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Diogenes Mulls Implications Of Big Bucks/Private Equity On Craft Brew Biz And Distrib System

Craft Brew News:

By Diogenes

What will the entry of “big capital” into the beer distribution business and the craft beer industry mean to craft brewers?

That is a question that must be asked in light of private capital buying up beer distributors and a recent statement from Bill Anderson, an influential beer guy with money and influence on others with money, predicting that private equity is going to transform the craft brewing industry.

There have been many stories in the business press recently about private equity and hedge funds looking for longer term investments because of the stock market’s stagnation.

It is not surprising that the money people would find their way to the beer distribution business. With exclusive territories and ironclad franchise protection against the whims of brewers, beer distributors who reach a certain size possess a virtual license to print money.

Meritage Capital, with $8 billion in assets, just bought Columbia Distributing (34 million cases of beer and 11 million of non-alcoholic and other beverages) for over $600 million. Meritage is mostly the money of Jim Simons, who the Financial Times called the world’s smartest billionaire. This follows financial wizard Warren Buffet’s investment in wine and liquor distributors through his McLane subsidiary.

Just think of that: $600 million. That really raises the stakes in the beer distribution business. Can any existing beer distributor raise that kind of money to buy another?

Well, a few can. Reyes Holdings, a $2 billion enterprise, is probably the sort of example that is drawing the big money into the beer distribution business. By all accounts, Reyes is a very profitable company. In addition to beer, they also distribute McDonald’s supplies all over the world. The Reyeses are masters of efficient logistics.

MillerCoors recently backed off an effort to block the Reyes family from buying the Virginia distributor Chesbay. Reyes companies already distribute almost 50 million cases of MillerCoors products nationwide. MillerCoors’ motivation for the suit was unclear, but it provoked the ire of many MillerCoors distributors who saw it as an effort to blow up the three tier system.

To be fair, craft brewers do not have much good to say about most distributors. For craft brewers, choosing a distributor means choosing among imperfect options.

Efficient logistics are great, but most craft brewers are looking for distributors who will focus on an often complicated portfolio and be willing to nurse along small on- and off-premise accounts. Craft brewers like patient distributors who are committed to growing a brand. They dislike distributors who have minimum delivery requirements, and who trim small volume SKUs while demanding fat margins.

However, it seems to me that craft brewers have no choice but to learn to work with big distributors whose primary focus is efficient logistics. And I expect that the big money will be looking to buy and nurture precisely that sort of distributor. After all, private equity does not have a reputation for patience. On the contrary, they are often viewed as “strip and flip” or “slash and burn” operators looking for a fast buck.

Private equity’s entry into the craft brewing industry is underway, with unclear results.

Centerbridge Capital, with $15 billion under management, bought Rock Bottom and Gordon Biersch in 2010, arguably more like restaurants than breweries. Fulham& Co, with $280 mil under management, owns Long Trail and Otter Creek.

KPS’s investment in the Genesee Brewing Co., and their acquisition of Magic Hat and Pyramid, does not seem to have been of great benefit to those brands. KPS sold the company, known as North American Breweries, to Cerveceria Costa Rica, which brews Imperial beer. The NAB roll-up was not good news for the Founder’s Preservation Society, the shadowy organization of craft brewing industry pioneers. A charter member of the society, Magic Hat cofounder Alan Newman, made it clear in his book, “High on Business,” that he was unhappy with that deal.

The Boston private equity firm Fireman Capital recently bought a majority stake in the Utah Brewers Cooperative for $35 million, which includes Wasatch and the Squatter’s brewpub. Founding partner Jeff Polychronis told Craft Brew News that he and his team really liked Fireman because they “think like we do.” He said Fireman gave Utah outside financial, beer distribution and restaurant expertise.

I, for one, have never met a banker who thinks like I do.

I have heard that the hedge fund guys who bought a big chunk of Schlafly’s in St Louis are pledging to be patient with their investment.

Selling to the big brewers may be a safer option than selling to private equity. At least they know something about the beer business. Goose Island seems to be doing well under the ownership of ABInBev.

Bill Anderson predicted more private equity deals for craft brewers, but he did not judge whether this would be good or bad for craft brewers. The final sentence of his blog post hit the nail on the head:

“Whether the new capital coming is smart and patient-or not-will make all the difference for the beer industry going forward.”