Craft brewers’ production soared again in the first half of 2014 to keep high-end beer makers at the forefront of a bustling beverage marketplace, but despite the segment’s eye-popping growth and frothy prospects, unique M&A dynamics have largely relegated deal makers to the sidelines.
Only a handful of major transactions have dotted the craft beer industry in recent years despite consistent growth among many of its players. The meteoric rise of small-time brewers contrasts with stalwarts like Anheuser-Busch InBev and Molson Coors Brewing Co., chided by industry watchers for failing to capitalize on the trend.
Both brewing giants, along with Pabst Brewing Co., have said they plan to expand into high-margin specialty beers, one of the fastest-growing corners of the marketplace. But in the years since their big-ticket rivals cast them aside, craft brewers have been thriving on their own.
“Big brewers spent a long time ignoring this phenomenon and not being willing to integrate craft beer into the light beer model,” said Tom Pirko, managing director of beverage advisory firm Bevmark LLC, which counsels some of the world’s largest beer companies. “But by the same token, now they’re looking at how to respond to consumer demand because they’re in trouble.”
Through the first half of 2014, small and independent brewers produced 18 percent more beer than in the same stretch of 2013, according to a recent report from the Brewers Association, a trade group. In that span, the brewers sold roughly 10.6 million barrels, up from 9 million the previous year.
Craft beer production still falls well short of the beer giants’ output, but independent breweries’ growth lends credence to speculation that the craft industry could bite deep into its outsize competitors, whose flagship light beer is losing its appeal to consumers with more refined palates.
The shift underway in the beer industry mirrors a trend toward higher-end products in the wine and spirits spaces over the past several years. But there’s one key difference: Where global distillers, like Diageo PLC, saw competition in the premium liquor space, they pounced.
Beer goliathes have generally kept profits churning even as the volumes fall for their bread-and-butter light beers, but economically speaking, slowing demand for the decades-old product will likely waver too much to sustain the companies’ U.S. operations as craft beer booms.
“The big brewers are still trying very hard to exploit this growth in the high end and, to a certain extent, are succeeding but not to the extent of offsetting the drag in their mainstream brands,” said Eric Shepard, the vice president and executive editor of trade publication Beer Marketer’s Insights. “It’s been a juggling act that’s been more difficult for Anheuser-Busch and MillerCoors to perform.”
Both companies in recent years have expanded their craft beer offerings through notable acquisitions. MillerCoors, a joint venture between Coors and SABMiller PLC, bought the Blue Moon and Leinenkugel’s names, and AB InBev scooped up the Blue Point and Goose Island labels.
Still, there are thousands of viable independent brewers in the marketplace, a number that grows by the day, pressing big-name companies to shake up the marketplace in order to safeguard their success. But that won’t be easy, at least from an M&A standpoint.
The momentum carrying the craft beer industry has sent valuations skyward, keeping wannabe buyers wary. At the same time, the brewers continue to scope out additional success, a realistic and enticing enough prospect to keep them away from the bargaining table, said Derek Groff, senior manager for business valuation at Frank Rimerman & Co. LLP.
“Right now, a lot of breweries really aren’t interested in selling. A lot of the owners feel like a lot of growth and upside is still available to them,” he said. “A lot of people feel like selling out now would be selling too early. Deals can be done at the right price, but we continue to see a gap in valuation.”
While they hold off on M&A, the top executives at many breweries are opting to expand into new markets or beef up their facilities – strategies that, for the most successful craft brewers, are paying off as demand for their products skyrockets.
In addition, the prospect of a sale isn’t one most brewery founders see as a natural choice after launching a brewery and steering it to prominence. The process is a grueling labor of love, made all the more difficult as competition thickens. Plus, the craft beer movement is anchored by the belief that consumers should have more than a handful of choices – a philosophy that offers little support to industry titans eyeing acquisitions.
“There’s a natural reluctance to sell or to partner with big, global brewers, or even with private equity, because that’s not why these guys got involved in the first place,” Shepard said.
Decades-old breweries staring down their founders’ retirements have found ways to skirt around outright sales. Several have adopted employee stock ownership plans that give workers shares in the brewery at no upfront cost, which can then be held in a trust until the employee retires or leaves the company. At that point, the shares can be sold.
The ESOP path offers substantially less in the short term than a straight-up sale, especially one to a deep-pocketed industry giant. But it can be a key safeguard for the brewery’s identity – something that wields power in the marketplace but could erode under Big Beer ownership.
“One of those players said to me, ‘When we decided to go the ESOP route, we didn’t want to drive by the brewery in five years and see someone else’s name on the front,'” Shepard said.
That fear fed into last year’s landmark sale of Missouri’s Boulevard Brewing Co., one of the most popular and successful independent brewers. The company approached its buyer of choice, Belgium’s Duvel Moortgat Brewery, and struck a deal worth more than $100 million to fold itself into a company it said matched its mission.
But even though brewery founders remain skeptical of buyouts, more consolidation is inevitable, analysts said.
A push to narrow the industry will likely rope in private equity players already seduced by the explosive popularity of craft beer.
Multiple investment firms have tried unsuccessfully to bundle several independent brewers under their ownership, according to several advisers working in the industry. The tactic has yet to work out but could come into sharper focus if the market falters, and struggling brewers get desperate for capital – a turning point that would spawn more acquisition opportunities in general.
“Some of the larger players that have excess capital or dry powder to use for acquisitions are going to pick off some of these guys that are growing,” Groff said. “There has to be a shakeout of sorts. The industry cannot continue to grow 20 percent every year – not only is that theoretically impossible, it’s just not practical.”