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

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