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Craft Brewer Consolidation Is Slow, But…

Beer Business Daily:

“There’s an appetite by the strategic buyers [big brewers] to acquire crafts, and there’s an appetite for private equity to acquire crafts”, but the deals have been few and far between, so said Townsend Ziebold, managing partner at First Beverage Group at the Brewbound Craft Beer Session yesterday in San Diego.  Townsend said that other than the few deals we’ve seen (NAB, Pyramid-Magic Hat, Squatters, Nectar Ales, Angel City, stake in Terrapin, Schlafly), consolidation has been slow, and a few others have fallen through.  One fell apart because of distributor alignment issues, and one fell apart because a private equity got involved and changed the price, said Townsend.

“Most industries go through an expansion phase, growth phase and maturity phase;  We are absolutely still in the middle of the growth phase in the craft beer,” he opened.

MARKET SHARE ‘FALSE METRIC.’  The top ten craft brewers’ share of market is slipping, sure, but Townsend says not to worry. “What’s fascinating about the craft industry is that the top 10 brewers represented about 511,000 barrels of growth in 2011; the rest of the market, 970,000 barrels….”.  The business is fragmenting, but it’s still growing very fast. “The top 10 are growing: they have a 1.8% market share loss, but I think the fixation on market share is a false metric. If you’re in the top 10 and growing at close to double digits, growth is good.”

BREWER CONSOLIDATION IS SLOW.  The industry is uncharacteristic of others that grow and then consolidate. “We’re not seeing by any standard any level of consolidation,” he stressed. In fact, for as big as the craft industry is, he’s struck by the “lack of deals in last 6 years,” and suggests some recent deals have only been done for lack of bigger ones. It does “suggest an abundance of demand to buy crafts, and a lack of supply,” resulting in “today’s environment is a high multiple environment.” More on that in a sec.

The aggregate size of the industry is also growing. “So inevitably growth will slow because you’re compounding on larger market size.”

“We think pipeline of new entrants will continue to expand. Some new crafts will fail, but we think a majority will succeed. We know that many larger crafts, to continue growth, are expanding geographically, which is fine.  And we think if you’re a local beer being encroached upon by a larger craft, you also want to expand. … Not only capacity expansions; it’s regional expansion.”

SKUS BECOMING MORE EFFICIENT: BUT BE CAREFUL, BREWERS. As defined by SIG, new SKUS in 2011 were 304 and repped 2.2% share of the craft market; in 2012, 276 new SKUS repped 4.8% of craft market. “So good news is, [there is] SKU proliferation … but it does seem SKUs are getting more efficient.”  (Thanks Bud Light Platinum).

At the supplier level, he is slightly more cautious: “If you’re growing SKU count, you have to be mindful of what are the impacts of additional SKUs at your brewery.  By definition the more SKUs you have, the more inefficient your plant will become because of the changeover of lines. So for every 3-5 SKUs you add, maybe you should be taking away 1 or 2. But at some point, SKU proliferation does affect profitability.”

ACQUISITIONS OUTLOOK. It’s no surprise that First Beverage holds the position that “there’s a number of owners willing to sell,” he said.  Age, lifestyle, succession of brewers all play into it. “Obviously, it’s very well known that Tenth & Blake’s basic strategy is expansion by acquisition. … So there will be craft owners swayed by large offers, though we don’t think that’s the primary reason someone will sell.” But Townsend thinks buyers will come from another camp: Larger crafts buying smaller crafts. There are more cultural alignments, but still elements of synergies.

It’s a seller’s market, so he encouraged brewers to put “social issues, key employees, cultural issues” on the table as well when selling or raising capital. “In a sales transaction you will have the luxury to preserve some of those non financial characteristics.” But sell-minded craft outfits should also be very mindful of having aligned distributor footprints. (And speaking of alignment, he touched on that too: With the Big Two owning a good chunk of the craft drinker market, “there’s an inevitable squeeze out effect” at the affiliated distributor level. “I think this is one of most significant threats to the craft industry today,” Townsend said.)

And for those that stay in the beer business? “Long term prospects for the industry are great. If you can navigate the waters,” though he placed big emphasis on understanding the cost of growth — breweries are capital intensive. “Having said that, over the next year or two there may be some very notable transactions that will cause certain craft brewers to think about that that scarcity value.   In the end, he said, “it is a great time to sell. Or raise capital.”