December 9, 2011
In Craft, $20 Billion Could Be at Play
Dear Client:
Bill Anderson delivered interesting news on the craft industry’s investment outlook at Monday’s Brewbound conference. Bill would be embarrassed for me to tell you that his family is a prominent A-B distributor in Los Angeles (and other brands in Hawaii). But the fact remains he has forged quite a business for himself away from his well-known family as a principal of First Beverage Capital, which does investment banking and direct investing in emerging beverage brands. And he revealed at the outset that his group is also likely close to their first engagement with craft, having the advantage of New Belgium’s former head of distribution in J.B. Shireman. Stay tuned for that news…
LOTS OF CASH CHASING A UNIQUE CULTURE. Bill explained how there is “no shortage of investors who want into the craft arena.” His group has met recently with three large family offices in New York that want into the space, and an international company that wants to make a large craft investment. The draw is “fun, iconic” brands affecting not just beer or the beverage space, but also culture and consumerism in general.
“But they’re also doing the math, saying, ‘If craft is 5% of volume and 7% of dollars of a $95 billion U.S. beer market, and people are saying it could be … 10% or 20%, or [as Steve Hindy recently said of full-flavored, high margin beer’s potential] 30%, you’re talking about $15 to $20 or more billion worth of money at play. That’s what’s attracting private equity.” He estimates that First Beverage hears from private equity firms “once or twice a week” asking for introductions to the craft space.
“Usually we don’t say yes. I think there’s a huge culture question of private equity coming into the craft beer space,” says Bill. And he has other concerns.
MISMATCHED EXPECTATIONS AND CULTURES. Investors may see craft’s rosy picture and growth numbers, and the way craft’s influence extends. And they may be crunching those aforementioned potentials. And hoping to fund the next New Belgium.
In reality, the cultures have potential to clash. Bill isn’t confident, for example, that some outfits understand the “costs of iconic, socially responsible brand resonance” that is craft’s bottled lightening. Moreover, he doesn’t know if they have the patience it takes to get brands “lifted,” citing the phenomenon of Blue Moon’s 15-year “overnight success.”
Investors also don’t like high capital expenditures. “Private equity doesn’t like to see a lot of money going into brewing facilities,” Bill says. But Schlafly’s Dan Kopman and Saint Arnold head and former banker Brock Wagner estimate it will take some $1.5 billion to build the capacity needed to take craft to 10 share.
Finally, they’d have to come to alignment on exit strategies, over which the segment itself is struggling. It’s also struggling on whether it wants to take private equity money to begin with.
DETERRING LACK OF LEADERSHIP IN U.S. BEER. On a more macro level, in every sense of the phrase, Bill doesn’t think there’s been leadership in U.S. beer industry [Ed. Note: This is a recurring theme, and one I will address in my opening speech at the Beer Summit in February]. The infighting over issues like the Care Act and other legislation at even the craft level is at play here as well.
“If you’re looking at investing in craft, you have to be very concerned with the macro space,” Bill says, citing Mike Mazzoni’s recent numbers on the number of serving sizes and share the Big Two have lost since 2008. There’s a “sense that these guys have to react” with numbers like this, Bill says, citing the example of distributor exclusivity, which he thinks will make distributors more careful about the types of craft they take on. Besides such potential distributor limitations, craft has its own headwinds, and Bill listed ones we’ve all heard, including promiscuity, private label, duopoly pressures, management skillset gaps, wineification, and generational transfers.
The bottom line is the industry needs someone who can straddle the issues and be the face to be on more solid footing. “Carlos Brito’s done a great job of managing ABI, bringing great value; but he’s not a U.S. beer guy,” Bill says with understatement. In fact, he thinks Kim Jordan could be heir apparent to this stake, because she can “blend being able to speak to distributors and talk to crafts, and she knows the Big Two well.” But “the void of leadership at the top is affecting everyone in the segment.” Interesting themes to think about.
UPDATING PENNSYLVANIA’S LIQUOR CODE
Pennsylvania Senator Wayne Fontana took to Patch.com to update the public on the Liquor Control Board’s progress on updating Pennsylvania’s liquor code in hopes of preventing privatization. Most notably the LCB has created a pilot program that makes select wine and spirits available for purchase over the Internet with UPS home delivery. Most of the wines on the website aren’t part of the LCB Wine and Spirits stores. “The goal of the LCB is to provide an added convenience for consumers at the lowest possible cost,” wrote Wayne. [Ed. Note: Should that be the goal of the LCB? Really?] He also noted the program has no affiliation with SB 890, which would provide greater consumer choice by allowing direct wine shipments by ordering on the Internet, phone or mail. Other bills the legislation is considering include Bill 242, which would allow distilleries producing under 100,000 gallons to sell spirits to the PA Liquor Control Board, other licensees and the general public. In addition, it would allow beer distributors and licencees who serve meals to extend operation hours on Sundays.
BEER BRIEFS:
LAST IRI SHOWS NO RED IN SIGHT (THIS PERIOD). Look. We all know that four weeks doesn’t make a trend, due to shifts in comps. But hey, let’s report that the latest four weeks in SymphonyIRI’s major three channels have been a boon for the category. There’s no red to be found in dollar or case sales, up 5% and 1.2% respectively over last year’s numbers for the period ended Nov. 27 (year to date those numbers are 2.1% and -0.5%). Average price per case change has crept up steadily throughout the year, up 75 cents for the category this period.
Craft contributed some to the growth, but case sales for domestic premiums finally eked out of the red this latest period, up 0.1% over last year. YTD, they’re down 1%. Dollars sales for the segment were up 3.4% the latest period vs. 0.5% YTD.
YUENGLING UPDATE: IT MUST BE A MADHOUSE. Yuengling dollar sales were up 81% over the month, no doubt due in part to their successful Ohio rollout. How they were able to supply that much of an increase in beer in such a short amount of time, I don’t know. It must be a freaking madhouse at their breweries right now. I’m scheduled to speak with Dave Casinelli tomorrow but he may be too busy filling kegs or loading trucks. Dave, if you’re reading this buddy, no worries, we can talk later.
KOCH’S QUOTE CREATING STIR. LOTS OF EMAILS came in yesterday questioning Jim Koch’s claim that most American beer drinkers drink craft beer at least occasionally. We crunched the numbers, and if by “most” you mean over 50%, and if there are 90 million beer drinkers in the US, then the math works, because that’s about one craft beer a week. This is a transformational statement, to be sure. It means that most beer drinkers drink craft beer, if only rarely. I harkens back to a tippling point that Greg Koch of Stone Brewing and others have been saying for quite some time.
SPECIAL THANKS to my fantastic and gifted staff of editors: Megan Metcalf, Jenn Litz, and Emily Pennington, for helping me get these daily issues out this week while I was under the weather and had no voice. And to my great circulation/admin director Kim Griffin for running interference …. I appreciate you. You are all rock stars.
Until Monday, Harry
“There are three kinds of lies: lies, damned lies and statistics.” — Mark Twain
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