Beer future much unlike what was

FORT COLLINS —  Late last year, New Belgium Brewing Co. co-founder Kim Jordan made a surprise announcement that the Fort Collins brewery would sell itself to Australian beverage company Lion Little World Beverages, a subsidiary of Japanese firm Kirin Co. Ltd.

But while the sale of the United States’ fourth-largest brewery seemed to come out of the blue for fans, the economics of the craft-beer industry has created an environment where brewing behemoths are aggressively snapping up independent craft brewers, which they could continue to do into 2020.

Slowing growth

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U.S.’ craft breweries grew production by 4 percent last year, according to the trade group Brewers Association, based in Boulder. While that seems strong, it pales in comparison with the 18 percent or so production growth that craft brewers saw in 2013 and 2014.

Craft’s cut of the overall beer market has also slowed, from jumping 3.25 percent between 2013 and 2014 to adding just 0.5 percent between 2017 and 2018 to hold 13.2 percent of sales.

Brewers Association chief economist Bart Watson said the slowdown in new production seems worse than it is because the craft market became more mainstream at the turn of the last decade.

“Craft is, I won’t say ubiquitous, but it has been really successful,” he said. “Now it’s not getting that free growth from expansion and new distribution, and it’s going to have to do the harder work of growing in the same places, growing in new demographics and markets. It’s just going to be a little bit different.”

Mid-size stressors

At the same time, there are challenges specific to New Belgium and other brewers of its size due to how the beer market has developed. It has to bear more cost in distribution, marketing and production than its smaller local taprooms do and has to compete with those small upstarts on the “newness” factor. But it doesn’t have the advantage of scale that the major domestic brewers have in producing or shipping its beer.

That challenge was brought up at BizWest’s Brewing CEO Roundtable in December. Sanitas Brewing Co. owner Michael Memsic said at the time that it’s still possible to be a successful large-scale independent craft brewery, but it requires near-perfect timing and resources in the current climate.

“You’ve got to be well-funded, you’ve got a killer team and you’re part of a community that is really thirsty for you,” he said. “It can still happen, but it’s going to be a lot harder to make that happen, harder to hit home runs in this next era than it was to hit home runs 10 years ago.”

But Jeffrey Green, owner of Very Nice Brewing Co. in Nederland, was more skeptical about how an upstart brewery can grow into a national brand without diluting its goodwill from the beer community in its backyard.

“In this time and place, I’m not saying lightning (cannot) strike… but is it scalable? Is it linear? You’re this size and you’ve still got that magic?” he asked.

Valuations

At press time, the sale price and the value of New Belgium as a company is still a matter of speculation.

In 2015, Reuters cited anonymous sources claiming that New Belgium valued itself at more than $1 billion. A Forbes report, also citing anonymous sources, pegged the deal at between $350 million to $400 million.

In an email interview, a New Belgium spokeswoman declined to disclose any information about the deal’s financials, including the value of the sale or the potential value of the company four years ago.

However, she said New Belgium realized that the craft-brewing market had reached capacity levels.

“There are over 7,500 independent breweries in the United States right now. Many will continue to thrive and succeed,” she said. “But we also believe we’ve reached a saturation point and new breweries aren’t clearly driving the incremental volume to help the entire industry grow.”

Future M&A?

New Belgium is only one of a handful of craft buyouts and mergers over the past year. Earlier in December, the Oregon-based Craft Brew Alliance agreed to sell to AB InBev NV (NYSE: BUD) for about $350 million in company stock.

In August, Michigan’s Founders Brewing sold a 60 percent stake to Spanish brewing company Mahou San Miguel on top of the 30 percent the Madrid firm had already purchased. And in May, Dogfish Head Brewing agreed to merge with Boston Brewing Co., the company behind the Sam Adams brand, for $300 million.

While craft growth has slowed in the past five years, it is still growing compared with the overall 0.8 percent loss in sales volume that the beer industry saw in 2018, mostly due to fewer people buying from major domestic brands. Combine that with a handful of struggling large brewers and low interest rates, and it appears that 2020 will likely produce more craft-brewing acquisitions.

Even New Belgium’s spokeswoman acknowledged that the company was in some level of financial distress as it began speaking with Kirin.

“Given the state of the business and our financial standings, it was imperative that our fearless founder Kim found a solution to better the financials of our company and find what was best for our shareholders (us!) and the company,” she said.

New Belgium’s new owners also appear ready to keep buying brands across the world. In the company’s latest annual report, Kirin said it has earmarked the equivalent of $2.73 billion USD for a spree of acquisitions and $2.82 billion for capital upgrades over the next three years.

Assuming the Forbes estimate of $350 million to $400 million for New Belgium is correct, Kirin could buy almost seven companies with similar valuations as the Fort Collins brewery.

… Or a future rebound?

While Watson warned against being overly rosy on the current state of the industry, he said these recent patterns somewhat mirror the craft industry’s slowdown around the turn of the century.

At that time, he said, a lot of larger brewers scaled back on distribution and focused on what beer styles resonated with their existing customers instead of stretching themselves into other markets where they didn’t have a foothold.

“For me, slowdowns can often be very good for focusing firms around what they do best,” he said. “I think that’s going to be the challenge for a lot of regional craft brewers, to really clearly understand their niche.”