down as a percent of net sales. CBA expanded gross margin from 31.9% to 32.9% during 2d qtr, boosting gross profits almost 10%. But again, 1st qtr results counter that affect YTD: gross margin at 28.8% for 6 mos, down a full point. So tho net income up big for the qtr, CBA still at slight loss YTD.  

Valuations for distrib and craft brewer deals are at or near historic highs, several speakers at our Spring Conference showed, with continued low interest rates as clearly one big factor, especially in distrib deals. Over period of yrs, distrib deal multiples expanded from about 6x EBITDA (earnings before interest, taxes, depreciation and amortization) to now paying 10x "is the new norm," according to Paragon Bev Advisors managing director Mark Hall. "Today," added Mark, sometimes multiples are "north of 10x." For craft brewer transactions, valuations are far higher with an even greater expansion in multiples. They jumped from a range of 6-12x EBITDA in 2007-2013 to 12-25x today, said First Bev founder Bill Anderson. Ballast Point at a reported 28-30x is an "outlier that will remain so," said Bill. But even with craft's recent slowdown, there is such a big pipeline of potential buyers, that Bill didn't expect a pullback in these multiples of 20-25x anytime soon. Multiples may eventually "trend down" if AB takes a "pause."

Distrib valuation multiples based on gross profits nearly doubled since 2003, consultant Joe Thompson showed based on the many transactions he's done. Today avg distrib transaction trades for 3.85x gross profit, whereas back then it was 2.14x. By supplier: avg AB trades for 3.6x, MC 3.4x, while Constellation at 6.3x and Heineken at 5x in his database. "Valuations will remain at current levels as long as," Joe highlighted, "EBITDAs remain high, interest rates stay low, buyers are willing to share savings with wholesalers" etc.

Distribs Are More Profitable Another big factor in increased multiples: distribs are more profitable, in part because of above-inflation price increases for several years as distribs (and brewers) reduced costs. Beer distrib EBITDA increased 3% per yr over last 5 yrs, according to Mark, 4% per case, given volume decline. "Can this be sustained?" Distrib GP margins dipped to 22% in 2005 (during last price war), but since climbed up to 27.2, noted Joe Thompson. And the avg GP per case climbed almost 50% in 10 yrs from $3.55 to over $5 ($5.19). During this period operating expenses as a % of sales went down from over 22 to under 19, Joe showed. That combo of rising prices, lower costs led to big jump in distrib oper profits per case. Distrib oper profits per case in 2015 averaged $1.57 in Joe's database, up from 60 cents $10 yrs ago.

"It's Time to Put Back Into the System," Sez Joe Thompson "It's time to feed the Goose that's been laying the Golden Eggs," concluded Joe. He called on distribs and brewers to "make the system do what it's designed to do" i.e. creating "long-term wealth" instead of "taking short-term money off the table." He had several specific asks to make system better. Distribs "need to invest more in marketing and invest more in in people." Brewers "need to start interacting instead of interfering with distributors," said Joe. Brewers "develop brand equity--if you have a pull problem, expanding territory or rushed innovation only makes the problem worse." Distribs "should understand that brewers now have other options" and "learn to say no to bad ideas." Brewers need to "work within" 3-tier to develop a more effective brand building model." The 3-tier system is the "best system ever" but "we've got to do a better job of working in sync and getting it going."  

US Appeals Ct decision earlier this yr could open door wide for "pay-to-pay" in Calif and across US, distrib assns and others now argue. Recall, US Appeals Ct for 9th circuit reversed and remanded a US Dist Ct decision that got lotsa attention. Appeals Ct questioned legitimacy of Calif law that barred suppliers/distribs from paying 3d parties to install video ads in retail stores. US Dist Ct had agreed with state that the scheme violated Calif law barring "things of value." But Appeals Ct viewed issue thru free speech lens. Along the way Ct questioned state's claims that law prevents vertical integration and promotes temperance. At time, alc bev atty Marc Sorini pointed out that Appeals Ct "opened the door to part of California's tied-house scheme potentially being declared unconstitutional." Now, state seeks rehearing from Appeals Ct or rehearing from full panel of judges there. Its attys provided new analysis that suggests Appeals Ct erred in its commercial speech analysis based on Supreme Ct precedent. Meanwhile, in their comments to the ct, NBWA, WSWA, Calif distribs and Calif craft brewers raised concerns that resonate with heightened attention to trade practice issues prevalent this yr.

Appeals Ct's "sweeping decision" has "far-reaching national implications," NBWA argues. Its brief stresses importance of keeping each tier independent and how tied house laws like Calif's do that. If current Appeals Ct decision stands, NBWA argues, it "calls into serious question all federal and state tied-house laws that prohibit the provision of 'value' in the context of advertising or promotion." By claiming actions are simply ads or mktg, "an industry member could de facto create a tied house by purchasing expensive full-page newspaper ads, radio ads or television ads featuring any retailer or retail chain," NBWA frets. Same goes for paying "slotting fees" to place POS in certain favorable locations, buying end caps or "paying cash to a bar to install a brand-identified tap handle. All of these practices are the equivalent of 'pay to play' arrangements or slotting fees, which have always been prohibited in this heavily regulated socially sensitive industry." Recall that in Mass investigation, 3d party co's allegedly invoiced distrib for "marketing fees" that actually paid for tap handles.

Payin' for Ads is "Pay-to-Play," Assns Say Calif beer and wine/spirits distrib assns also question Appeals Ct's free speech analysis. They argue law doesn't address content, but aims to "prevent payment" for ads and is "supported by valid purposes to prevent manufacturers from disguising illegal payments, influencing retailers or compromising their independence." Assns also cite NY, Chi and Mass investigations to argue that if Calif law invalidated, it will "exacerbate illegal pay to play," producers/distribs will be able to "disguise" payments for "preferential treatment" and "freeze out competitors." Finally, Calif Craft Brewers Assn supports same points and argues that if retailers can be "compensated" for ads, "the competitive market will be tipped in favor of those larger and more dominant players," which is "exactly" what tied house/trade practice laws aim to prevent.

There's more. As Mass and Calif trade practice issues play out, Wash state just tagged AB with a $150K fine/suspension for alleged exclusive arrangement its Seattle branch had with 2 concert venues. AB is challenging. Then too, Kroger backed off the planogram plan it intended to adopt earlier this yr. Plan to have industry members fund a 3d party to manage its store sets dropped after TTB "clarified" that such actions (tho not specifically the Kroger plan) would be considered illegal inducements. Looming in the background, of course, are the Dept of Justice's review of both ABI-SAB and AB's actions in Calif, and potential anti-competitive implications, including charges of the kinds of undue influence concerns that form the basis of these trade practice issues. Interesting times, indeed.