Beer Business Unplugged

Full Sail Brewing Co. of Hood River, Oregon was one of Oregon’s first craft brewers and had been employee owned for years.  Like many craft brewers who have been around that length of time, Full Sail has had many ups and downs.  Just recently, the 78 employee-owners voted to cash out and sell to Encore Consumer Capital.

Full Sail’s annual volume is impressive at 115,000 bbls. and the Full Sail beers are highly awarded and respected.  While none of the terms and conditions have been made public, these 78 employees have all agreed to remain at the brewery.

In recent years, private equity firms have discovered the craft industry and aggressively pursued opportunities.  One of the most interesting announcements came recently with the formation of Enjoy Beer by Rich Doyle and the investment firm of FFL.

As one of its founding partners, Enjoy Beer has signed 160,000 bbl. brewer, Abita and is actively looking to sign up to four additional partners.  When they are ready, their plan is to take Enjoy Beer public.

As we know, ABI has been active in buying successful crafts purchasing breweries including Goose Island, and recently 10 Barrel Brewing and Elysian Fields Brewing, all of which were growing and well regarded brands with loyal consumers.  Both 10 Barrel and Elysian Fields are located in the Pacific Northwest.

When Schlitz decided to sell out in the early 1980s, it was the result of producing liquid that was damaged.  In spite of their efforts to again brew good beer, the damage had been done.  Coors Brewing Co. had an interest in acquiring Schlitz because they wanted to begin the sales of Schlitz Malt Liquor and Old Milwaukee as they, Coors, had no brands in those segments and both brands were category leaders. Unfortunately for Schlitz, and their wholesalers, the government would have challenged this under anti-trust laws.

Stroh Brewing Co., however, which was much smaller than Coors, was able to move forward and purchase Schlitz with government approval. Stroh, while not in the same position as Schlitz, was a small regional brewer who was struggling to maintain market share.  Many of us, who were Schlitz wholesalers at the time, privately believed that putting two sick companies together would not create one healthy company.  Ten years later, that proved to be true.

Heileman Brewing Co., made up of a number of successful regional craft beers including; Rainer, Henrys, Old Style, Lone Star, Mickey’s, Iron City, Drewrys and others sold to an Australian named Alan Bond.  Heavy debt and declining sales forced Heileman into bankruptcy and eventually they, too, sold.

Since 2008, the beer industry has seen the rapid rise of craft beers, while the overall industry continues to shrink, meaning that ABI and MC have lost millions in sales.  The world financial experts continue to discuss the possibility of ABI buying SABMiller.

Some think it will eventually happen, while others seem to think that there are too many complicated and conflicted issues which will preclude this purchase from happening.  From a distance, based on sales, one might initially see another Stroh/Schlitz model of brands that are struggling.

What if ABI and SABMiller come to the conclusion that the craft segment will grow to a 50% share of the US market?  Imports, led by the Mexican beers could grow to a 20% share.  That would leave 30% for ABI and MC.

The question then is: how much money will these two giant companies throw at large craft established breweries?  With PE firms, along with ABI and MC as buyers, it is no wonder that Full Sail and others have chosen to cash out. The difference between genius and stupidity is simple: genius has it limits.

Beer Fodder;

When Miller introduced Lite in the early 1970s, no one in the industry had any idea how big the light segment would end up being.  Miller Lite took off, followed by Budweiser Light, Coors Light, and Schlitz Light, followed by the regionals with their own version of light beer.

A few years later, the light segment surpassed domestic premiums, becoming the largest selling segment and remaining so today. Lights have survived a stream of new flavors and segments introduced over the decades, including, but not limited to, Dry beers, Ice beers and even LA beers.

Almost all these new products, including light beer, came from the large breweries who were working to increase their market share from their competition.  To some degree, why rock the boat?

The chart above shows the annual brewery count since the late 1800s. From the late 1940s to the late 1980s there was little increase in brewery count; however, the growth rate for new breweries since the 1980s has been incredible, with almost 3,500 breweries and more coming.

In fact, many colleges are offering brewing classes as part of their curriculum. Some schools, including Portland State University, are offering programs that cover not only brewing, but other aspects of the industry, as well.  PSU’s class on sales and distribution has more than 33 students registered. Many of these students come from as far away as Germany, Canada and Puerto Rico, and were already in the industry working at breweries, wineries, ciders, and even hop farms.  Almost all either owned, or were planning on owning, their own operations.

Today is the beginning of this year’s BA convention in Portland.  Attendance will be around 11,000 people and runs until Friday.  As in Portland State’s craft beer program, the excitement for the BA convention grows every year as more and more people see crafts as the place to be in beer.

To some degree, the craft industry is not unlike the light beer industry when it began growing by double digits.  The craft industry is now around 11% of the total beer industry.  The question remains, just how big will crafts get?

There are some who believe that obtaining a 20% share by 2020 is a realistic goal, and based on recent trends, 20% seems to be very achievable.  Forecasting success of any brand, much less the size of any one segment is, at best, difficult. But what we do know is this: two companies control over 50% of the beer industry with light beers, a segment that is in a slow decline, and there are over 3,400 breweries that produce a product that represent only 11% of the beer market, and that segment is on fire with thousands more operations scheduled to open.

These small operations do not have to put up with the corporate bureaucracy and other obstacles with which the large mega breweries deal.  These upcoming craft brewers know what their consumers want and are giving them those craft beers.

Just how big will crafts be?  It is simple. As with these brewers, the empires of the future are the empires of the minds.