Nationally, BA-defined craft share of on-premise dollars hit 30 for 52 wks thru Mar 29, according to GuestMetrics data presented by Peter Reidhead during Brewers Assn Power Hour yesterday. Share for BA-defined craft (calculated for this presentation, so includes Yuengling, others, but not Blue Moon, Shock Top, others) is at or above that in 12 of 20 major US mkts detailed during presentation, including a whopping 48 in Cleveland, OH. Slide didn’t include Seattle or Portland, OR, but Peter shared that craft at about 60 share in those markets. Staggering segment share breakdown in San Francisco shows craft at 41 and imports at 21, just slightly above the segment’s national avg (20). But in SF, premium lights have just 4 share on-premise, Peter showed, well below the 20 share they have nationally. Other big craft markets include Boston (40 share), Austin and Atlanta (39), and Philly (36). Other segments mostly smaller than national avg in those markets, but not by much.

BA-defined craft share at 32 in Chicago, San Diego and Minneapolis, but on-premise sales of other beer segments in those cities pretty different. While Chicago over-indexes slightly on imports and premium plus, “other” segment (including premium regular, FMBs and cider) at 31 share in San Diego, and 26 share in Minneapolis. Craft at 31 share in DC and Denver, 30 in Tampa. Some of biggest US cities underindex on craft, but only slightly in biggest two: craft at 28 share of on-premise beer $$ in NYC and LA. Remaining 6 markets in South: Dallas and Orlando (22 share), Miami (20), Phoenix (19), San Antonio (17) and Houston (15). Imports are twice as big in Miami on-premise than nationally and have over 30 share in San Antonio and Houston. Premium lights have 27-32 share of on-premise beer $$ in 5 of these 6 mkts (not Miami).

We misheard Will McCameron of Brewery 85 during a CBC seminar last month and misquoted him in our April 17 issue. He actually said, “I couldn’t live without my taproom now. Like, it’s a huge part of my business. It doesn’t just cover the lights and the gas. Like, that covers so much more. I can hire more people,” and “it just exponentially helps us,” according to an audio clip of this comment provided to CBN (the full recording of this seminar is not available on the CBC website for conference attendees). Our issue misquoted Will as saying he “could live on my taproom now.”

Elysian coulda been bought by New Belgium, an intriguing snippet from Denver Post First Drafts blog indicates, as we wrote in INSIGHTS Express late last week. The Colo co “made a last-minute push to purchase” the Seattle-based breweries/brewpubs, the Post’s Eric Gorski confirmed with Elysian co-founder Dick Cantwell. And “New Belgium was prepared to make a competitive offer,” Gorski writes of Dick’s comments. Indeed, “late in the AB discussions, Elysian’s board held an emergency meeting and voted to give New Belgium time to develop a concrete offer,” but “no time was given in the end,” per Post.  The rest, as they say, is history.

Just in time for Memorial Day weekend, Concrete Beach’s Miami Social Hall, the 149-person capacity taproom adjacent to new brewery in Wynwood district, opens next Thursday. Recall, Concrete Beach is Miami outfit from Alchemy & Science, the Boston Beer subsidiary run by Alan Newman. When it open, it’ll be second on-site taproom for A&S, adding to Angel City in LA. And progress is moving forward with NYC-based Coney Island brand.

“We are still in our infancy in the Chicagoland market,” Windy City prexy Bob Collins told Chicago Tribune during group interview edited and published this week. Bob sees “lots of room for growth in terms of sales opportunities,” beyond current channels, noting c-stores specifically. For example, Windy City expanded its account universe from 800 about 7 years ago to 3500 last yr and 4500 this yr, adding 70-90 every month. The interview hits on “issues with pricing,” as co-owner of famed beer bar Map Room, Laura Blasingame, said, noting that “some local breweries are charging a lot for a product that’s 6 percent alcohol by volume.” Indeed, “I don’t want an $8 pint from Chicago.” On same token, “it’s a scary thing when beer turns into a status symbol or a luxury item,” said Randy Mosher, author and partner at both 5 Rabbit Cerveceria and Forbidden Root breweries. Comparing highly rated/sought after beers to “Pokemon cards,” he understands that to people who pay attention to rating sites, the beer “will taste better. That’s the way our neuropsychology works. But as a producer, you want people to be clear-headed about what they’re drinking.” Elsewhere in interview, Halfacre founder Gabriel Magliaro explained that “we’ll sell the beer,” when his co completes doubling of capacity. But culturally “it will totally transform my business in a way that I can’t say I understand right now.” And there’s plenty more to dig into.

Value of hot, and not so hot, craft brands when they move between distribs has been hot topic of discussion for yrs now.  It’s also at center of legal dispute that broke out last week between AB and NJ craft distrib Hunterdon.   After buying Elysian Brewing earlier this yr, AB wanted to move its brands to AB distribs, just as AB has with other brand purchases in past (InBev Euro brands, Blue Point, etc).  But after several contacts, AB could not come to agreement with statewide, all-craft Hunterdon on price.  On May 4, AB sent termination letter and check for $562,883.46 to Hunterdon.  That was its final offer of 5.5X GP made a few days earlier, an offer Hunterdon did not respond to, AB sez.  AB estimated $12 per case gross profit, for total of $102,342.45, apparently on approx 8,528 cases of Elysian brands Hunterdon had sold for 12-mo period thru Mar 2015.  That’s just shy of $563K.  AB also pointed out in letter (and lawsuit) that multiple “consistent with or higher than comparable New Jersey transactions.”  When AB moved Blue Point in 2014, brands transferred to NJ distribs at 4.75X GP.  So AB gave Hunterdon a “15% premium,” it claims. Early in talks, Hunterdon exec “asserted that the value of the Elysian brands was 12 times gross profits,” according to AB suit.  That would be over $1.2 mil.  At the 5.5X level, Hunterdon’s atty wrote, AB and its NJ distribs were “seeking to coerce Hunterdon Brewing to accept less than” fair market value and thereby “undermining the brands’ value,” again, according to AB lawsuit.  Letter also said Hunterdon prepared to “pursue all necessary legal action” vs AB. 

But AB sued first, in US Dist Ct, seeking declaration that its termination legit under NJ law.  Turns out, NJ has law similar to Ohio’s that a “successor brewer” can terminate distrib without cause and move brands to distribs in its own network if terminated distrib gets fair mkt value for brands before they are moved.  Beyond valuation question ‒ and it will be interesting to see whether a judge or jury decides such a specific valuation dispute, or whether this settles ‒ some interesting backstory here.  Hunterdon is statewide craft distrib owned by L Knife (Sheehan family), which has AB in several big mkts, tho not NJ.  It also has Elysian in several states.  There are long-running tensions between AB and L Knife operations, which were among first to be non-exclusive, aggressively sell craft and sell against AB distribs outside their territory.  Indeed, INSIGHTS hears AB currently withholding Oculto and/or Mixxtail brands from L Knife operations in several mkts over transition of Blue Point.  Also, AB and its NJ distribs have been down this road before.  There was hugely expensive jury trial over same issue: the proper GP multiple for the InBev Euro brands and Rolling Rock.  In the end, AB distribs got brands and paid multiple very close to what they offered.  Importantly, the focus in that case was on deals in NJ-only, not frothier multiples in deals outside the state.  In recent yrs, lotsa craft brands trading for multiples of 8X GP in other areas.    

There’s “an interesting dichotomy going on right now with session IPAs,” said IRI’s Dan Wandel at our meeting this week.  Session IPA $$ sales are nearly quadrupling (+298%) in IRI supers thru Q1 2015 and snagged 3.5 share to over 5 share of total craft IPAs.  “I would have expected most of that to be coming from the American IPA since they’re the largest [substyle], but the biggest share was coming from the Imperial [IPA].  So it’s a very interesting scenario to see the higher end ceding share to the session IPA,” said Dan.  Imperial IPAs lost 2.8 share of style to ~23, and American IPAs lost 0.6 share of style to ~68.  Yet both were still up strong thru Q1 (+21% and +34% respectively) and both still gained share of total craft segment sales in supers.  All in, Dan tracked 36 total session IPAs in scans thru Q1 – “8 more” since end of 2014, including two sizable intros from New Belgium (Slow Ride) and Sam Adams (Rebel Rider).  Gotta note, craft Belgian White IPAs are the only substyle of IPA that’s declining thru Q1, down 13% off very small base in scans. (Recall, Blue Moon, Shock Top not included in IRI craft stats, so launch of Blue Moon White IPA won’t affect these measures.) English IPAs are accelerating (+47%), “Other” IPAs (+8%) back to growth this yr and Black IPAs (+24%) picked up pace as well.

7 of Top-15 New Brands in IRI Supers are Craft “Overall $10 million in sales [were] attributed to new beer products in the first quarter” in IRI supers, Dan noted, and 7 of the top-15 tracked were craft brands.     Impressively, Sierra Nooner Pilsner, Hop Hunter IPA and NBB Slow Ride session IPA are the top 3 intro brands among all beer in supers thru Q1, noted Dan.  Editor’s note: Dan’s list does not include Redd’s Wicked since sales began last year, or AB new seasonal Ritas since they’re listed as “Bud Light Lime Seasonal” in scans, going against last yr’s seasonal intros.  Sam Adams Rebel Rouser and Rider IPAs, Bell’s Hopslam IPA (new to scans, but not new brand) and Abita’s Harvest Lager were other craft brands listed.

Firestone Walker 805 phenom has been “educating us about what the consumer is really looking for,” co-founder David Walker said during panel discussion at our Spring Conference in Chicago this week. The brand’s growth to about half of the brewery’s biz, almost 2 mil cases this yr, may be a bit of “serendipity” or “alignment of the planets on our side,” but the co is “accepting it and running with it.” There’s “provenance and authenticity to it, which helped,” David said, as it “falls into this broad-based consumer movement” that’s interested in those things. And it’s “connecting with non-craft drinkers,” who “are just not as engaged as the people who are drinking” other Firestone brands. Again, 805 was #9 biggest craft $$-gainer in IRI nation-wide for 1st qtr, tho it’s only sold in Calif. “I’d like to tell you it was contrived and all our idea,” he concluded, but 805 (the brand, the area code and the community they both serve) “defined itself.”

Firestone to 300K Bbls; Revolution to 75+K Bbls; Cigar City to 50K Bbls; Mostly At Home, IPAs  Firestone’s “growth has been uncomfortably strong for the last three, four years,” David said; it just passed the 200K-bbl mark in 2014 and is “winding [its] way up to about” 300K bbls in 2015. Breweries repped by other pair of panelists shipped less than 100K bbls combined last year, but, like 805 in Calif, they’re making waves, getting big growth in their home markets. Revolution Brewing of Chicago hit about 50K bbls last yr, after opening its production facility 3 yrs ago, managing partner Josh Deth said. It’s on pace for 75K bbls, “maybe more,” this year, still seeing “crazy growth.” Home-market Illinois still buys 95% of Revolution production. He estimates craft share in downtown Chi could be up to 18%. Similarly, Cigar City sells about 97% of its beer in Florida, founder/CEO Joey Redner said. It’s “capacity constrained,” so “on about a 50,000-pace” after shipping about 45K bbls last yr, up from 34K in 2013 and opening in just 2009.

Cigar City didn’t start strong at home, selling about 1000 bbls in Fla early on, because that “was about how much the market wanted,” Joey said. So the co started shipping to other states. But because the state gets 80 mil visitors a year, tourists “really in many ways helped grow our brand” and Cigar City has “really benefited from that swell in population.” Lead brand Jai Alai IPA is now at an “uncomfortably high” 55% of production, for Joey. Florida Cracker (a witbier) and Invasion Pale “fight for second position,” then Madura Brown. Similarly, Anti-Hero IPA is about 55% of Revolution’s biz, Josh said. It just intro’d a “brand new number-two,” Fist City Pale. Seasonal brands combine to be #3 brand for Revolution, followed by its Hero Series and Bottom Up Wit.

Expansions on Horizon: “Hemmed In,” Buying and Squeezing  All 3 currently considering capacity expansions at their respective breweries. But Joey’s current facility is “pretty hemmed in” on 2.6 acres in “semi-urban” Tampa. Work with BrewHub has come along, but the lack of “robust canning options” has kept Cigar City from producing more there. And “some of our beers, I think, are better coming out of BrewHub’s facility,” Joey noted, “especially our lager.” Josh has some “new outdoor fermenters” coming in soon, followed by a 120-bbl brewhouse in August. So it’ll have capacity for 150K bbls by end of yr, with room to double that. David and co “can squeeze by another year or so in our sort of current footprint,” but is “looking at various alternatives” including building on land around its brewery or “maybe even acquisition.”

Deals on Horizon: “Hyperbole” of Worry, “Always Take the Meeting”  All 3 panelists also expect more craft deals in near future. It may be “naive to think that brewers aren’t going to look at acquisition” or “investment” to “fund the next phase” of growth or “phase partners out,” David said. He sees “a little bit of hyperbole” in comments about deals hurting craft’s “soul.” Indeed, “I don’t think any of us are that influential or important that we’re going to upset what is a fabulous revolution in the American palate.” At the same time, “it’s a lot of fun,” David reminded. “Everybody’s collars been loosened up a little bit, courtesy of the craft brewers,” he said. “They might have been irritating, they might still be irritating,” he acknowledged, but “we’re adding a little bit of spice.” So it’ll be “hard to pry the control out of the hands of a lot of the owners,” he expects.

That could include Josh, who feels like the “kid with the lemonade stand,” saying “no, I’m still having fun selling the lemonade. Why would I want to sell the lemonade stand?” His “pitch” to early investors was a “long-hold type of investment,” so he’s “not getting pressure from anyone to sell and [doesn’t] plan on doing it.” Still, “8 to 10 people in this room have offered to buy my brewery,” he quipped. For Joey, an increase in deals “seems natural” and he thinks there “sort of has to be deals” since “that authenticity is really what people are trying to buy.” He also notes that plenty of small brewers are probably “leaving a lot of money on the table,” that more experienced business people could pick up. He’s still “fairly young” so not actively looking to sell, but “I’ll always take the meeting” because “at the very least, I get to know someone else’s motivation and you learn something about your business,” he said.

Multiple Locations & Legislative Change: Florida Growlers, Taprooms, Transfers  “It’s politics,” Joey said about 3-yr battle to finally legalize 64-oz growlers in Fla, “nothing moves too fast.” Importantly, he added, small brewers in the state got “clarity” on legality of operating taprooms, “the incubator” and “minor leagues” to test beer brands. Recall new law bars brewing companies with multiple breweries from transferring beer between facilities in excess of production at the receiving facility. Cigar City is the “only brewery that’s seriously transferring” in Fla these days, so this piece of the law caps how much the co can send from its larger facility to its new, much-smaller brewpub. But at same time, it’s getting a second location at the Tampa airport and is considering replacing a 3-bbl system at current air-side brewpub, which has been “massive for the brand,” with a 10 or 15-bbl system.

Calif Duplicate Licenses, Slow Local Govs  Firestone Walker also plans to open a brewpub, recall, in Venice, CA. But opening that has been a “lesson in patience,” David said, as co must “work our way through” permitting in “big bureaucratic Los Angeles system.” But they’re “learning about it and getting there,” so it can be “more relevant down there.” Brewers in Calif can have up to 6 duplicate licenses, a limitation put in place last year after both brewers and wholesalers “saw the danger of a two-tier tied house environment” and agreed on limits. The tiers “can work together,” he said, while noting that “the fact is things change. We have to be able to change with them. Regulation, certainly in this industry, will change as the industry changes.”

Ill Negotiations, Legalizing Brewpub to Brewery Model  To that end, Josh hinted that interests in Illinois have been “negotiating for about twelve months” on issues created by City Bev lawsuit that led to newish craft brewer license allowing self distribution. Currently, Revolution operates with permission from the state, as the new law bars brewers from having brewpub and production brewery licenses.  “I think we’re at the finishing line,” he said, to see a bill to legalize that in next few weeks. Josh thinks that “everyone in this room should agree” that “Goose Island model” Revolution followed should be legal as it’s “how you build successful brands that make everybody money.”

Deal environment in craft – whether it’s acquisitions, private equity investments, ESOPs, roll-ups, you name it – will be “frothy” for another 2-3 yrs, predicted First Beverage founder Bill Anderson at our Spring Conference this week. (Note that this report appeared yesterday in INSIGHTS Express.) First Bev has already served as advisor on several craft deals and from his view, Bill thinks deal pace may become even more intense over next 18-24 mos.  Indeed, he expects there could “easily” be 25 transactions in next 12-15 mos and ultimately upwards of 40-50 craft brewers may sell or take an investment.  Why so much activity?  Lotsa reasons, but “there’s a ton of money on the sidelines that wants to come in,” combined with increased interest among craft brewers to take that money.  While craft beer phenomenon on consumer level unlikely to change much, in Bill’s view, all this money and all these deals will “radically change” nature of the craft business. 

He likened earlier craft atmosphere to “a great little neighborhood” created by craft founders which held “friendly street barbecues” and they could pretty much predict how other people in the industry would react.  But lotsa new players with that “ton of new money,” have “different motivations.”  Like “building McMansions.”  They want to come to the barbecue, “but they’re not bringing anything.  They just want to eat your food.”  So there’s now “a ‘there goes the neighborhood’ moment.”  Again, while consumers may not notice all this change, biz of craft likely to become “less collegial, less predictable” going forward, Bill believes.

Lotsa reasons why craft biz so attractive to different investors right now. Those investors include “domestic strategic buyers” like AB, MC and Pabst, foreign strategic buyers (think Spain’s Mahou and its Founders deal), private equity, family offices and more.  What’s not happened much yet: a lot of “craft on craft” deals.  That’s in part because most craft brewers “don’t have a lot of M&A DNA on their team” and they’re busy trying to manage/ build their own bizzes.  First Bev’s deals usually take 7-10 mos, said Bill.  Since for many craft brewers it’s their first transaction, it takes time and a lot of work “getting them comfortable around the process.”  Key reasons for current flurry of activity:

• “Nothing like the craft beer space” out there.  It’s not only “hottest category” in bevs, but possibly hottest in CPG land, Bill suggested.

• A “wide deep pool of potential buyers that’s increased markedly in the last 6 months” (see above).

• Younger craft brewers found success more quickly than early pioneers, know they can make a lot of money and are not as attached to “the legacy piece” of the movement.  Then too, younger owners “not as concerned about the optics of selling out and selling out fast.” 

• “Smart strategic” buyers can find “smaller niche brands that don’t have complicated distributor networks,” avoid footprint issues and “layer” them into current systems.  (Think AB’s purchases, even while it’s in legal dispute with NJ distrib over its refusal to give up/sell brands AB acquired.)

• Craft is “huge attraction” for private equity, even tho most PE firms don’t like bizzes with high cap ex requirements.  But they see growth rates not available elsewhere, a “leaky bucket” of mainstream beer (“dollars spilling out” of AB and MC) that will feed that growth, plus it’s a fun biz.  “Not many other categories are this attractive.”  Then too, earlier perception that craft brewers would not take PE money “has broken.”  And “family office” models of PE offer attraction of longer term investment approach.  The numbers are good.  Craft brewers are “very profitable businesses” with very attractive margins, and smart PE players see they can create even stronger results with a mix of the craft brewer’s talent and “big company expertise.” 

• Global brewers want “diversification,” a US “beachhead” and US brands to sell in their mkts.  And foreign brewers have their own legacies in their own countries to build on.

Even while Bill sees frothy near term for craft deals, he does think “the music will stop” eventually.  And there are some pitfalls and risks in deal landscape.  While this “first cycle” of craft brewers starting to sell and trade will drive lotsa action over next 24-36 mos, music will eventually stop as “the most aggressive buyer will have its number met” (AB).  Also, PE firms won’t buy 10 brewers because they can’t concentrate their money so much in a single industry, so more like 2-3 and “they will be done.”  What about the “roll up” strategy reportedly contemplated by Fireman Capital/Oskar Blues and Rich Doyle’s Enjoy Beer LLC, plus a handful of others?  Some of those roll up programs view an IPO as “potential exit strategy,” Bill suggests.  Some will work, some will fail, as some may “pay high multiples to get in” that won’t really pay out.  Finally, there is risk that acquired craft brewers will “lose authenticity,” and new players will do “unpredictable things” (i.e. discounting), that can change nature of biz.  Indeed, elsewhere at INSIGHTS Seminar and in lotsa conversations in recent mos, this deal activity – along with recent AB pricing actions – has spread concern about threatening craft’s current healthy pricing architecture.

While a number of craft brewers have gone ESOP route, Bill pointed to pluses and minuses.  Some of the ESOPs may have used growth projections that are “hopeful,” he suggested, and resulting debt loads could be a burden.  ESOP trustees tend not to “accelerate new ideas” that PE firms might bring and the structure “complicates decision-making.”  On other hand, ESOPs allow founders to retain more control, they’re “more in sync” with craft legacy of a founder like NBB’s Kim Jordan, “democratize ownership” and have tax advantages.  Debt isn’t only an issue for ESOPs.  No craft brewers wants to be “laden down with debt” now, which makes it tuffer to expand geographically or invest in current brands, even as competitors are getting “fresh capital.”  

Net-net: right now is a “unique window of very high multiples and very able, willing, hungry buyers.”  Such an environment may not happen for another 8-10 yrs, Bill thinks.  Ladies and gentlemen, take your meetings….

Craft share growth on premise has “tapered” each quarter since Q1 2014, from +2.3 to just +1 share in Q1 2015, while interestingly “premium light share is not down as much now,” noted GuestMetrics’ Bill Pecoriello during presentation at our Beer INSIGHTS Spring Conference in Chicago Tuesday. Craft’s peak share on premise (in GuestMetrics data) was in Q4 of 2014, at 35.1% of $$ sales, but it was 34.6% in Q1 this yr (tho still up 1 share from Q1 last yr).  So “sequentially we have some flattening going on here in the craft share in the on premise,” he said, calling attention to a possible “plateau,” at least in GuestMetrics universe.  That “doesn’t mean that supermarkets can’t double from 17 share to 34,” Bill assured, “but we’re starting to see craft as a category slow in the on premise.”  (Remember, GuestMetrics includes Shock Top, Blue Moon, others owned by big beer cos in craft stats, so they also impact these trends at least to some degree.) 

Then too, all of craft’s growth in Q1 is comin’ from IPAs, new brands, and long tail of craft brands.  So 3 different measures show craft growth coming from what’s hoppy, new and small. While IPAs collectively account for all of craft’s +1 share growth in Q1 this year, all “other styles” combined didn’t gain any share.  So “other styles” is where majority of craft slowdown has occurred – “a year ago all the other styles collectively had gained a share point” in Q1 2014, yet in Q2 and Q3 gain slowed to +0.5-0.6 share, and in Q4 gained just 0.1 share.  Bill also found that “most craft share gains have been driven by new brand introductions.”  In fact, each quarter since Q3 2014, all craft share gains have collectively come from new brand intros (brands that previously weren’t tracked in GuestMetrics data year prior) while “all other” craft brands share collectively declined at increasing rate each quarter.  And interestingly, top-20 craft brands tracked were collectively down 1.3% for 52 wks thru Mar 29, while remaining brands were collectively up 3.8%, accounting for 65 share of craft on premise.  “So all the growth is in the tail, all the growth is in the new brands, all the craft growth in the on premise is in the IPAs right now, collectively.”

IPAs, Mexican Imports & Angry Orchard Winnin’ On Premise Too  Lookin’ at total beer segment, “who are the top brands that are winning? IPAs and Mexican Imports, and Angry Orchard, and cider,” said Bill.  There were 5 IPAs among top-10 share gaining brands for 52 wks thru Mar 29.  Lagunitas IPA (+0.15) and Rebel IPA (+0.13) gained most, while Ballast Point Sculpin IPA, Bell’s Two Hearted Ale, and Goose IPA each gained 0.05-0.06 share.  Meanwhile, Angry Orchard Crisp Apple gained the most share of any brand on premise by far for 52 wks thru Mar 29, +0.35 (Lagunitas IPA was next closest).  Also gotta note, 3 of top-10 share gainers were Mexican imports (Dos Equis, Modelo Especial, Corona Light).  And Yuengling (not included in GuestMetrics craft number) gained solid 0.08 share.

Craft Brewer, Brand Ranks Still Swelling as Sales Per Brewer, Brand Slipping; Top-20 Brands Down for 52 There were 1,821 craft suppliers and 11,984 craft brands thru Q1 2015 tracked in GuestMetrics data, both suppliers and brands up 17% vs last yr.  That already marks 56 new suppliers and 158 new brands tracked since end of 2014.   However sales per brewer and sales per brand has continued to decline nearly every quarter for the last 2 yrs, and overall craft sales have slowed, noted Bill. “So again this gets into the economics of the new entrant,” he said.  “Are we going to see craft begin to slow in the on premise given the sheer size that it’s gotten to already?”