Craft Beer Billionaires are Changing the Game

A U.S. Senator, who long ago seemed to have a handle on what disturbed people most about the political process in Washington, once offered this line about the problem of budgets. “A billion here, a billion there,” he said, “and pretty soon you’re talking about real money.”

That’s the tune that now seems to be humming through the craft beer community. A billion dollar deal here, a billion dollar deal there and pretty soon you’re talking about real beer money.

Last year, according to respected individuals who work on the financial side of the beer business, there were three major deals that figured in the billion dollar range. The best known was the purchase by the publicly-traded Constellation Brands of Ballast Point Brewing Company for $1 billion. Using the current metric of $3,000 per barrel as a pricing guide for breweries in demand, Tony Magee brought in $1 billion by selling a 50 percent stake of Lagunitas Brewing Company to Heineken International. Given similar metrics, Firestone Walker would have been worth close to $1 billion prior to Duvel Moortgat taking a majority interest.

If people were stunned by the actual sales, the pricing should give them a double stunner, if not an imperial pause. Homebrewers-turned-brewery owners that every serious beer lover could relate to have suddenly started turning into billionaires. On top of this, the countervailing forces of macro beer and a Belgian company with financial expertise were behind the deals.

Given that Anheuser-Busch InBev and MillerCoors were also snapping up smaller breweries last year, likely at similar price points per barrel, should craft drinkers be worried?

Personally, I’ve started seeing a helluva lot more six-packs priced at $14.99 since the Ballast Point sale, where the company’s purchase price was motivated in part by its ability to not only grow fast but command 50 percent higher profit margins than most craft brewers. This pricing falls in line with those four-packs that would work out to the same cost per bottle, sure. But still, prepare for the higher pricing of six-packs in demand, especially IPAs and those with higher ABV.

It seems the consumer can’t win. Either you can’t get a popular shelf whale, and even if you can get a craft brew that is consistently popular and stacked high on the shelves, it could cost considerably more.

The issue of finding craft beers on the shelf is the other “whale in the room.” At the same time the number of craft breweries is increasing – 5,000 now looks to be a reasonable number for the near future – the number of wholesalers and distributors is shrinking. Yep, the same consolidation that we’re seeing on the corporate and craft level in brewing is taking place among wholesalers. That means more craft brewers seeking deals with fewer decision-makers. It also means more distributors in the hands of macro brewers in states where laws allow such relationships. (Beware the relaxing of the three tier rule that prohibits brewers from distributing.)

With craft self-distribution limited in most states and with the ability of wholesalers to buy and sell the contracts they made with brewers in some states, it is the best of times and worst of times. There’s lots of creative, independent brewing and a tighter squeeze when it comes to selling it in retail outlets.

Call me Alfred E. Newman-ish, but I’m not worried when it comes to getting craft. Craft brewers have always been able to outsmart their bigger rivals as well as the hang-ups in the distribution networks.

There’s no reason craft can’t continue to grow and have more clout in the marketplace by acquiring other craft breweries or building more production breweries using a combination of bank loans and private equity. Colorado-based Oskar Blues Brewing Company is now pursuing both models after expanding to North Carolina and soon to Austin, Texas. In between, Oskar Blues purchased Perrin Brewing Company in Michigan. This follows on the heels of a deal to sell a majority interest to private equity group Fireman Capital.

Does that mean Oskar Blues is no longer craft or that its beers are no longer creative? I’m OK with this evolution as long as the prices don’t also start jumping – and especially if breweries closer to drinkers result in fresher beer.

Brooklyn Brewery is building a huge new facility on Staten Island – in part to increase exports to Europe. Does that mean it’s no longer Brooklyn or a craft brewery?

Firestone Walker sold to Duvel Moortgat of Belgium, which also owns the Boulevard and Ommegang brands in the U.S. The combined total barrelage of these four is less than the output of the Sierra Nevada brand per year. So are they no longer craft?

Ultimately it means that demand for craft continues to grow at an amazing pace, but that the ground rules for how independent brewers battle for market share with major corporations – and where – are evolving rapidly.

There are some interesting angles. Heineken cut a deal with Magee for the privilege of doing battle against newly enlarged ABI around the world using American craft as a growth vehicle. ABI, meanwhile, is using its macro Stella brand as a premium alternative around the world to its strategy of promoting lagers like Budweiser. Given that the world seemingly cannot get enough of American craft, it will be interesting to see how privately-owned Heineken fares with its new strategy versus the publicly-traded behemoth. And it will be interesting to see how many of Heineken’s breweries around the world start producing Lagunitas brews in order to increase velocity.

Americans, apparently, can’t get enough of American craft. Everybody wants to be in California, which is bourgeois with bling as opposed to the latter-day hipsters found in so many other craft strongholds. California is where all three of the newest billionaire brewers who sold last year started. Lagunitas is even building a second facility in a state where craft brewers – some of whom have sold to ABI and MillerCoors – can’t get their beers across state lines such is the demand within them. Look for Sweetwater Brewing Company of Atlanta, which managed to stay independent in a 2015 private equity deal, to become the first brewer to go from the East Coast to the West, quite possibly to California.

What is the everyday craft consumer – Joe and Jill 4-Pack – to do? For those antagonized by the sudden emphasis on money in what has always been a capital-intensive business, well, there’s always the local brewpub and/or brewer’s tap room. Homebrewing is also a prime alternative.

One thing for sure is that flavorful, creative beers loaded with quality ingredients are here to stay, because beer drinkers know them when they taste them. Taste along with American hops have turned the tide. The renewed competition with macro brewers, who are experts at delivering fresh beer, and the increase in prices might even put more pressure on all independent brewers to use “best by” dates. If asked to pay premium dollars for beer, it’s unacceptable for the consumer to bet on a beer’s freshness. Better fresh delivery by wholesalers and brewers ought to be a silver lining amongst all that gold.