At presstime, we got announcement that Boulevard investing $12 mil to increase fermentation capacity in Kansas City by 40% to 300K bbls.  “Cellar Five” project will add space and half-dozen new 1K-bbl fermenters.   

Our anonymous Greek columnist Diogenes returns for the first time in awhile with what has become an annual survey of the craft deal landscape couched in the concerns of a shadowy organization that he calls the Founders Preservation Society. 

By Diogenes

It has been an active year for the Founders Preservation Society. 

Anheuser-Busch InBev bought the 10 Barrel Brewing Co of Bend Oregon this week and also Blue Point Brewing Co earlier this year.  ABI now owns three craft breweries outright and about 1/3 of Craft Brew Alliance.  That is hardly a threat to the 3200 brewery craft beer movement.  But it almost certainly means the 100% AB InBev owned breweries get a greater share of mind from AB InBev branches and distributors.

Harpoon cofounder Rich Doyle resigned as CEO and passed that title to cofounder Dan Kenary.  Doyle cashed out through an Employee Stock Option Plan, and pledged to stay involved in the marketing of Harpoon.  At the end of 2012, Kim Jordan of New Belgium also sold her stake and agreed to draw a significant pile of cash from her company through an ESOP.  She remains CEO.  Gary Fish of Deschutes employed a small ESOP, selling 8% of the company’s stock to employees.  He is still president.

The ESOP seems to be a great option for founders.  But I question how an ESOP develops the next generation of leadership of a craft brewery.  Who replaces the founder when he/she exits?

But the other big news of 2014 is the blitz of private equity companies into the craft brewing industry. 

With craft beer booming, many of the top brewers are planning big expensive expansions.  That’s a scary undertaking for any manufacturing business.  Private equity operatives are swarming over the list of top 50 breweries.  They are claiming to be patient, long-term investors.  But that is not the reputation of private equity.  The Metropoulos family, which recently sold Pabst after holding it for four years, is the model of private equity familiar to me.  (Metropoulos bought it for $250 million and sold it for more than $700 million.)  It seems most private equity operators are looking at a five-year timeline for flipping a business.

Three private equity deals have already come to light this year.  Uinta in Utah with Riverside; TSG (also an investor in Pabst) did a deal with SweetWater and Ulysses bought a controlling interest in Southern Tier Brewing Co.  Southern Tier founder Phin DeMink and his wife Sara are staying in the business but Ulysses brought in a professional CEO to run the company.

There are reports that others are shopping for capital with private equity companies.

The aggressive movement of big capital to craft brewing is reminiscent of the mid-90s, when a half-dozen craft breweries issued initial public offerings.  Being public did not work out great for anyone except Boston Beer Co.  Redhook and Mendocino have not been successful as public companies.  Pyramid was taken private by Magic Hat, backed by a private equity company.  Nor’wester tanked.  These lackluster performances contributed to the malaise that struck the industry in the late 1990s.

But 2014 is very different than the 1990s.  The top 50 craft brewers are much stronger financially than the top 50 in 1994.  Craft beer is booming; ABInBev and MillerCoors distributors both are bullish on craft breweries.  Craft’s market share will top 10%.  The Brewers Association set a goal of 20% by 2020.  Some are predicting 30% and more for craft.

No one is talking about an IPO, perhaps because of a 1990s hangover.  Maybe they should be.

Magic Hat founder Alan Newman sounded a cautionary note after he exited his company a couple of years ago.  Appearing at a conference, Newman noted that private equity companies are looking for a 25% annual return on their investment.  They know where they are going with your company, and if you don’t like it, then leave, he said.  A private equity company sold Magic Hat to North American Breweries, owned by another private equity co, which flipped it in 4 years.  It’s now owned by a Costa Rican company.

Only time will tell whether the private equity blitz is a boon to the craft brewing industry, or a bust. If the reputation of private equity holds true, then the five-year clock is ticking for at least some of those who have received private equity investments.  Your faithful correspondent for the Founders Preservation Society is counting the days.

Re-launched regional brand Tivoli Brewery will soon launch brewing operations at Metropolitan State University of Denver’s Auraria campus, in brand’s historic home at Tivoli Student Union. The part brewery/restaurant, part classroom will offer beverage management students the oppy to learn the brewing biz from the ground up, the Denver Biz Journal reports. It may also offer learning to students of the Community College of Denver, which hopes to launch a Beer Industry Welding certification program to help feed the growing industry with trained employees. 

Tuesday’s election results paved the way for even more craft consumption in Minneapolis, as voters struck down the city’s 70/30 law, requiring that just 30% of of a restaurant’s revenue can be derived from beer and wine. A whopping 84% of voters wanted to do away with the law, according to local WCCO-TV, since it “Just Didn’t Work With The Craft Beer Boom,” the station headlined. Besides reducing paperwork, it opens up possibility for patrons to pick up a beer or glass of wine from a restaurant without ordering food, starting in Jan. 

NorCal’s Dust Bowl Brewing received final local approval to build new 30K sq-ft production facility in Turlock this week, the co announced. Plans make room to double current sales to 10K bbls in 12 mos following new brewery’s opening next Nov, with initial capacity of about 17K bbls. From there, the co has room to expand to up 100K bbls, which will allow Dust Bowl to expand sales throughout Calif. Besides investing in tank space, the new facility will be partially automated “to improve our consistency,” brewmaster Don Oliver commented in release, plus a new lab for quality control. Local Oak Valley Community Bank has helped fund construction.

As craft grows and more money flows, companies continue to be challenged to hold onto those values that have differentiated them for a growing group of consumers. And this week’s announcement of AB’s acquisition of one of the fastest growing small brewers in one of craft’s closest-knit brewing communities cut straight to the heart of that balancing act. At ground zero, emotions ran high for many in Bend, Oreg. Fans of 10 Barrel took to social media expressing sadness, anger and fear, much of it arising from assumption (perhaps false) that AB does not seek to play in the craft segment but to destroy it. Across the country, less-emotional observers believe the purchase represents an admission that AB execs “can’t create the brands they need from within,” as Cicerone Org founder Ray Daniels suggested on Twitter. So 10 Barrel seems an appropriate (and to some, inevitable) choice: many sources cited perception that 10 Barrel makes “amazing” beers, held by AB’s Andy Goeler. Other acquisitions have set off similar responses before. But the folks pushing back against the emotional responses, reminding that beer’s a business after all, seemed larger (and louder) this time.

More moderate writers acknowledged that biz is biz while giving voice to fears that AB’s muscle behind such a brand could push other small, independent brands off taps and shelves. Bend’s outdoorsy, independent-spirited residents have embraced 10 Barrel, as freelance writer Heather Vandenengel wrote on her blog, but what now? The co has 200 employees, 150 in Bend, alone, the Bend Bulletin pointed out. Among them, a cadre of highly respected brewers that’s part of Bend’s close-knit brewing community. “It feels like one of our family members has died,” Larry Sidor, partner at Crux Fermentation Project, also of Bend, and once Deschutes brewmaster told the Bulletin. “When making beer for me is all about money, I’ll retire,” he added. Deschutes founder Gary Fish tagged on to those differences in values, bringing it back to consumers: “some people want to buy from what they perceive is a small, local company, and if they perceive that has changed, they may act on that desire.” Worries about “alienating the fan base” popped up in MarketWatch report too, which leaned on Paul Gatza and Bart Watson of the Brewers Assn (for which Gary is chairman of the board). And those worries are warranted: a large number of comments to 10 Barrel expressed sentiment that they’d not be buying the co’s beers again, choosing instead to support one of numerous other breweries in highly competitive Bend and broader PacNW market. It’s unclear whether those feelings will subside or how big of an effect they’ll have on 10 Barrel’s biz even if they don’t. Regardless, this conversation seems likely to persist.

“Each one of these partnerships is unique and different,” AB’s Andy Goeler told CBN about its 3 craft acquisitions, Goose Island, Blue Point and now 10 Barrel.  Interestingly, AB likely paid more for the smaller 10 Barrel, over $50 million we hear, than it did for Blue Point and Goose Island (which was almost 3x as large).  Only Goose Island number publicly revealed at $38.8 mil.  Blue Point reportedly around $25 mil. So AB has already spent well over $100 mil on its craft acquisition spree, but that’s peanuts to AB. And it ain’t done yet.

10 Barrel likely commanded a higher price because it is rapidly growing in much smaller geography, plus most of its volume is already aligned with AB distribution network.  So not many footprint issues.  There are some and it will be interesting to see how/if they’re resolved.  AB has not been aggressive about consolidating non-AB distribution of Blue Point yet, so far as we know.  Perhaps another reason that 10 Barrel commanded a higher price is because 10 Barrel also has thriving retail business. 

One distrib advocate contended to us that AB would not be allowed to own brewpubs in Oreg. If so, AB’s press release certainly didn’t contemplate that.  AB specifically mentioned that it would be acquiring the brewpubs.  And brewpub license in Oreg doesn’t cap production volume, commented one craft brewer.  Indeed, when we asked Andy about the brewpubs, he acknowledged that the brewpubs are “a new piece of business,” that AB is “very interested” in and that it’s a “key piece of their model.” He also noted that the brewpubs were a “great place to learn” what’s really going on with craft consumers. 

The basic plan with 10 Barrel, at least initially, is to let them do their thing, mainly providing resources, either financially or in terms of expertise.  The young founders contend that it will be “business as usual.” There are no immediate plans for expansion.  All the beer will be brewed at 10 Barrel’s existing facility.  “Day-to-day nothing changes.”  But it will be fascinating to see how AB’s purchase of 10 Barrel will be received in fiercely independent hometown Bend, home of over 20 indy craft brewers.  Especially since AB will effectively be all 3 tiers of the 3 tier system.  In addition to 10 Barrel’s brewery and brewpub, AB owns branch in Bend too. This may be legal, but it wasn’t original idea of 3-tier.  (Parts of this article appeared in our INSIGHTS Express).  

In Oreg, AB searching for answers.  Recall, AB down to 28.6 share in Oreg, having lost nearly 20% of its biz there just in last 5 yrs.  That’s from Beer Institute data, which likely doesn’t include all of smaller craft.  So true AB share likely even lower, perhaps its lowest in US. With 10 Barrel, AB is acquiring nearly 1 full share of volume in state, considerably higher share of $$.  In fact, last data we saw had 10 Barrel at almost 2 share of Portland $$ in foodstores.  We’d guess it’s even higher in hometown Bend and also that AB is lower.  So among many other purposes, 10 Barrel could shore up AB’s position in one of its most seriously challenged states.  But what about other craft brands that are sold by AB branches, like Ninkasi?  Will Craft Brew Alliance (which AB owns about 1/3 of) take a backseat to 10 Barrel (which AB owns outright)?  Stay tuned.

First Beverage acted as financial adviser to 10 Barrel, as it did earlier this yr for Southern Tier, and last yr for Boulevard. It’s gradually developing a practice, maintaining relations and seemingly keeping their deals under wraps.  There are other deals out there right now with much larger firms like R.W. Baird and Lazard that are more widely discussed behind scenes, tho again we’re not printing names because outcomes could change.  Suffice it to say, there are at least 3 or perhaps 4 further craft transactions in the works.    

New prexy of Tenth & Blake, Scott Whitley makin’ transition from running Coors Distributing Co in Denver.  So he highlighted some lessons learned as a distrib that he’ll take to his new role with MillerCoors, at BIF mtg. One of his major themes: “We all fight complexity ’cause it’s costly and doesn’t help us run efficient businesses but at the end of the day, he who manages complexity wins.” At CDC, Scott ran 14-mil-case distrib with 400 brands and 1200 SKUs.  “That’s the average in the MillerCoors system” he pointed out. “Mostly major suppliers, 14 craft suppliers…it was a movable feast every day, as you guys know.”

His 1st lesson: “Be careful what you ask for.” Meaning suppliers should “be careful of what you choose as your priorities,” because “we [distribs] can do anything; we can’t do everything.” Distribs gotta be “more righteous than maybe ever on what you focus on and prioritize.” “I understand you only have so much capacity,” and “making choices” about “what we ask you to do” is something that Scott plans to bring to the MC team. Along the same lines, “focus on things that matter,” sez Scott. That doesn’t necessarily mean only bigger brands, since craft has proven “there’s been a lot of great innovation on small things,” and “sometimes small things become bigger things.” He went on: “I want to be righteous about turning our brewers loose on experimentation,” but once packaged or kegged “we’ve got to be pretty smart with what we try to ship out and be commercially successful.” He used Blue Moon Cinnamon Horchata as an example: “We’re testing it now, it’s doing extremely well. Will it be a player down the road?  Time will tell.”

Next: “Mass, Margin and Momentum,” a “3M theory” Scott learned from Greg Brown of Admiral Beverage on how to narrow down what brands to consider as a distrib.  “If I can get at least two of those 3 M’s, it’s worth the proposition,” and “if I can get all 3 it’s an absolute no brainer,” said Scott. “What I really want to focus on is stuff I can take and scale up.… We’re uniquely positioned if we’re innovative enough.”  Lastly: relationships still matter.  Scott feels “while metrics are there to get really, really tight on the business, at the end of the day building relationships are more often than not selling taps with equal effectiveness to any presentation my team might make.”  Craft segment has helped in “bringing us back to that a bit,” thought Scott.

New Belgium Brewing has been #1 growth craft brewer in US thru Aug 2014, according to IRI, ceo Kim Jordan showed to group of Fla wholesalers at this yr’s Beer Industry of Florida (BIF) mtg.  While a solid portion of that’s been from innovation with Snapshot Wheat, Rampant Imperial IPA, and Le Folie cans, “more exciting news” is that “40% of [NBB’s growth] is Florida business.” Kim also credited new packaging to this yr’s success, stating “I think we were brave to do that, and we feel like it really paid off.”

Currently NBB has approx 1 mil bbls of capacity in Fort Collins after investing “about $30 million in 2012 and 2013.” With Asheville plant NBB will have around 1.5 mil bbls annual capacity, which will “enable us” to expand footprint nationally. In the next week or two, Asheville facility “will actually look a bit like a building,” so still “a long way to go,” sez Kim, “but it’s a start and we’re excited about it.” Currently “getting ready to have our equipment shipped” from Germany too.

Kim Addresses Laundry List of Industry Issues Amid "Wild West" Mkt Place Kim also touched on long list of looming industry issues, from quality and craft proliferation to consolidation and “hipster” consumers.  While 20% mkt share for craft by 2020 is “totally attainable,” in Kim’s view, there’s a lot of change that’ll happen in the process.  Kim reiterated her concern about some new brewers coming in with shorter term intentions (see Nov 3 CBN). “This is the exception not the rule” she said, but recently Kim was talking to a friend on “buy/sell” side of the industry who was concerned with “all the new brewers” he’s meeting these days; they’re “thinking they’re going to be in this thing for 3 years, maybe 5, they’re going to make a pile of money”; they have “no trouble talking smack,” and “selling on price, not much on merit.”

On quality, Kim noted NBB’s additional “field QA [quality assurance] staff” of 14 people around the US whose “sole job is to go around and preach the gospel of QA and craft beer…there’s no one in craft beer with that level of investment in field QA.” “We need your support” and it’s “imperative that we champion quality together.” Then too, “it affects all of us” when cos send brands to “far off markets” and “don’t tend to it.” To that note, NBB will likely be “pulling brands” over next few yrs, trying to decide “which of your children you like the least.” But lookin’ at efficiency “at some point I think we’ll all… need to look at some of our brands…. We talk about it every year and so far have not been able to pull the trigger.”

Then too, “somehow the on-premise has to feel a bit less chaotic,” Kim said, adding that folks need to help retailers realize “they can’t make money…selling one keg at a time.” These days off-premise arguably the better building block for growth, sez Kim, but “we cannot turn our backs on the on-premise; that’s where millennials go.”

As for succession planning, “we want you to know that we feel like we have a plan,” sez Kim. Recall, NBB is 100% employee owned. A large majority of craft brewers don’t have plans in place.  On consolidation, announcement of AB’s purchase of 10 Barrel, a “highly respected Pacific Northwest [brewer]…changes the complexion of our industry whether we like it or not.” Then too, Kim is “wildly in favor” of 3-tier system. 

Poking fun at beer geek “hipster” culture, Kim said “I can’t decide if we’ve arrived or it’s over,” referencing recent New Yorker illustration of “Brooklyn hipsters” acting like the beer is “way too precious.” It’s “really important that we don’t end up being these people,” ’cause “beer drinkers like us because we’re fun and we’re a friendly industry.” “You know, it’s beer” she told Draft Mag in recent interview. That being said, the next group of drinkers coming of age will likely have a “similar kind of ethos” to millennials, “in terms of their attraction to a different way of showing up in the market place.”  All in, “we need to get together to resolve these issues” with “honesty, good faith and commitment to come back to the table.” ’Cause right now the “marketplace feels a little bit like the wild west out there.”

A hot craft market, home to some of the midwest’s top small brewers and also a state with some of tuffest 3-tier/franchise laws in US, Michigan has seen a fair amount of not-so-friendly remarks about the middle tier recently. Enter moderate deep-dive into distributors role in growth of craft from Southwest Michigan’s Second Wave. “What is becoming clear, especially to established breweries is just how important distributors are to the growth of craft beer,” the author notes, tapping on a pair of “established breweries” to show just that. Consistent double-digit growth for craft is “all about distributors picking up the craft beer ball and running with it,” Erik Frank, Field Marketing Mgr for Deschutes told the paper. Indeed, the middle tier has been “key in helping promoting our side of the industry,” Bell’s founder Larry Bell said. The article tracks changes in distrib/supplier relationships and the regulations that govern them in Mich, including when small brewers “traded away the right to self-distribute for the right to serve beer by the glass” in 1992, Larry recalled.

Fast-forward to 2014: “could there be some tweaks to the laws? Yeah, I think that would be good, but that’s an ongoing dialogue,” Larry explained. That’s not quite the rhetoric-filled comments we’ve heard from others in Mich and elsewhere. The tweaks he’d like to see share quite a bit with those sought elsewhere: amending franchise laws to be closer to those in nearby Wisc, where “if we want to switch wholesalers we just switch wholesalers,” Larry said. “Now you don’t switch wholesalers on a dime, not without reason,” he added, noting the inequity that “we have to sell [a distributor] beer if we have beer. But a wholesaler can tell us they don’t want to sell our beer anymore and we don’t get any compensation. It ought to be a two-way street,” in his view. Importantly, disagreements and legal battles between distribs and brewers are “the exception not the rule in what is normally a fruitful and mutually beneficial relationship,” the author maintains, concluding that “if these two entities don’t listen to each other and don’t meet one another’s needs, then they both suffer, as do the consumers.”