Jan 222019
 

As I write this blog, the governmental shut-down continues.  In fact, this governmental shut-down is now the longest in history.  We all know that such action means the TTB label approval process has ceased.  It has been reported that for every day the TTB is closed, three additional days are added for the label approval process.

Obviously, one would think that this situation is not good for the industry. There are some, however, that believe this shut down might not be so bad considering the markets are not currently being flooded with new or updated beers.  Many of the craft brewers survive by selling seasonal or one-off products with new or different flavors.  The bigger brewers are probably in good shape as their label approvals were completed last year, however, plans for later this year or next could suffer.

While the industry sits on new brands, more and more small local and regional crafts are closing their doors.  As noted in last week’s post, many of these financially strapped breweries are no longer able to raise or generate the funds needed to expand and/or stay in business.  Some industry pundits believe this is the long overdue industry shakeout that many have been expecting.

So the question in early 2019 is:  how is the beer wholesaler managing the uncertainty and turnover in brands in their respective markets?  It is no secret that the craft’s biggest issue with wholesalers is the lack of focus given to crafts.  As many crafts/breweries are closing and many brands are tabled, we see that the current environment is a personification of this lack of focus.

When a craft closes its doors, for whatever reason, how does a wholesaler retain and/or change that draft handle in their market?  If the wholesaler is an AB or MC distributor, is that handle converted to one of the AB or MC craft brands and at the expense of the local crafts?  Is such action fair to the locals who did what the wholesaler asked by putting people on the street and hustling chain authorizations?  Crafts experiencing such a situation could feel not only left out but perhaps even believe they have been lied to.

A craft brewer who has dedicated people, resources, money, and commitment to a wholesaler may perceive that they have no future with that wholesaler if that brewer is not on a wholesaler’s priority list.  If this is true, then that brewer has few options.

This is a no-win scenario for the wholesaler, brewer, and the consumer.  It is easy to believe that the wholesaler will support their “rainmaker” supplier but then not focus on their struggling brands or those that are more brewery-supported.  Either business model has a similar effect.

As more and more craft breweries close, along with the coming flood of new labels and brands, wholesalers should look at the ensuing push-back from their suppliers.  It will soon be coming to a head.

Action expresses priorities.

 Posted by at 7:00 am
Jan 152019
 

In the late 1970s and early 1980s, the prime rate for loans was in the mid-teens and prospective homeowners faced interest rates of up to15%.  Because the cost of money was so expensive, most people interested in purchasing a home or business looked for creative financing options, which typically meant the owner carrying back all, or part of the loan. Even at that, one would have been lucky to obtain rates lower than two or three points of prime.

Because an investor could invest in short-term CDs with no risks, it was unlikely that anyone during this time period would consider purchasing a beer distributorship with high rates.  This is exactly the position I was placed in when purchasing the Schlitz distributorship in South Texas.  Of course, this was also the era of highly leveraged buy-outs.  Purchasing any business with little to no equity, coupled with loans that were tied to the prime rate plus-one led to a road map for disaster.  While the distributorship had positive cash flow, the interest on the loans was too much to handle.  The interest rates, the selling of Schlitz to Strohs, and the unexpected collapses in the market, eventually quelled that opportunity.

On December 21st, Big Bend Brewing Company announced that they were closing their doors.  Big Bend, which opened six years ago, is located in the far West Texas town of Alpine.  While Big Bend enjoyed success in West Texas, the cost of freight across the state put the brewery at a disadvantage against other local beers. Big Bend thus decided to build a brewery in San Antonio in the hopes of easing the freight costs.

One year ago, Big Bend leased a building and reportedly paid Diversified Metal Engineering (DME) of Canada one million-plus dollar for the brewing equipment.  Soon thereafter, DME went into receivership reportedly owing $13.5 million.  Big Bend faced other challenges including difficulty in raising additional capital to build the San Antonio brewery.  Today, Big Bend continues to look for new capital but faces an uphill battle.  The brewery does have options:  they could sell their labels and the Alpine Brewery, but any new investor will demand control of the business.

With the Federal Reserve raising the prime rate coupled with the publicly announced future rates, the craft industry now faces its biggest challenge.  Big Bend could be the beginning of the real shakeout of the crafts.  Investors can now invest in low-risk notes or CDs with an acceptable return.  The question is: why would one invest in the brewing industry, an industry that many see as saturated.

The cost of entry into the craft industry is relatively low, however, as the industry has learned, long-term growth in crafts is capital-intensive, without the ability to finance or raise the funding, brewers such as Big Bend will hit a wall.  2019 might be the first year that the industry sees more breweries closing than opening.  The days of zero interest rates are gone, as are the venture capitalists.

Nobody likes high-interest rates.

 Posted by at 7:00 am
Jan 082019
 

A review of the past fifty years reveals that there were years which not only defined a product but also changed the industry.  In 1975, after several years in test markets, Miller Lite was launched nationally.  This brand was not only successful, but its introduction created an entirely new category of beer.  Even in today’s market, the light segment remains the most viable.

In 1983, Corona transformed its bottle from a short, stubby brown container to the current clear longneck.  That alteration alone was the most successful package change in the history of the beer industry.  Corona’s victory drove the growth of Modelo Especial and all other Modelo products.  1983 was another defining year for the beer industry.

Five years later, in 1988, the craft segment secured its future with the founding of Rogue, Deschutes, Great Lakes, Brooklyn, Goose Island, North Coast, and Wynkoop breweries.  These breweries and others including Anchor, Boston, and Sierra Nevada have fueled a segment that has again transformed the beer business.  Such successes have led the industry to a record high 7,000 operating breweries.  During the last thirty years, the craft segment has provided wholesalers with the opportunity to add volume and margins while simultaneously solidifying their future.  Crafts have also enabled wholesalers to be less dependent on their main suppliers.

In 1999, AB tested a product in Florida which they believed would resonate with Baby Boomers.  That product was Michelob Ultra.  Twenty years later, Ultra is, and has been the industry’s fastest growing product and shows no sign of slowing down.  The lower ABV and carbs, tied to an active lifestyle, transcends all segments and demographics.  Craft brewers, now realizing the volume potential of the lifestyle segment have jumped on board with their offerings of sessionable beers.  Again, 1999 defined a growing and changing industry segment.

The next defining year in the beer business may well be 2018, given the impact of alcoholic waters and seltzers.  End caps, displays, and shelf space of local retailers are becoming more dominated by these products.  Investment money, from both inside and outside the beer industry, is pouring into this segment.  Seltzers with low ABV, low carbs, low calories, and soon, no carbonation, along with organic and natural ingredients have hit the mark with the Millennials.  Many in the industry see this segment as a short-lived one.  Many suppliers, however, do not see it that way. Boston Beers ’Truly, is planning to double their 2018 volume for 2019.  In fact, Boston Beers recently announced that their wholesalers are already building Truly inventory.  Expect other major suppliers to build inventory in anticipation of substantial growth.

Millennials believe spending six dollars or more for a Starbucks’ cappuccino is worth every penny, yet this same group will cut the cord for cable providers as they see no value in a cable.  Likewise, Millennials will spend the money on an 11.2-ounce seltzer as it fits their lifestyle.  This in itself will define the seltzers category.

Years from now the industry will look back on 2018 as a year that defined industry standards, as did 1999, 1988, 1983, and 1975.

Every new beginning comes from some other beginnings’ end.

 

 Posted by at 7:00 am