2016 will be first year of a new era for craft beer with a vastly different and even more challenging competitive landscape, especially for established craft brewers. Consider all that's happened, even in last few mos. First: players have changed. Big guys seriously invaded craft's space through acquisition. Top 4 US beer players, AB, MC, STZ and Heineken, ramped up positions with significant craft acquisitions. Indeed, top 4 US brewers/importers will likely sell well over 2.5 mil bbls of acquired craft in 2016. AB alone bought 5 craft brewers in 14 mos and will expand them to many new territories. The 7 it bought since 2011 will easily sell over 1 mil bbls of beer in 2016. Heineken bought 50% of Lagunitas, which also plans to sell 1+ mil bbls in 2016. Constellation plans to sell 500K+ bbls of Ballast Point. MC bought vast majority of smaller Saint Archer (35 K bbls); it has expansion plans too. That's before any additional deals. And all 4 still shopping. The big 4's craft volume, ambitious growth objectives and incremental resources will all place competitive pressure on established craft brewers.

Second, it's a chaotic, deal-rich environment. Many brewers looking over their shoulders, wondering who's next and also if now is best time to do a deal. Such high valuations won't last forever. INSIGHTS tracked about 25 craft transactions last yr, for part or all of craft brewers. Lots more in works. In 2015, 4 of top 5 fastest growers did deals: Lagunitas, Firestone Walker, Ballast Point and Founders. Those 4 totaled near 1.6 mil bbls in 2015. Gained near 1.4 mil bbls in last 5 yrs, major engines of segment growth.

So big guys are coming in, and hottest guys are cashing out, but there's another growing competitive pressure on established craft brewers. Local is KING. There are an all-time record number of brewers. BA counted 4144 at end of Nov, with 1800 more in planning. Many are small local players with very narrowly targeted geographies. And they give fits to more established regional and natl craft brewers. You can see it in numbers for 2015. In fact, 3 of top 4 BA-defined craft brewers will likely be down a bit in 2015: Yuengling, Boston Beer (Sam Adams), New Belgium (for 1st time ever). Those 3 are about 1/4 of BA-defined segment. Craft Brew Alliance also expected flat sales-to-retailers in 2015. Many other craft brewers experienced slowdowns late in yr.

For full yr 2015, segment growth still close to mid-teens. That's exceptional. Recall, BA estimated 16% growth in 1st half. Craft up 14.4% in IRI MULC for full yr, not including root beers. But segment slowed late in yr anecdotally and in data. Craft up "just" 11% for last 13 weeks in IRI MULC, without root beers, and less than 10% (9) in most developed channel foodstores. That's still strong and could be law of large numbers (difficult to grow as fast on bigger base). And a late-year slowdown off-premise isn't new considering relative heft of segment in Q4. But in conjunction with other data and numerous reports, this slowdown may be more meaningful. What's more, craft lost share in GuestMetrics data in Nov in tuff on-premise channel. GuestMetrics doesn't capture vibrant growth of tasting rooms and craft-centric accounts. But share loss in GM's universe, where volume down 5%, suggests a ceiling. Craft at 35 share of $$ in GuestMetrics.

Add it all up and it's an unsettled picture amidst a still powerful consumer trend towards craft beers and away from mainstream beers. Craft has grown double digits for 6 yrs in a row. Will it make 7? And who will the winners be? Now that big guys into craft in a big way, will that make it even harder for them to right ship on mainstream beers? Will their increased focus accelerate shift to craft styles, however segment is defined? Ultimately, the consumer decides, but these are all pressing questions in early 2016.  

Talk about betting and dreaming big: between Nava brewery purchase and expansions, plus just-announced Mexicali brewery and Ballast Point buy, Constellation committed to spend $5.5 bil to get bigger in beer biz and play strong in craft. And yet Constellation will stay within its target 4x net debt to EBITDA range and "remain opportunistic around M&A," said cfo David Klein. And it's growing profits by leaps and bounds. Building breweries will be done in stages: 1st phase of $2 bil Mexicali brewery coming on stream by end of 2019 (4.25 mil bbls). But by time STZ finishes building out Nava (over 23 mil bbls capacity) and Mexicali (17 mil bbls if fully built out), could produce as much as 40 mil bbls.

Constellation's new brewery will be near Calif border, where it does 25% of its biz and grew again at double digit clip in 2015. Constellation sold about 4 mil bbls in Calif in 2015. It gained 1.5 share or so there to about 17. Ballast Point adds another 0.7 share or so. So Constellation already over its longterm national Gold Network goal of 20 share of $$ in Calif. Now it talks to distribs there about 30 share of $$. Modelo Especial closing in on Bud Light for #1 brand last 13 weeks in LA metro IRI MULC, where it's still flying, up more than 30%, even after latest price hike.

In Mexicali, Constellation set out plans to build brewery with capacity of 8.5 mil bbls, but with "scalability" to double that. Constellation also planning to add another 2.1 mil bbls capacity to Nava to be ready by end of 2018. Company already in process of building Nava out to 17 mil bbls capacity by Jun of this yr and to over 21 mil bbls by summer next yr. Constellation "remains on track with all expansion activity," it said. Co has "no concerns about our ability to continue to supply US for foreseeable future," said Rob. But with biz growing faster than expected, it will need to work with AB for longer than initially planned. So they will "extend the Interim Supply Agreement currently in place in order to support the robust growth levels…and continue a smooth transition as incremental capacity ramps up." Agreement will now continue thru Jun 2017; ABI will "supply a select number of products" anticipated to be 15-20% of Constellation's US biz.  

Following a whopping 16.5% sales-to-retailer jump in qtr thru Nov, Constellation Brands Beer Division (CBBD) well ahead of schedule in efforts to double its biz in a decade. Recall, doubling implied a CAGR of 6.9% starting from 2013. Yet Constellation now sez it expects shipments to grow 10-12% in fiscal yr ending Feb (up 10% for 9 mos, while STRs up 12%). It grew double-digits 2 yrs in a row. So STZ got 3 yrs of expected growth in 2. And it accelerated at the tail end of '15. Part of Q4 liftoff was weather. "Clearly a warmer fourth quarter was beneficial for our beer business," said ceo Rob Sands on conference call. Yet results "driven primarily by the accelerating momentum of Corona Extra and Modelo Especial," added Rob. "Nearly every brand in the portfolio experienced double digit depletion gains." Especial accelerated to over 20% growth in qtr and Corona also "accelerating." Got "nearly 25%" of its growth from cans. Even Constellation's on-premise biz grew at a mid-to-high single digit rate.

Constellation financials also humming, natch. In qtr, beer revs up $63 mil, 8% to $831 mil. Oper income jumped $50 mil, 20% to $291.6 mil. In 12 mos thru Nov, CBBD revs at $3.478 bil, up $352 mil, 11.3%. Oper income jumped $200 mil, 20% to $1.2 bil. Rev per bbl up just 1% for 12 mos (1.5% in latest qtr). Mix shifting to faster growing but lower-priced Modelo Especial. But oper income per bbl up 9% to $76.13, $5.52 per case. Yep, Constellation makes $5.50/case oper income on beer. That's much higher even than ABI. Constellation's operating margin at 34.5% for last 12 mos, up from 32 the 12 mos prior. But Constellation cautions that beer margin won't expand much next yr as it will incur many expenses building breweries (see below). Constellation expects 22-24% growth in beer oper income in fiscal yr ending Feb. Or about $1.25 bil. That will put it in striking distance of MillerCoors oper income, which was $1.35 bil in 2014 and down slightly for 9 mos 2015. Think about it. MC 3.5x bigger in volume and over 2x as big in revs. Yet next yr, STZ likely to make more in oper income.

With such strong volume and profit growth, no wonder that stock remains investor fave. STZ stock jumped another 4.5% to $150 or so following these results. And that's in overall mkt that is down 2%. STZ stock one of more amazing stories INSIGHTS covers. It was basically level at $20 for over a yr prior to ABI purchase of Modelo. Since then it has grown to be 7.5x as big, including 45% growth last yr. Stock mkt capitalization is over $28 bil. Value of ceo Robert Sands stock alone appreciated by over $600 mil in 2015, according to USA Today analysis that found he was one of only 8 ceos whose stock appreciated by more than $500 mil (Amazon's Jeff Bezos led the charge at $32 bil).  

Nuthin' official yet; figures below are our preliminary estimates. But even with inevitable revisions, key points won't change: 1) AB and MC each off in 2-3% range in 2015, as they have been almost every year since 2008; 2) collectively, AB and MC lost another 3.5 mil bbls or so and dipped below 70 share; 3) Constellation up 10%+ for 2d-straight yr and gained 0.7-0.8 share; 4) despite slowing among some big players, craft up double-digits for 6^th-straight yr, blowing past 20 mil bbls and 10 share. No other top-10 player moved share needle by more than 0.1 as some up, some down.

Current reported data indicates US industry down very slightly in 2015. But Dec taxpaid and import figures not yet reported and we anticipate TTB will revise 2015 shipments upwards as 2016 rolls on, like it has in recent yrs. That's why table below shows US biz basically flat for the yr. Looks like taxpaid dropoff will be offset by import growth plus (slowed) cider gain. No matter how you cut it, domestic taxpaid shipments final will be lowest in 30 yrs, despite craft explosion. But imports at about 4X the 1985 total. And cider added about 2 mil bbls to biz since then. Note too: exports up big in 2015, so total shipments number a little better than US-only trend.

Estimated AB decline a bit steeper than 2014. Gotta go all the way back to 1998 for last time AB shipped under 95 mil bbls, even earlier to last time it was below 44 share. And AB in 2015 about 13 mil bbls below peak volume. MC shipments off nearly 3% again in 2015, we figure. MC's peak volume, in 2008, was 64.5 mil bbls. So MC lost over 10 mil bbls since then. That yr, AB and MC had just over 78 share of total shipments. In 2015, top 2's combined share fell below 70; preliminary estimates suggest they were below 69 share. Constellation neared 16-mil-bbl mark in 2015, up almost 11% even in flat industry. With Ballast Point, Constellation well over 16 mil bbls and close to 8 share of US biz. Since Constellation got Modelo portfolio for all of US in 2007 (and had a coupla down yrs after that), it picked up over 4 mil bbls. Expanded volume by over 1/3 and gained 2 full share. Heineken USA eked out small gain in 2015, we estimate. Pabst got big boost from root beer and posted its best yr since 2012, up estimated 200K bbls, near 4%.

Boston estimate of +5.1% in middle of its guidance from Nov, but lotsa moving pieces there in Q4. Yuengling down slightly, about 3%, we estimate, for 2d time in 3 yrs. Shipped about same 2.8 mil bbls as 2012. NAB off modestly for 3d straight yr, tho trend improved in 2d half. Diageo Guinness had similar experience, but better back half put DGUSA into the black, its first gain since 2010. Mike's Hard posted solid gain even with step-up in FMB competition. Trends very mixed within craft in 2015, but looks like segment still up about 2.5 mil bbls. Among top 15 or so, Sierra, Lagunitas, Ballast Point and Founders put up big bbls and/or % gains. But others struggled to gain at all, especially Boston's beer biz, New Belgium and Craft Brew Alliance, 3 of top 5. Others in group slowed to mid-single-digit or low-singles. Long tail added lotsa bbls.     

 

Craft Brew Alliance announced "it has secured a $50 million credit facility from Bank of America Merrill Lynch," co announced. Beer from Stone's Berlin brewery hits mkt on Monday, reported St Cloud Times. But it comes from Stone's pilot brewhouse and main Berlin brewery won't open, including restaurant and packaging hall, until next Mar. Bell's will head to 3 more Southern states early next yr: Mississippi, Louisiana and Arkansas.

 Two fast growin' OH brewers just announced plans to further expand capacity. MadTree Brewing has located "preferred location" for a 2d brewing facility in Cincy "about a mile and a half away from the brewery's current home," founder Kenny McNutt told Cincinnati.com. It's currently operating at 25K bbl/yr capacity, so "the sooner the better" for 2d facility, said Kenny. Recall, MadTree sold 11K bbls in 2014 and expected to nearly double production this yr (see Apr 23 issue). But it appears co exceeded expectations and is brushing up against capacity sooner than expected. It certainly exceeded those growth expectations in scans; $$ up 170% in IRI multi-outlet + convenience data thru Oct 25, with 5 brands up triple-digits. Last yr MadTree purchased nearby 17K sq-ft space that it was using for storage, tho still hadn't decided exactly what it would use space for longer term. So that could help tide 'em over a bit in meantime. Stay tuned.

Then too, OH's Jackie O's Pub & Brewery is "adding a fermentation hall that has space for 12, 120-barrel fermenters," prexy and ceo Art Oestrike shared with The Athens News. "Adding just three fermenters will increase our production by 50 percent." And it'll employ about 100 once it makes additional hires. Recall Jackie O's has been revamping "both Jackie O's Public House and Brew Pub," after they were damaged in Union St fire last yr. Still, Jackie O's more than doubling $$ sales in scans this yr, up 146% in IRI MULC thru Oct 25. Its brews are available at 2731 "retail beverage outlets" across the state, as well as "a few beverage stores in Kentucky," noted paper. Last yr it grew estimated 105% to 6500 bbls, according to Brewers Assn.

New Holland volume up 15% and revs up 25%, said sales veep Adam Lambert (formerly at Dogfish Head) during Brewbound Session. And he's just fine with "growing in a controlled, methodical fashion," rather than going for "massive, huge" growth. "It's a good way of doing business," said Adam. (That same principle espoused by his old co Dogfish Head in recent yrs too.) He comes to distribs with a simple biz plan with "obtainable goals" that are "easy to execute" and only involve 2-3 SKUs. For New Holland that would be its lead brand Dragon Milk Stout, which sells for $15.99 a 4-pack. "The days of jamming" distribs with 100 SKUs, said Adam, "are over." Now he looks to "deliver a bunch of small victories" for distribs.  

Amid the fracas and continued shifts underfoot, Odell just keeps rolling along. It's on target to ship 111-112K bbls this year, growing in low double-digits once again, co-founder Wynne Odell shared during Brewbound Session yesterday. From the co's outset, its "goal was eight to ten" percent growth per year, but has averaged +12-13%, Wynne said, a "very sustainable pace for us." Recall, its growth in 2014 was significantly faster due to launch of big Texas market. Still, "we have our hands full now, filling out Texas," Wynne said, adding that the co will add distribution in Iowa next year.

Back at the Fort Collins brewery, moving distribution storage to a warehouse off site cleared space for its new canning line. It also recently replaced its kegging system, after previously bringing in much bigger brewhouse that could take Odell up to 400K bbls (note that at consistent 12% growth, it would take the co another 10 years to get to that level). "So we don't have huge capital requirements in the next few years," she said. It'll look into a new bottling line, but that's not likely until 2019, at the earliest. Finding capital to expand brewing capabilities hasn't been a major hindrance for Odell over the years either, Wynne said. Instead, what "constrained us more" was "wanting to make sure the relationships we had for distribution were strong." That is, not going "far and wide" quickly to only discover later that appointed wholesalers aren't the right long-term partners. Instead, Odell's relatively slow, concentric expansion of distribution has kept it from experiencing that.

Yet Odell has dealt with a little shake up of its distribution in home state Colorado, when ABI acquired two of its distributors earlier in the year. It "ended up being a very positive thing for us," she said, recounting the moves (see CBN from Nov 4). Yet, "in terms of what it means for the future," expansion of ABI's wholly-owned distribs is "scary," Wynne said. "All the houses that exist are pretty darn full," she noted. "I recognize there are lots of distributors out there. But ones that you feel you can be effective partners with? Not so much." Odell is "very dependent on our AB independent" distribs, so it's "heartbreaking to think that may be taken away from us through no action of our own."

Odell's Slow Growth, Mission-Driven Culture Fits New "Evergreen" Co Model Following transaction Odell completed this year, selling majority stake to trio of long-time leaders and additional stake into ESOP, Wynne said that she heard about the "concept of an Evergreen company" for the first time. And her company fits quite well, she thinks. That term coined by founders of new Tugboat Institute in Sept, a group aiming to unite entrepreneurs and CEOs who are determined "to build a notable private company that will last decades, if not generations," the group's founders wrote. Their thinking behind self-sustaining independent companies should ring familiar for many in craft space. This "emerging model" replaces previous biz trajectories toward planned exits, Dave Whorton and Chris Alden (both from worlds of venture capital and tech biz) wrote. "The once-coveted IPO," they say, "isn't what it used to be." Even CEOs who took venture capital early on are now "wary of any path that compels them to a pre-determined exit or a growth-at-all-costs approach." These CEOs, which epitomize Evergreen founders, "avoid anything that could put the viability and longevity of their business at risk and undermine its purpose." During the last decade of investing in entrepreneurs (Whorton) and writing about tech companies (Alden), "we have seen an increasing number of experienced entrepreneurs pursue this alternative path," those "who have no desire to sell or go public" and "have increasingly avoided capital altogether."

As Wynne summarized yesterday, 7 characteristics define these companies: Purpose, Perseverance, People First, Profit, Private, Paced Growth and Pragmatic Innovation. Earlier in her presentation, Wynne highlighted 3 early decisions that she and her fellow co-founders Doug and Corkie Odell made that still define the co and its decision making (including partial ESOP deal). And the overlap with these 7 characteristics is striking. Early on, the trio knew the co's mission was to offer the highest quality beer while remaining committed to "managed growth" and "tight ownership structure." Wynne specifically noted how long-term growth "requires pragmatism," or to "work within the constraints of the resources available to you," she said. And an empowered employee-base, established by the co-founders' early focus on people, is a "golden resource that buoys" Odell still, she said.  

 It's been a busy year at AB InBev's High End unit, as it brought new craft brands into the fold and expanded its team to support those brands and others. "My biggest work in the last year," High End CEO Felipe Szpigel told Brewbound Session audience yesterday, has been to "find the right people." Though he wouldn't share exactly how many folks work in his unit currently, he asserted that it's "smaller than" either Boston Beer or Tenth & Blake. And "99.9% of my time and my team's time is on organic growth," he claims, rather than bringing on new brands. The co has "evolved a lot" this year, Felipe said, noting that work with its acquired craft brands is "less integration, much more empowerment." But he noted later that, particularly in craft, "sometimes you kind of confuse the brewery or the brand with the leader. And that's something that doesn't resonate with the culture of our company." At ABI, employees know they work on "something that's bigger than themselves," he said, "that's timeless." Indeed, to keep Goose Island strong for another 100 years, "we've got to select people who are better than us," Felipe said. Speaking of Goose, he again acknowledged that after a strong 2012, the brand "suffered in 2013" when "we had the distribution. We didn't have the rate of sale." But "we're in a moment where we're having a super healthy balance," and Goose IPA growth currently about an "even split."

As it's somewhere around the "fifteenth largest beer market in the world," all the acquisitive activity in the state is no surprise to Calif Craft Brewers Assn exec director Tom McCormick. "California Craft Beer has a good reputation across the country," so of course large brewers like ABI, MC, Constellation and Heineken want to take part in that, he said during panel of Calif industry members at Brewbound Session in San Diego yesterday. It's been a great year for in-state brands, as we've noted multiple times in CBN. To that end, "all of our California brands are all up," said Steve Almaraz, craft category development director for Reyes Beverage Group. "The local brands have a great chance to tell their story," he said, as "they're making great product" and "have amazing taprooms." Yet at BevMo! retail chain, "the big brands for us are the big brands," consistently, according to Amy Gutierrez, beer category mgr. At same time, "our focus is local," she said, as BevMo! offers some autonomy to individual areas and stores. Still, the continued increase in Calif-based breweries will likely make work "much more complicated and detailed to survive and thrive, going forward," Tom said.

Another complication for small brewers comes from consolidation on the wholesaler tier, Tom noted. Following acquisition of a pair of Bay Area distribs by ABI, Tom thinks "the biggest impact is going to be on the larger craft brands," he said, "that need the horsepower" of larger distrib houses. "Hopefully we'll see the marketplace correct itself by bringing in some more options," he said. But it's "really hard to start a beer distributorship," as he knows first hand. Steve too thinks that "as consolidation happens, opportunities arise" for new distribs to open. Low gas prices help and sticking to a small territory makes it easier, he said. But he also acknowledged that "we haven't picked up a whole lot of brands this year." So with limited options and full books, he expects that "there's going to be some difficulty getting your beers to market out there." Especially since dealing with "smaller distributors" is "a little more difficult" for BevMo!, Amy said. She recently cut off deliveries from a very small distrib that just wasn't delivering enough beer to make the drop fee worth it. BevMo! already gets deliveries from over 200 distribs in 3 states. Adding another is "more work for us," however the co is "willing to help them," as they believe in offering small, local options.

Of course, many small breweries are "still figuring it out," or what it takes to work with larger chain buyers. In her view though, "the distributors need to kick it up" when selling craft. "They can't just be order takers," she said, as retailers need some "old-school selling, telling a story" to help them sell brands. It's "really important for that story to get down" and be relayed all the way to sales folks in stores. That's up to both brewers and distribs, she said, inviting the audience to remember "it's the excitement. It's the fun," as "that's what the whole industry is about." And Steve agrees, insisting that salespeople "have to be beer people, have to be passionate." Outfitting Reyes with educated sales people is "something that we took really seriously," he said, before noting that finding experienced people in the current talent pool is very hard. It's easier to find an excited candidate and then "you can build that person to greatness." Saint Archer co-founder Jeff Hansson has also seen the difficulty of finding and particularly keeping skilled sales folks. And their work's getting harder with more of them hitting the streets: "now our sales reps are six deep at craft beer bars," he said. They're sometimes turned away from buyers that have "already seen fifteen suppliers today."