Beer Business Daily:
Craft beer trends, brand valuations, and M&A are just a few of the topics we spoke with First Beverage Group’s JB Shireman, their director of craft services.
ARE CRAFTS SATURATED ON-PREMISE? With regard to the velocity of craft — whether you measure it by brand or by tap — it appears to be slowing a bit this year in the on-premise. However, craft volumes continue to growth briskly on the top-line, so is it that it’s becoming saturated or are there just more taps? “I think it’s a little bit of both,” says JB. “I think there’s a couple of ways to interpret saturation…. Anybody that’s paying attention…. There are more tap handles than we’ve ever had” and “more and more brands.” JB’s main worry with saturation is that retailers put on so many handles that they can’t keep the beer fresh. “Having been a bar owner a couple of times in my life, it takes a lot of turnover to keep taps fresh,” he says.
ARE HIGH BRAND MULTIPLES SUSTAINABLE? That’s the “gazillion dollar question”, but JB points out that there are a few variables that are not changing, at least in the short term: Low interest rates, the strength of franchise laws, high sales trends, etc. “You also have this other piece that is significant: The strategic value,” says JB, citing Ben E. Keith’s expensive purchase of C.R. Goodman in Texas as an example. “That was their strategic entryway… to get into that category” statewide. “I don’t see any of the things affecting those multiples bringing those multiples down right away other than if we start to get to a more serious shake out or a reshuffling of the deck on the craft side.” Although JB points out that “we don’t have rosy domestic trends” which gives wholesaler less cash flow to play with. “That has to have some value on the whole equation.”
NO MORE NATIONAL CRAFT? JB said he caught some grief for suggesting that it would be much harder to create a national craft brand today than it was 20 years ago. “I still stand by it,” he says.
“The industry has changed so much. For somebody to start now and try to build a brand out to be a national craft brand — and by that I mean a truly national brand in all 50 states — and manage that business well, what it takes in terms of sales, marketing, branding, people support, logistics, wholesaler management, understanding of the supply chain, soup to nuts, and variety seeking consumers, all of that. It will be incredibly challenging. Will somebody do it? Probably so. Will Lagunitas be in all fifty states someday if they want to? Probably so. It’s definitely become the exception to the rule. The old model of growth was: start a brewery, rally consumers around one flagship… and you eat off geography as you add more states and people. Those kinds of old school growth models have become just that, old school.”
JB concedes though that it’s not a stretch for a brewer to focus on several markets spread across the country — say 15 — and focus on them like a laser and be “quasi-national.”
WHEN WILL CRAFT M&A PICK UP? The great craft roll-up has yet to happen. Will it? “I think through the investment banking work we do on the sell side at First Beverage, I think we stay pretty close to that, as close as most people. It’s just a deeply, deeply personal thing,” says JB, talking about the founders of breweries making the tough decision to sell out. There are also other considerations for the buyer: “A lot of it has to do with misalignment of wholesalers… that takes a tremendous amount of value out of the equation for a strategic buyer.”
JB also says that the strategic buyer pool is “not as rich as we once thought it was.” He’s not talking about a lack of capital — the money’s there — but a lack of strong interest by big brewers to gobble up little ones. A-B bought Goose Island, but for the moment they seem content to grow that business into a national craft powerhouse rather than roll-up a bunch of small guys. “Some of these breweries seem too small to” the big brewers. “And small guys may not want to do a deal with the big guys.”
But “I still stand by the notion that it’s going to happen,” declares JB.
SEASONALS SOFTNESS. For 2012 and 2013 so far, there’s a distinct softness in certain craft brewer seasonals. What’s going on there? “It’s not surprising, not even a little bit,” says JB. We’ve seen “the same four seasonal lineup for several years. Three years ago that was new. Now it’s the same seasonal, plus there’s brand new entries.” It’s tough to stand out, which is why we’re seeing some major craft suppliers revamp their seasonal program so the consumer doesn’t get fatigued with the same stuff every year. Sam Adams is revamping their Spring seasonal, for example, and many brewers are “purposefully expanding their beers to be sold beyond Christmas day proper to more of a holiday beer.” Spring seasonals seem to be the most challenged.
SPECIALTY DISTRIBUTORS. Cavalier, Click, Great Artisan, Windy City. Will we see more specialty distributors popping up? Yes, says JB, and there are very well capitalized entities getting big into it, citing L. Knife, Ben E. Keith, Reyes, and even cola bottlers. You can expect more blue-silver and red network well-capitalized distributors “rise to the occasion” and you’ll see more distributors aligning within states — even mixing blue-silver and red networks occasionally, particularly where there are A-B branches. “We’ve already heard more rumblings of more Bigfoot-type deals on the horizon,” says JB (see CBD 06-07-2013).
DO WE HAVE TOO MANY SKU’s/BREWERS? “I don’t know that there’s too many because a lot of them continue to sell… I worry about some of them coming in without the basic blocking and tackling,” notes JB. “Take code dates, pretty basic beer business stuff. I think there are things coming into the category that are bad for the category… I’m starting to see variances in consistencies and people turning a blind eye to quality assurance just to get on the warm shelf, not putting code dates on the bottle, that’s not good, and that just needs to go away.”
But on the other hand we’ve got a “consumer demanding this variety, that is going to stay insatiable for awhile….. we’re dealing with about the same length of shelf space for a decade and more. Why not just expand the cold space?” I concur.
CAPACITY EXPLOSION. There’s an awful lot of brewing capacity coming online in the next year or so. Will the industry be able to absorb it all? “It obviously depends on how fast the category is going to continue to grow, but I’m very bullish.”
What about a shakeout? “A better word than shakeout is really just a serious reshuffling of the deck,” says JB. “I think some of these small guys getting into the business who don’t understand quality, who don’t understand the game, just need to go away and they will. I think there’s other people who are going to stay very local and alter their business plans to make money in a very small geography….. some of them will be fairly hard to unseat.”
“The category itself is going to continue to grow. What I hope craft brewers are doing is getting smart and not getting too far out over the tips of their skis.” However, JB notes that when we hear about these huge 250k barrel expansions, what they’re really doing is building a footprint with an ability to expand to 250k barrels in the future, to “drop in tanks” as you need them rather than building empty brewhouses. “You talk about beer being heavy, well, stainless is expensive.” Amen brother.