Rumor Central: What Can We Learn from Brewery Buyouts?

rumor

Who doesn’t love a good rumor?

In our youth, school hallways were full of speculation of stolen kisses and scandalous breakups. As adults, our attention may be taken by tabloid magazines at the grocery store, but we refocus on what impacts our lives and interests, seeking out insight into the next plotlines and twists that will enliven the news of the day.

In recent years, beer lovers have followed this cycle with glee and horror as investments and brewery sales have become a regular part of the industry. Along the way, hearts are broken and curious minds churn, wondering what’s next for these businesses.

But there’s also the question of “who’s next?”

Speculation into who AB InBev or MillerCoors might want to bring into their portfolios now feels like a game we sometimes play. When surrounded by like minded friends or in the depth of a Reddit thread, analyzing and guessing who might be next to “fall,” has become something of a norm for enthusiasts within a maturing industry. Should we want to play detective, in many of these cases, clues have already been laid out before us in plain sight.

The Past

In 2015, Dogfish Head sold a 15 percent stake in the company to private equity firm LNK Partners. But that was preceded by projects started in 2011 that included a five-year, $45 million expansion to more than double the brewery’s capacity, $5 million for renovating their Rehoboth Beach brewpub and also a planned expansion of their spirits line.

That same year, Lagunitas sold a 50 percent to Heineken. But look back just one year prior, when in 2014 Tony Magee said he wanted to build five breweries across the United States.

People may have been surprised when Cigar City sold to Fireman Capital earlier this year, but the company had started a contract agreement with Brew Hub in 2013, showing that there was interest and demand to vastly expand capacity, then in 2014, ownership talked about building a new facility into North or South Carolina. The money to accomplish these feats has to come from somewhere.

But it seems the biggest sales – the ones everyone cares about the most – are when a brewery is purchased by AB InBev or MillerCoors. Should we see these instances coming? Maybe. As I pointed out in a post about AB InBev’s purchase of Belgian brewery Bosteels:

What this all comes down to is a series of common denominator traits we often see with purchases like this: a brewery that wants to grow and takes on debt to reach its goals … More often than not, you’ll find these kinds of purchases happen within a couple years of a brewery deciding to scale up rather fast.

Going back to Goose Island’s announced sale to AB InBev in March 2011, at least one thread tying together many deals has been the increased production levels of breweries purchased, perhaps one of the few publicly available pieces of information from which we could glean somewhat informed guesses due to the assumption of capital needed.

For Goose, the five years leading up to the sale saw the brewery more than double in production, reaching 127,000 barrels in 2010. The amount of beer sold just in Oregon by 10 Barrel, bought in 2014 by AB InBev, grew five times over from 2011 to 2014, reaching nearly 17,100 barrels. It was announced in December 2011 10 Barrel had taken on an undisclosed loan and an additional investor to begin expansion. Saint Archer, which sold to MillerCoors in September 2015, opened in May 2013, produced 16,800 barrels in 2014 and expanded to almost double production to 30,000 for 2015.

The Present

A similar trend can be seen in AB InBev’s most recent agreement to buy Houston, Texas’ Karbach Brewing. Among all the publicly available sources of info we can consider, two areas seem key to better understanding how and why this might happen.

First, let’s look at the market. Texans’ interest in craft beer has exploded in recent years, and, like the rest of the country, it’s come at the detriment of AB InBev and MillerCoors:

Since both of those companies formed in 2008, they’ve collectively lost almost 10 points of beer market share in Texas, from 86.5 percent to 77 percent in 2015, about 2 million barrels. Nationally, the two companies declined by over 23 million barrels in that time. That’s about the size of the entire craft segment in 2015, give or take a million or two, depending on who’s counting.

According to figures reported to the TTB, the amount of beer sold on-site at Texas breweries has been among the fastest growing in the country, with the Lonestar State’s 2015 figure making it the fourth-highest in the U.S., only behind famously beer-loving locales of California, Colorado and Oregon.

2011 2012 2013 2014 2015
No. of breweries 59 84 96 117 189
Own-premise barrels sold 5,396.15 2,356.02 9,709.23 9,848.20 62,622.83

In a state of 28.2 million residents, there’s clearly opportunity based on how sales have gone in recent years. If AB InBev wants to earn a stronger financial impact from the state, the purchase of a brewery makes sense to find a way to go both deep and wide in Texas. Here’s a timeline of why Karbach might have made sense based on issues of expansion and debt load:

  • June 2013: The New Yorker cites Karbach as the second-fastest growing brewery in the country.
  • February 2014: After producing 18,000 barrels in 2013 – two years after opening – the brewery is set to double that amount in 2014. There’s a need for new equipment, which comes form high-end German maker Ziemann, the first brewhouse of its kind coming to America. It’s announced the future addition of fermentation tanks will expand capacity to 300,000 barrels a year.
  • March 2014: Karbach breaks ground on a $15 million expansion.
  • April 2015: Work will soon start on a 30,000-square foot warehouse for cold and dry storage, cellaring and packaging lines.
  • April 2016: Eric Warner, co-founder and brewmaster of Karbach Brewing: “We are already tackling the next expansion phase and have ordered six additional tanks at Ziemann. At the end of 2015, our annual output was 65,000 hectoliters. Even in the land of opportunity, this is an extraordinary story. A few weeks ago, we celebrated only our fourth anniversary.”
  • November 2016: After making 55,000 barrels of beer in 2015, the brewery forecasted growth to nearly 80,000 barrels in 2016. The announcement of Karbach’s sale notes AB InBev would like to grow capacity to 150,000 barrels by 2019.

From what information we can collect, it all looks like a perfect situation for a partnership between AB InBev and Karbach.

Similarly, when MillerCoors announced it would be bringing Granbury, Texas’ Revolver Brewing under its wing, we might look back to 2013, when the brewery began expanding its equipment and then the company’s overall growth, which went from producing about 5,000 barrels in 2013 to 22,000 in 2015.

Across craft brewery sales in recent years, this kind of pattern has emerged, focusing on regional players that are growing quickly and can scale up. Like the Texas market, the Pacific Northwest is an ideal spot to plant a flag, especially since the region has shown to have “weak markets” for non-craft offerings. About a quarter of beer brewed in Oregon is sold in Oregon.

After opening in 2009 and seeing three years of steady growth, Oregon’s Hop Valley upgraded its production system to go from 1,000 barrels (2009) to 4,000 (2012). It increased packaged beer offerings and built a tasting room. In August 2014, the brewery was said to be one of the fastest growing craft breweries in the Pacific Northwest, increasing capacity by 75 percent. A new bottling and canning line would start in 2015, helping Hop Valley sell 39,000 barrels. The expectation was to reach 55,000 in 2016. MillerCoors purchased the company this July.

Along with business decisions that may influence a brewery to sell, underneath many of these deals is the power of home markets. California, Oregon and Texas are all top markets for own-premise sales by breweries, also indicating their packaged beers must sell well locally. Even Arizona, where a purchase by AB InBev of Four Peaks was announced in December 2015, has seen strong growth, including 40 percent more breweries and 68 percent more barrels sold on-site at breweries from 2014 to 2015.

2011 2012 2013 2014 2015
No. of breweries 34 45 47 53 78
Own-premise barrels sold 16,668.08 14,427.63 18,562.39 17,667.95 29,762.28

A sidenote to all this, the brewpub model appears to be an attractive business plan for brewery purchases, which we’ve seen in several cases from AB InBev, including Karbach. However, it’s worth nothing this is also common among smaller breweries expanding their reach, whether you want to look at Stone, Fat Head’s, Jolly Pumpkin or others. We can likely assume the idea of food and drink increases the potential for franchise opportunities beyond a sole production site with taproom.

The Future

Last week, this headline shot to the top of Reddit’s beer discussion board:

Is MillerCoors Buying Minnesota’s Surly Brewing?

The speculation was based around this photo of Surly founder Omar Ansari hanging with Dick Leinenkugel:

Release the hounds!

A long list of responses can be found on Twitter, all of which were made worse by last month’s announcement that longtime head brewer Todd Haug was leaving the business. Then two more employees said they’re set to start their own brewery. Also of note, Surly opened a $30 million production and brewpub space in 2014, doubling capacity at a time when own-premise sales are increasing rapidly. Minnesota was tied with North Carolina for the fifth-highest percentage growth in brewery on-site sales from 2014 to 2015, according to TTB figures.

But does it mean anything? Should we care? Speculative behavior isn’t particularly beneficial, even if it can be fun. What’s important is to take this at face value – people in beer meet with each other all the time.

In the end, it’s all rumor … until it isn’t.

Surly Brewing’s not selling out to MillerCoors, and everyone can chill out

Bryan Roth
“Don’t drink to get drunk. Drink to enjoy life.” — Jack Kerouac

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s